Discussions of different aspects of economic security, such as supply chain resilience, energy security and cybersecurity, have intensified in recent years. They tend to take place in distinct fora, yet they are closely intertwined. To shed light on these interlinkages and foster synergies between different expert communities, the OECD organised a workshop on Economic Aspects of National Security in February 2024, as part of the New Approaches to Economic Challenges (NAEC) work programme. This report aims to extend the discussion and provide further insights into the main topics addressed during the workshop. It builds on the expertise across the OECD Secretariat and the International Energy Agency. It discusses specific aspects of economic security in the context of heightened geopolitical tensions, high interconnectedness spurred by globalisation, and green and digital transitions. By focusing on these emerging issues, the report seeks to provide insights that facilitate informed policymaking and strategic responses to ensure economic stability and resilience in an ever-changing world.
Economic Security in a Changing World
Abstract
Executive summary
Economic security refers to a nation's ability to protect and sustain its economic stability and growth by strengthening its resilience against external and internal threats. It is a loosely defined concept which overlaps with the broader concept of national security. Following a series of economic crises and geopolitical tensions in recent decades, the breadth of economic security risks targeted by policymakers has expanded. It encompasses the capacity to safeguard key economic assets, maintain critical infrastructure and ensure access to essential resources such as energy, food and technology. The main dimensions of economic security include the protection of strategic industries and supply chains and maintaining trade and investment flows. It also covers cybersecurity. In essence, economic security is integral to national security, as a strong and stable economy underpins a nation's overall ability to defend and advance its interests in a rapidly changing global environment.
Economic security risks have recently come to the fore in the public debate with the disruptions to supply chains during the COVID-19 pandemic and the volatility of energy and agricultural markets in the wake of Russia’s war of aggression against Ukraine. The resulting disruptions in the supply of critical raw materials (CRMs), energy, pharmaceuticals, semiconductors and other goods challenged the economic, health or military security of countries. The importance of many of these aspects has increased in the context of rising geopolitical tensions, the much-needed green transition to prevent dramatic consequences of climate change, and accelerating digitalisation of economies. Therefore, many governments are expanding and exploring policy instruments and policy actions to ensure economic and strategic security.
This report discusses these pressing issues, examining both longstanding and emerging challenges to economic security, along with potential policy responses. It highlights several aspects:
Several economic security risks stem from concentrated production and trade of specific goods and technologies, including primary energy, semiconductors and CRMs. High concentration can be the outcome of increasing specialisation that helps to boost productivity and lower prices, including as a result of economies of scale in production. However, high concentration together with longer and more complex international supply chains may create potential for the propagation and amplification of micro-shocks and thereby raise geopolitical risks.
Increased cross-border ownership of companies, including ones that operate critical infrastructure, has also raised concerns about investment security. In this context, many countries have established or updated investment review mechanisms.
Risks to economic security tend to be interconnected. Disruptions in one area can have cascading effects on others. This stems from the complex interdependencies between different economic sectors and from the growing reliance on specialised intermediate inputs as well as connectivity services and infrastructure. Thus, efforts to enhance resilience in one area can indirectly contribute to resilience in another, highlighting the need for continued discussions and active collaboration across the various spheres of economic security.
Policy responses aimed at minimising economic security risks are essential. However, there are legitimate concerns that poorly designed measures could unnecessarily undermine the benefits of market economies and international trade. Therefore, effective policy design and dialogue is crucial to balance economic security needs without eroding the advantages of open markets.
While our knowledge about economic security risks in different domains is improving, there is still a need for more data and analysis. These are essential to formulating evidence-based policy recommendations.
In this context, the OECD as well as the IEA have played an important role and will continue to do so. Our analysis of supply chain vulnerabilities (e.g. the OECD Supply Chains Resilience Review), restrictions on exports of CRMs (e.g. OECD Inventory of Export Restrictions on Industrial Raw Materials), energy security, policy frameworks and guidelines for foreign investment policies and digital security, and exchanges of expert groups (e.g. the Semiconductor Informal Exchange Network (SIEN), the Trade Chief Economists Network and the Medical supply Chains Network (MEDICON) initiative promoting resilience in medical supply chains) provide important contributions to debates and policy design about economic security.
The report consists of four chapters. Each chapter addresses distinct yet interconnected risks facing contemporary economies and outlines a range of policy approaches to mitigate them.
The first chapter focuses on risks stemming from vulnerabilities in international supply chains. The emergence of global value chains (GVCs), supported by falling communication and data transfer costs and reduction of barriers to foreign investment and trade since the 1990s, has transformed the global economy. This has brought many benefits in terms of higher productivity, lower prices and a greater variety of goods, and has accelerated income convergence of many emerging market economies. At the same time, dependence on exports and imports has increased globally, including for energy and products essential for the digital and green transitions, but to a varying degree across countries and sectors. The production of some products has become highly concentrated in specialised firms and countries. GVCs have become longer and more complex. These features ensure efficiency gains and facilitate diversification of supply and demand. However, they may create potential for choke points and for propagation and amplification of micro-shocks. They may also raise geopolitical risks, including economic coercion. OECD research finds that, while the majority of global exports and imports remain well diversified, sectors such as commodities and agriculture show higher levels of concentration, increasing exposure to potential disruptions.
In the face of these risks, there are growing calls for policies to reduce dependence on specific countries, enhance security and improve the resilience of supply chains. Diversifying, bringing production home or to nearby locations (the so-called re-shoring and near-shoring), and optimising stockpiling are the three most frequently discussed strategies. However, some of such policies may undermine the benefits of international trade. As discussed in this first chapter, empirical research, including OECD studies, shows that shocks transmitted through GVCs on average tend to have small impacts on other sectors, although there are exceptions. Well diversified GVC linkages also offer options to source from alternative sources or to sell to alternative destinations when shocks occur. As policymakers consider strategic shifts in response to supply chain vulnerabilities, maintaining open markets and managing trade interdependencies will be key to balance economic security with continued growth.
The first chapter ends with a special focus on two specific supply chains which are crucial in today’s economy: semiconductors (Special Focus 1) and CRMs (Special Focus 2). Semiconductors are vital for economic growth and security. They are essential for various electronic devices, including vehicles and appliances and they play a crucial role in leading-edge technological development, such as artificial intelligence. However, the semiconductor value chain is highly concentrated, with few economies able to contribute significantly to every stage of production for all semiconductor types. For instance, more than 90% of leading-edge logic chips are produced by a single company, TSMC, in Chinese Taipei, and just three companies control nearly 80% of the market for the software required to design chips. Shortages in semiconductor supply have led to significant supply chain disruptions, particularly during the COVID-19 pandemic. Governments are responding to these challenges by seeking to build domestic semiconductor ecosystems and to reduce dependency on foreign suppliers as well as to diversify sources or critical inputs.
To enhance the resilience of semiconductor GVCs, international collaboration, information sharing and best practices are essential. The OECD convenes the SIEN to promote policy dialogue and transparency and to develop early warning mechanisms for value chain disruptions. Several OECD countries have implemented policies, including subsidies to investment, to develop local semiconductor ecosystems. However, establishing new manufacturing facilities requires more than financial support to companies – it also depends on a skilled workforce and critical infrastructure. Addressing the global shortage of semiconductor talent requires renewed efforts to improve science, technology, engineering and mathematics education and to foster stronger industry-academia partnerships.
CRMs, explored in the second Special Focus of the first chapter, are set to play an increasingly vital role for energy generation and economic security, as they are key components of green energy and digital technologies. Demand for CRMs has grown robustly and is set to increase further. These raw materials such as lithium, cobalt, nickel, gallium, titanium or tungsten are used for a broad range of goods, including batteries and semiconductors. The demand for such minerals has increased significantly in the recent years, driven by the demand for electric vehicles, solar panels and other clean technology applications. As nations strive to shift away from fossil fuels and accelerate decarbonisation, the demand for critical minerals necessary for green technologies is poised to skyrocket. The production of CRMs is concentrated in a few geographic regions. This creates supply chain risks and incites major producers to impose export restrictions to support domestic downstream industries. Such restrictions have risen significantly in the past 15 years.
Case studies show that while export restrictions can sometimes foster domestic industries, they do so at the expense of trading partners and may lead to increased foreign dominance. The high volatility in prices of CRMs, which can be further exacerbated by export restrictions, hampers investment decisions in the whole supply chain. International co-operation is therefore necessary to diversify CRM sources and secure stable supplies, while also promoting economic development in resource-rich countries. Balancing responsible sourcing with supply security requires careful management to avoid disruptions. Effective due diligence in supply chains is crucial for identifying and mitigating risks, especially in conflict-affected regions. Although initiatives to enhance traceability and transparency are in place, challenges persist due to unreliable data and ongoing geopolitical tensions.
The second chapter focuses on energy security, a longstanding concern but with new challenges. Energy security is part of the broader concept of national security and involves technical, economic and political aspects. It frequently deals with short-term risks (for example exposures to potential disruptions of energy systems) and resilience (for example the ability to withstand disruptions) for energy supply, transformation, distribution and end-use energy services for main energy sources. It also relates to the affordability of energy.
Energy security has been increasingly debated in the context of the green transition, highlighting the imperative of ensuring stable and sustainable energy supplies in a rapidly evolving environmental landscape. Renewable energy sources offer opportunities to reduce dependency on fossil fuels. However, they also introduce new challenges, such as the dependence on critical materials mentioned above and on technological innovations to ensure stable energy supply.
To guarantee energy security during the transition, when both clean energy and fossil fuels will be needed, countries will have to boost investments in low-carbon energy while phasing out fossil fuels. Energy efficiency measures will be essential to avoid mismatches between supply and demand. Policies to encourage retrofitting of buildings will be especially crucial to reduce energy consumption. Maintaining and reusing some critical fossil fuel infrastructure will also be necessary to avoid disruptions, for example using gas‑fired power plants to meet peak electricity demand, as well as strengthening electricity systems with grid flexibility solutions such as battery storage and demand response. Reducing the very high capital costs in emerging market and developing economies will be essential to lowering the costs of the transition. At the same time, addressing the specific risks faced by fossil fuel-exporting economies requires promoting diversification and investment in renewables, hydrogen and carbon capture. Finally, addressing market distortions (in particular fossil fuel subsidies) and correcting market failures will be key to leveraging private investment for an efficient green transition.
The third chapter sheds light on recent developments in the management of international investment security. Geopolitical risks and concerns about the security of supply of critical goods and services are prompting heightened attention to foreign investments in critical sectors. In this context, many countries have established or updated investment review mechanisms, have broadened their scope of application to include emerging technologies and sensitive information. Investment security was an early, arguably pioneering, aspect of governments’ broader efforts to enhance their economic security and aligns closely with more recent efforts to address other dimensions of risks. Investment-related tools may inspire and inform economic security initiatives in other areas.
The fourth and final chapter focuses on the role of cybersecurity in advancing economic and social prosperity. The accelerating digitalisation of economies has led to a growing reliance on connectivity services and infrastructure, coupled with increasing vulnerability to cyber threats and cybercrime.
Cybersecurity is crucial for protecting critical activities and information, including energy, financial systems, intellectual property and sensitive data. A breach in digital security, particularly in the case of ransomware, can have severe economic repercussions, leading to financial losses and the disruption of services, including those provided by public institutions. It can also tarnish stakeholders’ reputation. This could have profound implications for trust in public governance, financial and healthcare systems, and democratic processes at large. As economies become more interconnected and reliant on digital technologies and their underlying infrastructure, investing in and implementing robust digital security measures is essential to safeguarding economic stability, promoting innovation, and fostering trust among businesses and individuals.
The OECD Policy Framework on Digital Security, further detailed in the final chapter, outlines key strategies for addressing the economic and social dimensions of cybersecurity, including high-level principles as well as more detailed policy and technical recommendations. This includes establishing a culture of digital security to address some of the associated risks of digital transformation while reaping security benefits. The framework encourages national strategies that involve all stakeholders (governments, firms and individuals) to raise awareness of cyber threats, build incident response capacity, and promote risk management standards, workforce development and international co-operation.
Governments can foster an enabling environment for the adoption of digital security best practices among all stakeholders. This includes promoting a co-ordinated and holistic approach to digital security (i.e. across the entire lifecycle of products and services), incentivising network operators to adopt comprehensive risk management frameworks and encouraging suppliers to improve supply chain transparency (e.g. through enhanced traceability of components and digital security certification) and to diversify supply chains.
