A few days ago, the European think tank-Centre for International Political Economy (ECIPE) released a report titled “Should the EU pursue a strategic policy? An Analysis of Trade Dependence in the New Geopolitics” report. The report analyzes the EU’s current industrial policy objectively from a unique perspective, and believes that there are actually fewer types of products imported from non-EU countries (regions) that are regarded as “dependent”, and the EU does not need to consider its new industries. Policies are built on a general fear of dependence. It is untenable for the EU to implement a “strategic ginseng policy” (policy implemented for non-strategic commodities) similar to ginseng shortages (non-essential shortages), and the EU should take an objective view of the current EU supply chain problems , rather than simply replacing imports or simply moving supply chains back to Europe. The EU should analyze the EU’s external dependence relationship from a higher level, and then design appropriate policies to solve those problems that really exist “dependence” and have a greater impact on the European economy.
Reducing external dependence has become a global trend
The Russia-Ukraine conflict has opened up a new debate on Europe’s energy dependence on Russia. Some European countries are calling for the re-establishment of supply chains amid fears of product shortages. Back in 2020, the European Commission vowed in its New EU Industrial Strategy to “take full advantage of localisation opportunities to bring more manufacturing back to the EU in certain areas”. The recently introduced European Chip Law even mentions doubling semiconductor production within the EU by 2030 and securing critical supplies during the crisis. These concerns are symptomatic of the EU’s strategic dependence debate and the need for modern tools to protect itself from the risk of supply chain disruptions.
However, this debate on “foreign dependence” is not only happening in Europe, but is spreading globally. Many countries are considering similar issues and policies, including the United States and China.
Fear of dependence is a powerful driving force behind the EU’s industrial policy. In the words of its chief architect, EU Internal Market Commissioner Thierry Breton, “We clearly need to diversify and reduce our economic and industrial dependence”. From the new EU medicines strategy to the European chip law, reducing the EU’s reliance on the rest of the world has become a major starting point for public policy. In the European Commission communication outlining the EU’s New Industrial Strategy, the word “dependence” appears 42 times and the word “resilience” appears 22 times. Trade dependence and shortages are the main forces driving the new EU industrial policy in Europe.
Excessive fear of external dependence
The report proposes that the EU defines “import dependence” as meeting two conditions at the same time: the first condition is that EU imports from non-EU members must be equal to or higher than 75% of total EU imports and exports, if less than 75% It means that EU companies have the expertise to produce the product and can expand production in the event of a crisis; the second condition is that EU imports from non-EU members are supplied by a few countries (meaning that the import sources are not diverse enough).
After analysis, it is believed that less than 3% of EU imported products meet the two conditions of “foreign dependence” at the same time. Through the analysis and evaluation of nearly 9,000 kinds of product dependencies in the EU, the report analysis believes that, as shown in Figure 1, only the first quadrant (orange area) includes 233 kinds of goods that meet the conditions of trade dependence, while the third quadrant includes 8,454 kinds of EU low-dependent goods. Commodities; 228 and 70 in the second and fourth quadrants are commodities with limited dependence, either because EU imports from outside the EU are relatively low, or because the EU has a large number of external suppliers (see Figure 1).
According to the analysis of the report, most of the commodities that meet the conditions of external dependence are easy to substitute and non-strategic commodities (that is, the “ginseng” commodities mentioned earlier in the article), and the “strategic policy” formulated by the EU for “ginseng commodities” meaningful. Of the 233 EU-dependent products, 61% are agricultural products, beverages, textiles, plastics and wood products, as well as manufactured products such as artificial flowers, wigs or watches, because they are easily replaceable and even if Europe is no longer Importing them will also have a very limited impact on the European economy, not enough to pose a threat to the EU. Minerals, fuels or certain spirits, which account for 7%, are dependent products because they are only extracted and imported from specific geographic areas. Commodities such as insulin and liquid crystal, which account for 38%, belong to the manufacturing, chemical and pharmaceutical industries and are difficult to replace (these are the real products that need attention). Therefore, it makes no sense to focus the EU’s new industrial support policy on this, just because the EU is at risk of dependence on products in the first quadrant.
China, Russia and the US are the EU’s largest suppliers of trade-dependent goods. The most important countries for these 233 products are China (51 products worth 23.4 billion euros), Russia (10 products worth 7.9 billion euros) and the United States (30 products worth 3.5 billion euros) (see Figure 2).
Only 18 products in the EU meet the conditions of trade dependence on China, and only 10 in Russia. The report pointed out that although the EU is most dependent on China, from the perspective of the 51 Chinese products that “rely on” the most, mainly agricultural products, such as bamboo and ginseng, and textiles such as silk, the impact of these on the European economy can hardly be considered. is crucial. However, the EU’s dependence on China’s chemical and pharmaceutical raw materials, rare earths such as scandium, and some mechanical products may affect the European economy to a certain extent, which should be paid attention to. The EU relies on Russia for 10 products, including gas and fuel.
Policy options to reduce external dependence
Finally, the report believes that the EU should analyze which products are really critical to the EU economy based on different products from different trading partners. Not all products come from unreliable partners; and for some products, the EU’s key supply chain needs to rely on Other countries can function (look at the issue of “dependency” objectively).
The report discusses the following policy options for different situations:
1. Build an inventory of dependent products. EU businesses and governments have the option to build up inventories of dependent products so they do not face shortages in times of crisis. Inventories can cushion the shock and reduce the likelihood of shortages, but are unlikely to make up for the sudden increase in demand caused by the shock.
2. Subsidize EU companies to produce “dependent” products. As with the newly enacted European Chip Law, domestic production costs to receive subsidies will be high. Subsidizing domestic production may not enhance the EU’s ability to cope with shortages. Because semiconductors are globalized, even if Europe subsidizes semiconductors, it is only part of the global semiconductor supply chain and cannot get rid of its dependence on other parts of the supply chain controlled by non-EU countries, because the shortage of this part of the supply chain still exists. Therefore, subsidies to the EU are implemented on the basis of a full understanding of EU and global capacity, which may already have enough capacity to cover a sudden shortage of a particular product (adding new capacity would only hurt Europe itself).
3. Further diversification of non-EU suppliers could reduce trade dependence. This is the current strategy to reduce dependence on Russian hydrocarbons. It is important for policymakers to understand what the real causes of shortages are in order to take effective measures to deal with them. If the shortage is due to a temporary supply-demand mismatch, most of it will be resolved without any policy intervention. The same conclusion applies to other random events, such as a volcanic eruption, an earthquake, or another epidemic. The market will adjust itself after the event. The report also cites an example of a shortage of medical personal protective equipment (PPE) in the early days of the Covid-19 pandemic to prove this point. The combination of higher imports and domestic production proved to be able to meet the sudden increase in demand. In April 2020, EU imports of protective clothing from outside the EU accounted for 55% of total EU imports. The increase in the share of additional EU imports of protective clothing was driven by an average growth rate of 67% in April, May and June, while the purchases of protective clothing by EU countries (intra-EU imports) fell by 8% year-on-year in these three months. percent (see Figure 3).
The figure shows that Europe has become more resilient due to international trade. Import diversification increases in all EU member states when imports from outside the EU are taken into account. The report also pointed out that products such as scandium, rare earth or liquid crystals, which China relies on for the production of screens for electronic equipment, can also find new production sites by expanding the diversification of imports from other countries.
in conclusion
Fear of dependence eventually became the driving force behind the EU’s tough industrial policy. Of course, there are strategic loopholes in the EU. Some goods are imported from a few non-EU member states (regions) and are not produced and processed within the EU. This is the case for only 233 of the nearly 9,000 products, and many of these 233 products are fungible and non-strategic commodities. It is totally unnecessary for the EU to focus its new industrial policy on these non-strategic products. Chinese ginseng and bamboo should not be the target of European industrial policy, so there is no need for a “strategic policy” on ginseng.
Stockpiling and subsidizing domestic production are two policy options adopted by the EU to reduce import dependence. However, both policies would increase costs for the EU. Little research has been done on how to reduce the cost of dependence, but the report recommends that companies can diversify their existing sources of supply and that the EU should implement policies to support these actions. To encourage diversification and help companies quickly adjust to diversify their supply chains, the EU could remove import duties and accept regulatory procedures from more countries. With regard to the EU’s dependence on Chinese goods, the report suggests that EU companies can expand their purchases of non-Chinese goods by diversifying their purchases to reduce dependence (but not completely replace Chinese imports) .
Analysis of the data shows that the nature of the problem of import dependence is political, not economic. Semiconductors are a good example. The chip shortage is due to production not keeping up with demand, not because a natural disaster has clogged supply chains in Asia. Subsidizing EU semiconductor production is a political decision, but unlikely to free Europe from concerns about its import dependence.
Source: Mechanic Intelligence
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