A shifting geo-economic reality
Europe finds itself at a historic turning point. For decades, the EU has championed open markets, convinced that free trade and rules-based competition are the best foundations for prosperity and innovation. Maintaining openness is essential for small, export-oriented economies such as Luxembourg, and is one of FEDIL’s key pillars, ensuring access to global markets and fostering innovation. This vision has shaped European economic policy and contributed to a remarkable period of industrial development, export strength, and global integration. Today, while this commitment to openness remains essential – and while the Single Market still holds untapped potential, as highlighted by the Letta and Draghi reports – the EU must confront a transformed global landscape that requires targeted adjustments and a more strategic use of its policy tools.
The world around Europe has changed dramatically. The United States has shifted toward industrial patriotism, combining significant industrial subsidies with rising protectionism. China continues to deploy a state-controlled economic model, producing overcapacities that spill over into global markets. Geopolitical tensions and the weaponization of supply chains have created a new era in which trade policy cannot be separated from security, climate objectives or technological leadership.
Europe is now facing a wave of imports, particularly from China, arriving at prices below European production costs. Steel, aluminum, solar panels, batteries, and even electric vehicles are entering in volumes that European producers struggle to match. At the same time, production costs in Europe have risen sharply due to higher energy prices, the EU Emissions Trading System, and substantial investments required for industrial decarbonization. The result is a profound sense of vulnerability and a fundamental question: can Europe defend its industries while remaining true to its identity as an open, rules-based economy? And will protective tools make Europe stronger – or simply buy time while deeper competitiveness challenges remain unresolved?
The new EU defensive toolbox: tariff-rate quotas, EU preference and policies to strengthen economic security
In response to mounting competitive pressures, the European Commission has prepared a series of defensive interventions. Tariff-rate quotas, for example, shield the EU steel sector from global overcapacity by allowing duty-free imports up to a set limit and applying higher tariffs to imports above that quota. This marks a clear departure from past hesitancy: Europe is now willing to act when industries face existential threats.
Alongside these industrial protection tools, the Commission is testing the concept of EU preference, which remains under consultation. The idea is to explore whether, in specific and well-defined circumstances, public procurement or other public-support instruments could temporarily favor European production to address clearly identified market failures or strategic vulnerabilities. Such interventions would be strictly limited in scope and duration and subject to stakeholder consultation to ensure proportionality and minimize potential trade frictions.
The toolbox also includes policies aimed specifically at economic security, such as screening foreign investments, coordinating export controls on dual-use goods, assessing risks of EU investments abroad, and securing reliable access to critical raw materials like lithium, cobalt and rare earths – essential inputs for advanced technologies, renewable energy and defense.
The risks of protectionist tools
While defensive tools provide options to counter global pressures, they must be used with great care. Tariff-rate quotas, such as those applied to steel, give limited protection by allowing some imports at low duties while taxing excess quantities. However, they raise costs for downstream industries, reduce incentives to innovate, and can provoke retaliation from trading partners. While less blunt than full tariffs, TRQs remain a temporary, partial fix that does not address Europe’s deeper competitiveness challenges.
A broad “Buy European” agenda could trigger retaliation from trading partners such as Switzerland, the UK, or Japan, and potentially violate existing trade agreements. For an export-oriented economy like Europe, alienating allies could reduce market access and undermine long-standing commercial relationships. Additional challenges include defining what counts as “European” production, avoiding substitution rather than true resilience, maintaining legal certainty, and managing the complex monitoring such a scheme would require – complexity Europe has deliberately sought to avoid in other regulatory areas, such as the CSDDD. Attempting to localize entire production chains is unrealistic in high-tech sectors, where global cooperation and rapid innovation cycles are essential. Crucially, without clear expiry dates or sunset clauses, EU preference risks evolving into a structural protectionist regime, ultimately undermining Europe’s long-term competitiveness.
A coherent European trade strategy
A successful EU trade strategy begins by strengthening the internal market and using defensive tools wisely.
Completing the Single Market, particularly in services, finance, and telecom, is essential. The International Monetary Fund estimates that remaining barriers are equivalent to tariffs of roughly 45 % for goods and 110 % for services, underlining the cost of fragmentation. Simplifying administrative procedures, streamlining regulations and prioritizing strategic sectors such as green technologies, digital infrastructure, and critical industries to enhance competitiveness and innovation.
Defensive tools, including tariffs, investment screening, and export controls, should be precise, targeted and proportionate. Blanket protectionism risks eroding competitiveness and credibility. Properly designed, these tools can safeguard strategic interests without isolating Europe from global trade or provoking unnecessary conflicts. However, they can provide only temporary relief. Without parallel reforms, EU preference or other protectionist tools risk substituting for genuine competitiveness improvements, ultimately weakening Europe rather than strengthening it.
Europe faces structural challenges – high energy costs, regulatory complexity, fragmented research and venture capital markets, slow technology uptake, and demographic pressures – that cannot be solved by tariffs or procurement rules alone. Europe must address these foundational issues to remain competitive in sectors with fast-moving innovation cycles. A confident, open, and competitive Europe is within reach, but it requires courage, clarity of purpose, and reforms that go far beyond defensive tools. Transformation must be the guiding principle.
Some countries are beginning to develop comprehensive diagnostic tools to evaluate economic and industrial resilience. For example, the United States has introduced a supply-chain assessment tool to identify vulnerabilities and inform policy decisions. Europe has lacked a comparable system, relying on incomplete, sector-specific snapshots, but the Commission’s newly announced Economic Security Information Hub is intended to fill that gap. Better diagnostics would allow for targeted, evidence-based strategies rather than reactive, broad-brush measures.
Conclusion: balancing openness and strategic measures
Preserving an open and internationally integrated economic stance remains a core value for FEDIL, even as selective measures are currently needed. While the use of certain interventions from the protective toolbox slightly shifts Europe’s economic identity, it does not fundamentally alter it. In practice, Europe need not choose between naive openness and indiscriminate protectionism. It can be open where possible, protective where necessary, and always focused on strengthening competitiveness at home.
Protection can offer temporary relief when necessary, but its long-term effectiveness depends on how Europe uses that space. Indeed, Europe cannot protect itself into becoming more competitive: defensive tools may slow the impact of global distortions, but they cannot replace the structural reforms.
The ultimate goal is to bolster fundamentals for both Luxembourg and Europe, including affordable clean energy, streamlined regulation, innovation ecosystems, and the completion of the Single Market. Strategic partnerships with like-minded countries, rather than isolation, are key. Europe should not aim to shield itself indefinitely from competition, but to ensure it can compete successfully on its own terms.