Building partnerships with countries in East and Southeast Asia is a key step to enhancing EU’s supply chain resilience and addressing risky overreliance on China.
Key takeaways:
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Forming new green technology partnerships, particularly with Vietnam and Malaysia, will support the EU’s climate targets by enabling joint initiatives in renewable energy, electric vehicles, and sustainable production methods.
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Securing bilateral trade agreements with Asian countries such as Indonesia is crucial to secure scarce natural resources critical for EU’s net-zero transition while digital deals with Singapore and South Korea should be leveraged to boost innovation in the tech sector and streamline cross-border e-commerce.
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To build equitable partnerships, the EU should work with its partners to address regulatory challenges and offer technical assistance and capacity building.
With the US-China trade conflict that is likely to intensify under the new President Donald Trump, the rapid adoption of AI technologies that lead to increased demand critical electronics and semiconductor materials, and the acceleration of green technologies to meet net zero goals and decarbonisation, all major trading blocks, including the EU are reassessing strategic interdependence.
Coupled with internal stress caused by de-population and a shrinking labor force these challenges have intensified demands for an accelerated transition into a new growth model. To safeguard its future, the EU must diversify its supply chains and forge new economic partnerships that enhance its capabilities in strategic sectors, particularly in green technologies and manufacturing. Getting this right is critical for the EU to achieve long-term sustainability goals and maintain a competitive edge in the global economy.
Visualizing the EU’s “China dependence”
In recent years, the EU has benefited from a strong economic relationship with China, with the latter accounting for one-fifth of the EU’s external imports, whereas the rest of Asia (East and Southeast Asia) combined only made up 11.3% of the imports.
Source: Authors based on data extracted from CEPII – BACI.
Note: Hong Kong and Taiwan were included under Others, as we compare imports from China with East and Southeast Asia countries. Other ASEAN countries include Brunei, Cambodia and Laos.
Note: Other electronics include valves, light fixtures, electrical control boards, other electrical machinery, video displays, printed circuit boards, and telephones. Categorisation is based on the HS4 classification system.
The close links, while beneficial, have also exposed the EU to significant dependencies. Our disaggregated analysis of the EU’s current import data highlights the need for diversification. China dominates the EU’s imports of key technologies and their inputs, with $215.39 billion worth of goods sourced from China in 2022. China has a dominant role in providing essential goods like broadcasting equipment, cars, computers, and electric batteries. Overall, China accounts for over 50% of EU imports in 11 out of 17 categories (other electronics include 7 other subcategories) of critical goods as seen above. While there is no definitive threshold for high dependency, this level of reliance on a single supplier exposes the EU to significant geopolitical and geoeconomic risks. In contrast, other Asian countries have a much smaller role in terms of imports, with the three most significant being South Korea, Vietnam and Japan.
The relatively smaller contributions from these countries highlight the potential for them to take on a larger role in the EU’s supply chains. Scaling their current import share, however, depends on the EU’s strategic investments and partnership choices.
Green technology and manufacturing partnerships
The broader Asian region offers a dynamic and rapidly growing market that can support the EU’s supply chain resilience. Japan, for instance, has a well-established semiconductor manufacturing sector and advanced capabilities in green technologies. The Southeast Asian region, represented by countries like Malaysia, Vietnam, and Indonesia, is also experiencing substantial growth in foreign direct investment (FDI), particularly in the electrical processing, semiconductor, and green energy sectors, and is establishing itself as a major manufacturing hub. As for Indonesia, its abundant raw materials like nickel and cobalt are a key input for green technologies, such as electric vehicle batteries and renewable energy systems. This makes Indonesia a crucial partner for the EU in securing the necessary resources for a green transition.
Cooperation between the EU, Asian nations, and even the United States through initiatives like the EU and US CHIP Acts can empower Asian countries to become key players in the global semiconductor supply chain.
European companies have already begun to boost their operations in countries like Singapore, Malaysia and Vietnam. For example, German healthcare company B. Braun and Austrian semiconductor manufacturer Ams-Osram have both set up manufacturing bases in Southeast Asia, capitalizing on the growing industrial capabilities of these countries.
By expanding these efforts, the EU can further integrate its businesses with Asia’s growing green and semiconductor sectors, boosting supply chain resilience while fostering economic growth. This strategy could take shape in the form of joint ventures and partnerships in sectors such as electric vehicles, solar panels, and microchips. Greater integration between European and Asian markets in green technology and semiconductor manufacturing will not only accelerate the transition to net-zero emissions but also create economic opportunities for both regions.
However, to ensure successful integration, it is essential that Asian countries are prepared to meet EU trading standards, particularly with respect to environmental and labor regulations. The EU’s Emissions Trading System (ETS) and other regulatory frameworks set high standards for trading partners, and meeting them will require significant investment in capacity building within these countries. The EU should support these efforts by providing technical assistance, funding for sustainable development projects, and initiatives that promote regulatory harmonization.
The role of trade policy in enhancing EU-Asia strategic partnerships
The second pillar of the EU’s re-engagement strategy should be enhancing trade policies and building stronger bilateral and multilateral agreements with Asian markets to promote strategic cooperation. The upcoming trade agreements between the EU and Asian states, such as the EU-Indonesia Free Trade Agreement, and the Singapore-EU Digital Trade Agreement, are promising steps in this direction. By negotiating favorable trade terms with key Asian economies, the EU can facilitate diversification and build more resilient supply chains.
To maximize the potential of these trade agreements, the EU should focus on leveraging each country’s strengths and aligning them with EU strategic interests.
Singapore, being a leader in digital infrastructure and innovation, can serve as a key partner for the EU in enhancing digital trade standards and practices. The Singapore-EU Digital Trade Agreement could help in establishing cross-border data flows, promoting e-commerce, and ensuring high standards of cybersecurity and data protection.
Both Malaysia and Vietnam are emerging hubs for electronics and semiconductor manufacturing, data centers, and food production. The EU should prioritize technology transfer, capacity building, infrastructure investments, and sustainable agricultural farming sector in these countries to expand their roles in cutting edge technology, and ensure the region’s food security.
Indonesia has abundant reserves of nickel and other rare earth elements, which are crucial for green technologies such as electric vehicle batteries and renewable energy infrastructure. The country also has a large workforce that makes it competitive to supply the EU with fast-moving consumer goods (FMCG). The EU-Indonesia Free Trade Agreement should focus on securing access to these resources through sustainable mining practices, supporting Indonesia in upgrading its mining and refining capabilities, and enhancing supply chain connectivity to ease the exports of consumer products to the EU.
Japan, a global manufacturing powerhouse, possesses a highly diversified industrial sector, with its automotive industry, substantial exports of integrated circuits, consumer electronics, and a strong commitment to green technologies. Japan can provide the EU with a reliable and innovative source of critical components and finished products. Thus, enhancing trade connectivity with Japan opens up greater opportunities for knowledge transfer and strategic partnership for technological advancement.
Strengthening economic ties for a sustainable future
The EU’s pursuit of strategic autonomy is important to secure its future in an increasingly complex global landscape. By expanding partnerships with emerging Asian markets, enhancing trade policies, and investing in green and semiconductor manufacturing, the EU can build a more resilient economic framework. Deepening economic ties with countries in the region will reduce reliance on single-source imports and accelerate the green transition. Navigating the complexities of global trade requires a focus on sustainable cooperation. While the path to strategic autonomy vis-à-vis the EU’s economic relationship with Asia is not without challenges, it presents numerous opportunities for collaboration and growth that are pivotal for the EU to boost economic resilience.
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