A new EU draft law (to be presented December 10, 2025) will force companies in strategic sectors (batteries, chips, raw materials, etc.) to diversify supply chains away from risky non-EU suppliers and prioritize European or allied sources.Officials estimate this will cost EU companies more than €10 billion per year because European-made components are significantly more expensive than global (especially Asian) alternatives. what is your most up-to-date and in-depth assessment?
Economist-100, Chief Economist:
Executive Summary
The European Union’s draft law mandating supply chain diversification in strategic sectors marks a critical pivot from efficiency-driven globalization toward security-oriented economic nationalism. The policy aims to reduce dependency on “risky” non-EU suppliers—widely interpreted as a containment move against China and other geopolitical adversaries. While the projected €10+ billion annual cost is economically significant, the move reflects a structural shift in EU industrial policy toward resilience, autonomy, and strategic alignment with allied economies. This recalibration is not without consequences: competitiveness, innovation, and price inflation are all at stake, and the winners and losers in this realignment will be highly asymmetric.
Comparative & Historical Context
The EU’s proposed diversification law follows a growing trend among advanced economies to “de-risk” rather than “decouple” from China—a term popularized by the European Commission itself in 2023. This move mirrors past U.S. actions such as the CHIPS and Science Act and Inflation Reduction Act, which also sought to reshape industrial supply chains for national security and strategic autonomy.
However, Europe is entering this transition with greater structural vulnerabilities:
- The EU lacks tech manufacturing depth (especially in semiconductors and battery tech) compared to the U.S. or East Asia.
- Unlike the U.S., it cannot easily weaponize reserve currency status to subsidize large-scale reshoring.
- Past EU industrial policies (e.g., Airbus, Galileo, REPowerEU) show a mixed record in marrying strategic autonomy with cost competitiveness.
Thus, this policy signals a shift from global value chain integration (1990s–2020s) to a fortress-like industrial framework reminiscent of Cold War-era bloc economies—albeit with green and digital objectives layered in.
Strategic & Relative Impact
Winners
- European component and raw material producers stand to benefit from protected domestic demand, with high-margin opportunities as strategic sectors (batteries, semiconductors, rare earths) become captive markets.
- Allied economies like the U.S., Canada, Japan, and Australia—especially those with free trade agreements or shared geopolitical alignment—may gain privileged access to EU procurement contracts and supply chain slots.
- EU policymakers gain greater leverage to shape industrial trajectories, enforce environmental and labor standards, and exert geopolitical autonomy in relation to the U.S.–China rivalry.
Losers
- EU manufacturers and exporters, especially SMEs, will face higher input costs, tighter margins, and greater complexity in procurement—jeopardizing competitiveness in global markets.
- Consumers, already under inflationary pressure, may absorb costs via price increases, particularly in tech and EV sectors.
- Developing country suppliers, especially in Asia and Africa, may be collateral damage if their “non-aligned” status renders them “risky” under EU definitions.
This creates a strategic dilemma: economic nationalism benefits internal resilience at the cost of external competitiveness. The trade-off is starkest in sectors like EV batteries, where Chinese firms control over 75% of global capacity.
Unintended Consequences & Risks
- Cost Inflation vs. Green Transition
The law may undermine the EU’s Green Deal goals. Strategic sectors like EVs and renewables rely heavily on imported components (e.g., lithium from Chile/China, rare earths from Africa/Asia). Requiring EU-based sourcing could delay or derail the 2030 climate targets. - False Equivalence in Risk Assessment
The labeling of “risky” suppliers risks geopolitical overreach, where economic partners are excluded not on empirical supply chain reliability but on political grounds. This blurs the line between strategic autonomy and protectionism. - Retaliatory Responses
China and others may impose countermeasures—tariffs, export controls (as seen with gallium, germanium, and graphite), or investment restrictions—adding volatility to already strained global supply chains. - Fragmentation of Global Trade
The policy accelerates the balkanization of global trade, weakening WTO norms and embedding security concerns into economic decision-making. This institutional shift could diminish multilateral cooperation in global crises.
Final Insight & Steering Caution
This draft law is not merely an industrial policy—it is a geoeconomic signal. The EU is choosing controlled strategic vulnerability over market-driven exposure. While this may enhance long-term resilience and geopolitical leverage, it risks entrenching inefficiencies and triggering retaliatory dynamics.
The narrative of “resilience” may obscure a deeper truth: the EU is playing catch-up in a world where industrial policy is power projection. But in trying to reverse decades of globalization, Europe must avoid the trap of strategic isolationism under the banner of security.
Economist-100, Chief Economist
Three Corporate