Geoeconomic Fragmentation: What’s at Stake for the EU
GeoeconomicFragmentation:What’satStakefortheEU ChikakoBaba,TingLan,AikoMineshima,FlorianMisch,MagaliPinat,AsgharShahmoradi,JiaxiongYaoandRachelvanElkan WP/23/245 IMFWorkingPapersdescriberesearchinprogressbytheauthor(s)andarepublishedtoelicitcommentsandtoencouragedebate. TheviewsexpressedinIMFWorkingPapersarethoseoftheauthor(s)anddonotnecessarilyrepresenttheviewsoftheIMF,itsExecutiveBoard,orIMFmanagement. 2023 NOV ©2023InternationalMonetaryFundWP/23/245 IMFWorkingPaper EuropeanDepartment Geo-economicFragmentation:What'satStakefortheEU PreparedbyChikakoBaba,TingLan,AikoMineshima,FlorianMisch,MagaliPinat,AsgharShahmoradi,JiaxiongYaoandRachelvanElkan AuthorizedfordistributionbyHelgeBergerNovember2023 IMFWorkingPapersdescriberesearchinprogressbytheauthor(s)andarepublishedtoelicitcommentsandtoencouragedebate.TheviewsexpressedinIMFWorkingPapersarethoseoftheauthor(s)anddonotnecessarilyrepresenttheviewsoftheIMF,itsExecutiveBoard,orIMFmanagement. ABSTRACT:Geoeconomicfragmentation(GEF)isbecomingentrenchedworldwide,andtheEuropeanUnion(EU)isnotimmunetoitseffects.ThispapertakesstockofGEFpoliciesimpingingon—andadoptedby—theEUandconsidershowexposedtheEUisthroughtrade,financialandtechnologicalchannels.Motivatedbycurrentpoliciesadoptedbyothercountries,thepaperthensimulateshowvariousmeasures—raisingcostsoftradeandtechnologytransferandfossilfuelprices,andimpositionofsectoralsubsidies—wouldaffecttheEUeconomy.Duetoitshigh-degreeofopenness,theEUisfoundtobeexposedtoGEFthroughmultiplechannels,withsimulatedlossesthatdiffersignificantlyacrossscenarios.Fromawelfareperspective,thissuggeststheneedforacautiousapproachtoGEFpolicies.TheEU’sbestdefenceagainstGEFistostrengthentheSingleMarketwhileadvocatingforamultilateralrules-basedtradingsystem. RECOMMENDEDCITATION:Baba,Chikako,TingLan,AikoMineshima,FlorianMisch,MagaliPinat,AsgharShahmoradi,JiaxiongYaoandRachelvanElkan.2023.“GeoeconomicFragmentation:What'sAtStakeFortheEU.”IMFWorkingPaper23/245,InternationalMonetaryFund,Washington,DC. JELClassificationNumbers: F02,F10,F13,F15,F20,F60,F62 Keywords: Geoeconomicfragmentation;cross-borderrestrictions;trade;innovation;multinationalproduction;energy;EuropeanUnion;SingleMarket Author’sE-MailAddress: cbaba@imf.org,tlan@imf.org,amineshima@imf.org,fmisch@imf.org,mpinat@imf.org,ashahmoradi@imf.org,jyao@imf.org,rvanelkan@imf.org WORKINGPAPERS GeoeconomicFragmentation:What’satStakefortheEU PreparedbyChikakoBaba,TingLan,AikoMineshima,FlorianMisch,MagaliPinat,AsgharShahmoradi,JiaxiongYaoandRachelvanElkan1 1ThepaperbenefittedfromhelpfulcommentsfromHelgeBerger,OyaCelasunandIMFdepartments.GiovanniBorraccia,DavidVelazquez-Romero,andDennisZhaoprovidedvaluableresearchsupport,andexcellentadministrativeassistancewasprovidedbyEmilyFisher. 34 IMFWORKINGPAPERSGeoeconomicFragmentation:What’satStakefortheEU Contents Glossary3 Introduction4 GEFPoliciesAdoptedbytheEUandOthers7 TheEU’sPotentialGEFExposure9 PossibleImplicationsofGeopoliticalTensionsforEUEconomies:KeyStylizedFacts18 GEFintheContextofInnovationandMultinationalProduction18 ImpactofANEnergyPriceWedge26 SummaryofMainFindingsandPolicyConsiderations29 AnnexI.SelectPolicyMeasuresAdoptedbytheEU,US,andChina32 AnnexII.IdentifyingFragileIntermediateGoods34 TheTwoComponentsofProductFragility34 PresenceofCentralPlayers34 InternationalSubstitutability35 ClassifyingOverallProductFragility36 References37 FIGURES Figure1.Openness4 Figure2.TradeRestrictions5 Figure3.GlobalSlowbalization5 Figure4.NumberofNewlyImplementedTradeorFDIMeasures7 Figure5.RestrictionsAffecting/ImposedbytheEU8 Figure6.TypesofRestrictionsandEUStateAid9 Figure7.DirectGoodsTradeWithinandBetweenBlocs10 Figure8.ValueChainLinkagesandForeignInputandMarketReliance12 Figure9.Extra-EUImportsofFragileIntermediateGoods13 Figure10.EUCommercialServicesTrade14 Figure11.FinancialExposuretoFragmentationRisk15 Figure12.EUForeignDirectInvestmentLinkages16 Figure13.FragmentationandEnergyMarkets17 Figure14.EconomicImportanceofEnergyIntensiveSectors18 Figure15.IntellectualPropertyTradeandComparativeAdvantageinInnovationRelativetoManufacturing19 Figure16.TheWorldDividesintoFourAutarkicBlocs22 Figure17.SpilloverEffectsfromUS-ChinaTensions23 Figure18.US-ChinaTensions,withEUasBystanderorParticipant23 Figure19.LoweringInwardMPCostsforGoodsProduction24 Figure20.SubsidizingInnovationActivities25 Figure21.DeepeningEUIntegration25 Figure22.EU27:ProductionofEnergyIntensiveIndustries26 Figure23.FirmSurveysonResponsestoHighEnergyPrices26 Figure24.EnergyPriceShocksRelativeto201728 Figure25.ImpactofanEnergyPriceWedge29 IMFWORKINGPAPERSGeoeconomicFragmentation:What’satStakefortheEU Glossary CESEECentral,Eastern,andSoutheasternEuropeEUEuropeanUnion FDIForeignDirectInvestmentGEFGeoeconomicFragmentationGFCGlobalFinancialCrisis GTAPGlobalTradeAnalysisProjectIPIntellectualProperty MPMultinationalProduction Introduction Geoeconomicfragmentation(GEF)—apolicy-drivenreversalofglobaleconomicintegration—isbecomingareality,andtheEuropeanUnion(EU)isnotexemptfromthesedevelopments.Thenumberofrestr
