Unequal Decoupling

Abstract:

Who gains and who loses from geopolitical fragmentation? We develop a general-equilibrium, quantitative framework that incorporates cross-country heterogeneity in income and wealth inequality, capturing rich income dynamics in both advanced and emerging economies. We then consider two fragmentation scenarios: the closure of the United States or of China to trade and financial flows with the rest of the world. We find that in the United States, only households at the top of the wealth distribution experience welfare gains in both scenarios, while all other households incur losses. Outside the United States, the average welfare outcome is generally positive when the United States closes, as capital becomes more abundant in all countries. The reverse is generally true when China ceases lending. These average effects mask significantly heterogeneous impacts of these shocks on workers and owners of capital in each country.