RegStream

Background slides to Policy Panel

“Trade and Financial Linkages in the Era of Geopolitical Fragmentation”

CEBRA ITM/IFM joint Program Meeting, hosted by the Central Bank of the UAE, the Emirates Institute of Finance, and NYU Abu Dhabi

20 November 2023

Philip R. Lane Member of the Executive Board

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Global value chain and fragmentation Rubric

Euro area imports of intermediate goods

by region

(shares of total imports, deflated)

Asia Europe excl. EU EU excl. EA North America

South America Africa Oceania

2012

2023

100%

80%

60%

40%

20%

0%

Sources: Eurostat and ECB staff calculations.

Notes: See also Di Sano, M. , Gunnella, V. and Lebastard, L. (2023), “Deglobalisation: risk or reality?”, The ECB Blog, 12 July. The definition of intermediate goods is based on classification by Broad Economic Categories (fifth revision). Europe excluding EU includes Russia. For 2023, the data covers January-August 2023.

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Real imports and sourcing of intermediate inputs Rubric

Global imports by type of trade

(percentage deviation from steady state)

Sourcing of intermediate inputs (world)

(percentage points, market share)

0

-5

-10

-15

-20

-25

-30

Flexible

Range

Rigid

Total

Intermediate

Final

100

98

96

94

92

90

Initial

Imports between

blocs

Imports within blocs

Domestic sourcing

Final

Sources: Baqaee and Farhi, Asian Development Bank, FPS database and ECB calculations.

Notes: See also Attinasi, M. -G. , Boeckelmann, L. and Meunier, B. (2023), “Friend-shoring global value chains: a model-based assessment”, Economic Bulletin, Issue 2, ECB. Non-linear impact simulated through 25 iterations of the log-linearised model. In the left chart the grey areas indicate the range between the flexible setup (yellow line) and the rigid setup (red line) and provide an illustration of the scope of the effects associated with the trade shock. The right chart refers to the flexible setup. The red bar indicates losses in market share while the green bars indicate gains in market share.

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Change in Gross National Expenditure Rubric

Global GNE

(deviation from steady state, percentages)

Individual countries GNE (deviation from steady state, percentages)

Flexible

Range

Rigid

Flexible

Range

Rigid

0

-1

-2

-3

-4

-5

-6

-7

Singapore

Vietnam

South Korea

Mexico

Russia

Japan

Euro area

United Kingdom

United States

China

World

World excluding euro area

-12

-10

-8

-6

-4

-2

0

Sources: Baqaee and Farhi, Asian Development Bank, FPS database and ECB calculations.

Note: See also Attinasi, M. -G. , Boeckelmann, L. and Meunier, B. (2023), “Friend-shoring global value chains: a model-based assessment”, Economic Bulletin, Issue 2, ECB. The non-linear impact is simulated through 25 iterations of the log-linearised model. In both charts, the grey areas indicate the range between the flexible setup (yellow line) and the rigid setup (red line) and provide an illustration of the scope of the effects associated with the trade shock.

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Nominal impact of trade fragmentation Rubric

Consumer prices

(deviation from steady state level, percentages)

Flexible

Range

Rigid

6

5

4

3

2

1

0

United States China United Kingdom World

Euro area

Wages

(deviation from steady state level relative to medium-skilled

labour, percentage points)

0. 20

0. 15

0. 10

0. 05

0. 00

-0. 05

-0. 10

-0. 15

East

West

Low-skilled

High-skilled

Sources: Baqaee and Farhi, Asian Development Bank, FPS database and ECB calculations.

Notes: See also Attinasi, M. -G. , Boeckelmann, L. and Meunier, B. (2023), “Friend-shoring global value chains: a model-based assessment”, Economic Bulletin, Issue 2, ECB. Non-linear impact simulated through 25 iterations of the log-linearised model. In the left chart the grey areas indicate the range between the flexible setup (yellow line) and the rigid setup (red line) and provide an illustration of the scope of the effects associated with the trade shock. The right chart refers to the flexible setup.

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Past and future trends in location of production/operations Rubric

Last five years

(percentage of respondents)

Next five years

(percentage of respondents)

Into the EU Neither into nor out of the EU Out of the EU

Into the EU Neither into nor out of the EU Out of the EU

All companies

Near-shoring, diversifying

and/or friend-shoring

Near-shoring

Diversifying

Friend-shoring

All companies

Near-shoring, diversifying

and/or friend-shoring

Near-shoring

Diversifying

Friend-shoring

0

20

40

60

80

100

0

20

40

60

80

100

Source: ECB.

Notes: See also Attinasi, M. -G. , Ioannou, D. , Lebastard, L. and Morris, R. (2023), “Global production and supply chain risks: insights from a survey of leading companies”, Economic Bulletin, Issue 7, ECB.

Responses to the question “How has the location of your company’s production/operations changed in the last five years and how do you expect it to evolve in the next five years?” Respondents could choose one or more of the following replies: Tendency to (i) move more production/operations into the EU, (ii) move more production/operations out of the EU, (iii) (re)locate more production/operations geographically closer to the final production location or country of sales (“near-shoring”), (iv) diversify production/operations to a greater extent across countries, (v) (re)locate more production/operations to countries politically closer to the main country of sales (“friend-shoring”). The category “Neither into nor out of the EU” captures the responses of firms which did not signal a tendency to move production either into or out of the EU.

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Importance of factors for moving production/operations into or out of the EU Rubric

(percentage of responses)

Into the EU

Out of the EU

Geopolitical risk/uncertainty Climate change Regulation Transport costs Financial incentives Access to inputs Energy costs Local content requirements Tariff requirements Cost of inputs Labour (cost, skills, shortages) Brexit Informal administrative Geographical distribution of sales Technological change

-50

-25

0

25

50

75

Source: ECB Notes: See also Attinasi, M. -G. , Ioannou, D. , Lebastard, L. and Morris, R. (2023), “Global production and supply chain risks: insights from a survey of leading companies”, Economic Bulletin, Issue 7, ECB. Responses to the question “Which of the following factors do you consider particularly important in relation to recent or planned future moves of production/operations into or out of the EU?” Respondents could choose any of the above replies that applied to their company. Responses are ranked according to the net score (“into the EU” less “out of the EU”).

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Past and future trends in input sourcing Rubric

Last five years

(percentage of respondents)

Next five years

(percentage of respondents)

Into the EU Neither into nor out of the EU Out of the EU

Into the EU Neither into nor out of the EU Out of the EU

All companies

Near- shoring, diversifying

and/or friend-shoring

Near- shoring

Diversifying

Friend-shoring

All companies

Near-shoring, diversifying

and/or friend- shoring

Near-shoring

Diversifying

Friend- shoring

0

20

40

60

80

100

0

20

40

60

80

100

Source: ECB.

Notes: See also Attinasi, M. -G. , Ioannou, D. , Lebastard, L. and Morris, R. (2023), “Global production and supply chain risks: insights from a survey of leading companies”, Economic Bulletin, Issue 7, ECB.

Responses to the question “How has the geographical distribution of your company’s cross-border sourcing of inputs changed in the last five years and how do you expect it to evolve in the next five years?” Respondents could choose one or more of the following replies: Tendency to increasingly source inputs (i) from inside the EU, (ii) from outside the EU, (iii) geographically closer to the country of production (“near-shoring”), (iv) from a more diverse range of suppliers in different countries, and (v) from countries politically closer to the country of sales (“friend-shoring”). The category “Neither into nor out of the EU” captures the responses of firms which did not signal a tendency to source a higher share of inputs from within or outside the EU.

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Supply chain dependency and risks by country Rubric

(percentage of responses)

My company sources critical inputs from this country My company sources critical inputs from the country, and this is considered subject to elevated risk More generally, this country poses - or could pose - risks to supply chains in my sector

80

60

40

20

0

-20

China

United States

Taiwan

India

Brazil

Turkey

Russia

Ukraine

United Kingdom

Source: ECB Notes: See also Attinasi, M. -G. , Ioannou, D. , Lebastard, L. and Morris, R. (2023), “Global production and supply chain risks: insights from a survey of leading companies”, Economic Bulletin, Issue 7, ECB. Responses to the questions (i) “Does your company presently source critical inputs which depend (fully or heavily) on supply from a specific country; and if so, which one(s)?”, (ii) “Do you consider the supply of critical inputs from this country or any of these countries to be subject to elevated risk?”, and (iii) “More generally, which countries (if any) pose – or could pose – risks to supply chains in your sector?” Countries mentioned by three or more respondents are included in the chart. Many more countries were mentioned by just one or two respondents.

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Ease of substitution of inputs and strategies to reduce country exposure Rubric

Ease of substitution with inputs

originating elsewhere (percentage of respondents)

Implementation of strategies to reduce

country exposure (percentage of respondents)

Very easy

Easy

Hard

Very hard

No, we have neither adopted, nor do we intend to adopt, any

strategy

No, but we are considering

implementing

a strategy in the near future

Yes, mostly by shifting sourcing of

inputs from other countries located

Yes, mostly by shifting sourcing of

inputs from other countries outside

the same

in the EU

the same

the EU

Yes, implementing strategies other than those listed above

0

20

40

60

80

0

10

20

30

40

Source: ECB.

Notes: See also Attinasi, M. -G. , Ioannou, D. , Lebastard, L. and Morris, R. (2023), “Global production and supply chain risks: insights from a survey of leading companies”, Economic Bulletin, Issue 7, ECB.

Responses to the questions (i) “In case these inputs were suddenly no longer available, how easy would it be to substitute them with inputs originating elsewhere?” and (ii) “Is your firm implementing or is it planning to implement a strategy to reduce exposure to the country – or countries – concerned?” The percentages of responses refer only to those who said that their company presently sourced critical inputs which depended (fully or heavily) on supply from a specific country and that they considered to be subject to elevated risk. A small number of respondents gave more than one response to question (ii) and these responses have been weighted accordingly.

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Overall impact of production location and input sourcing decisions Rubric

Last five years

(percentage of respondents)

Next five years

(percentage of respondents)

Decrease

Unchanged

Increase

Decrease

Unchanged

Increase

80

60

40

20

0

Share of value

added in the EU

Share of

employment in the EU

Average prices

in the EU

80

60

40

20

0

Share of value

added in the EU

Share of

employment in the EU

Average prices

in the EU

Source: ECB.

Note: See also Attinasi, M. -G. , Ioannou, D. , Lebastard, L. and Morris, R. (2023), “Global production and supply chain risks: insights from a survey of leading companies”, Economic Bulletin, Issue 7, ECB.

Responses to the question “What has been/will be the impact of changes in production location and/or cross-border input sourcing on your company’s activity, employment and selling prices in the EU?”

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