How strong are the economic dependencies on global powers?

By Tanja Zimmermann

Photo credits: Adobe Stock

Economic dependencies on Russia are putting pressure on economies worldwide. With regard to dependency on important commodities, Russia can put countries around the world under pressure and is trying to exert its influence. Companies around the world are now trying to diversify more in the short and medium term. However, anyone who thinks that this is about economic dependencies on Russia has not yet recognized the challenge. In a survey published in April 2022, the ifo Institute found that nearly half of manufacturing companies rely on key inputs from China. Around half of these companies are now trying to diversify their sources of supply. New economic risks should be addressed with new technologies. Can economic dependencies also be diversified with the use of artificial intelligence?

According to the ifo Institute, China plays an important role both as a supplier and sales market. Germany is dependent on China for several specific industrial goods and commodities. For many companies, increased freight costs are becoming a serious factor. The growing uncertainties of existing supply chains are also a decisive factor. These are the reasons for the rethinking in many companies. Diversification of critical goods and commodities on a European level is gaining importance.

However, companies from Germany have the strongest dependencies on European trading partners for critical products. Only three percent of critical products come from China. German companies are mainly dependent on products from the chemical, electrical and transport equipment sectors. These include magnets, projectors and amino acids. And the importance of rare raw materials is even higher than for industrial products. For example, raw materials are sourced from China, which are crucial for new key technologies in Europe. For example, a high proportion is accounted for raw materials that are essential for the production of electric motors, wind generators and photovoltaic technologies, and thus crucial for economic growth. The question that also needs to be posed about this is how important the EU is for China. In terms of value added, the EU is the most important supplier of inputs. At the same time, the EU is the second most important sales market for China. However, China is more important as a sales market for Germany than the other way around.

Companies' diversification efforts could be supported by corresponding political activities. For example, the ifo Institute recommends that trade agreements with the Mercosur states and also with Mexico should be ratified as soon as possible. The ifo Institute also recommends giving greater importance to agreements with Australia and India. This would allow European companies to quickly gain better market access to these countries. Supply chains can be diversified in this way. According to the ifo Institute, the goal of a foreign trade policy should not be to break off economic relations. It is important to avoid unilateral dependencies. This would make it possible to assert European influence in a more coordinated manner.

21strategies uses third-generation AI to identify hedging strategies against risks in international trade. Geoeconomics, supply chain uncertainties and commodity dependencies have become increasingly significant in recent years. New situations require new approaches. Third generation artificial intelligence offers a good opportunity. 21strategies is able to develop hedging decisions against supply chain risks with a strategic-tactical approach. Especially under uncertainty, AI technology can develop efficient strategies. Commodity price changes, for example, can thus be detected at an early stage and efficient strategies can be developed. We would be pleased to present the possibilities to you. Contact us to find out how we can help you.