Oscar Guinea and Vanika Sharma / Apr 2022
Political leaders all over the world have been calling for strategic autonomy. Afraid of shortages, many European capitals are calling for the re-shoring of supply chains. These concerns, however, are not just dictated by a lack of trust in supply chains, but also bring forth an underlying fear of dependency.
In international trade, the issue of dependency appears when a company, or a country, becomes the main provider of certain goods or services and uses this power to impose its market conditions or achieve its political goals. This has become a crucial point of discussion in the current context of the Russian war on Ukraine. Europe, along with its allies and partners, has responded with an unprecedented package of sanctions that will have deep effects on the Russian economy. For products where Russia faces strategic dependencies from the West, Russian firms will struggle to find alternate suppliers. At the same time, the EU also finds itself in a pickle, unable to stop EU imports of oil and gas from Russia, as the EU does not have alternative suppliers to provide the amounts of energy that it requires.
Since fear of dependency has rapidly become a powerful engine propelling a more muscular EU Industrial Strategy, it is important to ask: how big is this problem? If the EU is dependent on some products made abroad, which are these products and where do they come from? And once these products have been identified, what can policymakers do to reduce this dependency?
In a new ECIPE study, we present a conceptual framework to measure EU’s trade dependencies, consisting of two indicators: the first measures the share of EU imports from outside the EU over EU production proxied as the sum of imports and exports, while the second indicator considers the market concentration using the Herfindahl-Hirschman index (HHI). To define the first condition, EU imports from outside the EU must be equal to or higher than 75% of EU total imports and extra-EU exports. The second condition is a threshold of 0.25 for the Herfindahl–Hirschman Index (HHI) which defines markets as highly concentrated.
Our analysis shows that EU import dependency on non-EU countries may not be as large as expected. The value of imported goods defined as dependent was €50 billion or 1.2% of EU total imports. Moreover, these 233 product categories include many different kinds of products – not all vital for the EU economy – from different trade partners – not all of them unreliable partners. Among these products, there are some which can be easily substituted, or the economy can operate without them like agricultural goods such as bamboo and ginseng, beverages like whisky or tequila, and textiles such as silk, but also energy, manufacturing, and chemical products which could be more difficult to replace. Most of these products come from China, the United States, and Russia.
Stockpiling and subsidising domestic production are two policy options that the EU is already pursuing to lower dependencies. Since 2020, many EU member states have built stocks of personal protective equipment to be used in case of shortages, and the EU has put forward a proposal for the European Chips Act that aims to double the production of semiconductors within the EU by 2030. Yet, the cheapest option to lower dependency is seldom discussed. Businesses can diversify their current sources of supply and the EU can carry out policies to support these actions, such as getting rid of import tariffs and accepting the regulatory processes of more non-EU countries.
Given the small size of the EU imports in which the EU can be considered dependent, it makes no sense to base Europe’s new industrial policy on a general fear of dependency. The policies required need to be much more specific to certain products (e.g., oil and gas) and certain export countries (e.g., Russia) and should facilitate better conditions for domestic production of these products, like allowing the mining of rare earths in Europe. Moreover, many of these products are easy to substitute and the economy can function without them – like EU imports of ginseng and bamboo. Strategic policies for such goods do not hold up. Some may recall that France was mocked for running a ‘strategic yogurt policy’ in 2005 after some politicians blocked a foreign takeover of Danone. Just like France did not need a “yogurt strategy” then, the EU does not now need an industrial strategy to produce bamboo or a strategic ginseng policy.