How the EU is adapting to post-pandemic global trade shifts

How the EU is adapting to post-pandemic global trade shifts

Thursday, 27 June 2024

Funcas Europe

In the latest episode of the Future is Blue podcast, host Carlos Urabayen talked to Alice Faibishenko, Senior Advisor at Funcas, to analyse the evolving landscape of global trade and investment flows since the pandemic. The conversation highlighted the profound shifts in economic policies and the reorientation of international trade, with a particular focus on the European Union's position amidst these changes. The podcast can be accessed here.

The post-pandemic economic landscape

There’s been quite some changes in the historical context of global trade. The early 1990s marked a significant era of free trade agreements, which facilitated a wave of economic opening and global collaboration. However, recent years have seen a reversal of this trend. The pandemic, coupled with geopolitical tensions involving Russia, Ukraine, China and the Middle East, has exposed the vulnerabilities of economic interdependence. This has led to a rethinking of economic policies and a shift towards "re-globalization."

One of the most notable manifestations of this re-globalization is the escalation of import tariffs between the US and China. This development is set against a backdrop of already weakening global trade, making it a critical area of focus for policymakers and economists alike. The podcast conversation highlighted the need to reassess international trade and investment flows through the lens of their impact on the EU's strategic positioning relative to global superpowers like the US and China.

The EU's trade and investment challenges

Discussing the EU's performance in global trade, Faibishenko pointed out a notable decline in the EU's export market share. Between 2019 and 2023, the EU's market share of goods exports dropped by one percentage point. Despite this, the services sector remains a stronghold for the EU, particularly in business services, which constitute 23% of the global market service exports. This resilience in services helps the EU maintain a current account surplus, projected to be 2.6% of GDP in the latest forecast by Funcas, slightly above the consensus of 2.1% of GDP.

However, the picture is less rosy when it comes to foreign direct investment (FDI). There is a worrying trend: the EU's attractiveness as a destination for FDI inflows has weakened compared to the US and China. Europe has become a net exporter of capital, with a significant portion of its savings being invested in companies outside the EU. For instance, Faibishenko highlights that this trend is concerning in the case of Spain, given the country’s need to boost business investment to stimulate economic growth.

Silver linings and future directions

Despite these challenges, Faibishenko pointed to some bright spots in the EU's economic landscape. One positive development is the intensification of trade and investment among EU member states. This intra-EU trade not only brings economic benefits but also offers security and stability in times of global uncertainty. Countries like Spain, with relatively low labour and energy costs, stand to benefit significantly from increased participation in the single market.

It's essential to revitalize the EU's internal market to mitigate the weakening external position. This includes advancing the Capital Markets Union and deploying a common European investment budget as a continuation of the Next Generation EU funds. These measures aim to channel excess savings within the EU into productive investments, fostering economic growth and resilience.

A call for strategic rethinking

Even in its enhanced form, the single market can only partially mitigate the weakening of the external position of the EU vis-à-vis other economies. Therefore, there is a need for Europe to rethink its economic relations with other major powers with the objective of arriving at an adequate path that avoids protectionism, while at the same time harnesses the economic potential of the bloc. The post-pandemic era presents both challenges and opportunities for the EU. By leveraging its strengths in the services sector and enhancing intra-EU trade and investment, the EU can navigate the complexities of the global economic landscape. As the world continues to grapple with the economic aftermath of the pandemic and the ongoing geopolitical tensions, it’s essential for the EU to fully understand and adapt the evolving dynamics of global trade.

Carlos Carnicero Urabayen


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