Breaking down Europe’s internal barriers must be the priority

By John Manners-Bell

Mario Draghi believes that Europe should focus less on external tariffs and more on removing the many barriers which remain for internal trade between members. Doing so would boost the economy and the logistics industry, but some believe risks undoing the advances made in sustainability.

Since President Trump’s election, the threat of tariffs has hung over the European economy. Trade between the two partners amounted to about $1 trillion in 2024, almost two thirds of which was made up of European exports. Applying tariffs of 25%, as Trump has promised, would have a significant impact on many parts of the European manufacturing sector, as well as on the thousands of people directly employed. However, Mario Draghi, former Prime Minister of Italy and author of the recent European competitiveness report, has highlighted an even bigger and more systemic challenge for the European economy: that of its internal barriers.

Writing recently in an article for the London Financial Times, Draghi quotes International Monetary Fund (IMF) figures suggesting that barriers to trade between EU members amount to an equivalent tariff of 45% for manufacturers and 110% for the services sector. These levels have meant that trade between EU members is just half of that across the United States, creating a headwind for economic growth and resulting in the loss of competitiveness. The IMF estimates that reducing intra-EU trade costs to those in the US by investing in border infrastructure; opening up protected sectors; creating a capital markets union; and more consistency in regulation could increase productivity by 6.7%.

Since it was founded, the World Trade Organisation (WTO) has been very successful at driving down tariff and non-tariff barriers which, in the era of globalisation, has encouraged European manufacturers to off-shore to markets in Asia and elsewhere. This has meant that, since 1999, trade as a proportion of eurozone economic output has risen from 31% to 55%, a much higher increase than in either China or the USA. At the same time, trade costs of imports from outside the EU fell faster than those for internal imports. For many years, this openness to global trade was regarded as positive (masking the missed opportunities within the region), but now it is increasingly seen as a cause of supply chain vulnerability.

Draghi makes the point that reducing trade barriers within the EU, at the same time as stimulating demand through de-regulation and higher levels of government investment, would achieve twin goals. Firstly, it would reduce trade openness and hence improve European resilience at a time when it is not able to rely on its major trade partners. Secondly, it would create huge economic value by unleashing the potential of Europe’s manufacturing and service sectors without the need to increase tariffs. In other words, Draghi’s strategy eschews President Trump’s ‘zero sum game’ approach which maintains that in international trade there can only be winners and losers.

There are signs that Draghi’s views on deregulation are gaining traction, resulting, for example, in the recent announcement of the dilution of the Corporate Sustainability Reporting Directive (CSRD) and the Corporate Sustainability Due Diligence Directive (CSDDD). However, deregulation is not popular with all parties. Many environmental lobbyists believe that ‘simplification’ of regulation will result in the weakening of sustainability commitments. The Worldwide Fund for Nature (WWF) said in a statement, ‘The Commission’s proposal to exclude more than 80% of companies from the CSRD’s scope, rather than providing a proportionate reporting standard, will create significant data gaps, increase burdens on businesses, and restrict access to sustainable finance – ultimately hampering economic prosperity.’ It also believes that limiting the scope of the CSDDD overlooks critical risks in global supply chains, a view shared by many. There is the fear in some quarters that deregulation is being regarded by the European Commission leadership in the same way as President Trump views tariffs – a game of winners and losers. The counter view is that regulation brings about sustainable economic growth. However, in the present political environment which prioritises economic growth and strategic autonomy, this view seems to be losing out.

Quick take – Implications for road freight sector:

Reducing internal barriers in the EU would have positive implications for the European international road freight sector. If Draghi is right, flows of cross-border goods within the region are being held back by structures left over from pre-Single European Market times. This does not necessarily mean that inter-continental movements will suffer. Releasing manufacturing and services value within the bloc will also stimulate demand for goods from remote suppliers in Asia and elsewhere, just not at the same pace as intra-Europe trade. Draghi’s approach will mean a ‘win-win’ for the logistics sector in the short term, although many sustainability cheerleaders fear that, in the long term, the deregulating actions of the Commission will be counterproductive.

Author: John Manners-Bell

Source: Ti Insight 

Supply chain strategists can use GSCi – Ti’s online data platform – to identify opportunities for growth, support strategic decisions, help them stay abreast of industry trends and development, as well as understand future impacts on the industry.

Visit GSCI subscription to sign up today or contact Michael Clover for a free demonstration: [email protected] | +44 (0) 1666 519907