Spotting the trade risks and opportunities for business in Europe, today and tomorrow

Following the war in Ukraine and increasing awareness of government vulnerability in terms of access to strategic raw materials and technology, a phenomenon first experienced during the pandemic, more governments have adopted measures that impact global supply chains. Some of these measures increasingly smack of protectionism and may negatively affect open trade relations between countries.

EU Member States, the Parliament and the European Commission are increasingly focused on strengthening Europe’s competitiveness through economic security and strategic autonomy, triggering measures at EU and national levels to support and attract investment in technology seen as critical for the Green and Digital Transition. In tandem, these measures are meant to reduce Europe’s excessive dependence for critical inputs on other markets and sources of supply such as China and the US.

Europe’s economic security concerns are used to justify these measures to control both inbound and outbound investments, especially for digital and green technology where Europe wants to ensure more diversification of overseas suppliers while building up domestic industrial capacity. New EU legislation governing overseas procurement is also designed to avoid excessive dependency on unreliable or rival suppliers and leverage reciprocity. The recently adopted Anti Coercion Instrument (ACI) is a further tool in the EU’s toolbox to prevent or counter the weaponisation of trade policy.

Europe’s Net Zero Industry Act, a response to the American Inflation Reduction Act, aims to facilitate investment in technology seen as critical for Europe’s Green and Digital Transition. The call for a more focused European industrial strategy and a new Clean Industrial Deal to help companies in the Green and Digital Transition is a priority for the next European Commission and could open opportunities for companies to clarify their demands with EU institutions.

OPPORTUNITY: Commission President von der Leyen announced at the European Parliament that the first priority will be to develop a Competitiveness Compass. It is meant to build on the Draghi report’s three pillars:

The Executive Vice-President for Prosperity and Industrial Strategy, Stéphane Séjourné, will build on the Green Transition Dialogues and work in partnership with all stakeholders to ensure targeted solutions for each value chain. This should be a wake-up call for companies to engage with the Commission.

Now that the Green Deal is in place, the new European Commission has promised to focus on supporting industry in its implementation by announcing the elaboration of a Clean Industrial Deal. Some relevant implementing laws and their trade impact are described below.

The Carbon Border Adjustment mechanism (CBAM) will affect imports from outside the EU if manufactured without respecting Europe’s environmental standards. This is already affecting suppliers operating outside the EU in countries without an Emissions Trading Scheme.

The Critical Raw Materials Act (CRM) has as objective to ensure companies operating in Europe get easier access to critical raw materials, especially to develop technologies and materials crucial for the green and digital transition. Companies in need of critical raw materials may need to step up to get their needs and concerns met.

The European Deforestation Regulation will negatively affect imports of products extracted or produced via deforestation since 2021, notably coffee, cocoa, palm oil, beef soya, wood, and rubber and their derivatives. Although, it has been postponed by one year to give companies more time to meet its stringent standards.

The European Corporate Sustainability Due Diligence Directive (CS3D) will affect how companies with a significant commercial presence in Europe do their sustainability reporting, affecting supply chains in and outside the EU.

Note that there are more policies with trade impact in the pipeline, especially considering the planned revision of REACH and measures on PFAS.

Implementation challenges from all this EU legislation may require policy makers to make adjustments based on the needs of certain sectors or companies. In turn, this may trigger a new governance model to enable the private sector to engage directly with relevant policy makers so that the Green Deal can actually be delivered. The next European Commission has promised to be a Commission that listens to business and that avoids over-regulation. This pledge offers a new opportunity for the corporate sector’s voice to be heard.

OPPORTUNITY: Commissioner Dombrovskis, with responsibility for implementation and simplification, plans to organise stakeholder dialogues that can align EU regulations with market realities. These dialogues are ideal opportunities for business to share their concerns.

The geopolitical tensions between the US and China have already led to stricter import controls and taxes on products imported from China into the US. The incoming Trump administration will use tariffs even more systematically to protect US based manufacturers against imports from outside the US. The EU while not copying the US approach against China, is also trying to reduce the risk of over-dependence on Chinese imports with trade defence measures that can level the playing field. This was seen in the recent anti-dumping or anti-subsidy actions on solar panel parts, wind turbines and more recently, Chinese-made electric cars.

Under the Trump administration, we anticipate a more aggressive US approach to trade that may lead to more aggressive EU counter measures. Companies need to monitor this closely, especially those exporting to the US. It is also possible that the US will put new pressure on the EU to fall in line with its trade restrictions towards China.

OPPORTUNITY: Commissioner for Trade and Economic Security, Maros Sefcovic, announced that his priorities for Trade would be based on the three D’s below. Companies affected by polarising geopolitics should ensure they reach out to the Commission and get their voice heard on these matters.

Over the next five years, we can expect more uncertainty for business in a political environment buffeted by changing geopolitics and the tendency towards more protectionist policies. It is in the interest of business to find new ways to constructively engage with EU institutions and governments on these significant challenges that affect their business, their consumers, and their investments in Europe.

OPPORTUNITY: Ad-hoc coalitions, alliances and new fora for dialogue may become the way forward for this dialogue. These emerging groups may help to resolve concerns more holistically and across supply chains, while also potentially addressing sustainability and social challenges as well.

Whatever your business or industry, FIPRA brings deep expertise in trade matters for sustained and impactful engagement with policymakers and other stakeholders. Your special combination of interests will likely merit a customised approach to dialogue and alliance building. Supported by our special advisers and global network, we co-create winning strategies and execute those strategies with impact. Services include: