Felbermayr | Fostering resilience of EU trade

Fostering the Resilience of EU Trade Links

Gabriel Felbermayr

European Trade Policy Day| Oct. 11, 2020

Felbermayr | Fostering resilience of EU trade 2

Risks affecting extra-EU trade links

• Classical business risks (competition, bankruptcies, …)

• Natural or health related hazards (climate change, Covid 19)

• Political risks (weaponization of trade and currencies)

• Political and technical risks affecting critical infrastructures

(internet, power supply, …) and thus national security

Different risks, different policies

Policies aiming at mitigating risks, and adapting to

materialized risks

Economic foresight and business intelligence

Felbermayr | Fostering resilience of EU trade 3

Some general insights from economic research

• Does higher trade openness and specialization increase GDP volatility?

Theory: possible, if shocks are industry-specific; not, if shocks are at country-level

Empirics: Shocks are predominantly country-level

• Trade openness helps speed up recovery after natural disasters

• When all countries are hit by same shock at the same time, trade openness is not useful

(but also not harmful)

Corona: Shock highly but not perfectly correlated over geographies; not fully

synchronized over time

Source: Caselli, Koren, Lisicky, and Tenreyro (2020), Diversification through Trade. The Quarterly Journal of Economics 135(1): 449–502.

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How diversified are EU27 imports across suppliers?

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Very diversified supplier base

• 91% of all products (HS6) are imported from at least 10 countries, amounting toabout 99.3% of the EU27 import value

• 80 products out of about5000 stem from at most 3 countries, amounting toabout 350 mn US$

(see also: https://ecipe.org/blog/how-survive-trade-apocalypse/)

Source: BACI (CEPII), own calculations and illustration. Bubble size is proportional to US$-value of imports. Data for 2018.

26 productsout of ~5000 from a single

country

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80 Products with less than three supplying country

• Raw materials: e.g. Uranium ore [240 mn US$, 2 suppliers], Thallium, Barium, Berryllium, …

Source: BACI (CEPII), Data for 2018.

• Some very specialized chemical substances: e.g. anthraquinone, fenproporex, …

• Some very specialized agri-food products:e.g. live goats, live fowl weighing > 185g, …)

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How diversified are Austrian imports across suppliers?

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Source: BACI (CEPII), own calculations and illustration. Bubble size is proportional to US$-value of imports. Data for 2018.

Single market garantiesdiversification

• 37% of all products (HS6) are imported from at least 10 countries, amounting toabout 82.9% of the Austrian import value

• 1121 products out of about5000 stem from at most 3 countries, amounting toabout 1612 mn US$

382 products withone supplier,

amounting to 63 mn US$ (0.13% of

imports)

Felbermayr | Fostering resilience of EU trade 7

EU trade: getting more concentrated over time?

Source: BACI (CEPII), own calculations and illustration. Herfindahl index takes value of 100 if trade is fully concentrated on 1 foreign country.

At the macro level, EU extra-trade is strongly diversified

• True for both exports and imports

• Concentration has not increased over time

• Index overestimatesconcentration, as internal trade is neglected

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Herfindahl index of concentration

Exports Imports

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How concentrated are EU27-imports in comparison?

Source: BACI (CEPII), own calculations and illustration. Herfindahl index takes value of 100 if trade is fully concentrated on 1 foreign country.

• Extra-EU importconcentration hasremained approximatelyconstant over last twodecades

• Concentration went down strongly in China

• Concentration went up in the US0

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Herfindahl index of concentration

EU27 US CN

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Source: OECD, own illustration. Covid-19-goods de-fined by World Customs Organisation.

Top-20 exporters of Covid-19-goodsCountry shares (%) in total global trade of Covid-19 related goods, 2018

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Exports Imports

• 10 EU countries in top-20 of worldexporters

• EU27 has a trade surplus in Covid-19 goods

• Strong two-way trade

• Generalized move toself-sufficiencyharms EU

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Fostering resilient trade links

Supporting the diversification of the supplier base

• Crucial role of Single Market

• Trade agreements: Example of EU-Korea FTA. Importance of flexible rules of origin.

• Right incentives in (quasi-)public procurement (e.g. medication, security equipment, …)

• Expand trade credit guarantee systems to imports

• Policy consistency: Overly ambitious supply chain act would be counterproductive

Where diversification is overly costly (raw materials)

• Incentives and structures to promote circular economy

• Incentives for maintaining stocks (fiscal rules)

• Trade diplomacy and strategic partnerships

• Joint strategic reserves at EU-level

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Warnings

1. Risk of counterproductive effects

• Reshoring must not lead to reduced supplier diversification, else it increasesvulnerability to domestic shocks

• Public interference into supply chains reduces competitiveness of domestic firms, thereby weakening their resilience

2. Have no illusions

• Full insurance through trade against highly correlated shocks is not possible

• Stockpiling is costly and possibly quite wasteful, in particular in relation to black-swan events

Felbermayr | Fostering resilience of EU trade

@kielinstitute

www.ifw-kiel.de

Prof. Gabriel Felbermayr, Ph.D.President

T +49 431 8814-236F +49 431 8814-500M felbermayr@ifw-kiel.de

@GFelbermayr

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