During the last decades, material prosperity has increased in all regions of the world. One reason is the rules-based international division of labor, which gave rise to specialization gains. Since the global financial and economic crisis of 2008/09, however, this form of welfare-enhancing international cooperation has come under pressure. Russia’s attack on Ukraine represents a new level of disruption to the international division of labor. The question for the EU is how it should shape its future foreign trade relations and how it can minimize the disadvantages stemming from deglobalization.

Prosperity Gains through the International Division of Labor

The international division of labor can increase an economy’s material prosperity in various ways. When countries specialize in producing those goods and services in which they have production advantages, all participating countries experience specialization gains – and an increase in their gross domestic product (GDP). For the world as a whole, this means that a larger quantity of goods and services is available, for which consumers pay a lower price.

A greater international division of labor thus leads to an increase in GDP for all participating economies – a win-win situation. That does not mean, however, that everyone in society benefits as a result of globalization – there are certain groups and regions in every country whose income declines due to the world’s global interconnectivity

Diminished Prosperity for All Due to Protectionism and Conflicts

If the international division of labor and globalization increase prosperity for all participating economies, deglobalization means a decrease in prosperity: The win-win situation becomes a lose-lose situation.

This applies to all trade-restricting measures, above all punitive tariffs. The US, in particular, has had many negative experiences with this. To name one early example, the general trade embargo imposed under President Thomas Jefferson from December 1807 to March 1809 is estimated to have caused gross national income in the US to shrink by 5 percent.

Nevertheless, punitive tariffs are used again and again. Generally speaking, tariffs and other trade barriers have increased worldwide since the financial and economic crisis of 2008/09. Looking to the future, it is to be feared that this trend will continue.

What’s Next for the International Division of Labor?

There are many signs that the extent of the international division of labor will decline in the future. Developed economies will continue to try to protect their labor forces from competition from low-wage countries through tariffs. Negative experiences with supply chain disruptions during the Corona pandemic and the Ukraine war have reinforced the desire for reduced import dependency.

And the Ukraine war could also lead to a new bloc formation in the world trade order:

  • One bloc would consist of democratic, market-oriented countries from North and Latin America, Europe, Asia (especially Japan and South Korea) and Oceania.
  • The second bloc would consist of autocratic states, above all China and Russia and their key trading partners.

In addition, there could be a group of countries, such as India, that cannot be assigned to either of these two blocs but try to trade with both blocs.

The emergence of these blocs would make the international division of labor more difficult and thus advance the trend towards deglobalization.

Moreover, it is to be feared that more and more countries will use their foreign trade policy in the future to achieve geopolitical goals. To achieve their foreign policy goals, they will not shy away from sanctions, export bans and similar measures.

The resulting disruption in international economic relations confronts the EU with at least three major economic challenges:

  1. Economic prosperity and performance will be weakened if some of the specialization gains made possible by the international division of labor disappear.
  2. The EU must increase its economic performance as Europe faces major investment obligations if it is to help rebuild Ukraine in addition to realizing its own digital and ecological transformation.
  3. The demands on its economic capabilities will increase even further since, given potential rule-breaking by other nations, the EU will have to reduce its exposure to political blackmail. Thus, the EU must augment its economic power, which is the prerequisite for political power.

Five Options for the EU

The following five options show how the EU could compensate for lower levels of prosperity caused by deglobalization and can strengthen its negotiating position on the international level by increasing its economic power.

chart: EU deglobalization

#1 Concluding New Trade Agreements

One option consists of signing new trade agreements. Economic partnerships of this sort can offset, at least partially, the specialization gains that are lost due to the deglobalization trends outlined above. The positive impact on economic performance would also improve the EU’s global negotiating position.

Potential partners are neighboring nations in Europe and market-based democracies further afield. The second group includes the US in particular, with which the EU already has strong economic ties. Further efforts are underway to strengthen transatlantic cooperation, for example, the establishment of the Trade and Technology Council (TTC) announced in June 2021. The council serves as a forum allowing the US and EU to coordinate on key issues in the areas of trade, investment and technology and aims to deepen the transatlantic partnership.

#2 Strengthening Cohesion in the EU and the Single Market

In addition to establishing new international partnerships, strengthening cohesion within the EU will also be necessary. The UK’s decision to leave the EU was one step in the process of deglobalization, from which all the 28 countries involved continue to suffer.

Further exits must be prevented since they would eradicate the prosperity gains brought about by integration and weaken the EU’s international negotiating position.

For example, cohesion in the EU could be strengthened by achieving a better distribution of the economic benefits accruing from European integration. This applies to the distribution of integration-related gains both between EU member states and within individual states.

The goal should be to ensure that those groups of individuals and regions participate more in the gains from integration whose income opportunities have decreased due to the presence of more competitive players from the EU.

Efforts to promote economic structural change in less developed regions of Europe are also a useful instrument. The aim here is to promote productivity to create competitive jobs.

#3 Strengthening the EU’s Strategic Independence

One possibility for strategically strengthening the EU’s independence is reducing its need for imports abroad. Various measures are conceivable here: diversifying the countries supplying products, intermediate goods and raw materials; creating additional production capacities in the EU; and increasing the productivity of energy and natural resources in order to import less.

While these and other steps would lower the EU’s dependence on supplies from abroad, they would come at a price: The goods produced in the EU are more expensive than the intermediate goods currently sourced from Asia and low-wage countries in other regions.

To the extent that Europe does not manage to lower these costs through technological advances, higher costs are the price the EU will pay for its reduced dependence on imports.

#4 Advancing the Ecological Transformation through New International Partnerships

As a resource-poor region, Europe is particularly dependent on imports of fossil fuels. Expanding the use of renewable energies would be an effective way to reduce this dependence. Such an expansion would also increase Europe’s competitiveness: Whoever masters the ecological transformation today will be a technology leader in the area of environmental issues, a key prerequisite for being competitive internationally in the future.

Europe should also avail itself of products and services from abroad to keep the ecological transformation costs as low as possible. One possibility would be importing renewable energies and climate-neutral hydrogen from countries rich in solar, wind and hydropower, e.g., countries in North Africa.

This also means that Europe would have to help finance the necessary infrastructure abroad – either by investing itself or by providing loans and other financial means through national development aid programs.

#5 Strengthening a Sense of Community among the European Public

One measure for strengthening Europe’s negotiating position is to impose sanctions on countries that break international rules. Even if economic sanctions do not lead to the desired policy shift in the relevant country, they still send a strong political signal. They show that the countries imposing sanctions are willing to bear the costs of inducing the sanctioned country to change its behavior.

Past experience has shown that sanctions are particularly effective if the countries imposing them demonstrate unwavering resolve. Since sanctions aimed at an uncooperative country outside of Europe also have negative consequences for the EU itself, there is considerable danger that individual EU governments will not adhere to the joint plan. They could thus shield the public in their own country from negative consequences, thereby improving their chances of being reelected.

If, however, all citizens within feel they belong to the EU, it is more likely they will accept these negative economic consequences. Approval of European integration is stable across the EU but could be increased.

One crucial way of strengthening this sense of community is to emphasize the benefits people have as EU citizens. This not only refers to economic advantages in the form of greater material prosperity, which is the prerequisite for high levels of immaterial well-being (e.g., health, life expectancy, educational attainment).

It also refers to peace, democracy and stability, issues that people often only begin to reflect on once more when political instability – including military conflict – occurs in the EU’s neighboring regions.

This text is an abridged version from the Bertelsmann Stiftung’s background paper on the “Salzburg Trilogue 2022”. More information on the Salzburg Trilogue can be found here: Trilogue Salzburg How to Heal a Torn World? Respect, Trust, Reliability and Mutual Understanding.

About the author

Thieß Petersen is Senior Advisor at the Bertelsmann Stiftung, specializing in macro-economic studies and economics. His focus lies on the causes and effects of financial and economic crises as well as the chances and risks of globalization. Most recently, he worked on the effects of carbon pricing and the benefits of a potential global climate club.

Read more on how the EU can increase prosperity through cooperation:

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Green, Smart and Fair: Rethinking European Cohesion in an Era of Structural Change