Pillar of Economic Security

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Economic security has risen in policy discussions due to crises such as the COVID-19 pandemic and the war in Ukraine, which disrupted global supply chains.
The author argues that a strong multilateral trading system based on the rules of the World Trade Organization (WTO) is the best guarantor of economic security because it provides households and firms affected by supply shortages with unparalleled flexibility.
Access to a broad range of outside options is key because it is difficult to predict where supply shortages will arise and who can step in—this flexibility is described as "flexicurity."

Ethiopia imported 45 percent of its wheat from Russia and Ukraine before the war; imports then plunged by 75 percent from Russia and by 99.9 percent from Ukraine.
Ethiopia sharply increased wheat imports from the United States and Argentina, although it had not imported any wheat from Argentina before.
WTO economists estimate that 19 percent of global exports are in "bottleneck" products (products that have few suppliers but a large market share).
The share of "bottleneck" products has doubled over the past two decades.
Only a small minority of US firms import the same product from more than one source country (Antràs, Fort, and Tintelnot 2017).
McKinsey estimates that supply chain disruptions cost firms more than 40 percent of a year's profit every decade on average.
Bilateral trade between China and the US was at a record high in 2022 despite large and persistent tariffs.
The 10 percent most critical products account for 90 percent of the gains from trade (Ossa 2015).
WTO economists estimate:
- Fragmentation 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.
- The opportunity cost of moving to geopolitical rivalry (forgoing international cooperation) is 8.6 percent.
- Opportunity costs vary by country group: 6.4 percent for developed economies, 10.2 percent for developing economies, and 11.3 percent for least developed economies.

Grossman, Helpman, and Lhuillier (2023) identify two opposing market failures:
- Firms may underinvest in supply chain resilience because some disruption costs are borne by consumers.
- Firms may overinvest in supply chain resilience to capture extraordinary profit opportunities during disruptions.
The theoretical conclusion: the case for policy intervention is subtle and ambiguous—governments may wish to push for reshoring, offshoring, nothing, or both.
For practical purposes, the case for policy intervention in global supply chains is weak because resilience is desirable but costly, and there is no clear reason firms are systematically under- or overexposed to risks.
National security considerations could alter this assessment; there may be circumstances where firms do not internalize security externalities and limited interventions could be justified.

Following the COVID-19 outbreak, trade recovered within just three quarters of the downturn in the second quarter of 2020.
Trade supplied households with masks, vaccines, and home office equipment during the pandemic.
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 countries such as Egypt, Ethiopia, and Türkiye.

The main policy role is to provide an economic framework in which resilient supply chains can thrive—this requires defending the multilateral trading system that keeps trade barriers low, nondiscriminatory, and predictable.
The rules-based nature of the multilateral trading system:
- Reduces the risk of policy-induced supply chain disruptions.
- Increases the likelihood markets will stay open when alternative sources are needed.
A power-based trading system would lose these advantages, allowing countries to freely adjust trade policies.
Trade policy uncertainty is detrimental to trade flows; Handley (2014) shows a reduction in bound tariffs increases trade flows even if applied tariffs remain unchanged, because it reduces trade policy uncertainty.
Preserving the credibility of the multilateral trading system is crucial; violations of WTO rules have collateral damage that undermines the system’s functioning.
The WTO's challenge of preserving credibility is likened to central banks' challenge of anchoring inflation expectations.

Improving the economic framework for global trade is possible and desirable to strengthen supply chain resilience.
The WTO's notion of “reglobalization” is proposed as a guiding principle: work toward more inclusive globalization that allows a broader range of countries to participate in global value chains.

Source: Pillar of Economic Security, F&D Magazine, RALPH OSSA.

Pillar of Economic Security
- Pillar of Economic Security (Markdown version)
- Pillar of Economic Security (PDF)