The recent attitude of the United States to focus on becoming a more inward-looking country rather than a world ally has left most of the world’s economic leaders in a state of flux. The current US-Israeli war in the Middle East and the previous threat by President Donald Trump to annex Greenland has created a situation so bad that even a post-Brexit Britain is seeking closer ties with Europe.
In a world that seems increasingly divided, many are asking whether the EU needs to rely less on its traditional global allies, and more on itself. Yet at the same time, there is no shortage of division happening inside the Union, or of opinions on how to respond.
So what prospect is there of Europe actually becoming more self-sufficient and protectionist—and what impact is this likely to have on European businesses?
Trading blows
The sense that Europe might be over-reliant on other countries is nothing new. It’s a sense that a lot of other countries and blocs have too. The sentiment is most commonly applied to China, which is responsible not just for huge amounts of consumer goods that are exported to the EU and elsewhere, but also pharmaceuticals, rare earth minerals, and other materials such as iron and aluminium. There are also major trading partners which are potentially vulnerable to China, namely Taiwan, which is responsible for a large proportion of global semiconductor manufacturing.
However, China has become far from the only destabilising force in global trade, or even the most prominent. That title arguably (or perhaps not so arguably) goes to the United States. Since the most recent election of Donald Trump to the now remodelled White House, the United States has issued a raft of seemingly arbitrary tariffs on the EU and most other nations. The claim is that these were a fair response to the trade deficits these nations and blocs had with the United States. In effect, if the United States exported more to you than you exported to it, they were going to claw back the difference by taxing imports.
While the worst of these tariffs have temporarily halted, a blanket 10% tariff on all exports to the United States has been in effect since 24th February 2026. While the impact of this has yet to be fully felt, it’s expected to be substantial. The European Central Bank anticipates that the United States will import 37% less goods, and that prices will need to be raised by around 9.5% on average. The automotive industry is likely to be worst affected, with the United States having already actively shifted imports to Canada and Mexico.
The age of disruption
Of course, this is only one aspect of the disruption being faced by the EU and other nations. Multiple conflicts have also caused major disruptions to supply chains, most recently the war in Iran, but also the ongoing conflict in Ukraine. Add to this the pandemic, and the prospect that a similar event could potentially happen again, and supply chains suddenly seem much more vulnerable than they did for decades prior.
The obvious solution to this is to make more goods domestically. Some imports will be hard or even impossible to replace, such as rare earth metals, which countries will continue to be reliant on. Some industries are also reliant on extremely complex and wide-reaching supply chains which will be hard to decouple. Airbus for instance sources parts for its aeroplanes from hundreds of specialist manufacturers around the world, an issue that upstart Chinese and Russian aerospace companies have run into when trying to build new aircraft.
The obvious issue with this is cost. The EU has become over-reliant on imports from countries such as China or India because the cost of producing goods there is significantly lower, and thus the prices are lower than local alternatives. Reestablishing those local alternatives will not only require significant capital investment, but also lead to more expensive products without a considerable difference in quality, forcing people to pay more to buy local—a tough ask with the high cost of living.
How the EU can bring back manufacturing
So what’s the solution? Well, one step is incentives. It is ultimately beneficial to individual countries and the EU more generally to improve their manufacturing capacity, and thus their ability to withstand disruption. This is actually something we’ve seen from the United States, where numerous firms have pledged to move their manufacturing to America, including chip manufacturers and car companies. As harmful as the tariffs are still likely to be in the long term, they have also seen some success in moving manufacturing stateside.
The EU has already made some progress on this front. The recently proposed Industrial Accelerator Act (IAA) is intended to both increase industrial capacity across the EU, and to accelerate decarbonisation. There are a few key pillars to this strategy. One is the use of public procurement schemes, which will have quotas for sourcing goods and materials locally. Industrial permits will also be easier to apply for, while new industrial zones will be set up in strategic areas, with incentives for businesses to start manufacturing in member states. Foreign investment will also be limited, so that production is not shackled by foreign interests.
There is also the simple reality that local production may become more economical. Supply chain disruption has raised the costs of importing many goods, but it has also impacted long-term planning and decision making. The ability to guarantee supply chains in long-term contracts without needing to worry about supply issues or logistics should inspire greater business confidence, and allow for more accurate financial planning. Combined with easing the regulatory burden on businesses, this could reduce the cost of EU manufacturing to make it more competitive.
There are also the existing incentives for innovative firms, which will be at the forefront of manufacturing in developing industries like renewable energy, cars, robotics, and battery technology. The EU offers significant R&D funding through its Horizon Europe scheme, as well as various grants and funding opportunities for innovative projects. Individual countries also offer incentives for R&D and tech companies, such as French Tech Next 40/120 or the Dutch Innovation Credit Scheme.
As much of a headache as this has been for businesses and nations, it also presents an opportunity. Plans to increase manufacturing and industrial capacity in the EU are well underway, and many businesses and entrepreneurs stand to benefit. The opportunity exists to capitalise on the drive for more locally-made and sourced products and materials, and provide greater national and transnational security as a result.
