Trade Dependencies

Over the past three decades, production has become increasingly fragmented across countries. Firms organise production through complex global value chains (GVCs), locating extraction, processing, component production, assembly and distribution across different economies. This international specialisation has generated substantial gains from trade — but it has also created an unprecedented network of economic interdependencies.

Global value chains allow countries and firms to specialise in the stages of production in which they are relatively more efficient. This fragmentation can lower production costs, increase product variety, facilitate access to specialised technologies and inputs, and provide risk-sharing against country-specific shocks (Backus et al., 1992; Antràs and Chor, 2021).

Yet the same forces that generate these gains can also concentrate the production of particular goods or inputs in a small number of firms, countries or nodes of the global production network. When those inputs are difficult to replace, a disruption affecting one supplier can propagate through downstream industries and eventually have aggregate economic consequences (di Giovanni and Levchenko, 2010, 2012; di Giovanni et al., 2020; Bonadio et al., 2021).

Why do trade dependencies emerge?

Trade dependencies are not an anomaly of globalisation. They are partly the consequence of the same mechanisms that generate its benefits.

Falling trade, transport and communication costs, together with the integration of new production centres into the world economy, have allowed firms to separate geographically the different stages of production. Countries increasingly specialise not only in industries, but also in particular tasks: extraction, refining, component manufacturing, assembly, logistics, design or services.

Such specialisation can generate economies of scale and substantial productivity gains. International trade can also provide insurance against domestic shocks: when production is disrupted in one economy, foreign production may substitute for it. In that sense, international integration can itself increase resilience.

But specialisation can simultaneously concentrate production in particular locations. A product may ultimately depend on only a handful of producers, even when the final supply chain involves firms located across many countries.

This becomes particularly important when inputs are highly specific. Replacing a supplier may require finding a producer with the appropriate technology, testing and certifying its output, adapting production lines, renegotiating contracts and reorganising logistics.

Supplier relationships can therefore be remarkably persistent. The relevant question is not simply how geographically diversified a supply chain appears, but how easily production and sourcing can actually adjust when one of its nodes is disrupted.

When does interdependence become a vulnerability?

The existence of foreign sourcing is not, by itself, evidence of economic vulnerability. Modern economies import thousands of products, and most of these trade relationships are both economically beneficial and relatively easy to adjust.

The problem arises when a disruption affects a product for which sourcing is highly concentrated and alternative sources of supply are limited. In that case, what begins as a local shock can propagate through production networks.

Evidence from individual disruptions illustrates these mechanisms. Following the 2011 Tōhoku earthquake, disruptions affecting Japanese producers were transmitted to their US affiliates, revealing strong complementarities within international production networks (Boehm, Flaaen and Pandalai-Nayar, 2019).

More recently, the Covid-19 pandemic disrupted transport networks and access to medical goods and intermediate inputs. Using the early exposure of French firms to Chinese lockdowns, Lafrogne-Joussier et al. (2023) show that disruptions to imported inputs affected firms' sales. Inventories helped firms absorb part of the shock, while some firms subsequently adjusted their sourcing towards alternative suppliers.

The pandemic, subsequent semiconductor shortages, Russia's invasion of Ukraine, export restrictions and renewed geopolitical and tariff tensions have therefore brought the resilience of global value chains to the centre of economic-policy debates.

The efficiency–resilience trade-off

These mechanisms create a fundamental trade-off. International specialisation produces efficiency gains, but some forms of specialisation may increase exposure to rare but potentially costly disruptions.

Resilience is therefore a form of insurance — and insurance is costly. Diversifying suppliers, maintaining inventories, duplicating production capacity or supporting domestic production can reduce exposure to shocks, but can also sacrifice some of the gains generated by international specialisation.

This is why the appropriate objective cannot simply be to eliminate foreign dependencies or maximise domestic self-sufficiency. Indeed, quantitative research shows that reshoring production does not necessarily make an economy more resilient when shocks themselves are global (Bonadio et al., 2021).

The relevant policy question is instead: which dependencies generate meaningful risks, how difficult would they be to substitute following a disruption, and what would be the economic or social consequences if supply were interrupted?

Why can public intervention be justified?

Firms already have private incentives to protect themselves against supply disruptions. Yet several mechanisms can create a gap between the amount of resilience chosen by individual firms and the level of resilience that is desirable for the economy as a whole.

Network externalities

In production networks, the consequences of a disruption are not necessarily confined to the firm directly affected. A supplier's failure may disrupt its customers and, through them, firms further downstream. Investments in resilience can therefore create benefits elsewhere in the production network that are not fully internalised by the firm making the investment (Grossman et al., 2021, 2023).

Information externalities

Firms generally have much better information about their direct suppliers than about the suppliers of those suppliers. As a result, a firm may have only limited visibility over its indirect exposure to foreign shocks further upstream in the value chain (Bui et al., 2022).

Private and social costs may differ

For essential goods, the social consequences of a shortage may also be much larger than the private loss borne by an individual importer. This is particularly relevant for products such as pharmaceuticals, medical inputs, energy or goods that occupy critical positions in production networks (Baldwin and Freeman, 2021).

From diagnosis to resilience policy

These considerations imply that resilience policy should begin with a granular empirical diagnosis, rather than from the presumption that foreign sourcing is inherently undesirable.

What risks lie behind a trade dependency?

Once vulnerable products have been identified statistically, the next step is to determine why a disruption would matter. In Mejean and Rousseaux (2024), we therefore cross the trade-dependency diagnosis with four non-exhaustive normative risk dimensions.

1 · Geopolitical risk

A dependency may become particularly problematic when production is concentrated in countries exposed to geopolitical tensions, economic coercion, sanctions, export restrictions or other forms of political risk.

2 · Supply-chain risk

The economic consequences of a disruption depend on where a product sits within the value chain. Shortages of highly upstream inputs can propagate across multiple downstream industries, potentially generating effects far beyond the market in which the initial shock occurs.

3 · Critical-goods shortages

Some products generate social costs that go beyond standard production losses. Pharmaceuticals and their active ingredients are a natural example: interruptions to supply can have direct consequences for public health.

4 · Future competitiveness

A purely backward-looking diagnostic may miss vulnerabilities that are emerging in technologies whose economic importance is rapidly increasing. Batteries, solar technologies, hydrogen and critical raw materials therefore require a forward-looking assessment of concentration and substitutability.

What public policies can improve resilience?

Firms already have private incentives to protect themselves against supply disruptions. Yet several mechanisms create a gap between the resilience an individual firm chooses and the level of resilience that is desirable for the economy as a whole — which is why the toolbox set out in Mejean and Rousseaux (2024) combines subsidies, information provision, coordination and, in some cases, domestic-capacity support, rather than a single instrument.

Firm-level resilience investment — supply-chain visibility, redundancy, agility, vertical integration — is systematically under-provided because of network and information externalities. A supplier's failure does not stop at the firm directly affected: it can disrupt that firm's customers and, through them, firms further downstream. Because these knock-on benefits of a firm's own resilience investment are not fully captured by the firm making it, there is a standard case for public subsidy (Grossman et al., 2021, 2023).

Information externalities compound the problem. Firms typically know much more about their direct suppliers than about the suppliers of those suppliers, leaving them with limited visibility over their own indirect exposure to foreign shocks further upstream (Bui et al., 2022). Real-time monitoring systems — France's tracking of critical drug stocks is one operational example — and EU-level data infrastructure that consolidates firm-to-firm trade records can substitute for what individual firms cannot observe on their own, turning a private blind spot into a public good.

Coordination and standardisation reduce structural fragility by making supply interchangeable across facilities. The US Sematech initiative for semiconductors is the classic example: aligning equipment manufacturers' designs with chip designers' requirements made supply more substitutable across the whole industry. The same logic motivates proposals for standardised chip architectures today — uniform design platforms reduce heterogeneity, keep compatibility across fabrication facilities, and reduce reliance on any single foundry.

Strategic reserves and targeted domestic-capacity investment are warranted where the social cost of a shortage is far larger than the private loss to an individual importer — food, pharmaceuticals and defence are the clearest cases (Baldwin and Freeman, 2021). These investments should also be forward-looking, anticipating future needs in green technologies rather than only current dependencies: batteries, solar components, hydrogen and critical raw materials are not yet flagged as statistical dependencies under a backward-looking diagnostic, but their market structure already looks fragile.

EU-level coordination matters because industrial policy remains a member-state competence while resilience is a Union-wide public good. An uncoordinated response risks a subsidy war between member states rather than a coherent EU-wide diversification strategy. The spatial distribution of public investment also has to balance reinforcing existing industrial clusters — to maximise vertical spillovers where comparative advantage already sits — against revitalising regions that have lost manufacturing employment and could benefit from the investment driven by the environmental transition. This balance is easier to strike at the European level than country by country, since each member state otherwise optimises locally without weighing the effect of its own choices on the others.

Where this research comes from

This section brings together a research programme on trade dependencies and economic resilience developed through several related projects.

• Mejean and Rousseaux (2024), Identifying European Trade Dependencies, Chapter 3 of Paris Report 2: Europe's Economic Security, published by CEPR and Bruegel and edited by Jean Pisani-Ferry, Beatrice Weder di Mauro and Jeromin Zettelmeyer.
• A contribution to the European Investment Bank's Investment Report 2024/2025, Chapter 5, Box C, extending the EU diagnostic over time and studying the persistence, geographical origin and sectoral composition of European trade vulnerabilities.
• Ongoing work on the diagnosis of French trade dependencies, applying the same logic at the national level to understand which products make France particularly exposed to foreign supply disruptions and how the European Single Market can provide alternative sources of supply.
• An ongoing extension towards an Atlas of Trade Dependencies, designed to apply the framework systematically across countries and over time.

What you will find in this section

Main research outputs