Quantifying Strategic Dependence

We develop a Strategic Dependency Index (SDI) to quantify the welfare cost of product-level import price shocks. Unlike existing empirical indicators based on concentration metrics and ad hoc thresholds, the SDI is derived from a structural cost-of-living framework, and allows for additive decomposability across products, source countries and destination countries. We apply the SDI to the EU27, and estimate trade elasticities, love-for-variety parameters, and origin-destination- specific taste shifters using highly disaggregated 8-digit product-level trade data over 2002–2021, instrumenting for prices and expenditure shares to address endogeneity. Three sets of findings emerge. First, the products generating the largest welfare losses are petroleum oils, liquefied natural gas, iron ores, and selected basic metals. Their strategic relevance stems from the interaction of both low substitutability across sources and large expenditure shares. Second, strategic dependency varies sharply across EU member states even for the same product, driven by fundamentally different channels — high substitution elasticities in some countries versus large expenditure shares in others — implying that uniform EU-wide policy responses may fail to address the heterogeneous sources of vulnerability. Third, the suppliers contributing most to aggregate welfare exposure do not coincide with the geopolitical rivals dominating policy discourse: China, the USA, and Russia do not lead the SDI ranking. The SDI provides a tractable, theory-consistent framework for evaluating targeted policy interventions aimed at reducing strategic trade exposure.