Global Geopolitical Risk and International Trade of Korea : Do Politics Matter?

This study examines the impact of geopolitical risk on international trade of Korea. Given the economic and diplomatic environment surrounding the Korean Peninsula, it is highly likely that shocks from geopolitical events exert a significant impact on export and import of Korea. To this end, we employ popular indices of geopolitical risk developed by Caldara and Iacoviello (2018). The monthly dataset for export and import of Korea during 1991-2020 is used for analysis. Moreover, exchange of goods with 10 major trading partners is also investigated. It is found that a rise in geopolitical tension leads to the reduction in international trade of Korea. On top of that, the negative impact of geopolitical risk is significant mainly for export of Korea. However, the magnitude of the economic effect of geopolitical risk varies according to trading partners. While existing studies dealing with geopolitical risk generally focus on the negative impact on the financial sector, this study pays attention to international trade, a major pillar of the Korean economy. Therefore, the findings in this study can offer valuable contributions to the literature on the interdependence between geopolitical risk and international trade of Korea