Inputs in Distress: Geoeconomic Fragmentation and Firms’ Sourcing

We study how disruptions to the supply of foreign critical inputs (FCIs) —defined as vulnerable inputs and key inputs for the digital and green transition —may affect value-added at different levels of aggregation. Using firmlevel customs and balance sheet data for Belgium, France, Italy, Slovenia and Spain, our framework allows us to assess how geoeconomic fragmentation may affect European economies differently. Our baseline calibration suggests that a 50% reduction in imports of FCIs from China and other countries with a similar geopolitical orientation would result in sizable losses with significant heterogeneity across firms, sectors, regions, and countries, driven by the heterogeneous exposure of firms. Our findings highlight that the short-term costs of supply disruptions of FCIs can be substantial, especially when firms cannot easily substitute away from these products.