European Central Bank working paper estimates 3% welfare losses and 20% trade contraction from East-West green supply chain decoupling

The European Central Bank published Working Paper No. 3152 proposing a methodology to increase the granularity of Inter-Country Input-Output tables so that trade shocks can be analysed for specific green-transition products rather than broad sectors. Using the resulting dataset, the paper simulates a hypothetical East-West supply chain decoupling in green products and quantifies the associated macroeconomic and emissions impacts. The approach disaggregates input-output relationships to single out 129 products essential to the energy transition, grouped into eight green sectors (including mined and processed rare earths, chemicals, electric batteries, renewable-energy equipment, electric vehicles and green electricity), drawing on bilateral product-level trade data and information on sectoral users. The authors also build a 2030-oriented input-output representation using International Energy Agency assumptions on green-sector demand and electricity mixes. In a fragmentation scenario where East and West blocs impose a 150% increase in trade barriers on these green products while a neutral bloc remains unaffected, welfare losses in the antagonist blocs reach up to 3% and trade between blocs contracts by up to 20% even after accounting for trade diversion. The simulation also indicates higher global prices for green products (with sharper increases for downstream goods such as electric vehicles), a 2.2% decline in global demand for green goods, and higher emissions intensity, with an estimated 544 additional tonnes of CO2-equivalent per USD billion of output and cumulative additional emissions over twenty years approaching one gigatonne.