The EU's trade dynamics in a changing global landscape

The EU's trade dynamics in a changing global landscape

Wednesday, 27 March 2024

Funcas Europe

This article covers the key points discussed in a recent Future is Blue podcast episode. You can listen to it here.

Recent economic challenges and geopolitical rivalries have transformed the perception of the benefits derived from international trade and cooperation. While the early 1990s saw the creation of trade agreements and open economies marking a period of global transformation and collaboration, the past two decades have seen globalization viewed more as a source of risks than as a catalyst for growth.

Scepticism towards trade narratives became prevalent after the 2008-09 global financial crisis, and recent events like the escalation of tariffs between China and the United States, along with the decrease in global trade due to the COVID-19 pandemic, have further intensified concerns. The onset of the war in Ukraine has also signalled a reorientation of global trade patterns.

The European Union's (EU) single market stands as a significant achievement in global economic history. Celebrating its thirtieth anniversary in 2023, this initiative has enabled free trade among member states and positioned the EU as a key global trade player. However, recent global economic challenges and geopolitical rivalries have shaped the Union's trade interactions with the rest of the world. The recent crises, including Brexit, have underscored the single market's importance for the EU economy, though they've also revealed structural deficiencies limiting its emergency responsiveness.

During the COVID-19 pandemic, both EU exports and imports saw an 8% decline compared to 2019 levels, with gradual recovery since mid-2020. Services sector activity rebounded post-reopening, while goods trade growth was hampered by pandemic-related disruptions. Intra-EU trade has seen a stronger recovery than extra-EU trade, playing a key role in post-pandemic economic growth stimulation.

Intra-EU trade facilitates economic integration and strengthens political ties among member states, while extra-EU trade provides market diversification opportunities and enhances the EU's international competitiveness. In 2022, intra-EU exports of goods constituted 62% of total exports, slightly higher than the 59% recorded in 2019, indicating increased participation in the shared market for economic and stability benefits. Services integration within the EU is progressing gradually but lags goods integration.

Besides fostering intra-EU trade, the single market positions the EU as a crucial global trading entity, with approximately 450 million consumers. The EU maintains an extensive trade network established through bilateral agreements and governed by World Trade Organization (WTO) principles.

In 2022, the EU ranked as the world's second-largest exporter of manufactured goods after China, representing 11% of global exports. However, the EU's global export share declined notably, indicating vulnerability to trade disruptions and geopolitical tensions. The EU exhibits high trade openness compared to other advanced economies, factors like the United Kingdom's EU exit, proximity to the Ukraine conflict, and changes in European monetary policy may have contributed to this decline in global export share.

The EU's top trading partners in goods are the United States, China, and the United Kingdom. China is the EU's leading goods supplier, accounting for 21% of total imports in 2022, although it ranks third as a destination. Meanwhile, the US stands out as the EU's primary goods destination, absorbing 20% of total exports in 2022; both figures are higher than those recorded in 2019. In contrast, EU trade with partners like the UK and Russia has declined due to Brexit and sanctions imposed following the invasion of Ukraine.

The EU plays a significant role in global goods trade, with machinery and transport equipment dominating exports and mineral fuels leading imports. Supply chain disruptions due to the COVID-19 pandemic led to a temporary decline in both intra and extra-EU trade, particularly impacting sectors like chemicals and food. However, the EU maintained a goods trade surplus until 2022 when increased energy prices amid the Ukraine conflict shifted the balance.

The EU's dependence on energy imports, notably from Russia, poses economic vulnerabilities. However, recent shifts towards green energy and digital products trade offer opportunities for reducing energy dependency while fostering economic growth. High-tech goods trade has surged, reflecting a transition to a greener, digital Europe but also exposing vulnerabilities in supply chain access to critical components.

The EU is not only a major player in goods trade but also a significant provider of services globally. Services such as finance, technology, and professional services contribute significantly to the EU's trade balance. Despite the impact of the pandemic, the EU has maintained a surplus in its services trade balance, driven by sectors like business services.

The EU remains a pivotal global trading entity despite challenges like the COVID-19 pandemic, Brexit, and geopolitical tensions. Intra-EU trade has played a crucial role in post-pandemic recovery, outpacing extra-EU trade growth. However, trade imbalances persist with key partners like China and the US, signalling economic vulnerabilities. The EU's transition to green and digital economies presents both opportunities and challenges, emphasizing the need for strategic trade agreements that ensure competitiveness and sustainability.

Patricia Sánchez Juanino


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