Unveiling the hidden costs of critical dependencies

This article examines the macroeconomic implications of critical dependencies in the euro area, the United States and China. Using a data-driven approach, it identifies products for which countries rely heavily on a small number of foreign suppliers for their imports in strategic sectors, such as health, energy and digital technologies. A complementary network analysis on the export side shows that, since the 1990s, the euro area and the United States have become significantly more vulnerable to supply disruptions originating from China, whereas China has reduced its dependence on western partners through strategic industrial policies. Using the list of critical dependencies established in the first analysis, a multi-country, multi-sector general equilibrium model, enriched with disaggregated input-output tables, is then used to quantify the impacts of potential supply disruptions. While the costs of a sudden halt to the supply of critical dependencies have risen for the euro area and the United States and declined for China, they remain much higher for China. Although the critical dependencies constitute a minor share of total trade and inputs to production, any disruption to their supply yields disproportionate economic costs owing to their low substitutability. These findings highlight the trade-off between resilience and openness, and call for targeted de-risking strategies (e.g. strengthening domestic capacities, diversifying sources) over broad-based protectionism.