## PILLAR OF ECONOMIC SECURITY

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**Canonical URL:** [PILLAR OF ECONOMIC SECURITY](https://www.imf.org/-/media/files/publications/fandd/article/2023/june/ossa.pdf)

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### Multilateral trading system and economic security
- Central thesis: a strong multilateral trading system based on WTO rules is the best guarantor of economic security because it provides households and firms affected by supply shortages with unparalleled flexibility.
- Key concept: "flexicurity"—access to a broad range of outside options mitigates supply shortages by enabling swift substitution among alternative suppliers.
- Empirical illustration: Ethiopia imported 45 percent of its wheat from Russia and Ukraine before the war in Ukraine and then saw these imports plunge dramatically—by 75 percent in the case of Russia and 99.9 percent in the case of Ukraine—yet it sharply increased wheat imports from the United States and Argentina, including from Argentina where it had not imported before.

### State of global supply chains (concentration, sunk costs, resilience)
- Evidence of concentration:
  - Only a small minority of US firms import the same product from more than one source country (Antràs, Fort, and Tintelnot 2017).
  - WTO economists estimate that 19 percent of global exports are in "bottleneck" products (products that have few suppliers but a large market share); this share has doubled over the past two decades.
- Causes and interpretation:
  - Large sunk costs in forming global value chains (identifying suppliers, coordinating production, building trust) help explain concentration.
  - Firms self-interestedly avoid supply chain disruption risks; supply chain disruptions cost firms more than 40 percent of a year’s profit every decade on average (McKinsey estimate, as cited).
- Resilience of global trade:
  - Trade recovered within just three quarters of the downturn in the second quarter of 2020 following the COVID-19 outbreak.
  - One year into the war in Ukraine, trade performed above expectations after initial slumps in products such as wheat, helping largely avoid food shortages in heavily exposed countries such as Egypt, Ethiopia, and Türkiye.

### Welfare and macroeconomic costs of fragmentation versus multilateralism
- WTO economists' estimates:
  - Fragmentation of the global economy into two rival blocs would reduce real incomes by 5.4 percent on average.
  - A revival of multilateralism could increase real incomes by 3.2 percent.
  - Opportunity cost of forgoing international cooperation and moving to geopolitical rivalry: 8.6 percent.
  - Opportunity costs by country group:
    - Developed economies: 6.4 percent.
    - Developing economies: 10.2 percent.
    - Least developed economies: 11.3 percent.
- Interpretation: stakes are highest for low-income countries because they benefit most from positive technology spillovers associated with international trade.
- Trade theory note: country-level specialization from comparative advantage yields gains from trade; the 10 percent most critical products account for 90 percent of the gains from trade (Ossa 2015), implying high welfare costs to diversifying production of bottleneck products.

### The case for policy intervention in supply chain resilience
- Theoretical tradeoffs (Grossman, Helpman, and Lhuillier 2023):
  - Market failure A: firms may underinvest in resilience because some disruption costs are borne by consumers.
  - Market failure B: firms may overinvest in resilience to capture extraordinary profit opportunities from disruptions.
- Practical conclusion:
  - For all practical purposes, the case for policy intervention in global supply chains is weak—resilience is desirable but costly, and there is no clear systematic under- or overexposure by firms.
  - Limited exceptions: national security considerations or uninternalized security externalities could justify targeted interventions to internalize those externalities.
- Policy options governments may pursue: reshoring, friend-shoring, nothing, or combinations—no one-size-fits-all prescription.

### Value of the rules-based multilateral trading system and policy priorities
- Functions of WTO-based system:
  - Keeps trade barriers low, nondiscriminatory, and predictable.
  - Reduces risk of policy-induced supply chain disruptions and increases likelihood that markets stay open when alternative supply is needed.
  - Rules-based credibility limits tariff overhang and trade policy uncertainty.
- Empirical mechanism:
  - Handley (2014): a reduction in bound tariffs increases trade flows even if applied tariffs remain unchanged because reduced bound tariffs lower trade policy uncertainty.
- Policy recommendation / priority:
  - Defend and preserve the credibility of the multilateral trading system; violations of WTO rules have significant collateral damage by undermining the system’s functioning.
  - Promote "reglobalization": work toward more inclusive globalization that allows a broader range of countries to participate in global value chains to strengthen supply chain resilience.

*ossa*

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_Source: https://www.imf.org/-/media/files/publications/fandd/article/2023/june/ossa.pdf_