The European Union stands at a pivotal moment, where economic resilience, technological innovation, and strategic autonomy must converge to secure long-term prosperity. Building on the landmark Draghi report, The EU Competitiveness Compass aims to chart this course, aligning policies and investments to tackle existing challenges while unlocking opportunities across sectors. Drawing from the European Commission’s Competitiveness Compass, this article explores the impacts on international trade arising from the upcoming policy and regulatory changes.  

While the Competitiveness Compass aims to streamline regulations, increase funding for strategic sectors, and create a more business-friendly environment, this does not signal a retreat from the European Commission’s core commitments to sustainability, the rule of law, and human rights. The EU remains firmly dedicated to its goal of achieving carbon neutrality by 2050, ensuring that economic growth and environmental responsibility go hand in hand.  

This article was written by Marius Ungureanu ([email protected]) and Sefa Geçikli ([email protected]), Marius and Sefa are part of RSM Netherlands Business Consulting Services, specifically focusing on International Trade and Strategy.  

Main Themes Affecting International Trade

International trade has long been a pillar of Europe’s economic prosperity, evolving from the early foundations of the European Coal & Steel Community (ECSC) in 1951 to a complex and interconnected global trade network. International trade is a core part of Europe economic well-being and further development. It also represents a strong tool in Europe’s portfolio when it comes to engaging with governments outside Europe and promoting European interests. As such, a decline in Europe’s role in international trade will undoubtedly have negative consequences on the role Europe has on the global arena. The aim of the Compass is to make it easier and faster to conduct business in Europe and with Europe. In this sense, the Commission decided to focus on four main themes: innovation, strategic dependencies, the single market and decarbonisation. In turn, each of these themes are underpinned by specific legislative or policy acts that should inspire confidence and commitment that Commission is seeking to truly perform a turnaround of Europe’s economy.  

Innovation, Research, and Development

Innovation remains a cornerstone of the EU’s strategy to enhance global competitiveness. However, despite maintaining a robust share of global patents, Europe struggles to convert intellectual assets into global trade advantages. The EU’s Start-up and Scale-up Strategy aims to dismantle barriers that hinder the growth of innovative companies, cultivating an ecosystem that encourages entrepreneurship. Central to this is the European Innovation Act, which prioritizes access to cutting-edge research, advanced technology infrastructure, and regulatory flexibility. This includes establishing risk-free testing environments, such as regulatory sandboxes, to accelerate the commercialization of new technologies.

In line with the European Commission’s Competitiveness Compass, the EU has pledged substantial investments in digital infrastructure such as, AI, cloud computing, quantum technologies, and 6G networks to ensure global competitiveness. The TechEU Investment Programme supports innovations across sectors like semiconductors, quantum computing, and clean technology, reinforcing Europe's leadership in transformative industries while driving sustainable economic growth. This technological sovereignty could reduce Europe’s demand for foreign technology imports while fostering exports of homegrown innovations. In turn, non-EU countries seeking access to cutting-edge technologies might face stricter trade conditions, with partnerships being contingent upon adherence to EU standards related to data privacy, cybersecurity, and intellectual property protection.  

Strategic Dependencies

The EU is intensifying efforts to enhance its strategic autonomy by prioritizing the development of domestic production capacities in critical sectors such as semiconductors, rare earth elements, and energy technologies. Reducing dependency on external suppliers is pivotal for mitigating geopolitical risks and ensuring economic resilience. To this end, the EU is promoting an “European preference” policy in public procurement, ensuring that strategic industries rely more on EU-based suppliers.

In addition, measures such as expanding the Carbon Border Adjustment Mechanism (CBAM) aim to curb carbon leakage by aligning import costs with the EU’s strict environmental standards. This strategy incentivizes global competitors to meet similar climate regulations while ensuring fair competition. Partnerships with non-EU countries will also play a crucial role in securing resilient supply chains and strengthening trade agreements, further safeguarding Europe’s economic sovereignty.

The Single Market

The EU’s Horizontal Single Market Strategy seeks to eliminate trade barriers between member states, promote regulatory harmonization, and create a frictionless economic environment. By streamlining governance processes and reducing bureaucratic red tape, the EU aims to facilitate seamless cross-border economic activities.

A Single Market Enforcement Taskforce will be established to monitor regulatory compliance, address implementation challenges, and preserve the integrity of the Single Market. Additionally, efforts to integrate candidate countries into this framework will foster expanded investment opportunities, enhance trade capabilities, and create a more interconnected value chain across Europe. This re-alignment will not only increase the competitiveness of EU industries but also strengthen Europe’s influence in international trade negotiations. Ultimately, the effects of the Compass on the single market should culminate with a reduction in relation to regulatory burden between 25% to 35%.  

Decarbonization

The Clean Industrial Deal represents the EU’s commitment to becoming a global leader in green industrial development. This policy mobilizes financial and regulatory tools to stimulate green investments and ensure economic competitiveness while facilitating the transition to sustainable practices.  

Complementary initiatives like the Industrial Decarbonization Accelerator Act aim to expedite the transformation of energy-intensive sectors toward cleaner energy solutions. The Circular Economy Act supports this by promoting resource efficiency, recycling, and reducing environmental impact. As part of this strategy, the EU will also introduce targeted incentives for carbon removal technologies and foster innovations that can effectively reduce emissions across industrial sectors.

These interconnected policies reflect the EU’s ambition to balance sustainability with economic resilience and technological leadership. By providing strong regulatory frameworks, financial incentives, and innovation-driven strategies, the EU is positioning itself at the forefront of the global green transition.

First Results

CBAM is a critical element of the EU’s decarbonization strategy, aligning with the broader goals of the Competitiveness Compass. Initially set for full implementation in 2026, the mechanism has now been delayed to 2027, reflecting the EU’s efforts to balance climate ambitions with economic competitiveness. CBAM is designed to prevent carbon leakage by ensuring that imports adhere to EU emissions standards, effectively placing a price on carbon-intensive goods entering the Single Market. While initially applied to all importers, a new threshold introduces a 50-ton annual exemption, significantly reducing compliance obligations for 90% of importers. This change aims to ease administrative burdens on smaller businesses while maintaining regulatory pressure on major industrial importers.

The scope of CBAM remains focused on core sectors such as iron, steel, cement, fertilizers, aluminum, hydrogen, and electricity. However, while no immediate expansion has been decided, discussions indicate that it may eventually extend to indirect emissions, and downstream goods. This potential expansion would deepen the EU’s control over carbon-intensive imports, increasing compliance obligations for industries reliant on global supply chains. To reduce the regulatory burden, the emissions tracking process has been simplified, reducing compliance complexity for affected businesses. This streamlining reflects a broader trend within the Competitiveness Compass: maintaining high environmental standards without creating excessive regulatory burdens that could undermine the EU’s economic position. CBAM, therefore, stands at the intersection of climate policy and international trade, reinforcing the EU’s commitment to decarbonization while ensuring that European industries remain competitive.

Effects on Supply Chain  

The Competitiveness Compass introduces a strategic shift in how the EU manages supply chains, prioritizing resilience, sustainability, and technological autonomy. A key focus is on reducing strategic dependencies in critical sectors, such as semiconductors, rare earth elements, and clean energy technologies. By encouraging European-based production and diversifying sourcing options, the EU aims to minimize geopolitical risks that could disrupt supply chains. Policies like the “European preference” in public procurement will incentivize businesses to source materials and components within the EU, leading to a restructuring of supply networks. However, this will also require firms to navigate new compliance requirements and adjust their supplier relationships, especially for industries currently reliant on non-EU markets for raw materials and technology.

The Single Market Strategy within the Competitiveness Compass aims to streamline regulations and remove internal trade barriers, creating a more integrated and frictionless supply chain ecosystem across Europe. The establishment of a Single Market Enforcement Taskforce will help monitor regulatory compliance and address bottlenecks in supply chains, reducing inefficiencies caused by bureaucratic fragmentation. Furthermore, by integrating candidate countries into the Single Market framework, the EU is expanding its supplier base and investment opportunities, creating a more interconnected European value chain. This will benefit businesses operating across borders by ensuring greater regulatory coherence, faster approvals, and improved logistics coordination, reducing the risk of supply chain disruptions due to inconsistent national policies.

Additionally, the Competitiveness Compass places a strong emphasis on decarbonization, which will significantly reshape supply chains. The Clean Industrial Deal and CBAM will push industries to source low-carbon materials and transition to greener production methods, impacting trade flows for carbon-intensive goods. The introduction of simplified emissions tracking and potential expansion of CBAM to downstream goods will require companies to rethink supplier selection and logistics strategies to remain competitive in the EU market. This shift towards sustainable supply chains will create opportunities for businesses investing in circular economy practices, carbon capture technologies, and clean energy solutions, but may create additional costs on firms that fail to adapt.  

Recognizing the urgency of the matter and the need to support the Competitive Compass with concrete actions, the European Commission has set an ambitious timeline for achieving its goals and revitalizing the engines of the European economy. According to this timeline, by the end of 2025, significant progress should be made toward achieving the objectives outlined in the Competitive Compass.  

Forward Thinking  

Looking ahead, the Competitiveness Compass sets the stage for a more resilient, sustainable, and technologically advanced European economy that can navigate global challenges while maintaining its leadership in trade, innovation, and environmental standards. As policy frameworks such as CBAM, the Clean Industrial Deal, and the Single Market Strategy continue to evolve, businesses will need to adapt swiftly to regulatory changes and embrace innovation-driven strategies to stay competitive.  

Moreover, as digital transformation accelerates, investments in AI, quantum computing, and green technologies will become pivotal in defining Europe's competitive edge. However, the effectiveness of these policies will depend on their implementation, enforcement, and industry adoption, making it crucial for the EU to maintain flexibility in refining its strategies while balancing economic growth with sustainability. In the long term, the Competitiveness Compass is not just a blueprint for policy but a roadmap that will require continuous evaluation and adaptation to ensure Europe regains its role a global leader in trade, technology, and green industrial transformation.

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