Mapping Import Critical Dependencies: An Analysis of European Industrial Vulnerabilities

Abstract

The tension between the benefits of trade openness and the need for national autonomy has been a constant factor in the economic relations among nations. Global supply chains increase this tension, by scaling up the potential of trade specialization, on one side, and by amplifying the effects of shocks between production nodes, on the other. In a world of multiple crises and political fragmentation, there is a need to strengthen supply chains.Thus, it is necessary to identify the products that are most exposed to supply chain disruption. In this article, we review and propose a methodology to identify critical supplies at the product level, that can be applied both to the European Union as a whole, in comparison with the other major world economies, and to the single EU member states. Specifically, we define a series of indicators to establish sequential selection criteria for critical product imports, based on the concentration of imports, the substitutability with exports, and, for EU member states, the substitutability with intra-area flows. Moreover, we add additional selection criteria: the strategic nature of critical products, the risk profile of supplier countries, and the potential import diversification.By leveraging a dataset that gathers information on bilateral trade flows for over 5,000 products (at the 6-digit level) traded among more than 200 countries, we apply the defined criteria to the aggregate of the European Union, comparing it with the two major trading partners, China and the USA, as well as to EU member states.Overall, the analysis suggests that import concentration is the most binding of all constraints identified for all countries analyzed. Differences emerge both in countries’ ability to diversify imports’ country of origin, both at the global level and between EU member states, and concerning the capacity of substituting imports with exports, in particular between China and the U.S., with the latter being characterized by a higher trade deficit. Moreover, the main European industrial economies display different potential substitutability of extra-EU imports with intra-EU trade.However, over the past 10 years, none of the countries analyzed have consistently diversified the origin of their imports. Trade vulnerabilities emerged for all the economies considered, no matter of their size. Indeed, critical dependencies seem to be mainly the result of long-term choices involving specialization, reallocation of international production chains, and efficiency-seeking in selected trade partners. For Europe and the U.S., this process is closely tied to the growth of emerging countries, with China at the forefront.Focusing on a set of intermediate and capital products, critical for European industry in most of the last six years, it is also possible to further characterize dependencies in terms of industrial inputs. We evaluate their strategic relevance and the geopolitical and climate risk attached, related to the countries from which these products are imported. Finally, through an iterative algorithm that redistributes market share among all worldwide existing exporters, besides those already exploited, we investigate whether alternative suppliers of these products are available, in order to diversify imports and decrease trade dependencies.

Keywords: Industrial strategic autonomy, Global value chain, foreign dependencies, import concentration, critical raw material