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How Economic Interdependence Shapes International Security

December 04, 2023
Nazim Uras Demir

Shipping containers at a port.

The COVID-19 pandemic brought unprecedented disruptions to global supply chains. While demand for electronics surged, factories in East Asia shut down, creating a semiconductor shortage that continues to reverberate through 169 industries. Many countries banned exports of key commodities as demand in their own country soared and the supply diminished. The pandemic laid bare not only the interconnectedness of the global economy but also interdependence of countries. At the pandemic’s height, for example, China supplied every four out of five personal protective equipment that medical staff relied on across the world. 

Does economic interdependence make countries stronger or more vulnerable? This question has been a topic of scholarly debate since Ancient Greece. Some scholars argue that increased interdependence leads to greater cooperation, others contend that it results in conflict, and still others suggest it’s a mix of both. What most studies have in common is that they rely on aggregate data on exports and imports of finished goods—the sewn shirt, the assembled car or computer.

But contemporary interdependence is increasingly characterized by trade in intermediate goods, which flow through complex global supply chains. Apple’s iPhone, for example, is made up of alloys, integrated circuits, batteries, displays, speakers, and lenses that are sourced from more than 50 countries. Similarly, Boeing’s 787 Dreamliner Jet is comprised of more than two million parts, sourced from 75 countries. While the trade in finished products shows countries’ dependence on each other in terms of what they consume, the trade in intermediate goods shows countries’ dependence in terms of what they produce. 

Today, trade in intermediate goods represents a larger proportion of global trade than goods solely produced domestically. United Nations Comtrade Data between 1995 to 2020 reveals that the total trade in intermediate goods amounted to more than US$114 trillion (Figure 1). Of this, the United States contributed over 10 percent, Germany nine percent, China nearly seven and a half percent, and Japan almost five percent. The United States held the top position from 1995 to 2014, but China has been busy catching up. By 2005, China’s trade in intermediate goods had surpassed several major European economies; China overtook Japan in 2006, Germany in 2014, and finally exceeded the United States in 2015. Over the past decade, the rest of the world has grown more dependent on China, while China has become increasingly self-sufficient, except in a few advanced industries.

As China’s influence in global supply chains grows and geopolitical tensions with the United States escalate, the trade of intermediate goods has become a central focus in foreign policymaking. States are crafting economic security strategies aimed not only at reducing vulnerabilities tied to reliance on China but also at limiting China’s access to advanced technological manufacturing lines. In 2021, the United States launched the National Strategy for Supply Chain Security, and in 2023 Japan followed suit with the Economic Security Protection Act. Similarly, the European Union (2023), South Korea (2022), Australia (2023), and Taiwan (2023) are all reevaluating and restructuring their trade policies, considering not only business imperatives but also national security concerns. 

These actions indicate a growing concern among states about the vulnerabilities, as opposed to the benefits, of interdependence, particularly in relation to China. It wasn’t always this way. Many policymakers and scholars thought that the expansion of global supply chains would promote cooperation and reduce the likelihood of conflict and—since countries would want to avoid economic losses from trade disruptions. Trade would in other words create an incentive to maintain harmony in the international system, ultimately leading to a “commercial peace.” 

However, recent years have shown that global supply chains can be used as tools of coercion during crises to exert pressure, inflict costs, and force compliance. In 2010, China’s exports to Japan of refined  rare earth minerals—integral to high-tech manufacturing—were seemingly disrupted for about two months following the arrest of a Chinese national by the Japanese coast guards in contested waters around the Senkaku/Diaoyu Islands. In 2019, Japan’s exports to South Korea of photoresist, fluorinated polyimide, and hydrogen fluoride—essential components in semiconductor production—were unexpectedly placed under export license requirements following a South Korea ruling regarding World War II restitutions. In 2021, U.S. exports to China of photolithography scanners, ion-implanters and other semiconductor manufacturing equipment were placed under export controls following increasing tensions between the world’s two largest economies. In 2023, China announced special export license regimes over Germanium and Gallium—key inputs in semiconductor manufacturing, and more recently, over Graphite, a crucial component of lithium-ion electric batteries.

Among the vast array of intermediate goods, those necessary for the creation of high-value goods, and those hardest to substitute, are most likely to be used as tools of economic coercion. These include good like semiconductors, aircraft and motor vehicle parts, and refined natural resources. Countries that control the supply of these types of intermediate goods enjoy direct leverage over other countries’ economies, as the production lines that transform these inputs into finished goods are often those that contribute most to the domestic economy. Integrated circuits stand out as an intermediate good that is both central to the production of high-value goods, and can only to procured through a handful of suppliers globally. 

Who holds the reins over these intermediate goods? Global production patterns have shifted in recent decades. In 1995, the leading producers of vital but easy-to-substitute intermedia goods were the United States at 16 percent, Germany at 12 percent, and Japan at nine percent. Fast forward to 2020, and the landscape changed with China emerging as the leading provider at 11 percent of the total trade value. For vital and hard-to-substitute goods, the United States led in 1995 with a 14 percent share, while Germany contributed 10 percent. By 2020, the United States was maintaining its leadership at 10 percent, but China had risen to eight percent, and Germany held a six percent share. The United States continues to enjoy leverage over China’s competitiveness in the global economy—at least for the time being.

Figure 1. Top exporters of intermediate goods based on UN Comtrade Data: 1995-2020 (from Demir, 2023; identification of intermediate goods is based on United Nations Statistics Division Broad Economic Categories).

Dependence on other countries for intermediate goods encourages hyperspecialization among firms, which only heightens the consequences of losing access to essential outputs. For example, South Korea’s Samsung and SK Hynix account for more than 60 percent of the world’s semiconductor memory device manufacturing. However, close to 90 percent of South Korea’s photoresist—a key input for the production of integrated circuits—comes from Japan. When the Abe administration established export license requirements in 2019, South Korean firms had no alternative suppliers, and thus no alternative but to abide by the restrictions in Japan.

To reduce their vulnerability, allied countries are joining forces. The Biden administration has been a lead adopter of “allyshoring,” which, as the name suggests, shifts supply chains from adversaries to friends. U.S. trilateral talks with Japan and the Netherlands, and its proposed Chip 4 alliance, which includes Japan, South Korea, and Taiwan, are all examples of this strategy. NATO countries similarly have increased their exports of vital and hard-to-substitute intermediate goods to the United States, moves likely influenced by the U.S.-China trade war. 

Economic interdependence is likely to remain a central dimension of great power competition, as a complete decoupling between the United States, its allies, and China seems improbable in the near term. As the United States adopts green technologies, it will remains heavily reliant on imports of electric batteries and photovoltaic cells from China, which dominates over 80 and 90 percent of the global output, respectively. Yet, the growing trend of surgically placed export controls and license requirements indicates that intermediate goods are becoming tools of coercion. Some supply chains may foster cooperation between states, but others may intensify existing conflicts. 

Nazim Uras Demir is a Ph.D. candidate at the University of California Irvine’s Department of Political Science and an alumnus of IGCC’s dissertation fellowship program.

Image Credit: Daniel Foster on Flickr

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