Sourcing all the eggs from one basket: trade dependencies and import prices

Highly concentrated imports can be a source of vulnerability in an environment characterized by geopolitical tensions. In light of this concern, some recently adopted policies aim to dilute advanced economies’ import concentration for key products. Likewise, a tendency towards supplier diversification has been observed in firm surveys. In this paper, we study how countries’ import concentration in a few external providers affects import prices. Import concentration decreased in OECD countries in the last two decades, especially up to the global financial crisis, in the hyper-globalization period. For EU countries, integration in the single market was crucial to foster diversification also beyond the hyper-globalization years. Yet, for a number of strategic goods, imports tend to be more concentrated in geopolitically distant providers. Panel regression analysis based on granular trade data at the country-product level shows that high import concentration is associated with higher import prices, which supports the view that strongly concentrated markets correspond to low levels of competition. This effect tends to be more pronounced when a supplier country’s perceived market power is strong, i.e. for goods whose production is highly concentrated at the global level or for those that a country cannot (fully) produce by itself. The positive relationship between import concentration and import prices is less pronounced in high-technology industries, consistent with the notion that in these sectors a high concentration is also related to the presence of cost-efficiency effects owing to economies of scale. Exclusive trade relations, i.e. those in which the importer sources a product from one provider only, are associated with lower import prices and could therefore be costlier to break.