Europe spans the whole geographical area bordered by the Mediterranean ocean to the south, the Arctic ocean to the north and the Atlantic ocean to the west. This geographical, as opposed to political or economic, perspective on the region demonstrates both the complexity and the diversity of European trade. Commodity-rich countries such as Russia and Norway, emerging economies including Poland, Hungary and Romania, and politically less stable countries like Ukraine and Georgia sit alongside large and powerful G20 economies such as Germany, France, Italy, Turkey and the UK. Small and developing nations are bound to large and developed nations in a region where trade fuels economic growth in each of its countries.

This creates both opportunities and challenges for trade in the region. At one level, Europe by its geography and resources could be as self-sufficient, say, as the US or China. At another level, because of its history and the global reach of many of its nation states, it is the hub for the global trading system. Europe as a geographical region accounts for more than 50% of world trade and its economies are highly open, with trade (exports plus imports) forming a substantial proportion of GDP (Figure 1).

Figure 1 shows how important trade is for the region. Even in Russia, which is the least “open” economy, the trade-to-GDP ratio is 49 – that is, trade value is 49% of GDP. This is higher, for example, than either China or the US, where the equivalent values are 22. The UK has a trade openness ratio of 57 and is therefore the third least open in Europe. Germany’s ratio is 86 – again below the median value for countries in the region of 103, but, for a large economy with a strong domestic base, a very high ratio indeed and the highest in the G20.


The fact that there are so many countries that have trade openness ratios above 100 illustrates how inter-dependent many of Europe’s nations are on each other. Where the ratio is above 100 it means that the international component of a country’s GDP is greater than its domestic component – this is the case for over half of Europe’s nations, including Ireland, Belgium, the Netherlands and Spain.


The economic and political context

Despite the importance of trade for Europe, its trade policies are currently at the centre of international attention:

  1. Brexit: The process of the UK’s exit from the EU has started, but the debate on trade will not begin until after the “divorce settlement” has been agreed. However, it is likely that EU and non-EU manufacturing and service-based businesses will already be scenario planning for greater trade complexity after the terms of exit are agreed. This may impact both UK and EU supply chains and therefore supply chain finance as location becomes a key component of strategic thinking.
  2. US policy: US President Donald Trump has signalled his frustration at the size of the deficit that the US runs with the EU generally, and with Germany in particular. In 2016 this deficit was US$76.5bn, which the US sees as largely Germany benefiting from the weak euro value against the US dollar. While his language, and the language of the administration as a whole, has toned down since May 2017, there is still nervousness that the US’ more protectionist stance may impact both the EU28 and Europe more generally.
  3. Elections: The future of the EU and its economic and social impact on national economies has been at the heart of election campaigns in the Netherlands, France and Germany. Some of this has been triggered by migration, some by Brexit and some by the dominant power of Germany within the EU, which still creates economic imbalances internally. While there is emerging sentiment, particularly in the wake of the French elections, that the strength of the German-French axis in Europe may be returning, there is a lot to do to convince the French public that “more Europe” is the answer to their national economic challenges, which require substantial economic reform.
  4. Deficit nations, sovereign debt and the ECB: The issue of economic imbalances has not disappeared, and Greek debt and persistently low interest rates, alongside quantitative easing (QE), continue to create a perception of artificial recovery in Europe as growth appears to be improving. However, the International Monetary Fund, the EU and Germany are still at loggerheads about the stringency of requirements against the next funding package for Greece, while unstable Italian banks threaten Italy’s financial stability as well.
  5. Non-EU Europe: The EU also faces a range of geopolitical challenges when it comes to its Central and Eastern European neighbours. Turkey’s relationship with the EU is, at best, strained over immigration with Germany, and the EU is not necessarily singing from an identical hymn sheet on how the relationship should evolve. Turkey has a customs union agreement with the EU but also acts as the conduit for trade from sanctioned countries like Iran. Similarly, non-trade relations with Russia are difficult because of both the Balkans and the Middle East, while sanctions on Russia have created trade diversion effects. Namely, trade is being routed through other countries, raising issues for energy security policy in the EU.

In this context, trade is simultaneously an instrument of policy, especially foreign relations, and the solution to the challenges that Europe faces. Much of this revolves around the role of Germany which, as the largest economy and trading nation in the region, holds much of the political and economic power. This Trade Briefing will examine trade within Europe in the context of the political and economic challenges of the EU, and examine the key issues for businesses and trade finance practitioners arising from a period of uncertainty that lies ahead.


Why trade matters in Europe

Europe is the biggest trading area in the world. The EU alone accounts for 30.9% of world trade, while the whole of Europe, including its extra-European trade, accounts for more than 50% of trade in the world. While trade growth has been sluggish over the period since the financial crisis, particularly in the EU28, the growth of Central and Eastern European nations, including those such as Romania and Poland, which are in the EU, has been strong. Russia’s trade has grown: although EU and US sanctions have dampened GDP growth in Russia, this has not affected the country’s trade. This is largely due to rapid growth in trade with Saudi Arabia and the Middle East more generally, and strong trade relations with China.

The strength of European trade growth since 1996 is evident, particularly in the period between 1996 and 2008 (Figure 2).


There are three things worth noting from Figure 2:

  1. Europe recovered to its 2008 trade levels by 2011, with exports being roughly similar and imports slightly higher.
  2. The Eurozone debt crisis in 2012 caused a drop in the region’s trade, and although imports recovered in value terms, exports did not.
  3. The collapse of oil prices in 2015 caused another significant drop in the value of Europe’s trade. Oil and gas is Europe’s largest traded sector and although the region is less dependent on oil prices than other regions, the drop in trade value has recovered only partially into 2016. The projections to 2020 do not suggest rapid growth in value terms.

Europe’s trade is diverse and the drop in trade in 2015 is arguably a function of two things: the fall in global commodity prices and deflationary pressures in the aftermath of the global financial crisis. These two global economic trends have impacted the European economy, not just in the Eurozone and the EU28, but in the region more generally.

Interestingly, export trade in Europe is highly correlated with the value of the euro at over 73% (Figure 3).


The negative correlation between the euro-US dollar spot price, and the EU28 exports before 2001 represents the early stages of the euro before it was full adopted. Since then, spot price tracks export value closely and underscores the importance of the euro as a trade currency, rather than as a speculative currency at its inception.

Figure 3 also shows how European Central Bank (ECB) policy has an impact, not just on the Eurozone and the EU28, but also on the broader geographical area. Although the majority of European countries are not in the Eurozone, the weakness of the euro since the ECB started its quantitative easing (QE) programme has not apparently improved the trade performance of the region as a whole.

Indeed, the performance of Europe’s trade since the financial crisis has been more erratic than for the world as a whole (Figure 4). Compared to global trade, European trade was worse hit by the global financial crisis in 2009 and recovered less quickly in 2010 and 2011. This is unsurprising: world trade growth is also influenced by the strength of emerging market growth (specifically China). However, Figure 4 generally suggests that the Eurozone crisis hit European trade hard and that the recovery in 2013 was in terms of imports rather than exports.


The fact that imports performed better than exports is important. Europe, or more specifically the Eurozone, has been criticised by commentators for not doing enough to provide a fiscal, infrastructure boost to increase demand for goods from elsewhere. This is arguably still at the heart of issues that the Trump administration has with Europe and Germany. While there is no evidence that a weak euro has improved exports, there is evidence that imports have increased. This suggests that demand is indeed stronger in Europe, irrespective of the strength of the euro.


The nature of European trade


The EU28’s trade is highly concentrated in high-end manufacturing (Figure 5). By adding the countries from Europe as a whole, oil and gas becomes the largest sector. But this focus on the EU28 for sector trade takes out two extremes: Norway and Russia are both countries where trade is highly commodity-focused and, in Russia’s case, sanctioned because of its activity in Crimea.

The fastest-growing export sectors give us a picture of how the EU28 is driving infrastructure, commodities and consumer products across the world (Figure 6).


Figure 6 also shows clearly the impact of the drop in commodity prices. All sectors were affected in 2015, in terms of the value of their trade. The fastest-growing sectors in 2016 are those that have recovered most strongly. These include oil and gas, which supports Europe’s trade generally in the non-EU countries, and the pick up in iron and steel, plastics, precious metals and iron and steel products may also reflect improvements in commodity prices.

There are two more general points to make. These are not the largest sectors, they are the fastest-growing ones, but even so they illustrate:

  • The dominance of infrastructure exports, including commodities and products like iron and steel, metals and plastics through to the products made from them. This highlights the role that Europe plays in building global infrastructures.
  • The growth in demand-based products – essential oils and perfumes, furniture, automotives and pharmaceuticals. These reflect the high-end production capacity of Europe, but also that demand outside of Europe for products that are more consumer-led is still evident. Growth in furniture, automotives and pharmaceuticals in particular also reflect very strong global businesses and supply chains originating in Europe.

But the challenge still remains: Europe, specifically the EU28, is not seen as growing its own demand quickly enough and therefore is not importing enough (Figure 7).


The EU28 imports its energy and this represents a challenge, not least because it is highly dependent on Russia. Sanctions have put pressure on Europe’s energy security and the lower imports in 2015 in oil and gas were arguably not just a function of the collapse in oil prices. 2016 shows a marked increase in oil and gas imports, suggesting that some of the issues around energy supply have been resolved.

The fastest-growing imports into the EU do not suggest weak infrastructures. Oil and gas, iron and steel, plastics and aluminium all suggest that the infrastructure growth in the region is recovering from 2015, since they are all associated with demand for infrastructure-related products (Figure 8).


Again, these are not the largest sectors but the year-on-year growth in Figure 8 suggests that Europe’s automotive, pharmaceutical and aircraft imports are strong, with annual growth rates of 2.5%, 3.9% and 5.4% respectively. This is arguably a function of the importance of Europe’s role in supply chains since these are global sectors. They are also sectors which reflect strong consumer demand and, as their projected growth is faster than export growth, this indicates that consumer demand in the region may be stronger in the next few years.

Given how open Europe is as an economy, trade and GDP are interdependent. The IMF reported last year that trade volumes were growing globally at just 0.8% of GDP, where the rate of growth had been roughly twice the rate of GDP growth in the period of rapid globalisation since 1995.


Figure 9 presents real GDP growth against trade value growth for Europe since the financial crisis. It shows an erratic picture and, where trade has grown at twice the rate of GDP, with the exception of 2011, it has been in a period of “catch up” from flagging trade the year before, rather than from sustained growth.

Yet, since 2012, Europe’s GDP growth, although modest, has been sustained. This reflects two things:

  • Trade volatility caused by commodity prices and, as importantly, the economic slowdown in Asia
  • Some recovery within Europe in 2016 from the Eurozone sovereign debt crisis. This is particularly evidenced through stronger GDP and marginally higher imports, suggesting that demand across the region is starting to recover.


The next two years present challenges for Europe nevertheless. First, Brexit negotiations are unlikely to shift trade substantially across the region and instead create a sense of uncertainty. Second, sustained sanctions against Russia may continue to impact its trade growth, particularly with the EU28 and the US.

However, the projections for most European countries in 2016 and 2017 is reasonably positive (Figure 10). These are trend projections based on patterns in the data, as opposed to forecasts, which are based on assumptions. As such, they are useful in understanding a base-case for how trade is likely to develop.


Figure 10 tells us several things:

  • Commodity prices do not look as though they will increase substantially: the Netherlands, Russia and Norway look likely to see mild reductions in their exports between 2016 and 2017 and as these are major oil and gas trading nations, this indicates that commodity prices are unlikely to take off significantly over the next year.
  • Germany dominates the European export landscape. This is unsurprising, but the fact that its exports are set to increase (as are France’s) suggests that the issue of the Eurozone trade surplus is unlikely to go away in the near term.
  • Poland, Hungary and Romania are all projected to increase their exports in 2017. This is a reflection of their strong role within global supply chains, especially in consumer electronics and automotives.


Germany similarly dominates European imports and is projected to see imports increase into 2017 (Figure 11).


France, the UK, Turkey, the Czech Republic, Switzerland and Poland are also all projected to increase import values in 2016 and 2017.

Import growth remains fairly static in Ireland, Norway, Denmark and Hungary, and in the Netherlands and Belgium it looks set to decline slightly. However, the Netherlands and Belgium are port nations and the drop in imports could be a function of changes in supply chains – for example, more being produced within Europe rather than imported from abroad. The role of countries like Romania and Poland in French and German supply chains might create this effect, for example.



All of this suggests that the EU28 and Europe in general is highly integrated and dependent on internal as well as external trade. Exports to largest trading partners, the US and China, are projected to grow based on current trends, while imports are projected to fall back, except from China and Turkey. These are trend projections only, but do suggest that the EU’s strength in exports is likely to continue with its key partners at least.

Europe’s biggest economies, Germany and France in particular, are projected to grow in terms of imports and exports and the data by sector suggests that infrastructure development and consumer demand may well be picking up. This may mean that imports over the next few years grow more substantially than exports and although this is unlikely to address US concerns around the size of the German surplus, it does mean that some of the issues around under-investment in Europe’s infrastructure since the Eurozone crisis are now being addressed. Along with stronger growth in Europe, this is a positive message for Europe’s trading community.


A non-EU focus

Trading conditions outside of the EU are substantially different to those within the EU and this section focuses on selected countries outside of the union: Russia, Switzerland, Turkey, Norway and Ukraine.


The Russian economy grew towards the end of 2016 and, to some extent, trade has helped it out of its economic difficulties over the past few years.

Sanctions have been in place on trade with the EU and the US since 2014 and this, alongside the collapse of commodity prices and weaker demand in Asia, has meant that trade values have fallen by nearly a half since the end of 2011.

Nevertheless, it still has a trade surplus of around US$244bn. Most of this is driven by its exports of oil, which are worth 20 times the next largest sector “commodities not elsewhere specified”. Russia’s imports are predominantly from China (US$40bn) and are in machinery and equipment, which includes computers and electronic equipment. Germany is its second-largest import partner (US$23bn), predominantly in automotives and pharmaceuticals.



Ukraine has been blighted by economic downturn and political instability since the global financial crisis in particular. It imports 90% of its oil from Russia, and the pipeline that runs through Ukraine to Europe from Russia has been the centre of disputes between Russia and Ukraine since 2009. This has deeply affected both its trade and economic performance, both of which have struggled to gain momentum in the wake of the Russian intervention in the country.

Its main exports are iron and steel, where it has production capability, and its main imports are oil and gas. The latter makes its economic fortunes highly dependent on regional geopolitics, since Russia is also its largest export partner at US$5.6bn-worth nearly one third higher than its exports to China, US$3.2bn.



Turkey acts as a conduit for oil trade between Russia, the Middle East and Europe and yet its largest export sectors are automotives, electrical and mechanical equipment and clothing. The first two reflect Turkey’s strong engineering base, which has enabled its integration into automotive supply chains as well as a strong role in providing sophisticated engineering technologies to oil drilling, particularly in the Black Sea.

Its major export partners are Germany, the UK and Iraq. Taking Germany as an example of how its supply chains work, Turkey imports automotives from Germany, as well as electrical and mechanical equipment. Equally, its top three export sectors to Germany are automotives, electrical and mechanical equipment and additionally clothing. It exports cars and clothing predominantly to the UK.




Switzerland falls outside of both the EU28 and the EEA and as a result is a special case on many occasions.

Although it has a reputation for electronics, pharmaceuticals, and watches and clocks, as export sectors, these are not as important as precious metals. Switzerland exports nearly 25% more precious metals (predominantly gold) than it does its nearest export sector, which is pharmaceuticals. Interestingly, it imports nearly as much as it exports.

Gold features strongly in Switzerland’s trade. For example, China is Switzerland’s largest export destination and the majority of its exports are precious metals, effectively gold. The UK is its second-largest import partner and the two fastest-growing (and largest) sectors that Switzerland imports from the UK are precious metals and works of art – both of which Switzerland exports to China. Its pharmaceuticals trade with Germany and France is substantial, and clocks and watches and electrical and mechanical equipment are also in its top five exports to these countries.



Norway is a member of the EEA, which means that it has access to the European single market. Its trade is heavily in surplus and dominated by oil and gas, which accounts for some US$73.9bn, nearly four times higher than the next largest export sector, which is fish.

Its major export partners are the UK (US$20.8bn), Germany (US$19.1bn) and the Netherlands (US$12.9bn) and in its top trade sectors are ships and iron and steel, reflecting the need for infrastructure around its oil production and exports.

Its largest import partners are Sweden (US$13.7bn), Germany (US$9.6bn) and China (US$8.1bn)

The business of European trade

Europe’s largest trade sectors include ships, pharmaceuticals, aerospace, electrical and mechanical equipment, automotives and oil and gas. These respectively account for 49%, 49%, 45%, 29%, 22% and 20% of world trade in these sectors.

These supply chains have enabled countries like the Czech Republic to specialise in precision equipment for automotives and Romania to specialise in car parts. Poland’s trade growth in cars and electronic equipment has been driven both by European supply chains, while South Korea has located key production facilities in Poland in order to take advantage of high skills and comparatively cheap labour, as well as to access European markets.

Germany is at the heart of many of these supply chains and the automotive supply chain demonstrates the reach of its global networks.


Figure 13 presents an automotive supply chain originating in Germany. It shows its top five partners. For exports, these are the US, the UK, China, France and Spain. For imports, its biggest partners are the Czech Republic, Spain, France, the US and Hungary. Taken down to a more detailed level, it is predominantly cars as opposed to car parts that are exported from Germany to the US, UK and China and it is mainly car parts and components that go into Germany from Hungary and the Czech Republic. Each of these countries trades with partners within Europe and beyond.


Focus on the UK


The UK’s trade is highly strategic in that it is focused around key sectors and dominated by its relationship with Europe. We do not know what the outcome of negotiations for trade are likely to be once the Article 50 negotiations start, but we do know that there will be little by way of discussions about trade until the terms of the exit are agreed. This means that we should look at where the projected trends are now in order to understand a negotiating position rather than try to project the impact on trade of any outcomes.

Equant Analytics calculations suggest that the UK’s export trade with the EU27 alone accounts for 49% of its total exports, and its trade with the whole of Europe (which includes trade agreements with the EEA and Turkey) accounts for more than 62% of its exports. Asia Pacific takes just 11% of the UK’s exports, while North America accounts for 17%.

The dominance of Europe, but also of the US, in the UK’s trade profile is illustrated in Figure 14, which shows its forecast key country trading partners by value in 2016.

The US is the UK’s largest trading partner. The largest sector of trade with the US is electric and mechanical equipment. The UK exported some US$10bn and imported some US$15bn of these goods. The next biggest sector is pharmaceuticals, where exports dominate and are worth some US$21bn. Meanwhile, the UK exported around US$8.6bn of automotives to the US in 2016.

In terms of the UK’s trade with Germany, automotives, electrical and mechanical equipment, pharmaceuticals and electronics dominate. And in fact, for all of the UK’s largest partners, these four are the dominant sectors. The only exceptions are Switzerland, where precious metals (such as gold) and works of art are the most important export sectors, and even China, where the largest export sector is also precious metals.


The UK’s key sectors (Figure 15) reflect the dominant sectors in European supply chains: electrical and mechanical equipment, electrics and electronics, automotives and aerospace. Imports are set to remain strong, suggesting that these supply chains will remain important as part of the UK’s trade mix, but the outlook for export performance over the next few years shows only weak growth overall.

Since we are only momentum (trend) forecasting, there are no assumptions about what might be causing this weaker growth, but it is consistent with sluggish export performance in the UK and arguably also reflects broader trends of weak trade growth in the global economy.

It should be noted that the correlation between the low value of sterling and stronger export performance over the past 20 years is weak at just 0.2%, so any gain from weaker sterling is likely to be felt only in the short term.


Service sector trade appears strong overall, but financial services and creative and media show negative export growth over the next few years (Figure 16). This projected negative growth is derived from the patterns and trends in the data that have been evolving over the past 20 years, and are not based on assumptions of Brexit. As a result, the suggestion might be that the global nature of these two sectors means that companies and institutions within them may already be setting up subsidiaries abroad potentially to get around licensing and IP issues in the case of creative arts and to reduce the risk of divergent regulatory frameworks in the case of financial services.



As the world’s 10th-largest exporter and sixth-largest importer, the UK’s position as it enters Brexit negotiations is relatively weak. It has a trade deficit in goods with the EU and while it has strong emerging growth with the Asia Pacific region, the growth itself is not fast enough to substitute for the dominance of Europe.

Indeed, the UK’s trade is highly focused around four key sectors: automotives, aerospace, electronics and electric and mechanical equipment. But because these are also sectors heavily concentrated in Europe, it is likely that the negotiations will need to prioritise them.

On the services side, the projections for UK exports of financial services are for negative export growth. As this is a trend projection, it may simply be a function of the process of globalisation itself – whereby financial services are increasingly setting up subsidiaries abroad.


Hidden European trade


Europe is a large and complex trading region and its 46 countries are not uniformly good at reporting their trade (Figure 17). The chart shows the Equant Analytics Divergence Ratio (EADR). This is the difference between the data provided by publicly available sources such as the United Nations Comtrade and Equant Analytics data.

The majority of European countries have low EADRs, suggesting that trade into and out of the region is well-reported. Notable exceptions include Malta, Cyprus, Latvia and Luxembourg.

Cyprus and Malta are well-known conduits for trade with the Middle East and North Africa, avoiding embargoes and sanctions, while Latvia has historical trade ties with Russia, which may affect its reporting. Luxembourg’s status as a financial centre means that trade may be booked through the country even if it does not actually travel through it.

It is worth returning to the sectoral focus of European trade in oil and gas, aerospace, pharmaceuticals, automotives (which includes components), electrical and mechanical equipment and electronic equipment. These sectors are strategic – in terms of energy and economic security and growth, and in terms of national security. Within these sectors, a proportion may be for “dual-use”, namely both civilian and military purposes.


At a very high level, dual-use goods account for a substantial proportion of the largest economies in Europe’s trade (Figure 18). The chart does not suggest that this amount of trade is directly associated with military purposes, since dual use is, by definition, military and civilian. But the size of the sectors in each of the European economies in the G20 does suggest that this is an important sector grouping for the region. Strategic trade is normally defined by economists as the sectors where capital and labour are allocated for the purposes of national economic interest. Since dual-use goods, however broadly defined, are a large group within trade as a whole, this indicates that they are strategically important for the region.


Concluding remarks: the long-term impact of Brexit

Europe is a complex region, politically, economically and in terms of its trade. The relationships between its nations are driven by a free trade area that currently covers 32 countries and a single market that covers 31 of these countries. Within the next two years there will be one less country: the UK.

What the EU will look like after the UK has left is still moot but it is clear from this analysis that even as things stand, the region is likely to take a more strategic, or compromise-based, approach than might currently appear to be the case from the present rhetoric.

The analysis has reinforced this view in several ways. First, Europe is bigger than the EU or even EFTA. The Central and Eastern European nations are important, because they are commodity-rich and have access to high levels of education and skills, making them central to European supply chains. The countries outside of the EFTA mix, however, are dominated by Russian interests and, as these remain complex, they also represent a source of instability to the region.

The EU was set up on the principle that war on the scale of World War II would never again be seen in Europe.

This has to underpin any structures that are built over the next two years.

Second, Europe’s trade is highly focused, with national strategic interests through economic and energy security representing a potential stabiliser to the likely oscillations in the Brexit debate and consequent negotiations. In the end, the sectors being traded are too economically important to every country within the region. Europe commands as much of world trade as it does simply because its policy makers and leaders have understood the long-term, inter-generational importance of this fact.

Finally, Europe is an open region. The least open economy is Russia, but some of the smaller nations, such as Ireland, depend on international trade for their GDP because their domestic economies are relatively small compared to their trade. Trade matters to Europe and the importance of this cannot be understated.

The concentration of trade and trade finance is the real “known known” about Europe. Immediately after the financial crisis, the hubris around the rapid acceleration of emerging markets, especially in Asia, meant that there was a sense that Europe’s trade as a percentage of global trade would decline. Based on the projections from current trends, this seems unlikely over the next few years: Europe’s bank-intermediated trade finance alone represented an estimated US$2.8tn in 2016. While this is split across the nations of the region, this is around 38% of the value of all trade finance globally.

Such trade concentration is based on history and centuries of economic development. It is unlikely that the UK’s exit will have much impact on trade in the longer term.