## Chapter 3 — FRAGMENTATION AND COMMODITY MARKETS: VULNERABILITIES AND RISKS

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### Introduction, scope, and approach
- Authors: Jorge Alvarez (co–team lead), Mehdi Benatiya Andaloussi, Christopher Evans, Chiara Maggi, Marika Santoro, Alexandre Sollaci, and Martin Stuermer (co–team lead), with contributions by Marijn Bolhuis, Jiaqian Chen, Benjamin Kett, Seung Mo Choi, Peter Nagle, and Alessandra Sozzi; guidance by Petia Topalova. Research assistance by Yarou Xu, Carlos Morales, and Canran Zheng. External consultant: Andrei Levchenko.
- Motivation:
  - Post–Cold War integration of primary commodity markets supported global growth; the war in Ukraine reversed aspects of this integration, with exports restricted and countersanctions contributing to surging inflation in 2022, food insecurity in low-income countries, and slower global growth.
  - Geopolitical tensions raise the risk of further fragmentation; examples of policy drivers include the US Inflation Reduction Act, the European Chips Act, and China’s export restrictions on gallium and germanium.
  - Text mining of earnings calls shows fragmentation-related keyword usage surged after Russia’s invasion of Ukraine (indices, 2013–15 = 100).
- Coverage and methods:
  - Nearly all countries and 48 commodities (agricultural goods, energy—coal, crude oil, natural gas—and other mineral commodities).
  - Methods: unique database of commodity output, use, and bilateral trade; descriptive statistics; empirical analysis; model simulations.
  - Main simulation: stylized persistent disruption of commodity trade between two geopolitical blocs defined using the 2022 United Nations vote on the war in Ukraine; alternative scenarios include neutral countries and countries switching blocs.

### What makes commodities vulnerable
- Production concentration and upstream constraints:
  - Natural endowments drive high geographic concentration of production.
  - The three largest-producing countries account for about 65 percent of global output of agriculture, about 50 percent of that of energy, and about 70 percent of that of mineral commodities on average.
  - Minerals are concentrated at mining and processing stages; relocating mining production is often impossible in the short and medium term.
  - Processing and refining face regulatory, technological, and infrastructure constraints.
  - Example: it takes on average 16 years from exploration to the opening of copper mines.
- Elasticities and trade importance:
  - Price elasticity of supply is relatively low for commodities in the short term; many commodities have low short-term price elasticity of demand.
  - On average across agricultural and energy commodities, about 30 percent of output is dedicated to trade and about 45 percent for minerals.
  - Many countries depend on only a handful of suppliers: roughly half of the world’s countries rely on three or fewer exporting countries for their imports of minerals, and a quarter on only one.
  - Average low-income country imports more than 80 percent of the wheat it consumes; low storage capacity limits consumption smoothing.

### Upstreamness, geopolitics, and recent trends
- Sensitivity to geopolitics:
  - Bilateral commodity trade flows are negatively associated with distance of military alliances (a standardized military distance of 1 ≈ distance between India and Morocco in 2018).
  - A one-standard-deviation increase in the distance of military alliances is associated with:
    - a decrease in trade in energy commodities by about 15 percent.
    - a more than 35 percent decline in minerals trade.
  - Results are robust for minerals across specifications; sensitivity higher for other geopolitical alignment measures (for example, UN vote–based ideal point distance).
- Recent fragmentation indicators:
  - Number of new interventions in commodity trade has risen every year since 2018.
  - In 2022:
    - there were more than six times more new restrictions affecting trade in commodities than the 2016–19 average.
    - trade-restricting measures on overall trade increased 3.5 times relative to the 2016–19 average.
  - Price dispersion increased in major commodity markets in 2022 (notably some minerals such as lithium and energy commodities); example: Russian coal traded at a price almost three times lower than Australian coal in September 2022.
  - Commodity sector FDI and cross-border M&A were declining even before the war in Ukraine.

### Price effects, volatility, and amplification mechanisms
- Price-change determinants:
  - Scale of price effects depends on supply-and-demand imbalances and price elasticities.
  - Illustrative partial equilibrium simulations show strong price effects for some minerals critical for the green transition and for some highly traded agricultural goods; price effects in figures are capped at 500 percent for readability (selected commodities with >500 percent increases are highlighted as outliers).
- Volatility amplification channels:
  1. Smaller market sizes after fragmentation make bloc-level prices more responsive to country-level shocks.
     - Wheat example: the United States accounts for about 7 percent of global and 15 percent of US-Europe+ bloc wheat production. A three-standard-deviation US harvest shock ≈ 60 percent of US wheat production, or 4 percent of global output, with wheat prices held constant. Using price elasticity of supply of 0.2 and price elasticity of demand of –0.85, the same supply shock doubles the impact on wheat prices when trade is fragmented into two blocs.
  2. Countries switching blocs can create large supply gaps and trigger large price swings.
     - Example: South Africa produces one-third of the world’s manganese; if South Africa switched to the US-Europe+ bloc, the price of manganese in the China-Russia+ bloc could rise more than 800 percent.

### Model evidence and macroeconomic impacts
- Partial-equilibrium model (single commodity, multicountry, calibrated to 2019 trade flows; main scenario: complete trade ban between two blocs):
  - Findings:
    - Inefficiencies from restricting trade result in losses in bloc-level total surplus: the global economy is worse off from fragmentation of trade in individual commodities.
    - Bloc-level changes in total surplus are generally small, with notable exceptions and important within-bloc heterogeneity.
    - Fragmentation of copper at the mining stage would reduce surplus by as much as 2.5 to 5 percent of gross national expenditure in Chile and Peru.
    - Fragmentation of palm oil or copper at the mining stage could lead to surplus losses in the China-Russia+ bloc of more than 1 percent of gross national expenditure.
    - Fragmentation of iron ore or soybeans could lead to surplus losses of more than 0.5 percent of gross national expenditure.
    - Some surplus data points in figures are capped at –0.05 percent of gross national expenditure for display.
- Static multicountry, multisector trade (general equilibrium) model:
  - Approach accounts for input-output linkages to simulate long-term GDP losses from fragmenting all commodity trade.
  - Findings:
    - Low-income countries could suffer deeper losses, on average estimated at 1.2 percent, with some losing more than 2 percent of GDP.
    - The hypothetical China-Russia+ bloc is more affected.
    - Global GDP loss is roughly 0.3 percent, modest due to offsetting effects across net commodity-producing and net commodity-consuming countries.
    - Global GDP losses from restricting commodity flows between blocs constitute about 15 percent of the loss from restricting all trade.
    - If countries that abstained from the UN vote on Ukraine are assumed to trade commodities freely, long-term global GDP changes are negligible, with meaningful losses only in Russia.
- Dynamic macroeconomic (DSGE) model — augmented IMF Global Macroeconomic Model for the Energy Transition:
  - Models crude oil, coal, natural gas, copper, nickel, cobalt, lithium (capturing about 70 percent of the value of global commodity trade) across six regions; fragmentation modeled as a ban on trading these commodities between two blocs.
  - Findings:
    - Output and inflation effects vary across regions and commodities.
    - Fragmenting oil markets allows quicker switching to intra-bloc partners with limited GDP impact; fragmenting natural gas faces rigidities that produce more pronounced GDP and inflation effects.
    - Minerals: fragmentation could lead to a steep rise in prices in the China-Russia+ bloc and sizable declines in real GDP. Roughly 80 percent of the supply of the four modeled minerals is mined in the US-Europe+ bloc.
    - The US-Europe+ bloc would not be able to benefit quickly from relative oversupply at the mining stage because scaling up refining capacity takes several years; that bloc would also experience GDP decline from mineral market fragmentation.
    - Trade fragmentation of all seven modeled commodities would be associated with a global GDP loss of about 0.3 percent; simulated losses larger in the China-Russia+ bloc.
    - Within the US-Europe+ bloc, Europe could experience a sizable impact on inflation (as much as 100 basis points or more) and GDP, mainly driven by fragmentation of oil and gas markets.
  - Caveat: regional granularity masks heterogeneity across individual countries.

### Implications for the clean energy transition
- Minerals identified as key inputs: copper, nickel, cobalt, lithium (used in EVs, batteries, wiring, solar panels, wind turbines).
- IEA (2023) net-zero-emissions-scenario demand projections:
  - demand for copper to grow by a factor of 1.5 by 2030;
  - demand for nickel and cobalt to double by 2030;
  - demand for lithium to increase six times by 2030.
- Geographic concentration examples:
  - Chile and Peru mine more than a third of the world’s copper;
  - Indonesia and the Philippines mine about half of the world’s nickel.
- Modeling results:
  - Baseline (integrated-world): world prices of the four key minerals could rise by about 90 percent, on average, along the net-zero-emissions-scenario path to 2030.
  - Fragmentation counterfactual (complete mineral market fragmentation across two blocs):
    - inability of the China-Russia+ bloc to import key minerals would lead to an additional price increase in that bloc of 300 percent, on average.
    - about 70 percent fewer new EVs in the China-Russia+ bloc in a fragmented world than in an integrated world, in the net-zero scenario.
    - global net investment in renewable technology and production of EVs would be roughly 20 percent lower compared with the baseline; the shortfall increases to about 30 percent if greenhouse gas emissions are used to weigh regional responses.
    - doubling the elasticity of substitution of the four minerals would reduce the decline in investment in renewable technology from 20 percent to 12 percent.
    - China’s fiscal cost of supporting investment to revert to the net-zero-emissions path would be 1½–2 percent of GDP.
  - Emissions and GDP distribution: the China-Russia+ bloc accounted for more than half of greenhouse gas emissions in 2020, but only a third of global GDP.
- Conclusion: fragmentation could make decarbonization more costly, delay climate mitigation, and mineral-rich blocs may not reap near-term benefits from oversupply because of constraints in scaling refining and processing capacity.

### Empirical illustration: oil trade flows after Russia’s invasion of Ukraine
- Policy actions taken:
  - European Union, United Kingdom, and United States banned most imports of crude oil and petroleum products from Russia after the invasion.
  - G7 members prohibited transportation and insurance services to tankers carrying Russian commodities above certain price thresholds.
- Shipping-pattern changes (Automatic Identification System data, April–June comparisons 2019 vs 2023):
  - Tanker shipments from Russian ports to Japan, the United States, and the European Union declined between April–June 2019 and the same period in 2023.
  - The European Union receives more shipments from countries such as Norway, the United Arab Emirates, and the United States, extending the length of tanker routes by 20 percent.
  - Russian oil shipments rose to countries such as China, India, Türkiye, and the United Arab Emirates.
  - India: about 35 to 40 percent of India’s crude oil imports came from Russia during April–June 2023, up from less than 5 percent before the war in Ukraine.

### Policy implications and recommended actions
- First-best: prevent fragmentation through multilateral cooperation and enhanced rules (WTO) on quantitative restrictions, export tariffs, discriminatory subsidies, local-content requirements, and other commodity-related trade measures—especially crucial for food commodities to avoid humanitarian disasters.
- Second-best: targeted “corridor” agreements to preserve integrated markets for critical commodities:
  - a minimum “green corridor” to safeguard critical minerals for decarbonization;
  - analogous “food corridor” agreements to ensure equal access to essential agricultural commodities.
- Improve data and transparency:
  - establish a platform or organization to improve sharing and standardization of international data on mineral production, consumption, and inventories (analogous to Joint Organisations Data Initiative for fossil fuels and the Agricultural Market Information System).
- Domestic and multilateral resilience-building steps:
  - foster investment in domestic mining, exploration, and recycling of critical minerals;
  - diversify supply sources;
  - invest in infrastructure to reduce trade costs and improve market integration;
  - support innovation to speed technological progress and develop substitutes;
  - build fiscal and financial buffers, strengthen macroeconomic and structural policy frameworks, and develop preparedness plans for sudden commodity-supply disruptions;
  - reinforce social safety nets to protect vulnerable households from higher commodity prices and volatility.
- Caution on industrial and “friend-shoring” policies:
  - industrial policies are third-best and must ensure equal treatment of firms, minimize distortions and fiscal risks, and avoid adverse cross-country spillovers;
  - friend-shoring policies can be market-distorting and costly and should be used only under particular conditions (clear market failures or narrowly defined national security concerns);
  - develop a framework for international consultations on friend-shoring practices to identify negative cross-border spillovers and mitigate adverse consequences.
- Financial-market safeguards:
  - consider policy measures to prevent disruptions in commodity-derivatives markets and financial instability, given that fragmentation in physical commodity markets could exacerbate financial market volatility and sharp exchange-rate adjustments.

### Key statistics and quantitative highlights (preserved exactly)
- 48 commodities covered.
- Text-mining index baseline: 2013–15 = 100.
- The three largest-producing countries account for about 65 percent of global output of agriculture, about 50 percent of that of energy, and about 70 percent of that of mineral commodities on average.
- On average across agricultural and energy commodities, about 30 percent of output is dedicated to trade and about 45 percent for minerals.
- Roughly half of the world’s countries rely on three or fewer exporting countries for their imports of minerals, and a quarter on only one.
- It takes on average 16 years from exploration to the opening of copper mines.
- In 2022:
  - more than six times more new restrictions affecting trade in commodities than the 2016–19 average.
  - trade-restricting measures on overall trade increased 3.5 times relative to the 2016–19 average.
- Example price differential: Russian coal traded at a price almost three times lower than Australian coal in September 2022.
- Price effects in figures capped at 500 percent (main figures) and at 800 percent (Figure 3.7 / Annex Figure 3.5.2 display cap).
- South Africa produces one-third of the world’s manganese; a switch could raise manganese price in a bloc by more than 800 percent (illustrative).
- Fragmentation of copper at the mining stage would reduce surplus by as much as 2.5 to 5 percent of gross national expenditure in Chile and Peru.
- Fragmentation of palm oil or copper at the mining stage could lead to surplus losses in the China-Russia+ bloc of more than 1 percent of gross national expenditure.
- Fragmentation of iron ore or soybeans could lead to surplus losses of more than 0.5 percent of gross national expenditure.
- Some surplus data points in figures are capped at –0.05 percent of gross national expenditure for display.
- Low-income countries average estimated loss: 1.2 percent (some could lose more than 2 percent of GDP).
- Global GDP loss from fragmenting all commodity trade: roughly 0.3 percent.
- Global GDP losses from restricting commodity flows between blocs constitute about 15 percent of the loss from restricting all trade.
- The DSGE commodity set captures about 70 percent of the value of global commodity trade.
- Roughly 80 percent of the supply of the four modeled minerals is mined in the US-Europe+ bloc.
- Europe inflation impact in the scenario examined: as much as 100 basis points or more.
- Oil shipping-route change: EU tanker route lengths extended by 20 percent (April–June comparison).

*Source: Chapter 3, "FRAGMENTATION AND COMMODITY MARKETS: VULNERABILITIES AND RISKS", World Economic Outlook, October 2023.*

### Introduction

### Introduction

### Overview and authorship
- The authors of this chapter are Jorge Alvarez (co–team lead), Mehdi Benatiya Andaloussi, Christopher Evans, Chiara Maggi, Marika Santoro, Alexandre Sollaci, and Martin Stuermer (co–team lead), with contributions by Marijn Bolhuis, Jiaqian Chen, Benjamin Kett, Seung Mo Choi, Peter Nagle, and Alessandra Sozzi, and under the guidance of Petia Topalova. Yarou Xu, Carlos Morales, and Canran Zheng provided outstanding research assistance. Andrei Levchenko was the external consultant. The chapter also benefited from discussions with Thibault Fally, Julien Martin, James Sayre, David Shin, and John Sturm as well as from comments by internal seminar participants and reviewers. Guidance on data was provided by Naomi Idoine and colleagues from the British Geological Survey.

### Context and motivation
- Since the end of the Cold War, primary commodity markets became more integrated as a result of trade liberalization, technological innovation, and declines in transportation costs, providing cheap inputs that supported global growth and helped raise living standards, especially in emerging markets.
- The war in Ukraine reversed aspects of this process: for the first time since the 1970s, commodities such as crude oil, natural gas, and wheat were broadly used to exert pressure in a major conflict. Exports were restricted and countersanctions imposed, contributing to surging inflation in 2022, food insecurity in low-income countries, and slower global growth.
- Geopolitical tensions have raised the risk of more severe fragmentation of commodity trade. Many countries are pursuing reshoring of commodity supply chains for national security, geopolitical, or other reasons (examples in the policy environment include the US Inflation Reduction Act, the European Chips Act, and China’s export restrictions on gallium and germanium).
- Text mining analysis of earnings calls shows usage of fragmentation-related keywords surged after Russia’s invasion of Ukraine (Figure 3.1: indices, 2013–15 = 100).

### Scope, questions, and approach
- The chapter studies channels through which further fragmentation of markets for energy, agricultural, and mineral commodities could affect economies and the energy transition.
- Key questions addressed:
  - What makes commodity markets vulnerable in the event of fragmentation?
  - Is there fragmentation in commodity markets, and if so, what form does it take?
  - Which commodities are most vulnerable to disruptions in international trade?
  - What would be the economic impact of commodity market fragmentation across blocs and countries, as well as on the global economy?
  - What might be the implications of such fragmentation for the clean energy transition?
- Coverage: nearly all countries and 48 commodities (agricultural goods, energy commodities—coal, crude oil, and natural gas—and other mineral commodities).
- Methods: unique database of commodity output, use, and bilateral trade; descriptive statistics; empirical analysis; model simulations.
- Main simulation: a highly stylized risk scenario in which commodity trade between two geopolitical blocs is persistently disrupted, with blocs defined using the 2022 United Nations vote on the war in Ukraine as a transparent starting point. Alternative scenarios are examined, including neutral countries and countries switching blocs. Online annexes detail commodities, country allocations, and robustness checks.

### Key contextual estimates cited
- Estimates of long-term output losses from restricting the international flow of goods and services, finance, and technology range from 0.2 percent to 12 percent of global GDP, depending on scenario and assumptions.
- The chapter focuses on the restriction of commodity trade between blocs; broader disruptions (other goods and services, finance, technology) would likely amplify global economic costs.

### Main findings
- Commodities are vulnerable in the event of fragmentation:
  - Natural endowments drive high geographic concentration of production. Example: the three biggest suppliers of minerals account for about 70 percent of global production, on average.
  - Low demand elasticities and upstream use in many manufacturing processes and key technologies make commodities highly traded; many importers rely on just a few suppliers, raising the cost of trade disruptions.
- Rising fragmentation in commodity markets:
  - Measures restricting commodity trade surged in 2022, much more than those restricting trade in other goods.
  - For selected commodities, price differentials across geographic markets have widened.
  - Commodity sector FDI and cross-border mergers and acquisitions were on the decline even prior to the war in Ukraine.
- Fragmentation could cause large price changes:
  - Scale of price effects depends on supply-and-demand imbalances and price elasticities.
  - Illustrative partial equilibrium simulations suggest strong price effects for some minerals critical for the green transition and for some highly traded agricultural goods.
  - Spikes in agricultural commodity prices could be concerning for many low-income countries reliant on imports to feed their population.
- Higher price volatility in a fragmented world:
  - Smaller markets after fragmentation would provide fewer buffers against supply and demand shocks, leading to larger price responses than under free trade.
  - Commodity producers would have incentives to switch allegiances because of potential price differences among blocs, inducing more supply shocks, volatility, and uncertainty—challenging fiscal, monetary, and financial stability.
- Macroeconomic impacts for commodity-dependent economies:
  - For some low-income countries and emerging market economies, illustrative trade model simulations point to long-term output losses exceeding 2 percent.
  - At the global level, economic losses appear relatively modest due to offsetting impacts across net commodity-producing and net commodity-consuming countries; however, this does not capture broader fragmentation effects across goods, services, finance, and technology, nor the increased volatility and distributional impacts within countries.
  - Fragmentation in agricultural commodity markets could raise food insecurity in low-income countries, with high social and humanitarian costs not included in the model simulations.
- Implications for the clean energy transition:
  - Demand for critical minerals is projected to rise severalfold in a net-zero-carbon-emissions scenario.
  - Minerals are highly concentrated geographically, with low elasticities of demand and supply; trade disruptions could raise mineral prices in blocs where demand exceeds supply.
  - Refining capacity cannot be scaled up quickly, so mineral-rich blocs cannot necessarily reap full benefits from oversupply.
  - In illustrative simulations, fragmentation results in up to 30 percent lower-than-needed investment in renewables and electric vehicles (EVs) at the global level by 2030.

### What makes commodities vulnerable in the event of fragmentation?
- Production concentration:
  - The first production stage depends on natural endowments and is heavily concentrated geographically.
  - The three largest-producing countries account for about 65 percent of global output of agriculture, about 50 percent of that of energy, and about 70 percent of that of mineral commodities on average.
  - Minerals are concentrated both at the mining stage (geographic concentration of deposits) and at the processing stage; relocating mining production is often impossible in the short and medium term.
- Elasticities of supply and demand:
  - Price elasticity of supply is relatively low for commodities in the short term.
  - Scaling up production requires large investments, environmental permitting, and community consultations; example: it takes on average 16 years from exploration to the opening of copper mines.
  - Processing and refining capacity face challenges (regulation, know-how, technology, skilled labor, infrastructure, labor costs), contributing to geographic concentration at these stages.
  - On the demand side, many commodities are inputs for key technologies and essential to household consumption; they are often hard to substitute and have low short-term price elasticity of demand.
- Importance of trade:
  - With concentrated production and broadly spread demand, commodities are heavily traded. On average across agricultural and energy commodities, about 30 percent of output is dedicated to trade and about 45 percent for minerals, with substantially higher shares for many individual commodities.
  - Many countries depend on only a handful of suppliers: roughly half of the world’s countries rely on three or fewer exporting countries for their imports of minerals, and a quarter on only one.
  - Import dependence in agricultural commodities can lead to food insecurity in trade disruptions: the average low-income country imports more than 80 percent of the wheat it consumes, and low storage capacity limits consumption smoothing.

*Source: Chapter 3, "FRAGMENTATION AND COMMODITY MARKETS: VULNERABILITIES AND RISKS", World Economic Outlook, October 2023.*

### 3. Upstreamness in Value Chains

### 3. Upstreamness in Value Chains

### Sensitivity to Geopolitics
- Bilateral commodity trade flows are negatively associated with distance of military alliances; a standardized military distance of 1 is approximately the distance between India and Morocco in 2018.
- A one-standard-deviation increase in the distance of military alliances is associated with:
  - a decrease in trade in energy commodities by about 15 percent.
  - a more than 35 percent decline in minerals trade.
- Results are robust for minerals across specifications; sensitivity is higher for other geopolitical alignment measures (for example, UN vote–based ideal point distance).

### Fragmentation in Commodity Markets: Recent Trends
- The number of new interventions in commodity trade has risen every year since 2018.
- In 2022:
  - there were more than six times more new restrictions affecting trade in commodities than the 2016–19 average.
  - trade-restricting measures on overall trade increased 3.5 times relative to the 2016–19 average.
- Price dispersion increased in major commodity markets in 2022, notably for some minerals (such as lithium) and energy commodities.
  - Example: Russian coal traded at a price almost three times lower than Australian coal in September 2022.
- Foreign direct investment and cross-border mergers and acquisitions in energy and mineral sectors were declining even before the war in Ukraine.

### Which Commodities Are Most Vulnerable (Partial-Equilibrium Model Results)
- Method: single-commodity, multicountry partial equilibrium model calibrated to 2019 trade flows; main scenario splits countries into two blocs based on the 2022 UN vote on Russia’s war in Ukraine:
  - “US-Europe+ bloc”: countries that voted for Russia to withdraw from Ukraine.
  - “China-Russia+ bloc”: remaining countries.
- Main assumptions: complete trade ban in a given commodity between blocs; intrabloc trade unaffected; baseline assumes integrated world price in 2019.
- Key simulated outcomes:
  - In the China-Russia+ bloc, prices of mined minerals such as cobalt, lithium, copper, and nickel would rise substantially.
  - In the US-Europe+ bloc, prices of refined minerals could increase substantially because processing is concentrated in China, Russia, and South Africa.
  - Palm oil and soybean are outliers: more than 80 percent of production would occur in the US-Europe+ bloc while most consumption would take place in the China-Russia+ bloc.
- Price-change reporting:
  - Price effects in figures are capped at 500 percent for readability; selected commodities experiencing increases higher than 500 percent are highlighted as outliers.

### Price Volatility and Amplification Mechanisms
- Fragmentation increases commodity price volatility through at least two channels:
  1. Smaller market sizes: bloc-level prices become more responsive to country-level shocks.
     - Example illustrative calculation for wheat:
       - The United States accounts for about 7 percent of global and 15 percent of US-Europe+ bloc wheat production.
       - A three-standard-deviation US harvest shock corresponds to about 60 percent of US wheat production, or 4 percent of global output, with wheat prices held constant.
       - Using a price elasticity of supply of 0.2 and a price elasticity of demand of –0.85, the same supply shock doubles the impact on wheat prices when trade is fragmented into two blocs.
       - Note: Lower elasticities would lead to higher price impacts; fragmentation still doubles the price impact in this example.
  2. Countries switching blocs: a single exporting country switching allegiance can create large supply gaps and trigger large price swings.
     - Example: South Africa produces one-third of the world’s manganese; if South Africa switched to the US-Europe+ bloc, the price of manganese in the China-Russia+ bloc could rise more than 800 percent.

### Macroeconomic and Policy Implications
- Fragmented commodity markets would:
  - Lead to higher price volatility, challenging public finances and fiscal and monetary frameworks and risking procyclicality of fiscal and monetary policies.
  - Amplify the price response to climate-driven increases in agricultural output variability, making it harder to cope with supply shocks.
- The analysis highlights that commodities with inelastic demand and supply and with high imbalances across blocs are most vulnerable to large price changes under fragmentation.

*Source: ch3 - 3. Upstreamness in Value Chains*

### Annex Figure 3.5.2 zooms into the results in Figure 3.7 by showing

### Annex Figure 3.5.2 zooms into the results in Figure 3.7 by showing

### Overview
- Annex Figure 3.5.2 focuses on the 15 commodities whose prices are most vulnerable to a single exporter switching blocs and the implied price changes.
- Figure 3.7 shows the largest price increases induced by a single exporter switching blocs; price effects are capped at 800 percent in the figure for readability.
- The chapter uses three modeling approaches: a partial equilibrium model, a static multicountry, multisector trade (general equilibrium) model, and a multiregion dynamic stochastic general equilibrium model that includes energy and critical minerals.

### Evidence from the Partial Equilibrium Model
- Approach:
  - Computes changes in producer and consumer surplus due to fragmentation in individual commodity markets.
  - Uses the resulting change in total surplus as an indicator of economic impact.
  - Accounts for changes in price and quantities consumed or produced of each commodity because of fragmentation.
  - Does not account for sectoral spillover effects nor simultaneous disruption of many commodities.
- Key findings:
  - Inefficiencies from restricting trade result in losses in bloc-level total surplus: the global economy is worse off from fragmentation of trade in individual commodities.
  - Bloc-level changes in total surplus are generally small, with notable exceptions.
  - Within each bloc, heterogeneity is important: some countries (net-exporters in a net-importing bloc, net-importers in a net-exporting bloc) may experience surplus increases while others decline.
  - Fragmentation of copper at the mining stage would reduce surplus by as much as 2.5 to 5 percent of gross national expenditure in Chile and Peru.
  - Fragmentation of palm oil or copper at the mining stage could lead to surplus losses in the China-Russia+ bloc of more than 1 percent of gross national expenditure.
  - Trade fragmentation of iron ore or soybeans could lead to surplus losses of more than 0.5 percent of gross national expenditure in the China-Russia+ bloc.
  - Commodities that are less price-vulnerable can still generate sizable surplus declines because of wide consumption (example: energy).
  - Surplus declines would generally be larger in the hypothetical China-Russia+ bloc because vulnerable commodities are more broadly consumed in this bloc.
- Notes on presentation:
  - Online Annex Figure 3.5.4 shows heterogeneity across countries; Online Annex Figure 3.5.3 shows the five largest surplus losses at the bloc level (some data points capped at –0.05 percent of gross national expenditure).

### Evidence from the Trade (General Equilibrium Multicountry, Multisector) Model
- Approach:
  - Static multicountry, multisector trade model that accounts for all input-output linkages across sectors to simulate long-term GDP losses associated with fragmenting all commodity trade.
  - Examines the role of neutral blocs (see Box 3.3 in the chapter).
- Key findings:
  - Broad differences across countries; some experience sizable losses.
  - Low-income countries could suffer deeper losses, on average estimated at 1.2 percent, given their high dependence on agricultural trade.
  - For some low-income countries losses could amount to more than 2 percent of GDP.
  - The hypothetical China-Russia+ bloc is more affected by fragmentation.
  - Global GDP loss is roughly 0.3 percent, modest due to offsetting effects across countries.
  - Global GDP losses from restricting commodity flows between blocs constitute about 15 percent of the loss from restricting all trade.
- Scenario/mitigation insight:
  - If countries that abstained from the UN vote on Ukraine are assumed to trade commodities freely, long-term changes in global GDP from this scenario would be negligible, with meaningful losses only in Russia.

### Evidence from the Dynamic Macroeconomic (DSGE) Model
- Approach:
  - Augmented IMF Global Macroeconomic Model for the Energy Transition, including production, consumption, and trade of energy from fossil and renewable sources, and four minerals critical to the energy transition.
  - Commodities modeled include crude oil, coal, natural gas, copper, nickel, cobalt, and lithium, capturing about 70 percent of the value of global commodity trade.
  - Fragmentation is modeled as a ban on trading these commodities between two hypothetical blocs comprising six regions.
- Mechanisms through which fragmentation affects activity:
  - Expenditure switching and trade diversion.
  - Temporary imbalances between supply and demand within blocs until prices adjust to clear markets, generating swings in commodity prices.
  - Rigidities that affect the speed of adjustment of output, use, and trade.
- Key findings:
  - Output and inflation effects vary across regions, blocs, and commodities.
  - Oil vs. natural gas: fragmenting oil markets allows quicker switching to intra-bloc partners with limited GDP impact; fragmenting natural gas faces rigidities (pipelines, other structures) that constrain trade diversion and produce more pronounced GDP and inflation effects in both blocs.
  - Minerals: fragmentation could lead to a steep rise in prices in the China-Russia+ bloc and sizable declines in real GDP. Roughly 80 percent of the supply of the four minerals is mined in the US-Europe+ bloc.
  - The US-Europe+ bloc would not be able to benefit quickly from relative oversupply at the mining stage because scaling up refining capacity takes several years; that bloc would also experience GDP decline from mineral market fragmentation.
  - Trade fragmentation of all seven modeled commodities would be associated with a global GDP loss of about 0.3 percent; simulated losses would be larger in the China-Russia+ bloc.
  - Within the US-Europe+ bloc, Europe could experience a sizable impact on inflation (as much as 100 basis points or more) and GDP, mainly driven by fragmentation of oil and gas markets.
- Caveats:
  - The model provides regional granularity but masks heterogeneity across individual countries.

### Key statistics and quantitative results (preserved exactly)
- 15 commodities highlighted in Annex Figure 3.5.2 as most vulnerable to a single exporter switching blocs.
- Price effects in Figure 3.7 are capped at 800 percent.
- Fragmentation of copper at the mining stage would reduce surplus by as much as 2.5 to 5 percent of gross national expenditure in Chile and Peru.
- Fragmentation of palm oil or copper at the mining stage could lead to surplus losses in the China-Russia+ bloc of more than 1 percent of gross national expenditure.
- Fragmentation of iron ore or soybeans could lead to surplus losses of more than 0.5 percent of gross national expenditure.
- Low-income countries average estimated loss: 1.2 percent (some could lose more than 2 percent of GDP).
- Global GDP loss from fragmenting all commodity trade: roughly 0.3 percent.
- Global GDP losses from restricting commodity flows between blocs constitute about 15 percent of the loss from restricting all trade.
- The DSGE commodity set captures about 70 percent of the value of global commodity trade.
- Roughly 80 percent of the supply of the four modeled minerals is mined in the US-Europe+ bloc.
- Europe inflation impact: as much as 100 basis points or more in the scenario examined.
- Some surplus data points in figures are capped at –0.05 percent of gross national expenditure for display.

*Source: Chapter 3, “Fragmentation and Commodity Markets: Vulnerabilities and Risks,” World Economic Outlook, October 2023 (figures and text excerpt provided).*

### CHAPTER 3 FRagMENTaTION aND COMMODITy MaRKETs: vULNERabILITIEs aND RIsKs

### CHAPTER 3 FRagMENTaTION aND COMMODITy MaRKETs: vULNERabILITIEs aND RIsKs

### Implications for the Clean Energy Transition
- Minerals identified as key inputs: copper, nickel, cobalt, lithium (used in EVs, batteries, wiring, solar panels, wind turbines).
- IEA (2023) net-zero-emissions-scenario demand projections:
  - demand for copper to grow by a factor of 1.5 by 2030;
  - demand for nickel and cobalt to double by 2030;
  - demand for lithium to increase six times by 2030.
- Geographic concentration examples:
  - Chile and Peru mine more than a third of the world’s copper;
  - Indonesia and the Philippines mine about half of the world’s nickel.

### Modeling results and scenarios
- Baseline (integrated-world) outcome:
  - world prices of the four key minerals could rise by about 90 percent, on average, along the net-zero-emissions-scenario path to 2030.
- Fragmentation counterfactual (complete mineral market fragmentation across two hypothetical blocs):
  - inability of the hypothetical China-Russia+ bloc to import key minerals would lead to an additional price increase in that bloc of 300 percent, on average.
  - result: acquiring minerals more expensive → lower investment in solar panels and wind turbines and fewer EVs.
  - in this net-zero scenario, about 70 percent fewer new EVs in the China-Russia+ bloc in a fragmented world than in an integrated world.
  - fragmentation generates only small gains in the US-Europe+ bloc (slightly higher number of EVs produced, but no gains in renewable-energy capacity by 2030) due to assumed constraints on scaling up mineral refining capacity.
- Global aggregate effects:
  - global net investment in renewable technology and production of EVs would be roughly 20 percent lower compared with the baseline because of mineral market fragmentation.
  - the shortfall would increase to about 30 percent if one uses greenhouse gas emissions to weigh the regional response of investment in renewables and EVs.
- Sensitivity to technological substitutability:
  - doubling the elasticity of substitution of the four minerals would reduce the decline in investment in renewable technology from 20 percent to 12 percent.
- Fiscal implication (fragmentation scenario example):
  - China’s fiscal cost of supporting investment in reverting to the net-zero-emissions path would be 1½–2 percent of GDP.
- Emissions and GDP distribution:
  - the China-Russia+ bloc accounted for more than half of greenhouse gas emissions in 2020, but only a third of global GDP.

### Broader vulnerabilities and impacts of fragmentation
- Structural vulnerabilities of commodity markets: highly concentrated and difficult-to-relocate production; hard-to-substitute consumption; critical role as inputs for manufacturing and key technologies.
- Observed recent fragmentation indicators:
  - measures restricting commodity trade surged in 2022;
  - price differentials across geographic markets have widened for selected commodities;
  - FDI flows in commodity sectors are in decline (trend started before the war in Ukraine).
- Distributional impacts:
  - potential for modest global aggregate output losses but significantly deeper long-term output declines for low-income countries on average.
  - fragmentation of agricultural commodities would raise important food security concerns for many low-income countries dependent on agricultural imports.
- Volatility and monetary policy:
  - a fragmented world would be more volatile; commodity price volatility could intensify due to smaller market sizes and incentives for producers to switch geopolitical allegiances, resulting in volatile inflation dynamics and more complex monetary-policy management.
- Energy transition risk:
  - fragmentation could make decarbonization more costly and raise risks of delaying necessary climate mitigation; mineral-rich blocs may not reap near-term benefits from oversupply because of constraints in scaling refining and processing capacity.

### Empirical example: changes in oil trade flows after Russia’s invasion of Ukraine
- Policy actions:
  - European Union, United Kingdom, and United States banned most imports of crude oil and petroleum products from Russia after the invasion;
  - G7 members prohibited transportation and insurance services to tankers carrying Russian commodities above certain price thresholds.
- Shipping-pattern changes (Automatic Identification System data):
  - tanker shipments from Russian ports to Japan, the United States, and the European Union declined between April–June 2019 and the same period in 2023;
  - the European Union receives more shipments from countries such as Norway, the United Arab Emirates, and the United States, extending the length of tanker routes by 20 percent.
  - Russian oil shipments rose to countries such as China, India, Türkiye, and the United Arab Emirates.
  - India: about 35 to 40 percent of India’s crude oil imports came from Russia during April–June 2023, up from less than 5 percent before the war in Ukraine.

### Summary of policy implications and recommended actions
- First-best: prevent fragmentation through multilateral cooperation and enhanced rules (WTO) on quantitative restrictions, export tariffs, discriminatory subsidies, local-content requirements, and other commodity-related trade measures—especially crucial for food commodities to avoid humanitarian disasters.
- Second-best: consider targeted “corridor” agreements to preserve integrated markets for critical commodities:
  - a minimum “green corridor” to safeguard critical minerals for decarbonization;
  - analogous “food corridor” agreements to ensure equal access to essential agricultural commodities.
- Improve data and transparency:
  - establish a platform or organization to improve sharing and standardization of international data on mineral production, consumption, and inventories (analogous to Joint Organisations Data Initiative for fossil fuels and the Agricultural Market Information System).
- Domestic and multilateral resilience-building steps:
  - foster investment in domestic mining, exploration, and recycling of critical minerals;
  - diversify supply sources;
  - invest in infrastructure to reduce trade costs and improve market integration;
  - support innovation to speed technological progress and develop substitutes;
  - build fiscal and financial buffers, strengthen macroeconomic and structural policy frameworks, and develop preparedness plans for sudden commodity-supply disruptions;
  - reinforce social safety nets to protect vulnerable households from higher commodity prices and volatility.
- Caution on industrial and “friend-shoring” policies:
  - industrial policies are third-best and must be designed to ensure equal treatment of firms, minimize distortions and fiscal risks, and avoid adverse cross-country spillovers;
  - friend-shoring policies can be market-distorting and costly and should be used only under particular conditions (clear market failures or narrowly defined national security concerns);
  - develop a framework for international consultations on friend-shoring practices to identify negative cross-border spillovers and mitigate adverse consequences.
- Financial-market safeguards:
  - consider policy measures to prevent disruptions in commodity-derivatives markets and financial instability, given that fragmentation in physical commodity markets could exacerbate financial market volatility and sharp exchange-rate adjustments.

*Source: CHAPTER 3 FRagMENTaTION aND COMMODITy MaRKETs: vULNERabILITIEs aND RIsKs (IMF, October 2023).*

### Box 3.1. Commodity Trade Tensions: Evidence from Tanker Traffic Data

### Box 3.1. Commodity Trade Tensions: Evidence from Tanker Traffic Data

### Historical patterns of commodity-market fragmentation
- Fragmentation historically ranged from full trade disruption (World War II) to limited/controlled trade (Cold War), to embargoes and export restrictions; fragmentation has rarely lasted because of commodities’ fungibility and arbitrage opportunities.
- World War II:
  - Trade among three major blocs—German-controlled Europe, Japanese-controlled Asia, and the rest of the world (the Allies)—stopped.
  - Some blocs faced commodity shortages: crude oil (produced mostly by the Allies) in Germany and Japan; natural rubber (produced mostly by Japan) in the Allies.
  - Government–industry responses:
    - Germany developed a coal-based synthetic fuel industry; by 1940, the fuel it produced accounted for nearly half of Germany’s oil supply and 95 percent of its aviation fuel.
    - US government stockpiled natural rubber and worked with industry to develop synthetic rubber.
  - Example of price manipulation: between 1941 and 1943, the price of tungsten rose 13-fold.
- Cold War:
  - Trade between US-led and Soviet-led blocs was limited due to Soviet self-sufficiency strategy.
  - East-West trade fell from three-quarters of trade by the East in 1938 to 14 percent in 1953; within-bloc trade and interdependence rose.
  - The Soviet Union still traded crude oil, natural gas, and some metals for manufactured and agricultural goods; traders often skirted government policies to facilitate exchange.
  - Political measures—example: after the Soviet invasion of Afghanistan, US President Jimmy Carter imposed a partial embargo on US grain exports to the Soviet Union; the embargo was ineffective as Soviet imports of US wheat were replaced by imports from other countries, especially Argentina.

### Embargoes and market responses
- 1973 oil embargo:
  - Arab OPEC members initiated an export embargo against the United States and other countries during the Arab-Israeli war and announced a 25 percent cut in output.
  - Oil prices more than quadrupled between September 1973 and January 1974.
  - Market and policy responses mitigated disruption: traders diverted oil to embargoed countries and production from non-OPEC countries rose; importers mandated efficiency improvements and created strategic oil inventories.
- Apartheid-era South Africa sanctions:
  - Several governments implemented wide-ranging bans on exports to South Africa, particularly crude oil.
  - Sanctions were blunted by traders willing to risk violating sanctions to supply oil at high prices.

### Key implications
- Fungibility and arbitrage tend to route commodities from producers to consumers unless trade barriers are near-absolute.
- Government measures and private-sector behaviors (stockpiling, synthetic substitutes, diverted trade, sanctions evasion) have historically limited the duration and severity of commodity-market fragmentation.
- Political considerations can drive trade restrictions, but global commodity market structure often enables replacement sourcing and trade circumvention.

*Author of this box: Peter Nagle.*

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_Source: https://www.imf.org/-/media/files/publications/weo/2023/october/english/ch3.pdf_