doi.org/10.52340/eab.2026.18.01.08.

This study examines how digitalization and geopolitical shocks interact to shape Georgia’s foreign trade dynamics and transit resilience within today’s fragmented global environment. The accelerating digitalization of international trade has fundamentally transformed the mechanisms through which trade flows are generated, transmitted, and stabilized – particularly under conditions of geopolitical conflict, sanctions, and supply-chain disruptions. The Russia–Ukraine war has sharply heightened transportation risks, disrupted Black Sea logistics, and accelerated the reconfiguration of Eurasian trade corridors, positioning countries such as Georgia in a strategically sensitive yet potentially advantageous role. In this context, geographic location alone is no longer sufficient to secure sustainable economic benefits; instead, trade resilience increasingly depends on institutional efficiency, digital infrastructure, and the capacity to absorb external shocks.
The theoretical foundation of this research draws on both classical and modern gravity models of international trade, as developed by Anderson and van Wincoop and further extended in contemporary empirical literature. Traditional trade theories, including Ricardo’s principle of comparative advantage and the Heckscher–Ohlin model, explain specialization through factor endowments and productivity differences but remain largely static, unable to capture the dynamic effects of geopolitical risk and digital transformation. By contrast, the gravity framework offers a flexible and empirically robust structure for evaluating bilateral trade flows while accounting for both physical and institutional trade costs. In this study, the standard gravity equation is augmented with indicators of digitalization, proxies for geopolitical risk, and measures of institutional distance to better capture the evolving determinants of Georgia’s trade and transit performance.
Empirically, the study employs a multi-method econometric strategy. First, the Poisson Pseudo-Maximum Likelihood (PPML) estimator is applied to address heteroskedasticity and the prevalence of zero trade flows, which are particularly common under crisis conditions. PPML enables consistent estimation of gravity equations even when trade flows collapse due to conflict, sanctions, or logistical breakdowns. Second, the Generalized Method of Moments (GMM) is used to correct for potential endogeneity between trade flows and factors such as digitalization or institutional quality. Lagged values of economic and institutional indicators serve as instruments, ensuring that estimated coefficients capture causal relationships rather than reverse causality. Third, the econometric analysis is complemented by author-designed simulation-based gravity models (SAQ1–SAQ4), which extend classical Tinbergen-type trade equations by incorporating variables related to digitalization, data flows, trade preferences, and geopolitical constraints.
The SAQ modelling framework represents a key methodological innovation of the study. SAQ2 models bilateral trade volumes as a function of GDP, population, distance, borders, trade agreements, digitalization, and data flows, while allowing coefficients to be optimized through nonlinear simulation. SAQ4 extends this approach by incorporating trade concentration and trade intensity indices, including the QGTI index adapted from Georgian trade statistics. This enables the analysis to move beyond aggregate trade volumes and assess the structural quality and diversification of Georgia’s trade relations under varying geopolitical scenarios.
The empirical findings are consistent across PPML, GMM, and simulation-based models. Digital trade facilitation – measured through electronic customs systems, digital logistics platforms, and data-flow intensity – significantly mitigates the adverse effects of geopolitical shocks on bilateral trade flows. Countries and corridors with higher levels of digital integration experience smaller declines in trade volumes during periods of conflict or sanctions, underscoring the stabilizing role of digital infrastructure. At the same time, the results highlight that institutional distance and regulatory fragmentation substantially constrain Georgia’s ability to convert its geographic transit advantages into sustainable economic gains. Even when digital tools reduce administrative delays, weaknesses in governance quality, regulatory harmonization, and contract enforcement continue to elevate transaction costs.
The DCFTA with the European Union plays a dual role in this context. While it provides a structural framework for regulatory convergence and market access, its short-term trade effects are constrained by adjustment costs and institutional asymmetries. The models suggest that without parallel investment in digital governance and trade facilitation, DCFTA-driven liberalization alone is insufficient to generate sustained trade expansion under conditions of geopolitical stress.
The discussion underscores that digitalization functions as a critical mediating mechanism between geopolitics and trade. Digital platforms reduce informational asymmetries, enhance customs transparency, and enable firms to reconfigure supply chains more rapidly in response to shocks. Yet digitalization does not automatically guarantee resilience; it must be embedded within a broader institutional ecosystem that supports interoperability, regulatory trust, and cross-border data exchange. Georgia’s experience demonstrates that partial digitalization without institutional convergence yields only limited resilience gains.
From a policy perspective, the findings imply that strengthening Georgia’s role as a Eurasian transit hub requires an integrated strategy that combines digital trade facilitation, institutional reform, and geopolitical risk management. Investments in electronic customs, digital logistics, and data-driven trade administration should be aligned with deeper regulatory convergence with the European Union and regional partners. Moreover, risk-management mechanisms must be incorporated into trade governance frameworks to ensure continuity under conditions of military conflict or sanctions.
In conclusion, the study shows that digitalization significantly enhances Georgia’s trade resilience in the face of geopolitical shocks, but its full economic potential can only be realized when supported by institutional convergence and coordinated governance. The combination of gravity-based econometric analysis and simulation-based modelling provides robust evidence that trade sustainability in the modern era depends not only on geography but increasingly on digital and institutional capacity.

Keywords: Digital trade; geopolitical risks; gravity model; PPML; GMM
JEL Codes: F14, F15, F17, O33, C51

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