Navigating a fragmenting global trading system: insights for central banks

Maria Grazia Attinasi, Michele Mancini, Lukas Boeckelmann, Claire Giordano, Baptiste Meunier, Ludovic Panon, Ana M. Almeida, Irina Balteanu, Marta Bańbura, Elena Bobeica, Oscar Borgogno, Alessandro Borin, Peonare Caka, Rodolfo Campos, Juan Carluccio, Paola Di Casola, Dennis Essers, Guillaume Gaulier, Rinalds Gerinovics, Demosthenes Ioannou, Makram Khalil, Laura Lebastard, Wolfgang Lechthaler, Catalina Martínez Hernández, Richard Morris, Michele Savini Zangrandi, Katja Schmidt, Roberta Serafini, Felix Strobel, Sebastian Stumpner, Jacopo Timini, Francesca Viani, Marco Bottone, Francesco Conteduca, Bernardo De Castro Martins, Simona Giglioli, Juuso Kaaresvirta, Ambre Kutten, Noemi Matavulj, Riikka Nuutilainen, Javier Quintana and Gabriel Smagghue

No 365, Occasional Paper Series from European Central Bank

Abstract: In light of recent global economic and geopolitical shocks threatening trade openness, this report aims to shed light on geoeconomic fragmentation and develops a rich set of new tools to assess its economic effects and implications for central banks. The report shows that, although global trade integration has largely withstood recent disruptions and the rise of inward-looking policies, selective decoupling between few trading partners (United States vis-à-vis China, western economies vis-à-vis Russia) and for specific products (such as advanced technologies) is occurring. Survey data show that, although European firms are reorganising supply chains critical foreign dependencies persist. A firm-level stress test reveals that sudden disruptions in the supply of critical inputs from high-risk countries would lead to significant, albeit very heterogeneous, economic losses across firms, regions and sectors. Addressing foreign dependencies with broad-based protectionism policies, however, is self-defeating. In an extreme counterfactual scenario involving prohibitive and across-the-board trade barriers between geopolitical blocs, global GDP could decline by up to 9% coupled with an increase in global inflation of 4 percentage points in the first year, with the impact persisting for at least five years. It is conceivable that trade fragmentation will unravel over the course of a number of years, with supply disruptions becoming more frequent and severe than in the past. If this process should ultimately lead to a less interconnected global economy, countries might suffer from increased volatility and price pressures, as shocks cannot be easily diversified away through trade. [...] JEL Classification: F13, F14, F51, F52, F61, F62, E31, E50

Keywords: critical inputs; geoeconomics; globalisation; global value chains; trade fragmentation (search for similar items in EconPapers)
Date: 2024-12
New Economics Papers: this item is included in nep-cis, nep-cna and nep-int
Note: 930374
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