Europe between protectionism and openness: How to compete in a fragmented world
Tuesday, 2 September 2025
In our latest Future is Blue episode, we explored a question that now sits at the center of the European Union economic debate: how to navigate between the rising tide of protectionism and the long-standing benefits of openness. Our guest, Ana María Santacreu, Senior Economic Policy Advisor at the Federal Reserve Bank of St. Louis, walked us through the evidence: trade is fragmenting along geopolitical lines, vulnerabilities are crystallizing around critical inputs, and Europe’s best lever for resilience may lie at home—by finishing the job of integrating its own market.
[You can listen to the episode here].The price of protectionism
Santacreu began by clarifying what economists mean when they talk about the “price” of protectionism. Governments have turned more frequently to tariffs, subsidies and controls since U.S.–China tensions escalated in 2018 and through the shocks of the pandemic and Russia’s invasion of Ukraine. These measures don’t just shift who trades with whom; they can ripple across production networks. As she put it, “Protectionism doesn’t just change who we’re trading with, it can completely disrupt the whole production network.” The result isn’t simply costlier steel or cars—it’s a broader hit to competitiveness and flexibility in highly integrated value chains, especially in Europe.
The cost of openness
Openness has underpinned the EU’s growth by lowering costs and diffusing technology. But today’s risks are different from the early 2000s. “The first China shock was all about cheap imports,” Santacreu noted. “The second China shock is about competition at the technological frontier.” In her recent research, she and co-authors build indices to track how much China’s export and patent specializations overlap with those of advanced economies. The overlap with Europe—Germany in particular—has risen sharply in sectors like advanced machinery, robotics and clean energy. At the same time, Europe depends heavily on China for critical minerals and processing capacity. When Beijing restricted exports of inputs such as gallium and graphite, it revealed how quickly supply chains in chips and batteries could be strained. Openness, in other words, now comes with a heightened exposure to strategic chokepoints.
Fragmentation in trade—less so in financial capital
Turning to the global picture, Santacreu explained that her research measures geopolitical influence on trade using econometric techniques, finding that “political alignment is increasingly determining who trades with each other.” Trade volumes remain large overall, but the partner mix is changing most in sensitive sectors (semiconductors, advanced machinery, clean energy). Europe exhibits what she calls selective fragmentation: trade with China in some high-tech areas has held up—or even deepened—while links with other geopolitically distant partners (for example, Russia) have receded.
Capital flows, by contrast, show less decoupling. Financial exposures can be rerouted via international hubs (Luxembourg, Ireland, Singapore, Hong Kong), complicating the picture. The upshot is that money still crosses blocs—even as trade patterns reflect geopolitical distance—and often gravitates toward safe havens during periods of uncertainty.
Europe’s dilemma: efficiency versus vulnerability
The EU has reaped clear benefits from openness: specialization, cheaper and more diverse inputs, faster diffusion of innovation, and stronger manufacturing competitiveness. Yet the same openness can create fragility where supply is concentrated. Santacreu pointed to measures of import concentration showing Europe’s reliance on a handful of suppliers for critical inputs—turbopropellers, computing equipment, semiconductors and components for energy technologies. China’s rapid move up the value chain heightens the challenge: Europe faces a direct rival in key future industries while depending on China for essential materials and processing. The lesson, Santacreu stressed, is balance: “Openness can maximize efficiency but also increase vulnerability.”
Can the EU still shape global rules?
Santacreu’s answer is yes—but via different channels than in the era of big WTO rounds. Europe’s influence today stems from regulation and standards that have effects beyond its borders (often described as the “Brussels effect”). She cited the carbon border adjustment mechanism and the anti-coercion instrument as examples. But she also underlined a constraint: sizable barriers still persist inside the single market, with research suggesting tariff-equivalent frictions exceeding 50% in some sectors. The credibility of Europe’s external agenda, she argued, depends on reducing fragmentation at home.
Priorities for the EU
Based on the discussion, three priorities stand out:
- Complete the single market. Removing remaining internal barriers would boost efficiency and resilience by helping firms absorb external shocks more effectively.
- Manage technological rivalry. Europe and China now compete head-to-head in advanced machinery, transport equipment and green tech. Europe must invest in R&D, scale new technologies, and—crucially—tighten the link between research and competitive products.
- Reduce supply concentration. Diversifying suppliers and developing regional processing capacity for critical minerals can mitigate chokepoints that have already surfaced when export controls tightened.
Resilience starts at home
Santacreu’s overarching theme is resilience. Rather than a binary choice between protectionism and openness, the task is to stay open while reducing exposure to shocks. “Europe’s biggest lever for resilience is actually at home,” she concluded, emphasizing that deeper integration of the single market would strengthen firms day-to-day and bolster the economy against supply disruptions, technological rivalry and geopolitical stress.
In his closing remarks on the episode, Miguel Ángel González-Simón from Funcas reinforced two complementary points: advancing the single market should go hand-in-hand with progress on the Capital Markets Union to finance innovation at scale, and Europe should work with like-minded partners that support rules-based cooperation. He cited examples such as Mercosur and parts of the Pacific; these references reflect his comments during the discussion.
The message for Europe is clear. Fragmentation is real, and strategic competition is intensifying. But by finishing the job of integration, investing to compete at the technological frontier, and diversifying away from chokepoints, the EU can remain open—on its own terms—and more resilient in a harder world.
[You can listen to the episode here].Carlos Carnicero Urabayen