The impact of crises on international trade corridors: A gravity analysis of South-South and North-South trade flows in the Strait of Hormuz in the context of geopolitical crises

Abstract

The empirical literature on the determinants of international trade has extensively analysed the effect of economic crises on trade flows, without explicitly distinguishing between South-South trade corridors, structured around integrated regional supply chains, and North-South corridors, dominated by trade with advanced economies — a gap this article addresses by systematically comparing the sensitivity of both corridor types to economic and geopolitical shocks. The analysis relies on a dynamic gravity model estimated using the System Generalised Method of Moments (System GMM) for the intra-regional corridor, and its Difference GMM counterpart for the inter-regional corridor, given the latter panel’s reduced cross-sectional dimension. Robustness of the intra-regional equation is further verified using fixed-effects estimation with Driscoll-Kraay (1998). The research panel covers seven emerging economies in Asia and the Middle East (Iran, China, Pakistan, Saudi Arabia, the United Arab Emirates, Qatar and Iraq), whose bilateral trade flows are observed from 2000 to 2022, spanning several major systemic shocks (the 2008-2009 financial crisis, the 2014-2016 oil price collapse, and the 2020 pandemic crisis). Results reveal a pronounced structural asymmetry between the two corridors. Within the intra-regional corridor, systemic crises significantly reduce bilateral trade according to the GMM estimates (β = −0.230, p<0.01), while oil prices act as a strong stabiliser (β = 0.132, p<0.01) and geopolitical sanctions weigh negatively on trade (β = −0.090, p<0.05). The Driscoll-Kraay robustness check confirms the effects of oil prices (β = 0.810, p<0.01) and sanctions on the partner country (β = −0.354, p<0.01), but does not confirm the significance of the crisis effect (β = −0.055, p>0.10). In the North-South corridor, by contrast, the crisis effect reverses sign and becomes positive and marginally significant (β = 0.413, p<0.10), consistent with a flight-to-quality logic, while sanctions exert a considerably more destructive effect (β = −4.861, p<0.10) than in the intra-regional corridor. These findings provide empirical benchmarks for stakeholders navigating the accelerating geopolitical fragmentation of the global economy, highlighting the differentiated vulnerability of South-South and North-South trade corridors to economic shocks and sanctions.

JEL Classification : B17 ; C01 ; C32 ; F13

Paper type: Empirical Research