The Fragmentation of supply chains and the impact on the cost of living

The world order is transitioning to a new multipolar era, accompanied by escalating challenges to socioeconomic and environmental sustainability. The global economy is undergoing significant systemic risks, marked by increasing geo-economic fragmentation, driven by geopolitical tensions, economic and currency related, energy and food security concerns, as well as crucial policy shifts such as the green and digital transitions.

Supply chain disruption and trade distortions increase burdens for businesses and consumers adversely affecting competitiveness and the cost of living in European societies. In addition, the incomplete integration of the EU single market and the persisting obstacles to global business expansion and Foreign Direct Investment (FDI) attraction, as highlighted by the Enrico Letta and Mario Draghi reports, induce a situation of considerably high risks, but also of opportunities for the EU.

In such a geopolitical and geoeconomic environment, the EU should adopt a proactive strategy to support European producers in diversifying their suppliers and clients while ensuring security through sustainable alternative business relations; in effectively implementing strategies for vertical (re-)integration; and in expanding the geographical scope of trade and financial relations. Similarly, policies are needed to support the existing, economically justified trends of reshoring and onshoring.

At the same time, counteracting the evolving fragmentation, the EU should recognise the central role of the World Trade Organisation (WTO), raise the issue of unilateral tariffs and proactively propose a relevant preventive reform blueprint, as well as initiate the strengthening of plurilateral agreements as a viable alternative, being particularly effective for critical issues.

In other words, the EU must struggle for its strategic autonomy, while avoiding self-isolation and, even more, becoming a guarantor of a new framework of international economic cooperation and solidarity while respecting socio-economic and environmental sustainability. The way to achieve this goes through:

• strengthening the extensive EU network of bilateral and regional free trade agreements (FTAs), while maintaining an open and non-discriminatory approach and remaining a credible international partner;
• prioritising trade relationships with key partners in the Global South to promote their climate transitions, while guaranteeing universal values, international standards and sustainability commitments (Global Gateway’ strategy).

The recently and unanimously adopted EESC opinion REX/596 Fragmentation of supply chains and impact on the cost of living calls for this strategy and delivers some recommendations, including to:

• maintain competitiveness, reduce import dependencies for critical goods and materials - particularly in high-tech and essential industries -, diversify supply chains and strengthen economic resilience through targeted investments in strategic industries and infrastructure;
• mitigate the risks of economic isolation, expand trade agreements with new and reliable partners, particularly in the Global South while respecting existing and new sustainability commitments and safeguard from unfair competitive practices stemming from abnormally low production costs and standards;
• foster technological advancement, prioritise investment in R&D for high-tech industries and sustainable manufacturing, develop and apply a unified EU industrial strategy to bridge productivity gaps and maintain competitiveness in key global markets;
• focus on MSMEs, enhance financial and technical assistance for expanding into new markets and adopting sustainable business models;
• implement targeted education and training programmes for upskilling and reskilling, promote labour mobility within the single market, and attract and retain talent, strengthening the EU’s innovation capacity;
• strengthen coordination between the European External Action Service and DG Trade to leverage the positive impact of existing and upcoming trade and investment partnerships.

The EESC stresses the need for an urgent and strategic response to global supply chain fragmentation. Strengthening economic security, reinforcing trade resilience, and prioritising industrial innovation will be critical to ensure that the EU remains competitive while protecting businesses and consumers from escalating costs and supply disruptions.

By Dimitris Dimitriadis, EESC Employers' Group Member, President of the External Relation (REX) Section, and Rapporteur of Opinion REX/596 Fragmentation of supply chains and the impact on the cost of living.