Hello and welcome everyone to Onyx webinar today. My name is Suryo Nugroho, and I'm senior geopolitical analyst here at Onyx. We offer a different webinar topic each month. For today's webinar, we will unpack how the EU is navigating a convergence of geopolitical pressures, ranging from the escalating Russia-Ukraine and Iran conflicts to rising tensions with China and policy volatility in the U.S., and also what this means for Europe's rapidly deteriorating operating environment. Before we begin with the content, there are a few administrative details to cover. We will have about 30 minutes of content to share, and we will save the last 15 minutes for the Q&A session. You can submit your questions in the Q&A box, and we will do our best to address your questions during the Q&A session. A copy of the presentation will be available later. To receive a copy of the presentation, please fill out the brief survey that will be emailed to you shortly after this webinar. Please also visit our website and subscribe to receive information on Onyx future webinars. We would also like to invite you to explore our latest insights on LinkedIn and the Vantage Point Blog, featuring a mix of short updates and in-depth articles. Please use the QR codes at the top to follow us on LinkedIn, as well as to subscribe to our Vantage Point Blog. A brief introduction for those of you who are not familiar with Onyx. Onyx is a consulting division of Expeditors who helps clients build more efficient and resilient supply chains. We are uniquely positioned to help our clients in identifying geopolitical, regulatory, economic, and operational disruptors, which then can be translated into a more forward-looking and resilient supply chain strategy. All of these are done through advisory engagements and insights. Projects are tailored to individual client needs, either as one-off projects or ongoing retainers. These are Onyx service lines. In a nutshell, our service offerings cover various areas within supply chain. The first one is planning and strategy, trade and compliance, sourcing and manufacturing, and we also cover transportation, logistics, and distribution. Please contact us if you have any project or need where our advisory expertise can assist. Now, I am excited to introduce the speaker who will be presenting today, Melissa Taylor. Melissa is Onyx Director of Geopolitical Research. She oversees the delivery of geopolitical and policy analysis at Onyx, so providing clients with actionable insights to navigate changing world. Her work in risk advisory and analysis for multinationals at the intersection of geopolitics and supply chains has spanned over 15 years, and she holds a master's in supply chain, transportation, and logistics from the University of Washington. With that, over to you, Melissa. Thank you, Suryo. I appreciate it. Let's dive right in. Today we're going to be talking about Europe and basically its position in the global system. We've had a few updates on Europe in the last six months. We had a Europe-specific outlook that we had beginning in January, and then we've recently done an update that you can go back and watch, that goes through some of the risk to Europe in the energy crisis. I'm going to give a little bit of an update on the energy crisis, but I'm really going to zoom in on two of the key issues that we discussed, really in our larger outlook. This is the January 2026 outlook, and essentially what it's highlighting is that EU-Russia is likely to continue to escalate, and there's a rising risk of clashes. That's absolutely kind of played out. We are seeing escalation in the Ukraine-Russia engagement. We're seeing Europe more directly involved, and we are seeing the risk to Russia continue to grow. At this point, it's in a must get worse to get better kind of place. There's some real risk to the Russian position, particularly in Crimea. There is increasingly signs that we may see some de-escalation on the horizon. When we look at the EU and U.S., this one is a little less clear. We had a very high risk for the EU-U.S. relationship. We've seen the U.S. really engaged in Venezuela and Iran, and that's really kind of kept much of this down to a minimum. We are seeing the United States focus on the EU a little bit more, in the last few weeks as we see, for example, a threat of 25% on EU autos coming out of the attempt to pass the legislation to actually pursue the U.S.-EU trade agreement. We also have seen More recently, the U.S. threatening to put, I believe it was 100% tariffs on some French goods just yesterday. We're seeing a lot more pressure from the U.S. just even in the last month or so. So far, this has been a relatively calm period for the relationship since Trump entered office. I do believe that EU and U.S. are likely to continue to see escalation, and I do think that by the end of the year, this kind of high risk outlook will come to fruition. When we look at the EU and China, we had risk as relatively low, medium, I suppose. Ultimately, the issue for the EU is that China is simply a third front that it must face, nothing has really changed there. We're going to talk today about really focusing in on our outlook for EU-China, some of the reasons we think that the EU is not in a very good position to pursue the kind of trade policies that have been discussed in the last few weeks within Europe. Then we see the EU emerging markets. The EU is continuing to pursue a diversification strategy. Again, we've had a couple of different discussions around this, but really the key takeaway is that this is a really important and significant trend for the EU, and it's something that they must pursue in order to grow their export markets. It is a long-term trend, it's not something that is going to really move the bottom line of economies, right? This is on a macro level, not something that's going to really do what the EU is hoping to do in the short term. We have the U.S.-China relationship, we had this at about a medium risk, so far that's kind of played out. We've seen the United States and China in a bit of a détente, essentially both sides trying to take a step back and create leverage against each other and find those ways that they can continue the competitive struggle more quietly. We didn't have in our bingo card the energy crisis. We saw the United States take action on Iran, the Strait of Hormuz close. We did see on Sunday that the U.S. President has announced that an agreement has been reached, that signature should be Friday, we will see exactly how that plays out. Our base forecast is simply that reaching a truly substantive deal that handles all of the various issues and allows the Strait of Hormuz to remain open permanently from here is low likelihood. It's not impossible, but we do continue to see the Strait of Hormuz at risk and energy infrastructure in the region at risk. This continues to be a key risk for the EU. That's kind of the overall landscape. I think I want to talk a little bit about the energy crisis in particular and its impacts on the EU, then we'll turn to EU-China. When we think about what we're seeing in terms of impacts coming out of the energy crisis, Europe is really, of the three main economic groupings, the U.S., China, Europe. Europe is really facing the greatest pressure from the energy crisis. This is for a couple of reasons. The U.S. has a lot less energy exposure than Europe does. China has built up significant reserves in order to deploy for this particular situation. Europe, on the other hand, has in many ways not been able to build those types of reserves and is still very much open to the global marketplace. Is buying much of what it needs on the spot market and absolutely has some key risks in its ability to particularly get refined fuels that it traditionally brings from the Middle East. What we see is that the EU is particularly impacted by the energy crisis and its likely impact on global growth. Whereas the United States sees a 2-point potential loss, we see more like a seven point out of Europe. This is something that Europe can attempt to counter with fiscal expansion. Germany has definitely discussed expanding its investment. If we think about how you think about macroeconomics, there's trade, there's investment, consumption, really, Europe has found itself in a position of really needing to expand its investment at a time when it can't really expand its trade, it can't necessarily expand its consumption. We see Europe really turning to this kind of investment-focused concern. One of the things that we highlighted in the previous webinar that I just wanted to update everyone on as we're thinking about the energy crisis and potential impacts on Europe. I think it's important to keep in mind that natural gas storage is really a central operating concern for a lot of companies in Europe. When we think about what could drive up costs in the already difficult environment that is Europe, where we have really rising wages, Rising overall costs to companies operating in the region. This kind of concern about natural gas storage is one of the top issues in terms of potential impacts on the European economy. What we've seen is actually, a little bit more ability to store natural gas than we were concerned about even just a month ago, which is great news. We're seeing that Europe is now at about its historic average for where it's kind of built up between what it draws, its maximum during the year and its minimum. We see that there's less likelihood of a severe crunch. Europe continues to be at risk, especially as we see this Hormuz crisis potentially continue to draw out, that is our base case. I want to spend the majority of time on this EU-China trade confrontation, and place it within the broader look that we have, and give a sense for what our outlook is, what some of the risks are, and keeping in mind that we have a very large potential impact if we do see EU continue down the road that it's on for a trade confrontation. What we have is the EU essentially creating a series of tools that may be relevant to Chinese investment, and it might impact overall ability of Chinese firms to operate within the EU. The Industrial Accelerator Act, it's really meant to boost demand for EU goods, but at the same time, really places a lot more burdens on companies to understand their supply chains and to not necessarily rely on China as much. While it doesn't name China, it is fairly significantly and clearly geared towards China. This is a tool that wouldn't be ready until mid-2027. Much like the Cyber Resilience Act, which would not be ready until early 2027. We have a gap here in terms of timing. We have a lot of interest from the EU. There are meetings going on this week about how to approach the Chinese issue of essentially what some call overcapacity, essentially of Chinese goods entering the European market at an even greater pace than we've seen in the past. As they're trying to deal with this, we do have some potential tools, but they take real time to develop. We do have the Foreign Subsidies Regulation, which is in effect, and the first investigations are underway. This is just one of many. There are also the traditional tools that Europe has brought to the table, like safeguards, that absolutely can be deployed, but have faced a lot of criticism simply because they are kind of a whack-a-mole game, right? The EU will take a few months to identify something that's coming in and potentially causing issues that's maybe underpriced, and then build the evidence and take action. It still risks retaliation from China, and ultimately, there's still significant damage to companies within the EU. There's a lot of criticism essentially of what's currently in place, and there's also this time gap that we have for the new tools that are kind of coming online. We do have also a series of tools that is often referred to as European Bazooka, the anti-competitive tools. These are a possibility, but again, these very much risk retaliation from China. What we've seen so far is the EU really focus on these surgical tools rather than blunt tools in order to keep that retaliation to a minimum. The question now is, does the EU take the chance? Does the EU take a chance on protectionist policies, broader policies, more politically driven policies, rather than necessarily data-driven policies which always happens at a lag? Does the EU potentially risk degradation of its industrial base as the European Council is currently warning, and continues to push the EU to a more focused effort to prevent Chinese companies and goods from entering the EU? Right now, what we see is the EU is very much engaged in this conversation, and China is very much engaged in the conversation, essentially pushing back and saying, "As long as the EU takes these actions, there will be a response." And they've been highly specific about what they actually plan to do and what that could look like. So we're seeing the EU essentially come to a very important crossroads as it's trying to make decisions about how it treats its industries. When we think about what this might look like moving ahead, I think we have a best case, a moderate case, and a worst case for the EU. The EU could see a rebalancing. So let's say the EU uses these tools. We see some true protection of European industry. There's not significant transshipment to other locations that is able to penetrate the European market. And the EU maintains its industries and moderately grows those domestic industries, but at the cost of near-term inflation, and with the hope that the industries become more efficient over time, which would return them to more normal levels of inflation. This is unfortunately a low likelihood outcome, just simply because of the labor and energy costs that are already quite high within Europe. We have about a 5%-10% premium on goods produced in Europe versus the U.S., and that's before you take tariffs into account, just because of the labor, energy costs, things along those lines. There's that key risk. There's also this concern about Chinese inputs. While the EU is continuing to try and build levers it can use vis-à-vis China already has significant levers, and importantly, these are levers that operate pretty quickly. So we've seen with rare earth restrictions that China has been able to prevent imports within, really start impacting companies within weeks. And we would expect the same thing should we see Europe try and bring some of these tools to bear. There's this question of if China doesn't respond, if we don't necessarily see a reaction of Chinese instruments, like in try and see the rare earth exports restricted, see companies put into this conflict of laws position. We see China is likely to be able to find ways to transship its products. It's unlikely that the EU could fully prevent that, even with its efforts to adjust how much data it's getting and how much information it's receiving from companies. For one thing, that will take some time for most companies to be prepared to do that. We also in the short, medium term, expect transshipment to increase should we see these tools go into place. Even without retaliation from China, we see the EU really in a position where it endangers its push to maintain the global trading order. The EU, in many ways, sees the global trading order as-- well, there's a debate within the EU, but many within the EU see the global trading order as the key to diversifying and de-risking, and continuing to maintain some of the export relationships that are so important to the EU, especially as the U.S. and China become less aligned on what the global trade system is all about. We see this risk of if we see Europe need to put up additional protections, it really puts that strategy at risk. Some within the EU don't want to see that strategy. We even had the trade chief essentially call for an adjustment to most favored nation rules, for example. This would, in the way he envisions it, essentially say, not everyone receives an MFN. It's not a given. We would say maybe countries like China don't necessarily receive an MFN. This action would also face Chinese retaliation, likely. Such discussions are at the center of the future of the EU and its approach to trade. We have a worst-case scenario. This is where we see full retaliation. We see high likelihood that China would be successful in choking off key domestic manufacturers of key inputs. It would cause the EU to lose competitiveness. It would cause exports to fall. We would continue to expect to see even European exports to be impacted in all three of these scenarios. We see some pretty significant impacts on the European economy in general, and there's still this risk of transshipment. There is a wild card here. The U.S. does decide to add its heft to this grouping. We could potentially see more pressure exerted on China, the U.S. would then open itself up as well to some of these retaliations, namely the rare earths, which at the end of the day, again, really can hit these economies within mere weeks. We see a U.S. that hasn't yet built out the tools that it wants to build out in order to face China. Whether that will happen during the Trump administration or not is unclear, but it does seem to be the aim of the Trump administration. There is an effort to really set up the United States to be able to take on China, and I don't think it's ready yet. Ultimately, even if the U.S. was ready, we would definitely see an attempt to extract some significant concessions from the EU. This just lays out kind of the strategic thought, right? I think it's important to remember that what I'm arguing here is that there's not much possibility that the EU comes away and fully wins a conflict with China, a trade conflict. What that means ultimately is it could mean that we don't see, for example, Germany give its blessing for the EU to move ahead with this type of action. It could mean that we see the European Union really essentially trying to escalate to negotiate and seek that moment where they can bring China to the table. Far, if that's the goal, it's been unfortunately quite unsuccessful. We've seen China essentially reject efforts by the EU to have these discussions. China's been quite assertive in what it plans to do, what the country plans to do in response should these measures go into place. There's not much evidence that the EU can successfully escalate to negotiate where, for example, the United States has failed to do the same thing. Another possibility, though, is that we see the EU possibly nonetheless going all in on this approach. As you can see here, some of the real risks are to the European economy, we'll see responses from China that will absolutely impact the European economy. The reason we might see that is essentially the strategic trap that EU has found itself in. As the EU is really struggling to make its way between the U.S. and Russia and China, and now an energy crisis, there aren't many options. The EU simply can't engage everything that it needs in order to quickly resolve this crisis, this competitive crisis that it finds itself in, will really need many years in order to even begin to think through, or to even begin to make progress on this kind of Gordian knot of a problem. Now it can, but it will take time. Unfortunately, I think what we're seeing right now, and again, this is my analytical opinion. I think what we're seeing right now is a Europe that's eager to do something, but unfortunately, it just doesn't have many options on the table. I continue to believe that we aren't going to see a true trade war between the two, but I'm not sure that we're going to see much come out of this that's beneficial for the EU either way. I do want to just quickly point to what some of the key goods that may be impacted are within such a scenario, if we did see the U.S. and EU, I'm sorry, the EU and China essentially kind of going tit-for-tat. When we think about Chinese exports, I think for a long time these were considered low value added. I'm sure you've all heard the narrative that we are seeing over the last few years, we've seen a lot more finished goods, but also just higher value added intermediate goods as well entering the European market. This remains a fairly small part of European overall exports. Europe imports intermediate goods from China. It builds it into its own goods and then exports those out. It remains a fairly small portion of that. It is increasingly important that we see competition on that intermediate good range, that's one of the places where I think we're seeing the most political response, right? However, we're also seeing China move up the value chain in consumer goods. We have automotives which are absolutely threatened in this current round of exports from the Chinese. Essentially what we're seeing is German companies trapped in this difficult position of relying heavily on the Chinese market, while also knowing that the more that we see Chinese goods enter the European market, the less likely the EU is going to be able to respond effectively. We have companies like VW essentially coming out and saying, "It's not going to get better. There's not going to be a better time for the EU to take action." Again, we have this really divided look at the best way to approach this, and a sense that whatever tools are available now are the tools that we should use. We see a lot of consumer goods producers really coming out, and some of them pushing strongly for this, others urging extreme caution. We also have this capital goods reliance. When we think about where really these economies are entwined, particularly Germany and China, we see a really heavy trade in capital goods, which again, is really at the heart of the manufacturing economy. That's an area where should we see escalation, we will see pretty significant risks for companies operating and requiring those goods within the EU, and even within China. All right. That was a very quick overview. Suryo, how's it going? Yeah. Well, thanks a lot, Melissa. Those are excellent insights, especially for companies operating in Europe, and also for those that are thinking about expanding to Europe as well. It's fair to understand the current landscape of Europe at the moment, right? We received a couple of different questions from the audience here, the first one is about the tightening import quotas. How will the EU's tightening import quotas and higher tariffs impact non-EU steel exporters? This is specifically related to steel exports. Absolutely. I would say that, don't take my word on this as expert opinion, but as I understand it, the EU is trying to find ways to really prioritize goods from countries that it considers playing by the market rules. We do see Europe making that effort and attempting to increase goods coming from those economies. When we think about many of the places that the EU is importing from, whether we're thinking about kind of the larger economies which may be prioritized or the smaller economies like Indonesia, that type of economy maybe is at more of a risk. Because it is kind of in this middle ground where the U.S., for instance, claims that Indonesia is dumping its steel production into the U.S. We have countries like that at much higher risk, in my opinion. Okay. That's totally understandable. I think the next one is with respect to the trade diversification effort that the EU is currently undertaking, right? As we know, the trade with the U.S. is disrupted at the moment. Now the EU is trying to expand their export market to the other countries by signing more Free Trade Agreements. What's the progress on this? Are they signing more FTAs with more countries? I want to ask about this, as we also know that the EU has a slew of strict regulations, like CBAM and the CSRD- Corporate Sustainability Reporting Directive. How those strict regulations affect this trade diversification effort. Yeah, absolutely. I think what we're seeing is primarily successful efforts to sign Free Trade Agreements. There's a degree to which, just as you're kind of pointing to, there are these issues that have traditionally delayed a lot of those Free Trade Agreements in the past. I think we're seeing some sidestepping around many of those. If we think about EU and India, there are at heart some serious domestic political issues that have prevented that agreement until now. Largely what we're seeing is a sidestepping, at least from what I've seen. Suryo, I'd be curious if you have another opinion on that though. Yeah. Some Southeast Asian countries, for example. Right now it's been quite a surprising progress. I can say the previous time when I was still working with ASEAN, it was really difficult to conclude the agreement with the EU, but right now they're willing to move things forward really quickly. The problem is not-- Having a zero tariff is one thing, but another key challenge is to comply with those strict regulations, right? Yes. Complaints are coming from especially small and medium enterprises that want to export from Southeast Asian countries that want to export to the EU. They're having difficulties complying with those regulations. Absolutely. While the EU companies exporting to Southeast Asian markets, they're having easier time exporting their goods. Those small and medium enterprises are asking about the fairness. Right quote-unquote, "the fairness of this Free Trade Agreement. Right. I think ultimately what we're seeing is some pull back from the EU on regulation. We've seen a really pretty concerted effort in these omnibus bills to pull back on EU regulation. I'm seeing pretty mixed reviews of the likely success of this. I would certainly say that doesn't eliminate the fact that the EU is going to remain a highly regulated market, right? It doesn't necessarily change those barriers to entry. I do think that the EU, in many ways, could view those as existing protections that don't necessarily face the same kind of retaliation that you see if you bring in other types of trade policy. Yeah. That's really true, though. Another question I got is about remilitarization. Does remilitarization have a significant impact in the EU's reindustrialization efforts and trade policy decisions? I think the answer is yes. My sense of the scale is that this is something that starts quite slowly, and it takes quite a bit of time. As with most of the other supply chains in the EU, it's closely intertwined with one of the major other powers that it's trying to de-risk from. When you talk about the U.S., defense system, right? The EU is actively trying to create an alternative and actively trying to build that out with different starts, but is absolutely running into barriers because it simply can't fully move away from the U.S. defense system. That's both due to the supply chain and the large dependence that Europe has had for some time. It's also due to pressure from the U.S., which brings this focus on exports of U.S. goods, right? U.S. military goods are absolutely one of those. It's also a matter of the way they operate together. When you're in the NATO operating system, it is simply easier to all be using similar equipment. That's not exactly how it works in practice, but it takes quite a bit of effort to be both a part of the NATO system and not necessarily use U.S. goods. Follow-up question on that, Melissa. Yeah. How about the fiscal space, though? Do they have enough fiscal space to do both- Yeah remilitarization and reindustrialization at the same time? I think that's ultimately the question. The key issue here is, again, there's disagreement about what to pursue here. For those who want to essentially really focus on competition, there is an effort to I think they're actually having the budget discussion today, right? There are those who want to continue the basic functioning of the EU. The EU has always sought to be more cohesive by subsidizing certain industries, right? There's a lot of money that goes to agriculture and that essentially goes into cohesion, right? This idea of you need to bring in the periphery and ensure that everyone is on a reasonably even playing field. We're seeing this play out live right now as Cyprus is pushing for less competition funding and maintaining much of that current funding that goes towards cohesion. We're seeing some of the foundational players essentially saying that we need to turn to competition and investment, and that really has to be our key driver, because when we look at this trade diversification, that's a long-term trend, right? That's a long-term trend and ultimately, there's not necessarily a clear export market to go to, right? There's no clear consumer. It's just a diverse set of countries. Then we have internal consumption, which isn't really driving growth in the EU, and then we turn to investment. Investment is really where the EU could potentially break out of this. It's really focusing on tech for a lot of that investment and hoping that will push it along and push it out of some of its current debts and some of its current malaise. Ultimately, it's not clear that the EU is all going to get behind this push. We're continuing to see some countries really push for multi-track. That's having different approaches outside of the EU system in many ways, which is a danger to coherence in the EU. We have a host of different abilities to fund that investment, a host of different views on whether they should. I think ultimately, what we're seeing is a question of what does the future of the EU really look like? Does it take on some of those traditional ways in which it approached the movement of funds, right? From the center to the periphery, that fundamentally many people believe keep the EU together, or does it take on some of these more competitive approaches? It also has these defense issues at the same time. It also has fundamental questions about its energy security, and critical minerals. We just have a litany of things that the EU has to take on. I don't have an answer to can the EU fully do it, and I should have started with that. It's clear that it's an incredible challenge, and there's not agreement within the EU about how to do it. Okay. That was the last question for today. Thank you, Melissa, for the excellent insights on the EU policy landscape. For everyone, the presentation will be available to be downloaded once you completed the brief survey that we are going to send in a brief moment. Thank you very much for attending this webinar, and then enjoy your day. Thanks, Suryo. Thanks, everybody.