Europe’s path to resilience and responsibility in a fragmented world

Europe, long a champion of the international rules-based system, must now adapt to an era where power often trumps rules. The world economy has become increasingly fragmented and unpredictable, driven by geopolitical tensions. Yet Europe is more secure than other regions in terms of trade. Its strong internal trade network—accounting for around 70% of exports and imports—acts as a buffer against disruptions, as it is less exposed to sectors dominated by adversarial trading partners, particularly as the region reduces its reliance on Russian energy.¹ Still, vulnerabilities persist. Europe is seeking to expand trade ties with China while reducing dependency on critical imports, exposing it to risks, particularly in sensitive sectors like electric vehicles. The uncertainty surrounding a second Trump administration adds to the challenges. Proposals to raise tariffs on European goods by 10-20% could sharply increase trade costs with the region’s largest trading partner. At the same time, businesses face mounting domestic pressures. Stricter climate regulations and a tightening labour market are forcing firms to adapt. Supply chains are being reconfigured and strategies realigned to balance resilience, sustainability and competitiveness. For Europe, navigating these pressures will require both pragmatism and agility in a world defined by power, not predictability.

Moving from a rules-based trading system to a power-based one

Global trade is shifting from rules-based systems to ones driven by power, forcing Europe to rethink its business strategies. Rising tensions between major blocs like the United States and China are reshaping the landscape. The EU’s de-risking policies, including tariff hikes on Chinese electric vehicles, reflect this shift. Although 39% of firms expect these measures to boost EU sales, many predict they will cause volatility and rising costs, raising concerns that protectionism could undermine competitiveness.

Despite efforts to reduce risks, Europe’s reliance on China for manufactured goods—especially semiconductors, batteries and critical raw materials—has grown.² Between 2018 and 2023, this dependency deepened, exposing Europe to supply-chain vulnerabilities.³ A full decoupling from China is neither realistic nor in Europe’s interest. The Chinese economy remains too large and too significant to ignore, and European firms—especially major German companies—are deeply embedded in the Chinese market. Many of these companies, having made substantial investments in China, are unwilling to abandon trade ties completely . However, this leaves Europe more vulnerable to supply-chain disruptions than America, which has broadened its sources by turning to Mexico and Vietnam.⁴

The return of Donald Trump to the American presidency also poses significant risks for EU businesses. Proposed tariff increases of 10-20%and weakened multilateral systems will hinder European firms from trading with their largest partner, particularly in industries important to Europe, such as automotive and manufacturing. Some European economies are more vulnerable than others: Germany and Ireland are among the most exposed to risks owing to their sizeable current-account surpluses with America.⁵ In contrast, countries like Croatia, the Netherlands, Poland and Spain face less immediate risk as net importers of American goods and services, with America representing a relatively small share of their overall merchandise trade.⁶

To manage rising trade tensions and global fragmentation, European businesses must adopt proactive strategies to build resilience. Although 40% of firms are already diversifying supply chains, many remain hesitant, risking a repeat of the reactive response seen in the wake of the Russian energy crisis. Waiting for external pressures to force action leaves businesses exposed.

Instead, companies should invest in precautionary diversification as soon as possible, accepting short-term costs in exchange for long-term stability. This includes reducing reliance on single markets by sourcing from politically neutral or emerging economies, particularly those not caught up in the Sino-American rivalry. Diversification can be challenging—especially for imports like critical minerals, where alternative suppliers are scarce—but a dual supply-chain strategy offers a pragmatic solution. By developing alternative sources to hedge against disruptions while continuing to capitalise on China’s scale and market potential, firms can strike a balance between resilience and opportunity. Encouragingly, 32% of European businesses are already pursuing this approach.

Building regional stability

Another strategy to manage geopolitical strife is to look closer to home. Regionalisation is favored by 26% of European executives, compared with 22% globally. The EU’s internal market has proven to be a valuable buffer against external shocks. Companies relying on intra-EU imports have been less affected by disruptions than those dependent on non-EU sources.⁷ Focusing on the “near abroad”, where countries share geopolitical alignment, helps to increase trade stability and predictability. Simon Lacey, the head of digital trade and geopolitics at the World Economic Forum, notes that recent geopolitical shifts are driving these changes. The Ukraine-Russia conflict and Brexit have underscored the value of a stable, localised supplier base that reduces exposure to external shocks.

Regionalisation also reduces transport costs within supply chains. This is the primary motivation for regionalisation among European firms, followed by decreasing transport times. This is even more important given that trade is currently being rerouted around the Horn of Africa owing to the Red Sea crisis.

Despite Europe’s integrated single market, businesses still face fragmented national frameworks that drive up costs and complicate operations. Political differences within the EU add to this challenge, with countries taking varied approaches to supply-chain restructuring. Although these tensions have yet to disrupt cross-EU supply chains, they represent a growing risk. Meanwhile, some EU countries, like Hungary and Poland, may enjoy better relations with Trump’s administration due to closer political alignment and higher defence spending. This could protect these countries against trade tensions, offering businesses a buffer in negotiations.

However, the trajectory of the Ukraine-Russia conflict could shift in 2025, as negotiations are expected under a renewed Trump administration. Ukraine may face unfavourable settlement terms due to a likely reduction in assistance from America and insufficient support from the EU.⁸ This could exacerbate regional instability and disrupt supply-chain flows, particularly for commodities like grains, metals and energy.⁹ This expected shift is driving investments in “friendly” regions, such as South-East Asia. Of the companies we surveyed, 53% are considering relocating their supply chains due to geopolitical concerns such as the Russia-Ukraine war seeking to balance resilience and efficiency in an evolving global trade environment.¹⁰

Committing to sustainability amid tightening EU regulations

Sustainability has become an important consideration in European trade strategies. Our survey confirms that they are driven by the EU’s strict regulatory standards, as well as consumer expectations.

The EU’s Net-Zero Industry Act aims to strengthen Europe’s manufacturing capacity for net-zero technologies and reduce dependency on external sources for green technologies. However, complying with other sustainability regulations, including the Carbon Border Adjustment Mechanism (CBAM), presents significant challenges for businesses. Compliance requires meticulous emissions data collection and comes with substantial costs, particularly for small firms that lack resources. This can make European products less price-competitive globally, especially compared with goods from regions with laxer regulations.

There is growing concern in Europe about the regulatory burden businesses face as they navigate multiple (often conflicting) policy objectives like the green transition and due diligence requirements. This complexity risks stretching firms too thin and limiting their competitiveness. Mr Kovacevic highlights that CBAM compliance demands collaboration across supply chains, with smaller suppliers often struggling due to limited resources. The integration of artificial intelligence (AI) and digital solutions can help to address these challenges by improving data tracking and streamlining compliance, making it easier for firms to meet environmental standards. To fully realise the benefits of AI, companies need to foster collaboration between supply-chain experts and digital teams, ensuring that innovation is translated into practical application.

These challenges have reinforced trends toward regionalisation, as companies find it easier to meet stringent standards when working with EU-based suppliers. European policymakers must balance sustainability objectives with a business-friendly approach. They must combine simplification and sustainability agendas to ensure that firms remain competitive while navigating an increasingly demanding regulatory landscape.

Economic challenges to overcome

Market-related complications continue to pose significant challenges for European firms, particularly those striving for greater regional integration. Brexit has exacerbated these issues by introducing regulatory barriers, higher costs and logistical complexities for firms trading with the United Kingdom. Addressing these challenges will require a focus on talent development through reskilling and upskilling, as well as automation to improve supply-chain stability. Although some firms are optimistic about improving UK-EU trade relations, significant hurdles remain. The European Commission’s recent legal action against the UK cites alleged mistreatment of EU citizens after Brexit and the UK’s failure to terminate bilateral investment agreements with certain EU member states.¹¹ This highlights ongoing tensions that could undermine efforts to strengthen ties. With the UK-EU trade agreement set for review in 2026, businesses should be mindful about underlying issues that could impact the ambition of any renegotiation of the trade agreement between the UK and EU.

Germany is the third-largest economy in the world and a major driver of European growth, but also faces challenges. Its export-focused industrial sector—with strengths in automotive, chemicals and engineering—is exposed to high input costs, intensified global competition and trade protectionism.¹² The German economy remains stagnant, with real GDP in late 2024 unchanged from pre-pandemic levels, making it one of the weakest performers in the EU and G7.¹³ As American isolationist trade policies and potential import tariffs loom under a second Trump presidency, Germany’s large trade surplus with America makes it particularly vulnerable. These pressures are likely to dampen growth prospects and force German industries to reassess production and workforce strategies, further straining European supply chains.

Resilient supply chains, competitive costs

Europe faces a fragmented and unpredictable global economy. Although its internal trade network offers stability, the region’s reliance on China for critical imports and the risk of US tariffs remain significant challenges.

To adapt, Europe must balance resilience, sustainability and competitiveness. Firms should prioritise easing regulatory burdens (particularly smaller firms) and investing in supply-chain diversification, regionalisation and digital innovation.

By strengthening internal integration and building ties with emerging economies, Europe can secure long-term growth amid increasing uncertainty.