With the number of natural disasters increasing, the European Union needs to protect its global supply chains from the effects of the climate crisis. In a working paper published on Friday 19 September, the Bruegel think-tank stresses that “[climate] shocks are not confined to the regions where physical damage occurs”, but extend to international trade and supply networks, exacerbating their economic effects.
The authors point out that the 2011 floods in Thailand - which led to $46.5 billion in losses, or 12.5% of the country’s GDP, and caused automobile and electronics production to plummet by 87.5% and 65% respectively - and the 2022 drought in the Panama Canal had quantifiable consequences for the global economy, even if they were short-lived.
But with the frequency and intensity of these climatic events expected to increase, “how fast will the resilience of regions and industries be eroded over time?”, they ask.
In light of this, the report demonstrates the role of public authorities. While companies need to invest in diversifying and securing their supplies, “for governments, it will become increasingly important to set the right incentives” to encourage them to do so.
In the EU, this means combining adaptation with economic incentives that are in line with climate realities.
The document also warns against the risks of policies that “dim(...) price signals such as insurance costs” and that discourage private players from reducing their exposure to threats.
And beyond EU borders, the issue of international coordination is crucial. The rice crisis of 2007-2008 showed how export restrictions can turn a localised shortage into a global shock.
“Uncoordinated policy responses can strongly exacerbate the effect of otherwise manageable climate-related production shortfalls”, the report points out.
The European Union is called upon to promote international cooperation for the security of supply chains, but also to adapt its infrastructures, such as ports, canals and logistics networks, to climate challenges. According to the authors, “climate adaptation requires investments in physical infrastructure, (...) but also policy (...) to encourage more flexible logistics and procurement chains (...) [and] diversification”.
In this sense, European trade and climate policies converge to preserve both competitiveness and economic and food security.
Read the document: https://aeur.eu/f/ik4 (Original version in French by Nithya Paquiry)