Quantifying Strategic Dependence

Niccolo Marco Eugenio Consonni and Glenn Magerman

No 2026-09, Working Papers ECARES from ULB -- Universite Libre de Bruxelles

Abstract: We develop a Strategic Dependency Index (SDI) to quantify the welfare cost of product-levelimport price shocks. Unlike existing empirical indicators based on concentration metrics and ad hocthresholds, the SDI is derived from a structural cost-of-living framework, and allows for additivedecomposability across products, source countries and destination countries. We apply the SDIto the EU27, and estimate trade elasticities, love-for-variety parameters, and origin-destinationspecific taste shifters using highly disaggregated 8-digit product-level trade data over 2002–2021,instrumenting for prices and expenditure shares to address endogeneity. Three sets of findingsemerge. First, the products generating the largest welfare losses are petroleum oils, liquefied naturalgas, iron ores, and selected basic metals. Their strategic relevance stems from the interaction of bothlow substitutability across sources and large expenditure shares. Second, strategic dependencyvaries sharply across EU member states even for the same product, driven by fundamentallydifferent channels — high substitution elasticities in some countries versus large expenditure sharesin others — implying that uniform EU-wide policy responses may fail to address the heterogeneoussources of vulnerability. Third, the suppliers contributing most to aggregate welfare exposuredo not coincide with the geopolitical rivals dominating policy discourse: China, the USA, andRussia do not lead the SDI ranking. The SDI provides a tractable, theory-consistent framework forevaluating targeted policy interventions aimed at reducing strategic trade exposure.

Keywords: strategic trade dependence; import vulnerability; welfare costs (search for similar items in EconPapers)
JEL-codes: D12 D60 F11 F13 F14 (search for similar items in EconPapers)
Pages: 35 p.
Date: 2026-03-23
New Economics Papers: this item is included in nep-cis, nep-eec and nep-min
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