Over the past two years, the external environment of the EU has deteriorated markedly, as its two largest trading partners have become less reliable at the same time, QNB stated in its latest economic commentary.
In the US, the new EU-US Framework on Reciprocal, Fair, and Balanced Trade is a major bilateral trade framework between the US and the EU and entered into force on July 1, 2026.
The deal sets a 15% tariff ceiling on most EU exports, a structurally higher barrier for Europe’s largest export market. China, meanwhile, has shifted from a key source of demand to an intensifying competitor: the EU’s goods trade deficit with China reached €359.8bn in 2025, as EU exports fell by 6.5% while imports rose by 6.4%, QNB stated.
In response, Brussels has embarked on the most ambitious expansion of its trade network in decades. In 2025 and the first half of 2026, the EU concluded trade agreements with Mercosur, Mexico, Indonesia, India, and Australia, which together will increase the share of the EU’s external trade covered by free trade agreements (the share of the EU’s trade with non-EU countries that takes place with partners covered by a free trade agreement) to 53.3%, up from 46.3% at the end of 2025.
The pivot is now extending deeper into Southeast Asia, according to QNB. The EU and the Philippines reached substantial agreement on a free trade deal in September, liberalising more than 94% of tariff lines, while talks with Thailand and Malaysia are advancing, with all three agreements collectively targeted for completion by 2027. Together with existing agreements with Singapore, Vietnam, and Indonesia, this would give the EU a near region-wide network across Asean, one of the world’s fastest-growing regions, QNB stated.
“In our view, the EU’s trade pivot is a strategic response to a lasting shift in the global trading environment, and its benefits will build gradually as the new agreements enter into force,” stated QNB, which identified three key objectives behind Europe’s trade pivot: diversification away from its main trading partners, whose policies have become increasingly unpredictable, new sources of external demand, and growth opportunities for a subdued European economy, as well as economic security through more reliable access to critical raw materials.
QNB stated, “First, the new agreements reduce the EU’s exposure to its two largest trading partners, which have increasingly become unpredictable. Higher US tariffs have weighed on demand as EU exports to the US fell by 30.4% year-on-year in the first quarter of 2026. This decline is, however, amplified by high export levels in early 2025, due to potential front-loading ahead of the announced US tariffs.
“At the same time, China is redirecting exports lost in the US market towards Europe: Its trade surplus with the EU grew by 24% in the first four months of 2026. Therefore, concluding a broader network of new trade agreements can act as an insurance mechanism by diversifying external demand across more partners and reducing vulnerability to policy shocks or concentration risks in any single market.”
According to QNB, the evidence suggests this is already working. In 2025, trade covered by free trade agreements grew by 3.1%, more than double the 1.4% growth with other third countries, with exports to free trade partners rising by €250bn. To give a comparison: this more than offsets the €54.5bn loss of exports to Russia.
“Second, the new agreements open up sources of external demand at a time when growth in Europe remains subdued and its industrial core is under pressure as the manufacturing sector is still underperforming. The India agreement shows the potential.
Tariffs of up to 44% on machinery and 22% on chemicals will be largely eliminated, while duties on European cars will gradually fall from 110% to 10% within an annual quota of 250,000 units.
“These are precisely the sectors where European, and particularly German, manufacturers are losing ground to Chinese competition. Overall, the agreement aims to double EU goods exports to India by 2032, saving around EUR 4bn a year in duties. However, the gains will build gradually, as implementation of the India agreement is expected from January 2027 and tariff cuts are phased in over several years,” QNB stated.
QNB stated that the Mercosur agreement, provisionally applied since May 2026, shows that benefits can start earlier: It immediately removed or drastically reduced tariffs on key EU exports such as cars and pharmaceuticals, and is expected to boost EU annual exports to the region by 39% by 2040. Early signs suggest trade flows respond quickly, as Argentina’s agro-industrial exports to the EU rose by 21% in the first four months of application, compared with the average of the previous three years, noted QNB.
“Third, trade agreements have become a central instrument of Europe’s economic security, particularly for critical raw materials. The EU remains highly exposed to China, from which it sources all of its heavy rare earths and 98% of its rare-earth magnets, inputs that are essential for the automotive, renewable energy and defence industries.
“This vulnerability is pressing, as China’s suspension of its second wave of export controls expires on 10 November 2026. Agreements with resource-rich partners offer alternative channels of supply. Preferential partners already supply a quarter of the EU’s critical raw material imports, and imports from Canada rose by 62% in 2025,” stated QNB.
The new agreement with Indonesia, for example, will broaden these sources further, strengthening access to its vast reserves of nickel, cobalt, copper, and tin. Diversification will not remove dependence on China, which controls 90% of global rare earth refining, but it reduces Europe’s exposure and concentration risks, QNB stated.
“All in all, Europe’s trade pivot is a strategic response to a more fragmented and less predictable global economy. The new agreements diversify external demand away from its two largest trading partners, open growth opportunities in dynamic markets such as India, Mercosur and ASEAN, and secure more reliable access to critical raw materials. While the gains will build gradually, they should strengthen the resilience of the European economy over the medium term,” QNB added.
