Green supply chain decoupling leads to significant economic and environmental costs
A new ECB working paper introduces a novel methodology to analyze green supply chain decoupling, revealing substantial economic costs and increased greenhouse gas emissions. The study simulates an East-West decoupling scenario for 129 products essential to the energy transition.
Granular analysis reveals decoupling costs
This paper introduces a novel methodology to enhance the granularity of Inter-Country Input-Output (ICIO) tables, specifically for 129 products essential to the energy transition, such as electric batteries and rare earths.
By disaggregating broad economic sectors, the researchers constructed a tailored ICIO table to simulate an East-West supply chain decoupling in green products.
The results reveal substantial economic costs: global welfare losses reach 3% and trade between blocs contracts by 20%, even with trade diversion through neutral countries.
Furthermore, the decoupling significantly increases greenhouse gas emissions, with cumulative additional emissions over twenty years comparable to those of large countries like Japan or Brazil.
This highlights how trade barriers on green sectors affect both economic efficiency and climate objectives.
Unmasking hidden risks in green supply chains
The research addresses a critical limitation in existing input-output tables, which typically group green products with non-green ones, masking their unique features and supply chain dynamics.
This aggregation prevents accurate simulation of trade shocks targeting green products or modeling substitution effects.
Recent policies, such as the US Inflation Reduction Act (August 2022), US tariffs on electric vehicles (May 2024), and EU tariffs on Chinese electric cars (July 2024), underscore the urgency of this granular analysis.
The study emphasizes that sectoral aggregation matters most when goods, like many green products, have low substitutability, amplifying the economic shock when their supply chains are disrupted.
The true price of fragmentation
This research provides a crucial, data-driven warning for policymakers navigating increasing geopolitical risks.
It clearly demonstrates that trade fragmentation in critical green technologies carries significant, often underestimated, economic and environmental costs.
The findings underscore the urgent need for international cooperation to avoid undermining both economic efficiency and global climate objectives.