  Geopolitical conflicts have increasingly been a driver of trade policy. We
study the potential effects of global and persistent geopolitical conflicts on
trade, technological innovation, and economic growth. In conventional trade
models the welfare costs of such conflicts are modest. We build a multi-sector
multi-region general equilibrium model with dynamic sector-specific knowledge
diffusion, which magnifies welfare losses of trade conflicts. Idea diffusion is
mediated by the input-output structure of production, such that both sector
cost shares and import trade shares characterize the source distribution of
ideas. Using this framework, we explore the potential impact of a "decoupling
of the global economy," a hypothetical scenario under which technology systems
would diverge in the global economy. We divide the global economy into two
geopolitical blocs -- East and West -- based on foreign policy similarity and
model decoupling through an increase in iceberg trade costs (full decoupling)
or tariffs (tariff decoupling). Results yield three main insights. First, the
projected welfare losses for the global economy of a decoupling scenario can be
drastic, as large as 15% in some regions and are largest in the lower income
regions as they would benefit less from technology spillovers from richer
areas. Second, the described size and pattern of welfare effects are specific
to the model with diffusion of ideas. Without diffusion of ideas the size and
variation across regions of the welfare losses would be substantially smaller.
Third, a multi-sector framework exacerbates diffusion inefficiencies induced by
trade costs relative to a single-sector one.
