ECB | Occasional Paper Series: Geopolitics and trade in the euro area and the United States: de-risking of import supplies?

Abstract:

Based on granular data at the product level, this paper looks at whether and how the euro area and the United States have modified their import sourcing strategies since 2016, the role played by geopolitical tensions and the potential impact on import prices. It considers two different, but not mutually exclusive, changes to sourcing strategies for a given product: (i) increasing the number of sourcing countries and (ii) reducing the import market share of the main supplier country. Data suggest that both regions have, on average, increased the number of sourcing countries, particularly for products that are mostly imported from “geopolitically distant” countries (based on UN General Assembly voting records). Broadening the number of supplier countries has come at a cost; however, it has affected only a small share of total imports, with modest implications for inflation and the terms of trade. At the same time, evidence of a reduction in the import share of the main supplier country is more mixed and is generally associated with a shift towards cheaper – but not necessarily geopolitically closer – countries, suggesting that cost considerations take precedence over supply chain resilience and national security concerns.

Non-technical summary:

Trade tensions, the COVID-19 pandemic and the war in Ukraine have highlighted vulnerabilities in foreign sourcing of intermediate and final goods, heightening appreciation of geopolitical risks. This occasional paper looks at how that is affecting trade patterns. It uses detailed product-level information in order to understand how US and euro area firms’ sourcing strategies have changed since 2016 and ascertain the potential costs of those changes. It focuses on two non-mutually exclusive strategies aimed at lowering risks of supply chain disruption for a given product: (i) diversification of sourcing countries (extensive margin) and (ii) rebalancing by reducing the market share of the main supplier country (intensive margin). We then assess whether those shifts have a geopolitical dimension. We find that both regions have diversified, increasing the number of sourcing countries on average for each product. That has accelerated since the pandemic, especially in the euro area. Geopolitical risks have played a role here: diversification has been stronger for products where the euro area and the United States used to rely particularly heavily on imports from geopolitically distant countries (e.g. China, Russia and Iran). Diversification has come at a cost, as the new sourcing countries are, on average, more expensive than the previous suppliers. However, the impact on aggregate prices has been small: over the period 2016-23, products from new countries accounted for a very small share of total imports (0.2-0.3%), implying modest effects on inflation and the terms of trade. Furthermore, while there have been strong declines in China’s share of total US imports since 2018 and in Russia’s share of total euro area imports since 2022, evidence of rebalancing away from other geopolitically distant countries (i.e. reductions in the market shares of such supplier countries) is less clear. In general, geopolitically distant countries’ shares of total euro area and US imports remain high. Indeed, China’s share of total euro area imports has increased by 3 percentage points (a rise of 15%) since 2016. For those products where the United States and the euro area have reduced their reliance on a main supplier, rebalancing seems to have primarily reflected cost concerns – i.e. a desire to shift towards cheaper sourcing countries – rather than supply chain resilience or national security considerations. Indeed, evidence suggests that rebalancing towards geopolitically close countries is costly, implying a shift towards imports that are 20-40% more expensive on average.

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