Bank says reliance on China for key raw materials leaves the United States and Europe exposed, urges targeted deโrisking.
Europe and the United States have become significantly more vulnerable to supply disruptions from China in key sectors such as energy, health care, and digital technologies, the European Central Bank said on Tuesday, warning that even small shocks to these โcritical dependenciesโ could have outsized economic costs.
โAlthough the critical dependencies constitute a minor share of total trade and inputs to production, any disruption to their supply yields disproportionate economic costs owing to their low substitutability,โ ECB economists wrote in an abstract to a new bulletin published on Aug. 5.
Global trade liberalization since the 1990s boosted efficiency but contributed to making countries such as China dominant in key minerals and others, such as Europe and the United States, heavily reliant on foreign inputs.
โThese dependencies create strategic vulnerabilities, as their disruption by geopolitical rivals can entail significant economic costs,โ the economists wrote in the bulletin.
The ECB analysis found that roughly 30 percent of Europeโs critical imports from Chinaโincluding rare earths, antibiotics, and consumer electronicsโqualify as โsingle point of failures,โ with few alternative suppliers.
The report said the share is even higher for the United States, at about 40 percent of critical dependencies from China. By contrast, China has sharply reduced its reliance on Western inputs through industrial policies such as โMade in China 2025โ and what analysts call a โfortress economyโ strategy aimed at withstanding external shocks.
Chinaโs dominance is most pronounced in strategic raw materials. It refines about 73 percent of global cobalt and 40 percent of lithium and accounts for more than 95 percent of rare earth production, according to the report. These minerals are essential for electric vehicles, renewable energy systems, and advanced defense technologies.
The ECB warned that the economic fallout from a supply shock could be severe even though these goods make up only a sliver of trade. Its model estimates euro-area final demand losses rose roughly tenfold since 1995 to 0.41 percent, with U.S. losses reaching 0.32 percent.
By Tom Ozimek