Selective industrial policy for the EU open strategic autonomy: The role of products' relatedness

The European Union has adopted the concept of Open Strategic Autonomy (OSA) to reduce strategic dependencies while preserving openness to international trade. An important policy question is therefore which countries are best positioned to develop new trade advantages in strategic products. Building on the literature on relatedness and export diversification, we address this question by complementing the standard notion of product distance, measuring how close a country is to a product compared to other countries, and how close a product is to a country's productive structure compared to other products. We term these concepts absolute and relative distance advantages. We argue that relative distance advantages reflect countries' incentives to diversify into a product, whereas absolute distance advantages capture their ability to successfully develop new trade advantage in that product. Using trade data for EU countries, we show that both dimensions significantly predict the emergence of new export specializations in products identified by the EU as strategic.