As the EU rolls out the Clean Industrial Deal, it must consider how its domestic policies may impact its trade relations and global standing. Industrial policy decisions taken in Brussels will have ripple effects, including on partners in the Global South. Addressing potential negative spillovers is not just a question of climate justice and good diplomacy – it is a strategic imperative.
Industrial policy is back at the heart of EU policymaking. The Clean Industrial Deal, the European Commission’s strategy aimed at boosting the bloc’s industrial base, sets out an action plan to strengthen clean manufacturing in Europe, close the bloc’s innovation gap and increase its competitiveness – all while decarbonising energy-intensive industries.
The scale of the challenge makes one thing clear – an inward-looking industrial strategy will fall short. This is where trade becomes essential: to secure key inputs, expand markets for clean goods, lower costs through integration in global supply chains and reduce dependencies.
Yet as the EU rolls out this new agenda, it must consider how its domestic policies may impact its trade relations and global standing. Industrial policy decisions taken in Brussels will have ripple effects, including on partners in the Global South. Addressing potential negative spillovers is not just a question of climate justice and good diplomacy – it is a strategic imperative. Failure to do so risks alienating key trading partners precisely when the geopolitical context calls for stronger alliances.
Trade: a central piece of the EU’s industrial policy puzzle
The Clean Industrial Deal embeds trade as a central piece of its strategy in three main ways.
First, it calls for accelerating Free Trade Agreement (FTA) negotiations, while introducing Clean Trade and Investment Partnerships (CTIPs), a new and more flexible model for engaging with partners in the Global South. Second, the Commission seeks to make a faster, more efficient use of trade defence instruments by shortening investigation timelines, initiating ex officio investigations and publishing guidelines on the Foreign Subsidies Regulation implementation. Third, it proposes a simplification and review of the Carbon Border Adjustment Mechanism (CBAM).
With this strategy, the Commission is attempting a balancing act: combining a more assertive posture to support EU industries and protect them from unfair practices, with the openness required to secure partnerships and access international markets. Striking this equilibrium is particularly important as the EU’s role as a regulatory power is coming under scrutiny. Trading partners have long raised concerns over what they view as a new wave of European regulatory imperialism and green protectionism, mainly linked to Green Deal policies, like CBAM and the Regulation on Deforestation-free Products (EUDR).
Anticipating the spillovers of the EU’s industrial turn
In the political guidelines for the 2024–2029 cycle, the Commission acknowledged the need to better listen and respond to partners’ concerns. Yet this commitment must be weighed against a foreign policy that is more transactional and strategically aligned with the EU’s economic interests.
Interestingly, a recent study has found that partners in the Global South generally welcome this greater transparency around the real drivers of the EU’s international cooperation, seeing it as ‘less patronizing’. What is often criticized is rather the inconsistency and perceived double standards in how the EU pursues its interests. If not adequately managed, the EU’s industrial strategy risks contributing to these perceptions.
Let’s take the simplification agenda as an example. Following the Letta and Draghi reports and mounting pressure from EU businesses and Member States, the simplification push has largely been framed as a way to enhance EU competitiveness. Yet for years, trading partners have voiced similar concerns about the administrative burden and compliance costs linked to the EU’s green rules, which risk shutting the most vulnerable out of the EU market. If simplification efforts end up easing burdens primarily for EU stakeholders while ignoring longstanding concerns from partners, it will fuel perceptions that the EU is willing to prioritize its competitiveness, even at its partners’ expense.
The CBAM simplification illustrates the balancing act the EU must strike. The Commission’s simplification proposal will, among other things, lead to an exemption of small and medium enterprises (SMEs) and small importers. In doing so, 99% of emissions will still be covered by CBAM, although 90% of importers will be exempted from its scope. Although this will alleviate the burden for EU importers, it does not fully tackle the difficulties faced by third-country producers. To its credit, the Commission has stepped up technical assistance and regulatory cooperation, such as through the Task Force for International Carbon Pricing and Markets Diplomacy, to support the design of carbon pricing policies. However, such efforts mostly benefit countries already willing and able to engage with carbon pricing, and do not fundamentally resolve bigger issues linked to a lack of capacity.
Meanwhile, CBAM revenues are expected to flow into the EU budget, with no concrete financial commitments yet for low-income countries. This is a missed opportunity and risks reinforcing perceptions of CBAM as a protectionist tool. Redirecting CBAM revenues – estimated at €1.5 billion annually from 2028 – toward decarbonization efforts in low-income countries (even if only partially) would go a long way to addressing climate justice concerns. Additionally, the recent EU–UK commitment to link their emissions trading systems could open the door for collaboration on carbon pricing diplomacy, or even a joint approach to CBAM revenue allocation.
Rebuilding trust through meaningful partnerships?
The Commission has reinvigorated the EU’s bilateral trade. Progress has been swift and includes unlocking political agreements on longstanding deals, such as those with Mercosur and Mexico (pending signature and ratification), and accelerating negotiations with India, with a high-level political commitment to conclude an FTA by the end of 2025. In Southeast Asia, negotiations have progressed with Indonesia, Thailand and the Philippines, while trade talks have been relaunched with Malaysia. The EU has also opened negotiations with other emerging powers like the United Arab Emirates and launched the first-ever CTIP with South Africa, currently under discussion.
Delivering on this ambitious bilateral agenda won’t be without challenges.
Trade deals today focus as much on accessing new export markets as on securing access to critical inputs. To this end, the EU has included energy and raw materials in recent FTAs to curb trade barriers and guarantee unrestricted access for its businesses. This has become a contentious issue in many negotiations, as the EU’s approach often clashes with the priorities of resource-rich trading partners, who are adopting a series of measures aimed at retaining greater value from their resources locally.
Indonesia is a paradigmatic example. Its raw materials restrictions, including a nickel ore export ban and domestic processing requirements, have made it the world’s top nickel producer and a key player in global battery supply chains. Despite losing a World Trade Organisation (WTO) case brought by the EU, Indonesia hasn’t lifted such measures, and likely won’t soon. Tensions have arisen in trade talks with other partners like India, where the raw materials chapter negotiations were paused for the time being over fundamental disagreements.
There are signs of a more flexible approach. For example, the EU–Chile FTA includes a carve-out on dual pricing policies, allowing Chile to engage in some local value addition. But to take deals with countries like Indonesia or India across the finish line, the EU may need to allow more policy space for partners’ resource policies. It will be interesting to see how far the EU is willing to rethink its red lines without undermining its strategic interests.
Given the geopolitical pressure to score quick wins, there is a real risk that sustainability commitments in EU FTAs may be weakened. While expecting all trade deals to match the full range of sustainability commitments in the landmark FTA with New Zealand is unrealistic, sustainability must remain central to EU FTAs. This calls for a new approach – one that is tailored and country specific, tackling key issues linked to the industrial push, like responsible raw materials sourcing and mining standards. Such commitment should be supported by financial packages that help partners meet obligations.
Tensions over EU Green Deal measures are surfacing in trade talks. For example, India is seeking a CBAM exemption or compensation for CBAM-related losses, while Indonesia and Malaysia seek flexibilities on the EUDR. Although ongoing efforts to use FTAs as vehicles for regulatory cooperation are welcome, the EU must resist the temptation to grant ad hoc exemptions from its regulations to individual countries to speed up deals.
The ongoing CTIP negotiations with South Africa are another development to watch closely.
As the first partnership of its kind, it will serve as the testing ground for what this new model can achieve and how it differs from other existing tools, like memoranda of understanding on raw materials, which have largely underdelivered. For the CTIPs to be a game changer in the EU’s cooperation on clean value chains, they combine support for local value addition and industrial development in partner countries, with concrete sustainability commitments and built-in monitoring mechanisms for public scrutiny.
Beyond rhetoric, the EU must now prove its ability to conclude meaningful partnerships that deliver mutual benefits – a prerequisite for the success of its industrial strategy. The CTIP with South Africa will test whether the EU can rise to this challenge.
The views and opinions in this article do not necessarily reflect those of the Heinrich-Böll-Stiftung European Union.
