Much has been written about Europe’s slide in global relevance over recent years. And more is to be written. European Commission President Ursula von der Leyen has recently mandated Mario Draghi, former president of the European Central Bank and prime minister of Italy, to prepare a report that identifies ways to help the EU businesses regain their footing. This is what was on the agenda of the January meeting Draghi held with the European Round Table for Industry, a lobbying group that represents major European companies.
The task is not an easy one; EU competitiveness has been worsening steadily and reversing this trend will require some fundamental changes and a bold roadmap going forward.
To complicate things further, elevated geopolitical tensions have led to a fragmentation of the world economy. Today’s business leaders must assess geopolitical risks and connect them to important corporate decisions. While in the past weighing such risks may have only been relevant for a few sensitive industries, it is now every leader’s priority in all sectors. And it’s proving hard for many to adapt to the new reality.
Take the recent withdrawal of Western corporations from Russia and the challenges found in completing their exit. Over 1,600 international companies are still operating in Russia, with only a small percentage of Western firms having been able to close their operations in the country since its invasion of Ukraine in February 2022. Sanctions, countersanctions, restricted sales, and large markdowns are just a few of the issues that underscore the major obstacles that businesses must face to adapt to this new world – as discussed in a recently published research on “trapped” multinationals in Russia co-authored with Simon Evenett.
Looking at recent trade patterns and geopolitical shifts, three strategic priorities emerge as particularly crucial for EU business leaders today.
1. With US-China decoupling going on, embrace a “China for China” approach
The US and China have started to decouple after years of tension, as seen by a sharp decline in the share of imports and foreign direct investment between the two countries. The 2022 DHL global connectedness index shows that, largely because of tariffs imposed by Trump and maintained by Biden, US imports from China declined from 21.6% in 2017 to 16.6% in 2022, while exports to China decreased from 8.4% to 7.3%.
With China emphasizing home market and innovation through its dual circulation economic strategy and the US imposing measures like limiting foreign acquisitions and extending export controls, both countries are aggressively putting policies into place to lessen their mutual reliance. This is especially true in sensitive industries, an example of this being the prohibition on US semiconductor industry sales to China starting in 2022. Additionally, China’s strategic efforts over the past years to reduce dependence on foreign technology have posed significant challenges for foreign enterprises heavily invested in China.