EU supply chain tectonics

Román Arjona, William Connell Garcia and Cristina Herghelegiu

Over the past five decades, international supply chains have been a key driver of efficiency and resilience in global trade, with the EU benefitting from open and integrated markets. Through global value chains, companies took advantage of advances in logistics, capital mobility, and trade liberalisation to optimise costs, access foreign inputs, and enhance economies of scale.

However, recent crises, including the COVID-19 pandemic, geopolitical conflicts, and trade weaponisation by major economies have exposed critical vulnerabilities and excessive dependencies in key sectors, as stressed by the ECB (2024). These disruptions have led the EU to reassess its approach, incorporating concepts like open strategic autonomy, de-risking, and economic security into its Trade and Industrial Strategies.

While acknowledging the benefits of globalisation, EU policymakers now emphasise the need to safeguard critical supply chains, reduce reliance on high-risk dependencies, and enhance resilience against external shocks. This shift reflects a broader strategy aimed at ensuring long-term economic stability and competitiveness in an increasingly uncertain and fragmented global environment.

In this column, we examine the EU’s approach to import sourcing in a rapidly evolving and increasingly divided international trade landscape. Specifically, we examine whether the EU is undergoing an initial reorganisation of its supply chains in light of the unfolding geopolitical forces that shape international trade.

The analysis explores the implications of these shifts for import diversification and price dynamics, considering both overall EU imports and specific sensitive supply chains critical to the EU economy. These include raw materials, semiconductors, and net zero technologies, areas that are central to ongoing EU policy initiatives.

Additionally, we investigate foreign-dependent products, particularly those reliant on a single country of origin, known as global single points of failure (SPOFs), as defined by Arjona et al (2023).

This analysis adds to the growing literature on the global supply chain reorganisation driven by recent crises and its associated policy responses. Fabry et al (2024) and Aiyar et al (2023) discuss how reshoring, friendshoring, and diversification are driving regionalisation.

Blanga-Gubbay and Rubínová (2023) and Gopinath et al (2024) show increasing trade fragmentation since the Russian military aggression against Ukraine, with rising friendshoring but little nearshoring. Freund et al (2023) and Alfaro and Chor (2023) document US supply chain shifts from China to Mexico and Vietnam.

With a particular focus on the EU, Balteanu et al (2024) find that many EU firms are adopting EU-shoring despite short-term cost pressures, while the 2024 European Investment Bank-European Commission supply chain survey reveals how firms responded to disruptions through inventory management and trade diversification.

In a recent study (Arjona et al 2024), we analyse the reorganisation of EU supply chains by classifying countries into four trading groups based on the EU’s trade partnerships and geographical proximity (Figure 1): (1) EU27 member states, (2) neighbouring agreement partners, (3) non-neighbouring agreement partners, and (4) non-agreement partners.

Figure 1. Distribution of countries in trading group

Note: This classification relies on the EU’s various trade cooperation agreements. It includes countries with established or provisionally applied trade agreements and those that have recently signed Raw Material Partnerships or the 2022 Joint Statement on Cooperation on Global Supply Chains. In addition to the UK and EFTA countries, EU neighbours are identified using information on the European Neighbourhood Policy and Enlargement framework.

In 2021, the European Commission published an update of both its Industrial Strategy and Trade Strategy, reinforcing its commitment to a competitive and resilient European economy. Since then, we observe that EU imports have reallocated towards EU27 and agreement partners at the expense of non-agreement partners.

Figure 2 shows that the market share of non-agreement partners declined by 1.8 percentage points, while EU27, non-neighbouring agreement partners, and neighbouring agreement partners gained 0.3 percentage points, 1 percentage point, and 0.6 percentage points, respectively.

However, this aggregate shift may conceal product-level variations, potentially driven by high-value goods, which we address through regression analysis, where we control for specific characteristics.

Figure 2. Changes in EU import market shares across trading groups for all products from 2021 to 2023

Note: The graph shows the changes in market shares held by various trading groups in EU imports from 2021 to 2023 excluding energy-related products, measured in percentage points (pp).

Source: Own calculations based on Eurostat-Comext.

When considering all goods, regression results in Figure 3 show that the intra-EU27 import share increases as the share imported from the non-agreement partners decreases. The negative and significant coefficient confirms this finding. Thus, we have witnessed a reallocation of EU imports away from non-agreement partners and towards the EU27, which suggests early signs of reshoring.

Additionally, we obtain evidence of increased sourcing from agreement partners, both near and far, highlighting a shift towards partner-shoring. Specifically, the analysis of sensitive supply chains shows that intra-EU27 imports rise as non-agreement partner imports decline, reinforcing the reshoring trend.

However, there is no systematic evidence of nearshoring, as imports from geographically close agreement partners remain largely unchanged, except in the case of semiconductors. In contrast, significant shifts are observed for geographically distant agreement partners, particularly for dependent goods and raw materials, indicating a targeted reallocation strategy rather than a broad restructuring of supply chains.

While acknowledging the benefits of globalisation, EU policymakers now emphasise the need to safeguard critical supply chains, reduce reliance on high-risk dependencies, and enhance resilience against external shocks

Figure 3. Market share changes in EU imports across trading groups for all goods and sensitive supply chains, 2021-23

Note: The figure presents the estimated coefficients from repeated regressions that analyse the relationship between changes in the import share from non-agreement partners and shifts towards the three trading groups: EU-27, Neighbours with Agreement and Non-Neighbours with Agreement. Each point represents a different product category (all goods, dependencies, high single point of failure (SPOF) dependencies, raw materials, semiconductors, and Net-Zero Industry Act (NZIA) goods), with statistically significant coefficients marked by at least one star (*). A negative and significant coefficient suggests that as the import share from non-agreement partners declines, imports from the respective trading group increase, indicating evidence of reshoring (EU-27), nearshoring (neighbours with agreement) or partner-shoring (non-neighbours with agreement) for specific product groups.

Source: Own calculations based on data from Eurostat-Comext.

We also show that shifting EU imports away from non-agreement partners leads to greater overall diversification, yet increased concentration among agreement partners, likely due to adjustment periods for ramping up production capacity. Additionally, reallocating imports from non-agreement partners is associated with rising unit prices, notably for EU27 (0.74%) and non-neighbouring agreement partners (2.71%).

This effect varies in magnitude and statistical significance across different product baskets. This suggests that, in the short term, resilience strategies may come at a cost, though firms’ adaptation measures could mitigate these price effects over time.

Conclusion

Global supply chains are going through significant changes. In this context, EU imports are shifting away from non-agreement partners toward reshoring (EU27), nearshoring (neighbouring agreement partners), and partner-shoring (non-neighbouring agreement partners). These shifts vary by sector but align with the EU’s goal of curbing dependencies and enhancing resilience. Our findings highlight the adaptability of EU supply chains as they adjust to evolving trade dynamics.

However, this transition may come with potential costs, at least in the short term, including through increased import concentration and some evidence of short-term price pressures. Firms’ adaptation measures could mitigate these price effects over time. While diversification is improving, some products remain reliant on specific agreement partners due to adjustment periods for production capacity expansion.

The EU’s strategies aim to balance international partnerships with strengthened internal production to mitigate vulnerabilities. As these policies unfold, tracking and understanding EU supply chain shifts remains as critical as ever, against an increasingly fragmented trade landscape.

ABOUT THE AUTHORS

Román Arjona is Chief Economist at the Directorate-General for Internal Market, Industry, Entrepreneurship and SMEs, William Connell Garcia is Team Leader of the Chief Economist Team, DG GROW, and Cristina Herghelegiu is a member of the Chief Economist Team of DG GROW (Internal market, industry, entrepreneurship and SMEs), all at the European Commission.

References

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Alfaro, L and D Chor (2023), “A perspective on the great reallocation of global supply chains”, VoxEU.org, 28 September.

Arjona, R and D Revoltella (2024), “Enhancing the resilience and security of EU supply chains”, VoxEU.org, 12 November.

Arjona R, W Connell and C Herghelegiu (2023), “The EU’s strategic dependencies unveiled”, VoxEU.org, 23 May.

Arjona, R, W Connell and C Herghelegiu (2024), “Supply Chain Tectonics: Empirics on how the EU is plotting its path through global trade fragmentation”, Single Market Economy Papers WP2024/28, Publications Office of the European Union.

Balteanu, I, M Bottone, A Fernández-Cerezo, D Ioannou, A Kutten, M Mancini and R Morris (2024), “European firms facing geopolitical risk: Evidence from recent Eurosystem surveys”, VoxEU.org, 18 May.

Blanga-Gubbay, M and S Rubínová (2023), “Is the Global Economy Fragmenting?”, World Trade Organization Economic Research and Statistics Division, Staff Working Paper: Research ERSD-2023-10.

ECB (2024), “Navigating a fragmenting global trading system: Insights for central banks”, ECB Occasional Paper 2024/365, European Central Bank.

Fabry, E, N Kohler-Suzuki, P Lamy and M Sibona (2024), “Shields Up: How China, Europe, Japan and the United States Shape the World through Economic Security”, Jacques Delors Institute, N298.

Freund, C, A Mattoo, A Mulabdic and M Ruta (2023), “Is US trade policy reshaping global supply chains?”, World Bank Policy Research Working Paper 10593.

Gopinath, G, PO Gourinchas, A Pescatori and P Topalova (2024), “Changing Global Linkages: A New Cold War?”, International Monetary Fund, WP/24/76.

Authors’ note: The opinions expressed in this column are the authors’ alone and cannot be attributed to the European Commission. This article was originally published on VoxEU.org.