Defining the new strategic direction
Ignacio García Bercero is a Senior Fellow at Bruegel
There are weeks in which decades happen. European Union trade policy has been through just such a week. Some developments have been positive for the EU, such as the robust reaction to coercive threats from the United States over potential tariffs related to President Donald Trump’s desire to acquire Greenland, and the 27 January conclusion of a free trade agreement (FTA) between the EU and India, which eliminates or substantially reduces tariffs on more than 97% of trade.
But other developments have raised questions about the EU’s commitment to an open trade policy. The European Parliament decided on 21 January to refer the EU’s FTA with the Mercosur bloc to the EU Court of Justice for an opinion on whether the deal breaches the EU treaties. The EU has also suggested linking non-discriminatory most-favoured nation (MFN) treatment to reciprocity. This appears to question the basic principle on which the international trade system is constructed.
How should these developments be understood? A Gramscian interregnum may be underway and the old order based on US hegemony is not coming back. A new strategy for EU trade policy is thus needed based on a realistic assessment of the likely global trading environment in the next decade.
In trade and economic terms, the EU is the equal of the US and China and can shape the global trading system. But its capacity to exercise influence hinges on its readiness to invest in alliances with the like-minded and with the major emerging economies with which it has now concluded trade agreements.
Based on the late-January flurry of trade-related developments, three points should be kept in mind in re-evaluating the EU strategy. First, for at least the next three years but likely for longer, the US and China will manage their trade relations outside a rules-based framework and may seek to coerce others.
In its trade relations with the two big powers, the EU must combine pragmatism with firmness against threats. The crisis over Greenland has shown the paramount importance of rapidity of response, the need for the EU to be willing to deploy its Anti-Coercion Instrument (Regulation 2023/2675, ACI) – which gives the European Commission more power to respond to trade threats – and the need for a plan on deterring escalation by the coercer.
Second, the EU’s network of trade and investment agreements is critical to strengthen economic resilience and is the best geopolitical instrument in support of alliances to respond to global challenges. The EU will soon complete its network of comprehensive FTAs; it needs to identify how to leverage these agreements as building blocks for plurilateral or bilateral agreements.
The EU must develop a political narrative that explains why trade openness is essential to advance Europe’s economic interests and values in a more fragmented world
Possible initiatives include: reinforcing the economic value for business of EU FTAs through a common protocol on rules of origin; enhancing supply-chain resilience and cooperation on economic security; facilitating investment in developing countries through new types of investment agreement to diversify overconcentrated supply chains; negotiating agreements on decarbonisation and elimination of overcapacity in steel and other sectors with hard-to-abate emissions; and promoting cooperation on regulation of the digital economy through digital agreements.
The ongoing dialogue between the EU and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership could incubate some of these initiatives, although different groupings of countries should be considered, depending on the topic.
Third, the World Trade Organization still provides the common rules on which to build new alliances and agreements. The EU should not compromise its WTO or FTA commitments. The MFN rule is fundamental; it contributes to the simplicity and efficiency of tariff regimes and protects against power asymmetries.
However, the current rules do not provide sufficient remedies to respond to subsidies that contribute to overcapacity, or to promote diversification of overconcentrated supply chains. More targeted remedies are needed. The WTO needs to accommodate, and coexist with, different types of plurilateral agreement.
WTO reform needs to combine short-term objectives with a medium-term strategy that builds a broad coalition in support of fundamental reform. Further reflection is needed on how to achieve fundamental reforms while retaining the core principles underlying the trading system.
To further its trade interests, the EU must develop a political narrative that explains why trade openness is essential to advance Europe’s economic interests and values in a more fragmented world. To start, it should identify why the economically and geopolitically valuable EU-Mercosur agreement should generate such divisions between EU countries and in the European Parliament. Applying the Mercosur agreement provisionally without the parliament’s support would be counterproductive and would undermine the legitimacy of FTAs.
Instead, the European Commission, Council of the EU and European Parliament should seek a fast-tracking of the Court of Justice’s opinion. This would allow more time for political discussion, with the objective of the FTAs with Mercosur, India and Indonesia entering into force early in 2027.
This article is based on a Bruegel First Glance.
