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Lukas Boeckelmann
- 30 October 2024
- ECONOMIC BULLETIN - BOXEconomic Bulletin Issue 7, 2024Details
- Abstract
- This box illustrates how aggregate greenfield foreign direct investment (FDI) flows are showing increasing signs of fragmentation along geopolitical fault lines. Euro area outward flows are following this trend, with greenfield investments increasingly tilted towards the United States and away from China. However, firms have also stepped up investment between geopolitical blocs to boost local production content in anticipation of protectionist measures or retaliatory tariffs. Econometric evidence from gravity models shows that the overall effect of increasing geopolitical divides on FDI is negative, with FDI flows within geopolitical blocs being almost three times higher than FDI flows between geopolitical blocs in recent quarters. Moreover, the estimates suggest that global FDI flows were dampened by 3% following the increases in average geopolitical distance owing to Russia’s invasion of Ukraine. Since then, geopolitical divides have become a particularly strong deterrent to greenfield FDI both into and out of the euro area.
- JEL Code
- F13 : International Economics→Trade→Trade Policy, International Trade Organizations
F14 : International Economics→Trade→Empirical Studies of Trade
F21 : International Economics→International Factor Movements and International Business→International Investment, Long-Term Capital Movements
- 8 February 2024
- ECONOMIC BULLETIN - BOXEconomic Bulletin Issue 1, 2024Details
- Abstract
- The pandemic triggered the deepest global recession (albeit short-lived) since the Second World War amid large-scale policy support, and led to a sweeping fall in world trade. Following the initial COVID-19 shock, trade staged a rapid recovery, but from the second half of 2022 world trade growth started to decelerate markedly and in 2023 it is estimated to have been considerably below its pre-pandemic average. This box reviews the factors behind the buoyant recovery of global trade following the initial COVID-19 shock and the reasons for its lacklustre performance in 2023, finding that the latter mainly reflects the unwinding of some specific post-pandemic factors (e.g. the rotation of demand from trade-intensive goods towards services owing to the full relaxation of pandemic containment measures) and a less trade-friendly composition of global activity.
- JEL Code
- F01 : International Economics→General→Global Outlook
F1 : International Economics→Trade
F4 : International Economics→Macroeconomic Aspects of International Trade and Finance
- 3 August 2023
- WORKING PAPER SERIES - No. 2839Details
- Abstract
- As countries and firms increasingly seek ways to strengthen the resilience of their supply chains, this paper studies the global economic costs of a decoupling of global supply chains along geopolitical lines as well as in strategic sectors. We explore not only the long-run effects, but also the short-run costs stemming from rigid wages and low substitutability across factors of production and input goods. We find that, in terms of welfare losses, the costs of decoupling are roughly five times higher in the short-run compared to the long-run, while country losses are heterogeneous. A reshaping of global supply chains increases the level of consumer prices in most countries, as well as producer prices, especially for trade-intensive manufacturing sectors. Global supply chain decoupling entails also a reallocation of labour across skill levels. Finally, global trade would decrease substantially, driven by lower trade in intermediate inputs and a higher reliance of countries on domestic production.
- JEL Code
- F12 : International Economics→Trade→Models of Trade with Imperfect Competition and Scale Economies, Fragmentation
F13 : International Economics→Trade→Trade Policy, International Trade Organizations
F14 : International Economics→Trade→Empirical Studies of Trade
F51 : International Economics→International Relations, National Security, and International Political Economy→International Conflicts, Negotiations, Sanctions
F62 : International Economics→Economic Impacts of Globalization→Macroeconomic Impacts
- 29 March 2023
- ECONOMIC BULLETIN - BOXEconomic Bulletin Issue 2, 2023Details
- Abstract
- This box presents a stylised, model-based, general equilibrium assessment of the global economic effects of trade fragmentation. The focus is on a rather extreme scenario in which two hypothetical geopolitical blocs raise barriers to trade in intermediate goods, causing a relocation of supply chains to countries within the same bloc (“friend-shoring”). Using a model developed by Baqaee and Farhi, we find that economic losses (in terms of welfare, trade and prices) can be sizeable, depending on the degree of rigidities embedded in the model. Effects are also heterogeneous across countries, as small, open economies that are reliant on global value chains are more affected. The findings in this box suggest that trade fragmentation would be a lose-lose situation for all parties involved and leave the global economy more vulnerable to shocks.
- JEL Code
- F12 : International Economics→Trade→Models of Trade with Imperfect Competition and Scale Economies, Fragmentation
F13 : International Economics→Trade→Trade Policy, International Trade Organizations
O33 : Economic Development, Technological Change, and Growth→Technological Change, Research and Development, Intellectual Property Rights→Technological Change: Choices and Consequences, Diffusion Processes