EU-US trade relationship through the lens of global value chains

The analysis in this Box looks at global trade from the point of view of integration in Global Value Chains, with a focus on the EU-US relationship. In an increasingly challenging geoeconomic landscape, the narrative of deglobalization has gained traction, claiming an ongoing process of fast decreasing economic interdependence between different parts of the world. However, analysis in the Autumn 2024 Forecast publication ⁽¹⁾ presented new evidence of still expanding Global Value Chains (GVC) in recent years (until 2022). The analysis presented in this box extends to 2023 and takes a deeper look at the EU-US relationship through the lens of GVC.  

EU-US trade links are analysed taking into account intra-EU trade relevant for GVC. This analysis looks at EU trade from the perspective of Member States, treating intra-EU trade as equally important as extra-EU trade in forging GVC, thus underscoring the importance of the EU’s single market. While all EU Member States share a Common Commercial Policy (CCP) they nevertheless constitute a very diverse group of economies with, namely, different structures, currencies and legal systems. Thus, intra-EU trade exploits the same type of comparative advantages that motivate countries to engage in GVC and should therefore not be ignored in the analysis. While accounting for intra-EU flows naturally increases all measures of EU’s integration in GVC, it also puts the EU-US relationship in a pragmatic perspective, in which the US becomes yet another important trading partner, but for most Member States it ranks well behind their major EU export markets. 

For both the EU and the US, participation in GVC increasingly relies on services. Eurostat’s macroeconomic globalisation indicators based on the FIGARO database (2024 edition) ⁽²⁾ suggest that in 2023 integration in GVC ⁽³⁾ rose further in the US and remained broadly stable in the EU⁽⁴⁾. Participation of the EU in GVC has been broadly stable over the two first decades of the century but increased in the post-pandemic years. Total GVC integration rose from around 50% of gross exports in 2010 to 54% in 2022 and 2023 (see Graph 1). This increase was driven by services whose contribution doubled between 2000 and 2023. This occurred largely via backward participation – that is, by relying on inputs from other countries in earlier stages of the value chain to produce goods that the EU later exports further. The contribution of goods trade, while still accounting for two-thirds of total GVC participation in 2023, has seen a steady decline in the past 25 years (from nearly 85% in 2000). Turning to the US (see Graph 1b), its participation in GVC moderated from 2010 until 2015 on a declining importance of (backward participation) of goods, but started recovering as services took centre stage, gradually lifting the contributions to US GVC indices from 9% in the early 2010s to 15% in 2023. Services now account for half of US participation in GVC, compared to roughly one-third in the first half of the previous decade. Services in US GVC predominantly represent intermediate inputs that are further processed and exported by other countries (i.e. forward participation).  

Graph 1: Total GVC Participation indices - contributions from backward, forward, goods and services

Notes: * preliminary estimate

Bilateral EU-US links via GVC have grown significantly over the past two decades. Trade in intermediate goods between the EU and US propelled by expanding GVC has grown steadily as a share of exports since 2010 (see Graph 2). In the EU, this was driven entirely by backwardlinks, i.e. foreign inputs imported by EU countries, processed domestically and later exported to the US. Over the past 14 years the share of these exports doubled in services and increased by one-third in goods (see Graph 2a). In contrast, forward integration, i.e. the share of EU value added embedded in exports to the US that are processed there and later exported, remained broadly stable. These trends have lifted the overall share of the US in EU’s GVC participation between 2010 and 2023 by roughly 1 pp, to 3.4% of EU exports in 2023. This happened against a broadly stable contribution from the rest of the world and a slight increase in contributions from intra-EU trade. When it comes to the US’ participation in GVC, the contribution from the EU has grown even more. However, here EU’s input has been more important on the side of forward participation, that is directly related to US exports to the EU that are further processed and reexported by the EU. Expansion in these trade flows has been particularly buoyant in services, the contribution of which roughly doubled in the last decade and now account for more than half of the total trade (up from one-quarter in 2011).  

Graph 2: Index of total participation in GVC: Bilaterial contributions to ...

Notes: * preliminary estimate

The EU plays a much greater role in US GVC than the US in EU’s ones. While expansion in bilateral trade has supported GVC integration in both countries over the last two decades, there is a stark difference in relative reciprocal importance. From the point of view of the EU, GVC-related intra-EU flows are by far the most important, accounting for 60% of total EU exports in 2023, up from 56% in 2011-2013, with a notable 2-pp-increase since 2019. GVC-related trade within the EU thus dwarfs that with the US. The latter rose, as a share of total EU exports, from below 5% in 2010-2013 to 6.3% in 2023 (see Graph 3a). By contrast, the EU remains by far the biggest partner in the GVC-related trade in the US. The EU’s share more than doubled between 2011 (16.5%) and 2023 (35.4%), largely driven by the tripling of the contribution from Ireland, which in 2023 accounted for roughly one-third of the EU’s input. This occurred against the backdrop of broadly stable shares of Canada and Mexico, declining shares of Korea and Japan and a sharp reduction in the share of China due to its gradual retrenchment from GVC (see Box I.2.1 in the Autumn 2024 Forecast). 

Graph 3: Index of total participation in GVC: Share of main trading partners

Notes: * preliminary estimate.

Services lie at the heart of bilateral EU-US trade within GVC. While the importance of the US to EU GVC integration is considerably smaller than the other way around for both goods and services, a clear specialisation shapes the bilateral trade patterns. The share of both countries in respective partners’ GVC is considerably higher in services than in goods, particularly in the case of EU’s input to US GVCs. This is not surprising given that services have been driving both countries’ integration in GVC over the past two decades (see Graph 1). However, backward links are more important for the US’ contribution to EU GVCs, while forward links are key to the EU’s contribution to US GVCs (see Graph 4). In other words, where the US matters most for the EU is exports to the US that are related to processing of intermediate goods and services previously imported by the EU. In contrast, the importance of the EU in US GVC is key in the segment of exports to the EU that are further processed in and then exported by the EU. The latter is where the EU becomes clearly indispensable for US integration in GVC. In 2023, the domestic US value added embodied in the exports to the EU that are then further exported by the EU accounted for 25.5% of all US exports in goods (up from 14.4% in 2011) and as much as 54% of all US exports of services (up from 25.4% in 2011). The contribution from Ireland was instrumental in driving up GVC trade in services between the EU and US, with the country accounting for nearly half of all GVC-related exports from the US to the EU in 2023, up from 32% in 2011. 

Graph 4: Bilateral importance of trade within GVC: Percentage contribution to the GVC participation

Notes: Blue line: Share of US in EU GVC, yellow line: Share of EU in US GVC.  * preliminary estimate

Both the EU and US are vulnerable to the intensification of bilateral trade tensions, but the threat seems greater for large segments of the US integration in GVC. While the trade-restrictive measures taken by the U.S concern trade in goods and the growth impact analysis of the new tariffs rightly focuses on the fallout from disruptions to merchandise trade, it is trade in services that has driven GVC in recent years and therefore appears key to their further expansion. The relative importance of the bilateral EU-US relationship is also by far more critical for services than for goods where diversification of trade is much higher, and both the EU and the US have many other important trading partners. In services, however, the vulnerability of the US to the EU market appears very high, with GVC-related exports to the EU accounting for roughly one-half of all US services exports. It is therefore, in services rather than in goods, that the EU has a powerful potential leverage in trade negotiations and disputes with the US. 

Graph 5: Total GVC participation indices of EU Member States in 2023, contributions from the US, EU and rest of the world

Cyprus, Denmark and Ireland are most exposed to the US via GVC. The contribution of the US to individual Member State’s integration in GVC varies significantly across the EU (see Graph 5). While intra-EU trade dominates GVC-related trade for all EU MS, the US is nevertheless an important partner for Cyprus, Denmark and Ireland, with absolute contributions exceeding 7 pps (of total exports), or more than 10% of all GVC-related exports. Interestingly, exposure of Cyprus is concentrated almost entirely in services, in the case of Denmark services account for less than 80%, while for Ireland only 43%. Other countries highly exposed to the US via GVC include Finland, Slovakia, Portugal, Italy and Belgium – all predominantly in goods, with the exception of the latter where exposure is equally divided between goods and services. Overall exposure of most Central and Easter European (CEE) countries (except Slovakia) remains relatively low, with the lowest in Bulgaria, Romania and Croatia. However, in view of current tensions concerning merchandise trade, the overall share of goods in GVC-related trade with the US is particularly relevant. From this perspective exposure of the CEE and several southern European countries appears remarkably high, with more than 80% of GVC links with the US accounted for by goods in Slovakia, Italy, Austria, Slovenia, Czechia, Hungary and Portugal.