"Can the EU Lead a New World Order in Trade?" - Peterson Institute

The United States under the second Trump administration has been unilaterally imposing tariffs on countries around the world since last year, undermining the globalization and free trade order that has been established since World War II. For now, the United States is the only country moving away from the free trade order, while other countries are still maintaining the overall framework of free trade, as they have refrained from engaging in trade retaliation or imposing reciprocal tariffs on each other.

At present, the only country that could potentially assume the role of defender of globalization and the free trade order, in place of the United States, is the European Union (EU). Japan's economic scale is significantly smaller, and China faces difficulties in taking on this leadership role due to its history of state subsidies and technology theft.

Cecilia Malmstrom, Senior Fellow at the Peterson Institute for International Economics (PIIE), a leading American think tank on international economics, published an article titled "Can the EU lead a new world order in trade?" on the institute's website on March 17 (local time). She stated, "The EU is now seeking to avoid escalating conflict with the U.S. administration while simultaneously building new alliances," and added, "For this strategic shift to succeed, the EU itself must become economically stronger, and at the same time, the newly emphasized industrial policy should not devolve into a tool for discriminating against economic partners."

The following is a summary of the main points.

Is the EU Ready for Reform?

Regardless of who occupies the White House, Europe must pursue economic growth, innovation, and a return to competitiveness. Trade conflicts with both the United States and China have underscored the need to boost self-sufficiency in key industries. The European Commission is presenting plans to simplify rules and regulations based on recommendations from two reports by Mario Draghi, former President of the European Central Bank (ECB), and Enrico Letta, former Prime Minister of Italy. The recently released Industrial Accelerator Act is expected to serve as a test case for whether industrial policy can promote cooperation with trade partners under the "Made with Europe" umbrella and avoid the pitfalls of protectionism.

For example, this bill introduces low-carbon requirements into public procurement and public support systems. The main focus is on expanding manufacturing production within Europe and strengthening the "European-made" requirement, but countries that have signed Free Trade Agreements (FTAs) with the EU and members of the World Trade Organization's (WTO) Government Procurement Agreement (GPA) are allowed to participate in procurement bids under certain conditions. However, the bill includes complex rules that require the examination and tracking of all components in the value chain involved in the bids, raising potential concerns of protectionist measures.

Nevertheless, the current industrial policy proposal is less protectionist than the initial leaked draft. The early draft raised doubts about whether non-European companies could participate under the same conditions as EU companies. The principle of full reciprocity—that there should be no discrimination against European companies bidding in other countries—will become an important factor in public procurement in the European market. However, this could make it more difficult to achieve both the goal of preventing unfair competition from China and promoting the green transition. Now, the European Parliament and member states must agree on the final provisions, and the outcome will determine whether this bill, designed as a strategic tool, ends up merely raising administrative and protectionist barriers.

Reducing Risk and Seeking New Trade Alliances

Reducing the risk of dependence on the United States also means forging new alliances and expanding the EU's market access opportunities. Currently, the EU has signed more than 40 trade agreements with partner countries, and additional agreements are continuously being pursued. Over the past year, new trade agreements with major economic blocs have been concluded one after another, opening the way for closer economic cooperation as well as broader partnerships. The agreement with Indonesia was politically concluded in September last year, and in January this year, an agreement was signed with the four Mercosur countries—Argentina, Brazil, Paraguay, and Uruguay.

The Mercosur agreement had been under discussion for decades and was concluded despite strong opposition from some countries, such as France, which were concerned about the impact on their agricultural sectors. The European Commission decided to provisionally implement the agreement starting from May 1, on the condition that the four Mercosur countries complete their domestic ratification procedures. Uruguay and Argentina have already completed ratification. While the European Parliament has referred the agreement to the European Court of Justice (ECJ), questioning the legality of the agricultural provisions, provisional implementation is legally possible.

The agreement with India is similar. Having been under discussion for nearly 20 years, it was finally concluded at the end of January this year. As with the Mercosur agreement, geopolitical considerations pushed both sides' negotiators to make a final decision. The agreement includes several exception clauses, particularly in the agricultural sector. Nevertheless, it is far more ambitious than many had expected, eliminating or reducing tariffs on more than 90% of EU exports to India. This agreement also demonstrates India's willingness to further open its economy and play a more active role on the global trade stage.

The EU is also working to conclude agreements with Australia, Thailand, Malaysia, and the Philippines. The revised agreement with Mexico had been stalled for some time, but a signing ceremony is scheduled for the end of May. The EU is reviewing its existing agreement with the United Kingdom to discuss ways to ease some non-tariff barriers in the sanitary and phytosanitary sectors, and has just reached an agreement with Switzerland to promote trade.

These agreements send a strong geopolitical signal that the participating countries want trade and cooperation under predictable, rules-based conditions as defined in legally binding and transparent documents.

Can the EU and CPTPP Lead New Alliances?

Beyond all these agreements lies the promising prospect of cooperation between the EU and the 12 member countries of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), a free trade pact in the Asia-Pacific region. Most of the EU's allies in the Pacific are members of this agreement. The CPTPP was originally envisioned as part of former U.S. President Barack Obama's "Pivot to Asia" strategy. However, U.S. President Donald Trump withdrew the United States from the agreement during his first term, after which the other countries proceeded, and the CPTPP entered into force in December 2018. Since then, the United Kingdom has also joined the CPTPP.

The EU has either already concluded or is negotiating bilateral trade agreements with almost all CPTPP member countries. Just before last Christmas, Maros Sefcovic, EU Commissioner for Trade, held a ministerial meeting with the 12 CPTPP member countries. They agreed to launch trade and investment dialogues and to support WTO reform. In addition, key objectives between the EU and CPTPP member countries include promoting digital trade, strengthening supply chain resilience, eliminating non-tariff barriers, and streamlining customs and regulatory procedures. Mark Carney, Prime Minister of Canada, a CPTPP member, has expressed his intention to play a leading role in strengthening solidarity between the EU and so-called middle powers, following a widely cited speech at the Davos Forum.

The EU and the 12 CPTPP member countries could form the core of what Carney envisions as an "anti-Trump alliance"—a broad "coalition of the willing" in the fields of trade and investment. For example, the EU and CPTPP could coordinate rules of origin or standards for promoting trade in climate-related goods and services. They could also seek common solutions or mutual recognition regarding the various forms of carbon pricing systems adopted by CPTPP member countries. Modernizing subsidy rules is another possible area of cooperation. In addition, other like-minded partners, such as the Mercosur countries and Korea, could be encouraged to participate.

The EU Must Remain an "Open Market"

The EU and its economic partners now have a window of opportunity to lead the world toward a new, updated multilateralism. Ideally, they could establish new rules for subsidies and economic security, and find common ground among different models of carbon pricing. This could include deeper cooperation in rare earth elements and critical raw materials, whether within the WTO system or through plurilateral agreements. Such bilateral and regional trade agreements could serve as pathways to new norms that help countries diversify supply chains, reduce risks, and strengthen value chain resilience.

However, for Europe to remain a trusted partner, it must continue to keep its markets open. The new European industrial policy aims to enhance manufacturing competitiveness, accelerate the green transition, and promote foreign investment. Yet, divergent administrative requirements and strict reciprocity demands in public procurement could undermine these objectives. Europe must avoid the mistake of making trade and investment more difficult, thereby alienating partners and allies. If the Industrial Accelerator Act fails to resolve these issues, the EU's ambitions to lead new economic alliances may also be undermined.

About Senior Fellow Cecilia Malmstrom

Cecilia Malmstrom previously served as a member of the European Commission and the European Parliament, and has been a non-resident Senior Fellow at the Peterson Institute for International Economics (PIIE) since June 2021. She also hosts the PIIE's biweekly online event series "Trade Winds" and is a visiting professor at the School of Business, Economics and Law at the University of Gothenburg. She has devoted most of her career to global issues and international relations, possessing extensive experience in multilateral cooperation and international leadership.

This content was produced with the assistance of AI translation services.