QNB: Europe Reshapes Trade Partnerships for Diversification, Growth and Economic Security

QNB Group said the shift in European trade policy represents a strategic response to a global economy that is becoming increasingly fragmented and difficult to predict. In its weekly report, the bank said the European Union’s new trade agreements are a strategic tool for diversifying trade partnerships away from its two largest trading partners and opening new markets for its exports, particularly high-growth economies led by India, Mercosur and the Association of Southeast Asian Nations (ASEAN), while also securing more reliable access to critical raw materials.

The report said the gains from these agreements will accumulate gradually, supporting the European economy’s resilience over the medium term.

QNB said the European Union’s external environment has deteriorated markedly over the past two years as its two largest trading partners have simultaneously become less reliable. The report said the new framework for reciprocal, fair and balanced trade between the European Union and the United States entered into force on July 1, 2026, as one of the main frameworks governing bilateral trade, setting a 15 percent tariff ceiling on most EU exports and creating a higher structural barrier to European exports entering their largest market.

Meanwhile, China has shifted from being a major source of demand for European products to an increasingly powerful competitor, with the EU’s goods trade deficit with China reaching EUR 359.8 billion in 2025 after its exports to China fell 6.5 percent and imports rose 6.4 percent.

The report linked these developments to Brussels’ move to expand its network of trade agreements in the broadest initiative of its kind in decades. QNB reviewed the agreements the European Union concluded with Mercosur, Mexico, Indonesia, India and Australia during 2025 and the first half of 2026, estimating that together they will raise the share of EU external trade covered by free trade agreements to 53.3 percent from 46.3 percent at the end of 2025.

The report said the transformation in European trade policy also extends to Southeast Asia, noting that the European Union and the Philippines reached an important understanding in September on a free trade agreement that would liberalise more than 94 percent of tariff lines, while negotiations with Thailand and Malaysia are progressing with the goal of completing all three agreements by 2027. It said the planned agreements, alongside existing arrangements with Singapore, Vietnam and Indonesia, would allow the EU to build a trade network covering most ASEAN countries, one of the world’s fastest-growing regions.

The report identified three main objectives behind the shift: diversifying trade relations away from major partners whose policies have become increasingly uncertain; finding new sources of external demand and growth opportunities amid sluggish European economic activity; and strengthening economic security by securing stable and reliable supplies of critical raw materials. Addressing the first objective, it said the new agreements reduce the EU’s exposure to its two largest trading partners as their trade policies become increasingly difficult to predict.

QNB said higher US tariffs have weighed on demand, with EU exports to the United States falling 30.4 percent year on year in the first quarter of 2026. The report attributed part of that decline to elevated export levels in early 2025, when shipments were accelerated in anticipation of announced US tariffs. At the same time, China is redirecting exports that lost access to the US market towards Europe, with its trade surplus with the EU increasing 24 percent during the first four months of 2026.

The report said additional trade agreements provide a hedge against these risks by diversifying sources of external demand and broadening the trading-partner base, reducing exposure to trade-policy shocks and the risks of concentrating trade in a single market.

On the second objective, the report said the new agreements provide additional sources of external demand while European economic growth remains sluggish and its industrial base faces pressure from continued weakness in manufacturing. QNB pointed to the trade agreement with India as evidence of the potential available to European exporters, saying it largely removes tariffs of up to 44 percent on machinery and 22 percent on chemicals, while duties on European cars will gradually fall from 110 percent to 10 percent within an annual quota of 250,000 vehicles.

The report said these sectors are precisely those in which European manufacturers, particularly German producers, are losing market share to Chinese competition.

More broadly, the agreement aims to double EU goods exports to India by 2032, saving around EUR 4 billion annually in customs duties. The report said these gains will accumulate gradually, with implementation of the India agreement expected to begin in January 2027 and tariffs reduced in stages over several years. By contrast, the EU agreement with Mercosur, provisionally applied from May 2026, offers earlier gains and is expected to increase annual EU exports by 39 percent by 2040.

Turning to the third objective, QNB said trade agreements have become a central tool for strengthening European economic security, particularly regarding critical raw materials. The report highlighted the EU’s continued heavy dependence on China, which supplies all of its heavy rare earth element needs and around 98 percent of its rare earth magnets, key inputs for the automotive, renewable energy and defence industries.

It warned that the vulnerability of these supplies is becoming more urgent as the suspension of China’s second wave of export restrictions approaches its expiry on November 10, 2026, noting that agreements with resource-rich partners allow the EU to diversify supply channels.

The report said partners already receiving preferential trade treatment provide one quarter of the EU’s critical raw material imports, with imports from Canada rising 62 percent in 2025. It added that the new agreement with Indonesia, for example, will help broaden these sources.

Source: QNA

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