Maureen Lankhuizen (p), Thomas De Graaff, Mark Thissen

Mark Thissen

This paper examines the short-term effects of some geo-economic measures, such as reducing foreign dependence and protectionist measures.

Our approach is grounded in input-output (IO) modelling, but we introduce an important novelty. Unlike the standard IO model we do not assume fixed coefficients. Nor do we assume changes in these coefficients based on, for instance, the (spatial) price elasticities in computable general equilibrium (CGE) models. Instead we minimize changes in production technology and demand behaviour due to a (policy) shock to the system. A more practical portrayal of our approach is that after a (policy) shock, we search for a new IO table that is as close as possible to the current (technological) structure as described by the A-matrix and the current size of the economy and trade flows as described by the IO table prior to the (policy) shock. With this, we give substance to the fact that economies cannot change dramatically overnight. The condition that economies change as little as possible, implies that relative as well as absolute changes in trade flows between industries and regions are as small as possible. This is represented as a (non-linear) optimisation problem in which both relative and absolute errors are minimised. Thus, we obtain a flexible model, with IO and CGE as ‘extremes’.

We calculate possible effects on production and trade of countries and regions for a number of scenarios. Preliminary results indicate that a large-scale reduction of foreign dependence in computers, electronic and optical products largely backfires on production in the EU. The EU economy cannot cope with the reduction of inputs. There is insufficient domestic production of computer, electronic and optical products to replace foreign supply. So, in the short term, bottlenecks arise. Unlike the EU, the United States is able to absorb the impact of a substantial reduction in foreign dependence in computers, electronic and optical products. This suggests that in the EU, capacity building as envisaged in the EU Chips Act may indeed be addressing a need. On the other hand, the US may not need a CHIPS Act to achieve reduced foreign dependence.

Sacha Den Nijs (p), Mark Thissen

Maureen Lankhuizen

In this paper we analyze the competitive opportunities and threats to industries in different regions of fossil fuel cost changes and how decarbonization may affect these opportunities and threats. The last few years, during but also after COVID-19 pandemic waves and lockdowns, large fluctuations in energy prices are observed. Global political changes, like the war in Ukraine, are expected to also induce large shocks to fossil fuel prices. Meanwhile, decarbonization efforts and the resulting change in the energy system will affect international trade patterns in energy. This affects regional economies in particular as these may not have their own fossil fuel supply locally. We investigate which industries in what regions are the most sensitive to such changes in fossil fuel prices, for example due to world-wide shocks like COVID-19. More interestingly, we consider how possible future changes in the electricity mix and energy usage that are the result of climate policy and decarbonization strategies may affect the regional competitive opportunities and threats of changes in fossil fuel prices. A Leontief input-output price model based on multi-regional input-output tables on an EU NUTS 2 level from Thissen et al. (2018) is used. We use the measure of revealed competition developed in Los et al. (2016) combined with value chain analysis using marginal prices as was used in Thissen et al. (2020). We extend this approach by introducing marginal prices on technological change and substitution between energy types, thereby creating the possibility of analyzing the effect of decarbonization strategies on the competitive opportunities and threats. Such an approach gives the opportunity to derive more general conclusions than those that rely on a few specific ad hoc scenarios. Results can indicate which regions and industries are, through their value chain, more sensitive in terms of competitive position to fossil fuel cost changes than others. Meanwhile, decarbonization may present opportunities for various regions and industries to decrease this sensitivity, which can result in policy recommendations that support decarbonizing faster to reduce the regional sensitivity of possibly world-wide global energy price shocks.

Frank van Oort (p), Mark Thissen

Sacha Den Nijs

Macro-economic shocks seem to increase in size and frequency. Brexit in 2016 caused a shock in trade, investments, and migration networks across Europe. Research shows that even with the current soft Brexit, regions are impacted severely by interregional barriers (Thissen et al. 2020, Springford 2022). Competitiveness, interregional relations, and resilience are again keywords in the Covid-19 pandemic shock where lock-downs in specific regions generate ripple effects through the world economy via trade, commuting and FDI networks. A mature literature shows large sectoral and regional heterogeneous impacts across European countries, affecting health conditions and economic development in various ways (McCann et al., 2021, Bourdin et al. 2022). Some recent papers covering German, Swiss, French, and Chinese local policies argue that these temporary spatial policies may be more effective in battling health implications of the pandemic than national ones (Huber & Langen 2020, Qiu et al. 2020, Weber 2020, Bonardi et al. 2020). A discussion of distributional fairness led to the acceptance of national policies rather than regional ones in The Netherlands (Edelenbos et al. 2023). On mitigating economic impacts by regional policies, the literature is not well developed. The fairness argument and identification problems contribute to policy-regionalisation being a “wicked problem”.

We analyse the degree to which firms and consumers in different regions are exposed to region-specific demand and supply bottlenecks due to implemented policies and rulings. We use mixed techniques based on multi-regional input-output modelling in combination with mixed integer optimization problems to illustrate the benefits for the Dutch economy when pandemic-related rulings will be regionally and sectorally differentiated. We show that the economic importance of a regionally differentiated approach to Covid-19 related policies and rulings (on safety, distancing, working from home, and changes in attitudes) is large and beneficial to mitigate economic impacts. The benefits of a regional coordinated approach are substantial (up to several percentages of GDP, and one-third of the national economic impact). Regional economic impacts due to the rulings affect production possibilities and supply differently over the regions, while the regionally differentiated impacts to demand lead to regional ripple effects via multiregional value chains that spread the effects over space. We extend the methodological and empirical discussion to other shocks, like that of the war in Ukraine with its sector (fuel, agriculture) and regional (specializations) specific effects.

Mark Thissen (p), Erwin Kalvelagen

Frank van Oort

Entropy-based estimation methods are the working horse in reconciling inconsistent data. They are based on information theory and commonly used in merging different sources of data in, for instance, the system of national accounts as represented by supply and use (SU) or Input-Output (IO) tables. We show that entropy-based methods have a bias toward the reliability of reconciled small numbers at the cost of the reliability of large numbers. As a consequence, these entropy-based methods may give unreliable results when there is a large variance in the size of the numbers that have to be reconciled. This can be detrimental in the analysis of dependence for trade policies (e.g. Brexit) or economic propagation effects of sudden events (e.g. Covid, energy supply, disasters, wars) via value chains since they are based on trade-linked systems of national accounts with trade flows that are typically characterised by such a large variation in size. We propose an estimation methodology based on the root mean square weighted error and percentage error (RMSWEPE) which gives more balanced estimates of the reconciled data. This methodology is numerically easy and can therefore be applied to large datasets. We illustrate the applicability of the methodology by the estimation of the 2017 regional NUTS2 trade-linked SU and IO world tables for the EU28.