How to de-risk: European economic security in a world of interdependence

Note: The figure shows the numbers of products for which the EU is import-dependent according to various methodologies, starting with that of the European Commission (2021) (second blue bar) and adding the criteria proposed by Mejean and Rousseaux, based on the ratio of imports over domestic absorption (red bar) and the degree of product stickiness (green bar). [...] Baqaee et al (2024) simulated the impact of a decoupling from China in a trade model with 43 countries and 56 sectors, in the form of a complete stop in trade between a ‘Friends’ bloc comprising the G7 countries, Spain, the Netherlands and an artificial country comprising the rest of the EU, and a ‘Rivals’ bloc including China and Russia, on the assumption that trade continues both within these bl. [...] The intuition behind this result is that the welfare costs of an end to trade integration between China and the ‘Friends’ group are mitigated by the fact that the Friends continue to trade with each other and with the ‘Neutrals’, and that these groups are sufficiently large and diverse to preserve most of the gains from trade. [...] At the same time, the combination of a heightened sense of the risks created by concentrated exposure to China and the structural slowing of the Chinese economy might push in the other direction. [...] The first is the obvious risk, already mentioned in section 2, of a broad disruption to European trade with the United States in the event of a return of Donald Trump to the US presidency3.