Geoeconomic fragmentation and the EU’s supply chain dilemma
The past few years have ended the illusion that global trade is a neutral, technocratic space. What has emerged instead is a trading system sorted increasingly along political and security lines, where access to markets and technologies is conditioned by geopolitical alignment. For an economy as open and deeply integrated into global value chains as the European Union, this shift is not a theoretical concern. It cuts directly into how European firms source inputs, structure production and compete, and it forces policymakers to rethink the balance between openness, security and competitiveness.
The new geography of trade is often reduced to a simple narrative of deglobalisation. That is misleading. Aggregate trade volumes have held up and cross border exchanges remain high. What has changed is the pattern, not the existence, of integration. The world economy is now more plausibly described as three interacting blocs western, eastern and a large neutral middle, broadly defined by political alignment and security ties. Trade between the United States and China has cooled in strategic sectors, links between the EU and Russia have been cut back sharply, and advanced technologies have become a primary target of restrictions. At the same time, flows between each bloc and the neutral economies have grown, signalling that firms are relaying trade through intermediaries where direct ties are politically sensitive.
Fragmentation therefore operates through selective decoupling. It is not a general pullback from global markets, but a reconfiguration of who trades what with whom. That nuance matters for the EU. European trade with China has weakened in some advanced technology products, yet dependence on Chinese inputs critical to the green transition has actually increased. Energy, batteries, rare earths and photovoltaic components remain heavily sourced from a single supplier that is simultaneously a systemic rival, a partner and a competitor. Parallel to this, the shock of Russia’s war on Ukraine has forced a forced diversification of energy supply, breaking long standing dependencies but at significant cost.
Corporate behaviour reflects this tension between security and efficiency. Surveys of European manufacturers show that a large majority experienced value chain shocks between 2021 and 2023, driven by energy prices, broader input cost spikes and pandemic disruptions. Their responses are instructive. Some are relocating critical sourcing closer to home within the Union or its neighbourhood. Others are widening the pool of suppliers, investing in inventory buffers or digital tools that provide better visibility over flows. For many, however, complete withdrawal from global sourcing is neither economical nor feasible. Instead of a clean move to reshoring or nearshoring, firms are experimenting with mixed strategies that preserve access to global networks while adding redundancy where the risks are highest.
That pattern is consistent with a broader shift from a pure efficiency model to one where resilience carries a premium. The just in time paradigm, built on thin inventories and long, finely tuned supply chains, delivered lower costs in a benign environment. It proved fragile under the combined pressure of a pandemic, war and sharp geopolitical rivalry. European companies are now discovering that reconfiguring global production networks is slower and more expensive than expected. In some cases, the apparent decoupling from China reflects a lengthening of chains, not true diversification, with Chinese content reappearing via third countries.
For the Union as a whole, the stakes are higher than for most advanced economies. External trade accounts for nearly half of EU GDP, a much larger ratio than in the United States. European firms are heavily embedded in multi stage value chains where intermediate inputs cross borders several times. Ninety percent of projected global growth in coming years is expected outside Europe. A world of rigid trade blocs would therefore bite particularly hard on European living standards, on its industrial base and on its capacity to finance the green and digital transitions.
The EU’s policy response accepts this reality and tries to square three objectives at once: remain open enough to benefit from external growth, reduce strategic vulnerabilities in critical supplies and keep the internal market functioning as the backbone of resilience. That agenda is now visible across a dense web of initiatives.
On the input side, legislation such as the Critical Raw Materials Act and the European Chips Act is designed to address bottlenecks in key value chains. The goal is not autarky, which would be unrealistic, but a mix of domestic capacity, diversified sourcing and targeted partnerships that reduce exposure to single supplier risk. A first wave of projects, ranging from rare earth processing in France to battery and semiconductor investments across several member states, aims to rebuild capabilities that had been allowed to atrophy or never existed in Europe at scale.
Parallel industrial initiatives like the Net Zero Industry Act and the Clean Industrial Deal extend this logic to clean technologies more broadly. They seek to anchor parts of the net zero value chain inside the Union, from batteries to electrolysers and photovoltaics, through a combination of regulatory support, coordinated public funding and industrial alliances. Important projects of common European interest, particularly in batteries and microelectronics, are instruments for pooling national resources and sharing risk in areas where no single member state can credibly compete alone.
Financially, the Commission has proposed a more consolidated framework for competitiveness and resilience. A central element of its multiannual financial proposal is the European Competitiveness Fund, intended to concentrate funding on clean transition, health and biotech, digital resilience and security relevant sectors. In principle, such an instrument can provide the scale and continuity needed for supply chain upgrading, if it is not dissipated across too many competing objectives.
Overlaying these industrial and financial tools is a fast evolving economic security agenda. Since 2023, the Union has been building a more explicit doctrine that links trade, investment screening, export controls and anti coercion instruments into a coherent approach. The aim is to mitigate the weaponisation of interdependence, particularly in critical technologies and infrastructure, while keeping the door open to genuine mutual gain. Proposals to expand screening of foreign direct investment, to clarify export controls on sensitive technologies and to give the Union a more agile response to coercion all flow from this logic.
Externally, trade policy has taken on a distinctly geopolitical flavour. The Union is using bilateral agreements not only to open markets but to lock in trusted partners along key value chains. Recent agreements and modernisations with Chile, Mexico, New Zealand, Kenya and the Mercosur bloc, alongside ongoing negotiations with India, Indonesia and Gulf states, are part of a wider effort to create a web of preferential access with countries seen as reliable in a more fragmented world. At the same time, the EU champions a reformed World Trade Organization as a necessary pillar for managing global trade tensions, even as the effectiveness of multilateralism is tested.
This policy activism has its critics. Some partners perceive the expanding EU toolbox, from the Carbon Border Adjustment Mechanism to the Foreign Subsidies Regulation, as veiled protectionism. The risk is that in trying to secure its own supply chains, the Union inadvertently accelerates the very fragmentation it aims to contain. Internally, there is also concern that the proliferation of instruments and objectives may create incoherence, regulatory overload and conflicting signals for firms already struggling with adjustment.
The debate among economists and policy analysts reflects this ambivalence. Institutions like the IMF and OECD warn that poorly designed resilience policies can impose heavy costs for limited risk reduction. For a highly open economy, unilateral protectionist measures would narrow markets, slow innovation and reduce welfare more than they would for more closed systems. In a scenario where the world hardens into tightly sealed blocs, the EU would face particularly severe losses, given its dense, often indirect integration into third country value chains. The argument from these bodies is not that Europe should ignore security concerns, but that it should exhaust the potential of internal market deepening and targeted, proportionate interventions before resorting to sweeping trade or industrial barriers.
By contrast, other voices emphasise the underused strength of the single market itself as Europe’s main buffer against external shocks. Completing the free movement of services, advancing the capital markets and banking unions, and improving the conditions for cross border investment are seen as domestic reforms with a geopolitical dividend. A more integrated market would allow firms to rewire supply chains within Europe more easily when external channels are disrupted. It would also make joint risk sharing and large scale financing of green and digital technologies more credible and less politically contentious.
Innovation and digitalisation are a recurring theme in this discussion. Evidence suggests that firms with better digital capabilities, particularly in logistics, data analytics and automation, are more resilient under stress. They can trace inputs, reroute flows, manage inventories and respond to policy changes more quickly. Policies that support the diffusion of such technologies, especially to small and medium sized enterprises, can thus reinforce resilience without forcing a blunt relocation of production. There is also growing interest in tools that improve supply chain transparency at system level, such as the Commission’s Supply Chain Intelligence Hub and early warning mechanisms. These instruments are still nascent but could, over time, reduce policy blind spots and allow a more surgical response to emerging vulnerabilities.
What emerges from this landscape is not a simple story of Europe choosing between globalisation and protection. The reality is a constrained optimisation problem. A purely open, efficiency driven model is no longer politically or strategically sustainable in an environment where trade and investment are consciously used as instruments of power. A heavy handed, defensive turn inward would be economically self defeating for a medium sized, ageing continent dependent on external growth and innovation. The question is whether the Union can construct a middle path where it reduces critical dependencies, invests in its industrial and technological base and deepens its own market, while remaining a credible champion of an open, rules based trading order.
Parliament has positioned itself broadly in favour of this strategic balance, calling both for diversification of critical supplies and for renewed efforts to complete the internal market and expand trade partnerships. It has stressed the need for better financing conditions, especially for smaller and innovative firms, and has floated joint borrowing as one possible tool in the face of common shocks. At the same time, it has highlighted the political difficulty of moving from reports and frameworks to concrete, sometimes painful, structural reforms.
In the end, managing supply chains in an era of fragmentation is as much about political priorities as it is about technical fixes. The EU’s openness has long been a core asset but also a source of vulnerability. Reconfiguring that openness without losing its benefits will require sustained coordination between industrial, trade, competition and financial policies, and a willingness to confront trade offs openly. The shocks of the last few years have pushed Europe to start that process. Whether it can keep its nerve as geopolitical tensions persist and domestic pressures rise will determine whether it emerges as a shaper of the new trade order or primarily as a taker of decisions made elsewhere.
