Prepared by Ivelina Ilkova, Laura Lebastard and Roberta Serafini

Published as part of the ECB Economic Bulletin, Issue 5/2024.

In recent years, a series of adverse shocks has highlighted vulnerabilities related to the sourcing of imported goods. In response, some firms in both the euro area and the United States have changed (or are planning to change) their sourcing strategies to improve supply-chain resilience.^[1] Based on detailed product-level data, this box analyses the extent to which and how the euro area and the United States have modified their sourcing strategies since 2016 – when geopolitical considerations began to play a stronger role in trade relations and de-risking concerns arose^[2] – and the potential impact on import prices. It focuses on two different, but not mutually exclusive, sourcing strategies aimed at fostering supply-chain resilience and addressing national security concerns: diversification (increasing the number of supplier countries) and rebalancing (reducing the market share of the main supplier country).^[3]

Over the past decade, the euro area has progressively diversified import sources, although there is no sign that this process has accelerated compared with the past. Since 2016 the euro area has gradually increased the number of sourcing countries per product, including for goods of strategic importance,^[4] with a slight acceleration observed since the pandemic (Chart A, panel a). This appears, however, to be the continuation of a process that had been ongoing in the euro area since the beginning of the century. By contrast, diversification has been less evident in the United States.

Diversification has, however, increasingly had a geopolitical dimension, with both the euro area and the United States diversifying imports of products sourced relatively more from geopolitically distant countries. We assessed the extent to which this diversification has a geopolitical dimension by classifying supplier countries as geopolitically close (for example, the G7 countries, EU Member States, Australia, South Korea and Türkiye) and geopolitically distant (for example, China, Russia, Iran, North Korea and Syria).^[5] Chart A, panel b), presents the results of an event study estimating whether, for a given imported product, having a geopolitically distant country as the main supplier affected the overall number of supplier countries compared with products mainly sourced from a geopolitically close country.^[6] The results suggest that diversification of import sources since 2016 has been significantly stronger for products imported relatively more from geopolitically distant countries, with its level rising in both regions under review, particularly after 2021.

Chart A

Diversification of sourcing countries for the euro area and the United States

a) Number of sourcing countries per product	b) Diversification when the main supplier country is geopolitically distant
(averages and medians)	(differences in the number of sourcing countries compared with goods sourced from geopolitically close countries)

While some diversification of import sources has been under way for a number of years, evidence of a shift in the reliance of the euro area and the United States on geopolitically distant countries is more mixed. Aggregate data indicate that China’s market share in euro area imports has risen by 3 percentage points since 2016, whereas it has declined by 11 percentage points in US imports. Since 2022 the euro area has had greater exposure to China compared with the United States. In the case of Russia, both the euro area and the United States have decreased their import market shares, in line with the sanctions imposed and the related embargoes. However, sourcing from China and Russia apart, evidence of rebalancing is more limited: aggregate import shares from geopolitically distant countries have remained stable for both the euro area and the United States, with neither region significantly shifting their imports away from these countries.

Evidence at the product level underlines that rebalancing away from a main supplier nation is limited. Focusing on strategic goods, we compared import developments for products mostly sourced from a geopolitically distant country and for those mostly sourced from a geopolitically close country. The results of an event study point to limited evidence of a substantial rebalancing by the euro area or the United States away from geopolitically distant countries (Chart B).^[7]

Chart B

Change in the importance of a main sourcing country for strategically important goods when it is a geopolitically distant country for the euro area and the United States

(percentage differences compared with the import level of goods sourced from geopolitically close countries)

The implications for import prices differ depending on which sourcing strategy dominates. For the same product, suppliers from new sourcing countries tend to be more expensive than existing suppliers (Chart C, panel a). However, the impact on aggregate import prices is small: on average over the period 2016-23, the flow of products from new countries accounted for a small share of total imports (0.2-0.3%), suggesting only a limited impact on aggregate prices.

For those products for which either the euro area or the United States has changed its main supplier country, rebalancing seems to be aimed mostly at reducing costs, rather than enhancing supply-chain resilience or addressing national security concerns. Rebalancing away from the main supplier country has primarily shifted imports towards cheaper sourcing countries, both for the euro area and the United States. On average, since 2016 the euro area and the United States have tended to rebalance imports towards cheaper sources, although there is some evidence of a change after Russia’s invasion of Ukraine in 2022, when both shifted towards relatively more expensive sourcing countries (Chart C, panel b). Indeed, shifting imports from a main geopolitically distant supplier towards a geopolitically close supplier is associated with a median price increase of 30% and 40% in the euro area and the United States respectively. Shifting within a group of geopolitically close countries has a broadly neutral impact on import prices.

Chart C

Import price implications of euro area and US de-risking strategies

a) Between new and pre-existing product-country flows	b) Between sourcing countries whose import shares increased and those that did not
(percentage differences, median of HS6 products)	(percentage differences, median of HS6 products)