Supply chain decoupling in green products: a granular input-output analysis

This paper introduces a novel methodology to enhance the granularity of Inter-Country Input-Output (ICIO) tables. While our general methodology can be applied to any products of interest, we show that the well-documented distortions caused by sectoral aggregation in ICIO tables are particularly pronounced for products with a low substitutability, such as those essential to the green transition (e.g. electric batteries, rare earths). We therefore apply our framework to construct a disaggregated ICIO table that singles out 129 products essential to the energy transition. We then simulate a hypothetical scenario of an East-West supply chain decoupling in green products through a multi-country multi-sector model calibrated with our tailored disaggregated ICIO table. Results reveal substantial economic costs: welfare losses reach 3% and trade between blocs contracts by 20%, even when accounting for trade diversion through neutral countries. We finally quantify how the green supply chain decoupling increases the intensities of greenhouse gas emissions, highlighting how trade barriers on green sectors affect both economic efficiency and climate objectives. JEL Classification: C67, F13, F18, F51, Q48