1. Introduction

1.1 Background

The global economy is transitioning into a new phase that impacts both governments and businesses. There are several indications that the global economy is shifting from a period of globalization to a new era marked by geopolitical and geo-economic factors. This new phase is defined by increased geopolitical tensions and a growing wariness of the dependencies formed through international trade, value chains, and investments. The discussion around national resilience and vulnerability has increased since the Covid-19 crisis that disrupted the operations of global value chains. Then Russia invaded Ukraine in early 2022 and later the Nord Stream gas pipelines were blown up. As a result, many countries became concerned about the critical dependencies they had.

Countries can leverage economic tools to pursue foreign policy objectives, engaging in geo-economics. This includes a variety of instruments such as tariffs, foreign trade restrictions, export subsidies, and market access conditions. It also encompasses strategic ownership, dependency creation, and industrial policy. Generally, the application of geo-economic power is subtle and sometimes ambiguous, making it challenging to distinguish from regular economic activities. Even when geo-economic power is identified, those employing these methods often do not acknowledge it. Sanctions and asset freezes, however, are exceptions, typically used in wars or other overt conflict situations.

Early signs of the shift in course appeared after the financial crisis. The change began to be reflected in international trade and the trade restrictions implemented, and also extended to foreign direct investment and restrictions on foreign ownership.

Figure 1.1 The change in the world economy

Note: The estimated fragmentation index (y-axis) is based on 14 indicators of geopolitical fragmentation, shown alongside 90% credible intervals. An increasing index signifies fragmentation, while a decreasing index indicates global economic integration. Source: Fernandéz-Villaverde, Mineyama and Song (2024).

In the light of geopolitical tensions, increasing trade barriers and national industrial state subvention, the conditions for the current openness of the Nordic economies are threatened. Due to limited domestic resources and market size, the importance of international trade is more important for small countries than large countries. This also means that small countries are typically more specialized than large countries as they benefit more on international trade (see e.g., Soo, 2011). The period of economic integration witnessed a geographical fragmentation of production processes and international trade (Hummels et. al., 2001; Timmer et. al., 2019).

During the past decades, the general discussion on international trade has strongly focused on exports and left out imports. The role of exports has been seen as a source of growth and necessity particularly for Nordic countries and other small open economies.

However, imports are often as important as exports because small countries are not able make everything by themselves. Imports include not only final goods but also raw materials, components and other intermediate goods that companies source to use in their production.

Disruptions in international trade and intensified geopolitical tensions have raised the call for better resilience of global value chains. As a part of better resilience, initiatives have been made to diminish dependencies (White House, 2021; CRMA, 2024; Alcidi, C. ja Kiss-Gálfalvi, 2023).

1.2 Goals and research questions

The shift from the era of globalization to the era of geo-economics with increased geopolitical tensions has been rapid. Consequently, there is now a pressing demand for a deeper understanding of these intricate dependencies. A comprehensive analysis of the current state of Nordic value chains is essential to identifying vulnerabilities, mitigating risks, and ultimately bolstering the Nordic region's economic security and stability in an increasingly volatile world.

This goal of this project is to respond these needs and provide new and innovative insights to inform strategic decision-making and foster a more robust and resilient economic future for the Nordic countries. Our purpose is to answer the following questions:

What kind of dependencies do the Nordic countries have on different countries and regions?
To what extent do Nordic countries rely on global value chains?
What kind of differences and similarities exist in Nordic countries’ dependencies?
What kind of vulnerabilities are associated with imports?
Based on the findings of this study, what policy recommendations can be proposed?

This report is structured as follows. Chapter 2 focuses on Nordic imports of raw materials, components, and other intermediate goods, providing an analysis of the most important imported intermediate goods in each Nordic country. Chapter 3 delves deeper into these imports by considering the vulnerability of the imported goods. Chapter 4 concentrates on unprocessed critical raw materials and their sources of import. Shifting the perspective from imports to exports, Chapter 5 considers the destinations of exports. Finally, Chapter 6 presents the conclusions and associated policy considerations.