Unlocking Europe's Global Potential: Revitalizing EU Trade Policy for Enhanced Competitiveness

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In an increasingly interconnected world, Europe's competitiveness hinges on a robust and dynamic trade policy. Current evidence highlights a troubling trend: despite its economic clout, the European Union (EU) underperforms in global trade relative to its potential. With 85 percent of global growth occurring outside the EU, alongside a surge in new technologies, innovations, and R&D investments in other regions, it is imperative for the EU to integrate more effectively with international markets.

The EU's growing isolation from global markets presents two significant economic challenges: deteriorating market access and diminished economic resilience. EU firms face mounting barriers to exporting their goods and services, which stifles their ability to scale up, specialize, and invest in research and development. Concurrently, the EU's reliance on a limited number of suppliers for critical raw materials threatens its economic stability. To counter these issues, the EU must diversify its supply sources and secure unimpeded access to advanced goods, services, and technologies.

Over the next five years, the EU has a crucial window of opportunity to revitalize its international trade strategy. This Policy Brief outlines seven actionable recommendations to enhance market access and bolster economic resilience. By modernizing existing Free Trade Agreements (FTAs), negotiating targeted sectoral agreements, expanding regulatory adequacy frameworks, joining the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), deepening Trade and Technology Councils with key partners, strengthening neighborhood policies on raw materials, and initiating a Trade Resilience Coalition, the EU can significantly improve its global trade standing.

Europe Unlocked, a coalition of business organizations, advocates for these measures, emphasizing that open markets and enhanced competitiveness are essential for Europe's prosperity. Without decisive action to reduce trade barriers and foster new international relationships, Europe risks lagging in global economic dynamism. By embracing this strategic approach, the EU can secure a more prosperous future, leveraging trade to drive growth, innovation, and resilience.

Europe’s Competitiveness: Market Access and Resilience

The Relation Between Trade and Competitiveness

International trade is a cornerstone of the EU's competitiveness and economic growth. It acts as a dynamic engine, contributing significantly to the Gross Domestic Product (GDP) and fostering higher productivity and innovation among exporting companies. Engaging with global markets is crucial not only for expanding sales but also for acquiring the technological and innovative inputs necessary for the EU to thrive in the global economy.

Despite the positive impacts of international trade on competitiveness, the EU is not fully capitalizing on these opportunities. The Extra-Regional Trade Intensity Index, which measures the value of the EU’s trade with the rest of the world relative to its overall economic size, consistently shows values below one. This indicates that the EU’s external trade is underperforming relative to its GDP, a trend that has been particularly pronounced since 2016.

Europe’s limited engagement with the wider world is problematic for several reasons. First, the majority of global economic growth is expected to originate from outside the EU. The International Monetary Fund (IMF) projects that between 2024 and 2028, the EU’s GDP growth will range between 1.4 and 1.7 percent, whereas emerging markets are expected to achieve growth rates between 3.9 and 4.8 percent. The European Commission has noted that 85 percent of global growth occurs outside the EU, underscoring the need for better integration with global markets. Furthermore, as emerging economies modernize and developed economies push the technological frontier, the EU will increasingly need to source new goods, services, and technologies from outside its borders.

Market Access

Market access, or the lack thereof, significantly impacts the EU’s ability to export goods and services. It refers to the extent to which the EU can enter foreign markets, which is subject to various tariffs, regulatory barriers, and other obstacles. Given the importance of exports as an engine of the EU’s economic growth, a lack of market access directly hampers the EU’s competitiveness.

Over the years, protectionist measures have escalated and evolved beyond traditional import tariffs. Between 2009 and 2023, European exporters faced a more than 20-fold increase in non-tariff barriers (NTBs), from roughly 500 to around 12,000, with a notable increase in the last four years. For instance, in 2023, French and German exporters of cars, iron, steel, and metal fabricated products such as tubes or wires encountered the largest number of NTBs.

The rise of NTBs is also impacting the EU’s services, particularly digital services. The OECD found more than 100 data localization measures, such as local storage requirements and flow prohibitions, enforced across 40 countries. These measures, mostly driven by non-OECD countries, have a direct negative effect on EU firms, especially in sectors like e-payments, cloud computing, and air travel.

NTBs on services are critical because they hinder Europe’s new sources of economic growth and its most promising companies. The EU’s international comparative advantage is shifting towards a service-oriented economy. This transformation is particularly evident within Europe’s ICT services sector. Between 2010 and 2020, exports of ICT services grew at an average annual rate of 8.5 percent, surpassing the growth rates of EU exports in chemicals (2 percent), machinery (1.4 percent), and transport equipment (1.4 percent). In 2020, the value of the EU’s ICT services exports reached €158 billion, exceeding the value of exports in pharmaceuticals (€129 billion), chemicals (€109 billion), and electrical equipment (€17 billion).

Economic Resilience

Economic resilience is the ability of an economy to absorb and recover from shocks, such as natural disasters, pandemics, or geopolitical conflicts, while maintaining its core functions. The significance of economic resilience for the EU’s competitiveness is twofold: it reduces dependencies on third countries and highlights the importance of securing stable access to a wide spectrum of imports, from raw materials to cutting-edge technologies.

The EU’s trade dependencies are linked to its ability to reduce its over-reliance on a single source of imports. Among 9,000 products imported by the EU, only 282 products, representing 2 percent (€58.5 billion) of EU total import values, could be defined as dependent. Moreover, not all the products classified as dependent are critically important to the EU economy.

However, the Russia-Ukraine conflict and China’s strategic control over critical raw materials (CRMs) have exposed vulnerabilities associated with economic dependency on minerals and fuels. In 2022, the EU was highly dependent on China for gallium, cobalt, magnesium, and manganese, with imports from China constituting over half of the EU’s total imports for these materials. CRMs are essential for the EU’s clean and digital technologies, defense, and other critical industries such as robotics.

Secure, stable, and seamless access to high-end goods, services, and technology is crucial for economic resilience. However, the primary barrier to sourcing high-end products often originates from within countries themselves rather than their trade partners. In recent years, the EU has established several trade and digital barriers, including the Carbon Border Adjustment Mechanism and the Artificial Intelligence Act, which are likely to raise import costs and potentially drive a wedge between the EU and the global economy.

These trade barriers pose significant challenges to the EU’s competitiveness. In 2020, US firms were the leading providers of ICT services to the EU market, accounting for 30 percent of total imports. EU imports of US ICT services, close to €47 billion, contribute to Europe’s economic transformation, reflected in the €158 billion of EU ICT services exported worldwide. EU regulations that create barriers to the flow of goods, services, and investment between the EU and its main trading partners will negatively affect the EU’s competitiveness in these new sources of economic growth.

Addressing the issues of market access and economic resilience is crucial for enhancing the EU’s competitiveness. By reducing trade barriers and fostering better integration with global markets, the EU can create a more dynamic and resilient economy, capable of sustaining growth and innovation in an increasingly interconnected world.

EU Trade Policy: A Forward-Looking Agenda for 2025-2030

In the previous chapter, we established two key economic challenges where EU trade policy can play a crucial role in the next five years: boosting EU market access abroad and improving economic resilience, especially for critical technologies and materials needed for EU firms to be competitive. This chapter turns to policy approaches and outlines a set of policy recommendations aimed at achieving these objectives.

While global trade policy often seems fraught with challenges, constructive and forward-looking trade agreements are indeed happening. Many countries are actively seeking deeper trade relations, leading to significant economic liberalization and improved economic security through diversified supplies of critical goods and technologies. The EU has participated in such negotiations with regions like Mercosur, New Zealand, and Australia. However, many initiatives have stalled, hindering the EU's ability to enhance both prosperity and security through trade.

For the next five years, we propose seven actions in EU trade policy that are feasible and do not require a wholesale shift in the Union’s current defensive attitude to trade. These measures connect with the objectives of market access and economic resilience, often benefiting both simultaneously.

1. Modernise Existing FTAs and Conclude Agreements with Mercosur, Australia, and ASEAN Countries

The EU has a substantial body of Free Trade Agreements (FTAs) with various countries and regions worldwide, supporting millions of jobs within the EU. However, the recent slowdown in new FTAs and the reluctance of some EU member states to ratify agreements due to domestic reasons have impeded progress. The EU's self-imposed limitations on liberalizing sensitive sectors like agriculture further complicate securing new FTAs with key partners.

Modernizing current FTAs offers significant untapped potential for improving European market access and facilitating imports. Most existing agreements need updates to remain relevant due to changes in the economy and trade restrictions since their inception. For instance, newer FTAs like those with Canada and Japan cover more areas of the economy compared to older agreements. The EU has already started negotiations on modernizing FTAs with 12 countries, yielding new agreements with Chile and amendments to the Association Agreement with Moldova.

Updating FTAs, especially with neighboring countries rich in minerals, is crucial. New EU policies like the Carbon Border Adjustment Mechanism impact trade in raw materials, making it essential to agree on better rules with raw-material-rich FTA partners. Additionally, modernizing agreements to cover services trade, particularly in ICT sectors, can significantly enhance the EU's competitive advantage.

2. Negotiate “Mini Deals”

Mini deals, targeted agreements to reduce or remove non-tariff barriers (NTBs), have become a practical trade policy tool. These agreements can focus on sectors where global regulatory requirements diverge, reducing unnecessary trade and administrative costs. The EU has already started deploying such agreements, like the digital partnership with Japan in 2022.

Negotiating mini deals in digital services and e-commerce can significantly enhance EU market access and bolster economic resilience. For example, mutual recognition agreements (MRAs) in sectors like machinery and electrical equipment can reduce trade costs, boosting bilateral trade and reducing dependence on countries like China.

3. Expand the Adequacy Framework for More Regulations

Expanding the adequacy framework, which certifies that a trading partner's regulations are equivalent to the EU's, can reduce trade costs and administrative barriers. This approach can improve market access and resilience by ensuring cross-border data portability and cooperation in regulatory models.

The EU should create a predictable "docking station" for countries to align their regulations with the EU's, facilitating trade and avoiding increased regulatory restrictions that reduce trade.

4. Join the CPTPP

The EU should apply to join the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). The CPTPP, originally a Pacific initiative, has evolved, with countries like the UK applying to join. Membership in the CPTPP can enhance market access, improve economic resilience, and counterbalance China's influence in global trade.

Joining the CPTPP also offers the EU a unique opportunity to shape global digital trade norms and standards, enhancing trade in digital-intensive sectors and fostering commitments in emerging fields like AI and the data economy.

5. Deepen Trade and Technology Councils (TTCs) with the US and India

The EU-US Trade and Technology Council (TTC) and the newly established EU-India TTC present opportunities for deeper cooperation in trade, technology, and economic security. These councils can focus on global standards development, energy security, and access to raw materials, enhancing both market access and resilience.

Enhancing the TTCs with more ambitious agendas and ensuring they complement ongoing FTA negotiations can maximize benefits for EU firms and strengthen trade relationships with these key partners.

6. Deepen Neighbourhood Policies on Raw Materials

The European Neighbourhood Policy (ENP) can play a vital role in diversifying imports of raw materials and energy. Strengthening ties with neighboring countries rich in important minerals can reduce the EU's dependence on suppliers like China.

Expanding the Neighbourhood Policy to include partnerships on raw materials and linking it with initiatives like the Commission's New Growth Plan for the Western Balkans can enhance the EU's strategic interests and secure reliable supplies of critical raw materials.

7. Initiate a Trade Resilience Coalition

The EU should spearhead the creation of a Trade Resilience Coalition to address global supply chain vulnerabilities and prepare for common responses to sudden trade stresses. Building on the Ottawa Group's collaboration during the Covid-19 pandemic, this coalition can focus on sectors of common relevance, such as critical raw materials.

A Coalition for Trade Resilience in CRMs can support global mining and processing, reduce market barriers, and ensure a stable supply of CRMs necessary for the digital and energy transition.

By implementing these seven actions, the EU can enhance its trade policy, improve market access, and bolster economic resilience, positioning itself for sustained competitiveness and growth in the global economy. These forward-looking strategies will help the EU navigate the complexities of international trade and secure a prosperous future.

Addressing Trade Policy Challenges to Reintegrate Europe into the Global Economy

Europe's detachment from the global economy is a growing concern, largely driven by lagging trade policy. Two significant economic hurdles – market access and economic resilience – have stifled the potential of trade to enhance Europe's competitiveness. This detachment negatively impacts job growth, innovation, and economic dependencies, leaving the EU vulnerable to global disruptions. Over the next five years, the European Commission must urgently steer Europe’s trade policy towards greater market access and economic resilience. Failure to act will limit the EU’s economic potential and leave it vulnerable to global disruptions. This chapter outlines seven realistic policy recommendations that can decisively improve market access and economic resilience for the EU economy, fostering greater competitiveness.

1. Modernise Existing FTAs and Conclude Agreements with Mercosur, Australia, and ASEAN Countries

The EU has an extensive network of Free Trade Agreements (FTAs) that support millions of jobs. However, many of these agreements are outdated and do not reflect current economic realities. Modernizing existing FTAs and concluding new agreements with key regions such as Mercosur, Australia, and ASEAN countries (Indonesia, Thailand, and the Philippines) is crucial. Updating these agreements can enhance market access, reduce trade barriers, and provide more robust frameworks for cooperation in areas like raw materials and digital trade.

Concluding and ratifying FTAs is a complex process requiring time and mutual willingness from negotiating parties. However, the potential benefits make it a necessary endeavor. Improved FTAs can cover more sectors, incorporate modern trade disciplines, and address new challenges, ensuring they remain relevant and beneficial for European businesses and consumers.

2. Negotiate "Mini Deals"

Mini deals are targeted agreements aimed at reducing or removing non-tariff barriers (NTBs) and enabling a reduction in bilateral trade costs. These deals are particularly effective in sectors where global regulatory requirements diverge and where the EU demonstrates a comparative advantage. Mini deals can significantly enhance market access by focusing on specific sectors like digital services and e-commerce.

For example, the EU could negotiate mini deals to tackle obstacles impeding the free flow of data, foster mutual recognition of digital standards, and facilitate cross-border e-commerce. Such agreements can provide substantial economic benefits, boosting trade in sectors that are critical for Europe's future growth and competitiveness.

3. Expand the Adequacy Framework for Regulation

A transparent and efficient process for countries to demonstrate alignment with EU regulations can significantly reduce trade costs and administrative barriers. The EU should expand the existing adequacy framework, which currently applies to data protection, to other regulatory areas. This expansion would facilitate predictable market access for foreign businesses and mitigate unnecessary costs and delays associated with importing into the EU market.

By creating a clear and predictable "docking station" for countries to align their regulations with the EU's, the EU can enhance both market access and economic resilience. This approach can help bridge regulatory differences, reduce trade friction, and support a more integrated global economy.

4. Join the CPTPP

The Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) is a significant trade agreement that the EU should seek to join. Membership in the CPTPP would allow the EU to shape trade rules, counter Chinese influence, and expand its market access in the Asia-Pacific region. The CPTPP includes provisions that can enhance digital trade, protect intellectual property, and promote sustainable development – all areas where the EU has strong interests.

Joining the CPTPP also offers a unique opportunity for the EU to participate in shaping global digital trade norms and standards, enhancing trade in digital-intensive sectors and fostering commitments in emerging fields like artificial intelligence and the data economy.

5. Deepen Trade and Technology Councils (TTCs) with the US and India

The EU-US Trade and Technology Council (TTC) has the potential to advance trade and technology policies significantly. By broadening its scope and focusing on new trade and technology policies, the TTC can serve as a springboard for deeper transatlantic cooperation. Additionally, elevating the EU-India TTC is crucial, recognizing India's growing importance as a tech hub and talent pool.

These councils can address global standards development, energy security, and access to raw materials, enhancing both market access and resilience. Strengthening these partnerships can provide robust frameworks for cooperation in critical areas and help the EU navigate complex global economic landscapes.

6. Deepen Neighbourhood Policies on Raw Materials

The European Neighbourhood Policy (ENP) can play a vital role in securing a reliable and sustainable supply of critical raw materials. By leveraging partnerships within the Eastern Partnership and the Union for the Mediterranean, the EU can diversify its sources of raw materials, reducing dependence on any single supplier.

Strengthening ties with neighboring countries rich in important minerals is crucial for the EU's digital and green transition. Expanding the Neighbourhood Policy to include partnerships focused on raw materials can enhance the EU's strategic interests and ensure a stable supply of essential resources.

7. Initiate a Trade Resilience Coalition

The EU should spearhead the creation of a Trade Resilience Coalition, building on the Ottawa Group’s efforts. This coalition would focus on building trust among members, agreeing on trade rules, and preparing for common responses to sudden trade stresses. Such an initiative can address vulnerabilities exposed by recent global disruptions, like the Covid-19 pandemic and geopolitical conflicts.

A Coalition for Trade Resilience, particularly in critical raw materials, can support global mining and processing, reduce market barriers, and ensure a stable supply of essential resources for the digital and energy transition. This coalition would enhance economic resilience and provide a framework for coordinated responses to global trade challenges.

Addressing market access and economic resilience is crucial for reintegrating Europe into the global economy and enhancing its competitiveness. By modernizing FTAs, negotiating mini deals, expanding regulatory frameworks, joining the CPTPP, deepening trade and technology councils, strengthening neighborhood policies, and initiating a Trade Resilience Coalition, the EU can create a more dynamic and resilient economy. These forward-looking strategies will help the EU navigate the complexities of international trade, secure a prosperous future, and maintain its position as a global economic leader.

Chris Sunderman Sean White Bob Gravestijn Riho Vedler Harri Rantanen Ayhan Köseoğlu Dr. Selda Eke Arzu Toren Erik Valiquette, CCLP