The economic value of strategic autonomy

Ricardo’s 1817 classical theory on comparative advantage had a huge impact on the growth of free world trade and the global reduction of import tariffs and other protectionist measures. After all, this was – and remains – in every nation’s interest. In principle, the decoupling of Ricardian trade with geopolitical blocs such as China and Russia leads to welfare losses in Europe and the Netherlands, as the Netherlands Bureau for Economy Policy Analysis (CPB) logically modelled again earlier this year.

But what is the economic perspective when international free trade seems to be increasingly failing to deliver on key goods and services? Global chains regularly prove more vulnerable in practice than in theory. Partly due to the COVID-19 pandemic, geopolitical developments, and technological innovations, national and European policy attention to strategic autonomy in medicine, computer chips, energy, critical materials, semi-finished goods, digitalisation, security – the list goes on – has increased considerably.

This is perfectly understandable: What happens if the timely and affordable supply of these ‘strategic’ goods and services becomes compromised? When unforeseen shocks become more frequent, due to both growing and more complex dependencies and geopolitical motives? How should we deal with this?

Of course, national governments have a role to play in protecting public interest in an economy. Naturally, availability and affordability can be considered public interests. The minimal efficiency of these interests may then begin to outweigh the efficiency of producing the relevant goods and services in the most efficient place in the world.

Yes, it is true that strategic autonomy comes with an economic price tag(opens in new window) (links to another website) because of the loss of efficiency in production chains due to the decline in international free trade. But the trade-off is greater efficiency in terms of higher security of supply and price certainty for citizens and businesses. The real key question is therefore: How much economic value do ‘we’ place on security of supply and price security? This is a difficult question to answer – certainly to calculate – but highly relevant and urgent.

In doing so, economists regularly forget to calculate (and factor into the sum) the negative externalities, i.e. the broader social or economic costs of a disrupted supply chain or sharp price shocks. Because there are potentially significant spillover costs for consumers and products, both tangible and intangible. This could include higher healthcare costs, civil unrest, or companies shutting down or phasing out production processes.
However, market parties will almost never fully price these costs themselves, nor will they automatically invest in the infrastructure, stocks, or processes to optimally mitigate such risks, despite their high social value or positive externalities. With this in mind, public policies that increase strategic autonomy can have a net positive value for society and the economy.

Together, we are called to answer an important new question: What is the economic value of strategic autonomy? How do we identify the broader benefits of increased security of supply and price certainty? A proper answer requires a thorough cost-benefit analysis, for which new methodologies need to be developed.

We also need to understand where exactly these specific economically risky dependencies are for the Netherlands and Europe. And what future ‘control points’ in relevant international value chains are possible and potentially interesting? Such criticality analyses also require the development of methodologies and, most likely, new combined data sources. Once such value calculations and identifications are possible, we arrive at the final question: What is the right policy approach for governments and businesses?

What is clear is that an applied research agenda for strategic autonomy is desired in order to build the knowledge to begin to answer the questions above. I suspect that the scientist Ricardo would have been an advocate if he had seen our modern economic practice behaving increasingly differently from his rightly revered timeless theory.

This reflection was written in the context of TNO Vector’s annual symposium, ‘Strategic autonomy in an open economy’, on 6 June 2024. Four setting-the-scene papers were published for the purpose of this symposium and can be downloaded below.

The papers:

• Economic security (in Dutch)
• Digital strategic autonomy (in Dutch)
• Energy supply security (in Dutch)
• National security (in Dutch)