Key messages

  • The US, once the main architect of the General Agreement on Tariffs and Trade/World Trade Organisation (GATT/WTO), has progressively abandoned leadership of the rules-based trading system. The tariffs of the Trump era and the continuation of certain protectionist policies by Biden are a shift that leaves a leadership vacuum in global trade governance.
  • Three scenarios are emerging for the future of global trade: (a) ‘trade without rules’, dominated by coercive, transactional deals and unstable blocs; (b) a ‘fragmented trading order’, where a coalition of countries maintains rules-based trade despite US and Chinese disengagement; and (c) a ‘reconstructed system’ with both the US and China re-engaging.
  • The EU, as the world’s third-largest trading power, is uniquely positioned to organise and lead a coalition for rules-based trade. Unlike the US and China, the EU remains strongly committed to legal frameworks and multilateralism. The role, however, requires overcoming inward-looking tendencies and asserting greater strategic leadership.
  • This paper proposes five strategic initiatives for the European Commission: (a) reduce dependency on US and China while maintaining a balanced agenda with both; (b) complete and expand its network of free-trade agreements (FTAs); (c) build a coalition with Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) members and other partners to defend rules-based trade; (d) partner with the African Union (AU) on trade, green investment and digital cooperation; and (e) lead on the trade-climate interface, promoting global carbon pricing and supporting decarbonisation in developing economies.
  • Global trade cannot be insulated from wider economic and political pressures: geopolitical competition, digital transformation, industrial policy and climate change. Any sustainable trading order must integrate these dimensions while supporting vulnerable economies and addressing macroeconomic imbalances.

Analysis[1]
One of the more bizarre reactions to the 27 July EU-US political agreement on trade was an op-ed published by the US Trade Representative, Jamieson Greer, in the New York Times. According to him ,the agreement concluded in the golf club of Turnberry is an ‘historic agreement’ that lays the foundations for a new global trading order ‘that is fair, balanced and oriented towards serving concrete national interests rather than vague aspirations of multilateral institutions’.[2] The lack of enthusiasm with which the agreement has been received in Europe suggests that few outside the current US Administration share the view that the Turnberry agreement will find a place in history similar to that of the Atlantic Charter.[3]

It is hard, however, to disagree with the statement that ‘Liberation Day’ tariffs have put an end to almost 90 years of US leadership of a trading order based on rules and non-discrimination. Even in the unlikely event of the next US President fully reversing Trump tariffs, any illusion about the US leading a reform of the global trading system should be dispelled. If trade is going to be based on rules, others will need to fill the leadership vacuum.[4] This paper starts by discussing the historical context for the US decision to sabotage the trading order of which it was the main architect.[5] It will then present three scenarios for the possible evolution of the trade regime. Finally, it will make recommendations on how the trade policy of the EU can contribute to shape the evolution of the global trading system in a direction that corresponds to its values and interests.

1. The US role in the evolution of the rules-based trading system

The announcement by President Trump of Liberation Day tariffs was a frontal attack on two key pillars of the General Agreement on Tariffs and Trade/World Trade Organisation (GATT/WTO) system: the principle of non-discrimination (Most Favoured Nation, MFN) and the stability of tariff bindings. In doing so, the US also reversed almost a century of reciprocal negotiations to lower tariffs. The current US average tariff of nearly 20% is close to that applied during the Great Depression.[6] How did we get there? To what extent does the new US trade policy respond to an ideological and idiosyncratic policy preference of the current holder of the Presidency, or does it reflect a more structural shift of the US approach to the global trading system?[7]

In order to try to answer these questions it is worth briefly reviewing the evolution of the US role in the creation and maintenance of the trading order through four distinct phases of its historic development:[8]

  • 1947-95: the building up of the institutions of a rules-based trading system. The US was not only the main architect of the GATT but also the prime mover behind successive rounds of trade liberalisation. This hegemonic role did not imply that the US did not have to accommodate the interests of other GATT members. The European Community (now the EU) played a central role in all GATT negotiations since the Kennedy Round in the 60s and in particular in the Uruguay Round negotiations that resulted in the establishment of the WTO. The trading system was the result therefore of many interactions between the US and its key trading partners. US hegemony was buttressed by its role as a security provider and its dominance of the international monetary system. Its ‘hegemonic’ role on trade was reflected in its influence in shaping the global trade agenda. Contrary to the argument now made by the Trump Administration, this did not imply that the US was ready to accept an unbalanced trade relationship, since the US insisted and secured reciprocity at least with countries at a comparable level of development. The most remarkable feature of the WTO was the high degree of ‘legalisation’ with the US accepting –unlike in most other international regimes– compulsory adjudication by a standing judicial-type body. The fundamental bargain leading to the establishment of the WTO was a substantial expansion of the disciplines applicable to the trade regime and US acceptance of effective constraints on resorting to unilateralism.[9] At the same time, the WTO was established with a rigid institutional structure based on the constitutive principle of the single undertaking and decision-making by consensus.[10]
  • 1995-2008: the attempt to define an agenda for the WTO. Once the WTO was created, and in the context of rapid economic globalisation, the new organisation embarked on accession negotiations with the ambition of becoming a quasi-universal organisation and on preparing the launch of a new Round of trade negotiations. The US was a strong supporter of China’s accession to the WTO (2001) in the expectation that the country would evolve in the direction of a market-based economy. The US was, however, much more reluctant than the EU on the expansion of WTO disciplines to new areas such as investment or competition, preferring to focus on more traditional market-access negotiations. To a certain extent this can be explained by concerns that an increasingly vocal coalition of developing countries would seek to steer rules in a direction inimical to the interests of US businesses. But there were also the first signs of domestic opposition to open trade policies as reflected in the Seattle debacle (1999). A rare period of close US-EU cooperation led by US Trade Representative Robert Bruce Zoellick and Commissioner Pascal Lamy was instrumental in the launch in 2001 of the so-called Doha Development agenda (DDA). The negotiations were, however, launched in the special geopolitical context that followed the 9/11 attacks and did not enjoy strong political support even amongst the proponents. After a hazardous history, negotiations were for all practical purposes abandoned in July 2008, shortly before the great financial crisis. The demise of the DDA illustrated the difficulty of establishing a balance of market access concessions and rules commitments in a context in which emerging economies had become increasingly important players in the global trading system. The focus of trade negotiations by the main players thereafter shifted decisively from the WTO to bilateral or plurilateral free-trade agreements, which increasingly included WTO plus rules in areas supporting the establishment of global value chains.
  • 2008-16: the emergence of China. There are many reasons for the failure of the DDA, but one important factor was the reluctance of countries to reduce tariffs on an MFN basis at a time when domestic industries were experiencing the so-called ‘China shock’. The impact of import surges from China on job markets was particularly pronounced in the US due to the limitations of the social welfare state and the absence of active adjustment policies.[11] The first Obama Administration adopted a very hesitant position on the negotiation of free-trade agreements, although in its second mandate the US developed an ambitious approach to try to modernise the rules of international trade by making the US the ‘hub’ of two comprehensive free trade agreements: the Trans Pacific Partnership (TPP) and the Trade and Investment Transatlantic Partnership (TITP). Part of the rationale for these initiatives was to define rules that could have an influence on Chinese non-market practices without having China at the negotiating table. The preference for high standard plurilateral agreements also implied opposing any attempt to revive multilateral negotiations in Geneva. Two events frustrated this strategy. One was the election in 2016 of Donald Trump, which took place in the context of a broader backlash against globalisation. The other structural change was the adoption by China of a successful (but expensive) industrial policy based on non-transparent and massive subsidisation with the object of acquiring a position of dominance in the industries of the future Made in China 2025 (2015). The US increasingly came to the view that, partly because of rulings of the Appellate Body, the rules of the WTO were not effective to counter distortions due to the role of the state in the Chinese economy.[12]
  • 2016-25: the US abandonment of the rules-based trading system. The first trade policy decision by the Trump Administration was to stop the negotiation of free-trade agreements. This contrasted with the approach of Japan and the EU that doubled down on their free trade agendas (CPTPP, EU FTAs with Canada, Japan and Vietnam). A consequence of this divergence, with implications for the Trump 2 tariff policy, is that the US often faces higher tariffs in export markets than countries that have maintained an active policy of FTA negotiations. The US then proceeded to block the appointment of members of the WTO’s Appellate Body (thereby nullifying the Uruguay Round commitment to binding third party adjudication), made recourse to the national security exception to protect the steel and aluminium sector and imposed discriminatory tariffs on a substantial part of Chinese trade.[13] None of these policies was reversed by the Biden Administration, which also adopted industrial policies in contradiction with its WTO obligations and reinforced export and investment controls vis a vis China on critical technologies. When seen against this background, Trump 2 has essentially completed the process of disengagement from rules-based trade by adding two critical elements to US trade policy: (a) the decision to ignore MFN and tariff bindings with regard to all trading partners and not only China; and (b) the abandonment of any aspiration towards a reformed system that still relies on rules, as best illustrated by US tariff actions as rationalised by Jamieson Grier in his New York Times op-ed.

The above account suggests that the working hypothesis should be that there is little prospect of the US being ready to accept constraints on its trade policy similar to those it agreed to in 1995. While Democrats are critical of Trump tariffs and still need to find their voice on trade policy, there seems to be a bipartisan consensus that the WTO has ceased to perform a useful role and that traditional free-trade agreements are politically too costly. This position appears to be rooted both in the geopolitical conflict with China and in domestic policy failures, in particular the weakness of the social welfare state as a tool to facilitate adjustment to economic shocks. The reversal of Trump tariffs would be difficult due to their revenue-generating capacity and the vested interests created by high tariff protection. Paradoxically, both the US and China appear to be trapped in political economy constraints that prevent them from adopting a trade policy that corresponds to their role in the global economy. An adjustment of macroeconomic imbalances would require a reduction of the US budget deficit (financed through non distortionary taxes rather than tariffs) and the shift towards a consumption-based growth model in China. In both cases, adjustments could be done in a manner that reinforces the social welfare state and supports more open trade policies. It is difficult, therefore, to envisage a reformed trading system in which the US and China fully participate in the absence of a significant reduction of geopolitical tensions and macroeconomic adjustments that go well beyond the trade regime. In the meantime, any leadership in support of rules-based trade cannot count on either the US or China.

2. Scenarios for global trade over the next decade

The core institutions of the existing trading system include both the WTO and Free Trade Agreements. The US played a hegemonic role in the creation and maintenance of a rules-based system, although since at least 2008 this role was subject to increased domestic contestation culminating in the decision by President Trump to fully disengage the US from any commitment to abide by international rules. The decision has come about at a time when global trade is much more diversified than in the unipolar post-Cold war ‘moment’, where geopolitics are dominated by geoeconomic competition between the US and China and where economies are experiencing major transformations due to new digital technologies and the need to shift energy consumption away from fossil fuels. This new reality can hardly be managed without major adjustments of the trade regime, so that maintaining the status quo is no longer an option. At the same time, most trading nations remain attached to the stability provided by a rules-based trading order and still abide by WTO rules for most of their trade.

In considering scenarios for the global trading system over the next decade, there are three variables to consider: (a) the extent to which the US and China are ready or not to accept certain rules-based guardrails while continuing to engage in geoeconomic competition; (b) the capacity of the rest of the world to act collectively to organise a reformed rules-based trading system that does not depend on cooperation from the two geopolitical rivals; and (c) the capacity of existing institutions –WTO and FTAs– to adapt.

This paper will present three scenarios for the next decade: (a) trade without rules; (b) a fragmented trading order including a coalition for rules-based trade; and (c) a reconstructed global trading system. The third scenario would imply that both the US and China are ready to cooperate in a major reform of existing trade institutions. This is unlikely in the absence of a major crisis that creates the political context for reinforced cooperation and a willingness to undertake domestic adjustments. The main difference between scenarios one and two is the capacity of the rest of the world to agree on a resilient system of rules-based trade. The political feasibility of each of these scenarios depends on the intensity of geopolitical competition, domestic political developments in those countries that have a systemic impact on global trade and the interface between the trade regime and other economic regimes, notably those relating to monetary issues and climate change.[14] What follows is a presentation of the main features of each scenario.

2.1. Trade without rules

Adam Posen has characterised the new US attitude to the trading system as moving from an insurer to an extractor of profit.[15] This is illustrated by the main features of the ‘deals’ so far concluded by the Trump Administration. These are: (a) an asymmetry of tariff commitments that favours the US; (b) the inclusion in some deals of non-market based one-sided commitment on investments; and (c) the lack of legal stability or of a mechanism for third party adjudication. Such deals are fundamentally inimical not only to the core principles of the GATT/WTO system but also to the carefully designed legally binding trade agreements that have supported the development of global value chains. The US has indeed walked away from all the trade agreements concluded by previous Administrations with the partial exception of the agreement with Canada and Mexico. Moreover, the US is also ready to apply tariffs as a tool to relocate manufacturing industries or as an instrument of coercion for non-trade objectives.

The position of China in this scenario still needs to be defined. On the one hand, China continues to support the WTO rule based trading system and its reform and maintains a network of free trade agreements (although accession to the CPTPP is very unlikely).[16] On the other hand, China is unlikely to change its mercantilist trade and industrial policies and continues to use coercive tools either for geopolitical reasons or to prevent challenges to its dominance in critical manufacturing sectors. An important variable is whether or not the US and China will conclude a framework trade agreement. An unstable understanding may be reached that maintains high tariffs on bilateral trade, combined with managed trade commitments from China (including purchase commitments and export restraints) and some form of understanding on export controls, including both semiconductors and critical raw materials. The agreement would not, however, tackle the structural obstacles that need to be addressed to ensure a level playing field or correct macroeconomic imbalances.

It is also not clear either whether the US will eventually reach agreements with other BRICs (notably India) although the prospects of BRICs coordination are rather limited in view of different trade interests and geopolitical positions. It is therefore very unlikely that the BRICs will emerge as a cohesive player in global trade matters.

This first scenario would also imply that other major trading powers decide to move away from rules-based trade by ignoring the rules of the WTO and weakening the commitment to free-trade agreements. Here the position of the EU is key. The EU is very unlikely to develop coercive policies similar to those of the US or China. At the same time, the EU-US trade deal appears to condone US protectionism and compromises the EU’s role as a defender of rules-based trade. There are also inward-looking protectionist tendencies and the advocacy for WTO inconsistent policies that might limit the EU’s readiness to assume a leading role in efforts to reconstruct the global trading system. The last section of this paper includes recommendations on how EU trade policy can influence the evolution of global trade towards the second scenario.

Scenario one is likely to be highly unstable and conflict prone. Coercive policies by the US and China will generate resentment. Multilateral institutions will fade into irrelevance and commitments under existing free-trade agreements will be increasingly nullified through regulatory or industrial policies. While the US and China will seek to attract countries to a hegemonic trading bloc, a stable bloc-based trading order is very unlikely since neither the US nor China would be ready to compensate members of their bloc for lost trading opportunities with the other. The EU will find it difficult to resist coercive pressure or to adapt to a trading system based on transactional arrangements. Its global trade and regulatory influence will diminish. Absence of mutually acceptable trade rules will also make it more difficult to cooperate on the provision of public goods like coordinating responses to climate change or pandemics. A global increase of protectionism and monetary instability could eventually lead to a financial crisis of unpredictable consequences for the global economy. Intensified geopolitical and geoeconomic competition can also result in a military conflict involving the US and China.

2.2. A fragmented trading order including a coalition for rules-based trade

Under this scenario the US continues to apply WTO-inconsistent tariffs (although possibly moderated in their impact) and China maintains a growth model that relies on massive subsidies for manufacturing and limited import penetration. A coalition in support of rules-based trade becomes the third pillar of a multipolar fragmented trading order.

Most participants in the trading system have benefited from the stability provided through a combination of WTO rules and free-trade agreements and would not wish to be part of a US-led or China-led trading bloc. Even developing countries that have not significantly benefited from global trade integration are concerned that their prospects for development through trade would be very negatively impacted by a trading system based on bargaining power. At the same time, the lack of a coordinated response to US tariffs illustrates a collective action problem. The US plays too central a role in the system and the combination of different geopolitical alignments and economic interests is a major obstacle to common initiatives. As the third-largest trading power, the EU would be the prime candidate for seeking to organise a coalition whose primary objective would be not only to preserve rules-based trade but also to adapt the rules of trade to new challenges. The starting point for building such a coalition could be closer cooperation between the EU and the CPTPP, since the EU already has free-trade agreements with most of its members.[17]

A possible structure for the coalition could be based on three key elements:

  • Members of the coalition would share a commitment to respect WTO rules in their mutual trade and to maintain WTO-compatible FTAs. This does not mean that all participants should have already concluded FTAs between them but that there should be a critical mass of bilateral or plurilateral FTAs and an openness to complete negotiations with other members of the coalition. To avoid a ‘hub and spoke’ system and to simplify transactions for businesses, agreement could be reached on a common protocol of rules of origin.[18] As regards the WTO, coalition members should coordinate positions on WTO reform and become members of the Multi Party Interim Arbitration Agreement.[19]
  • Members of the coalition would agree to start work on modernising trade rules through open plurilateral agreements. Two obvious areas for rule-making are digital trade and cooperation on economic security and supply-chain resilience. The latter agreement could include cooperation in the event of a member of the coalition being threatened with coercive trade action. Two more challenging areas are the level playing-field issues, including subsidies, and coordinated action on the trade and climate interface. The reason why these are more challenging is that agreements on these areas are unlikely to be effective unless there is at least participation from China (and ideally also the US). At any event, it is likely that open plurilateral agreements will have variable geometries and some of them might be easier to integrate in the WTO than others.
  • Developed members of the coalition should commit to apply duty-free access for least-developed countries and support investments in vulnerable developing economies. Since many of those countries are likely to have limited resources to become members of the coalition, the latter should promote WTO work on development-related issues. The main objective of this work would be to facilitate integration in global value chains, but there should also be openness to consider targeted flexibilities in the rules so as to support value addition and industrialisation. The coalition could in this context open a dialogue with the African Union (AU), which is in the process of consolidating its own free-trade area.

In order to have a systemic impact, the coalition should be expanded beyond the EU and the CPTPP to other countries. This could, for instance, include countries that have free-trade agreements with the EU and members of the CPTPP, such as EFTA, Korea, Mercosur or other ASEAN countries. The EU should open a bilateral dialogue with India to explore the possibility of it joining the coalition or at least some of its plurilateral agreements and the protocol of rules of origin.

Members of the coalition will develop their own relationships with the US and China. For instance, in a post-Trump context the EU may wish to conclude a WTO-compatible FTA with the US provided that it does not compromise its trade policy or regulatory autonomy.[20] The US and China would be offered the possibility of joining the negotiation of open plurilateral agreements, in particular those relating to the trade and climate interface and level playing-field issues. Indeed, China’s participation in a climate coalition is critical for its success. US participation in plurilateral rules-based agreements is, however, very unlikely during the Trump Administration. Nonetheless, it would be important to avoid any perception that the coalition has an anti-US agenda.

Under scenario two, the WTO will continue to play an important role in so far as the vast majority of its members will continue to abide by its rules and many of them will be parties to the Multi-Party Interim Appeal Arbitration Arrangement (MPIA). Reforms could focus on enhancing the effectiveness of its deliberation function and the work of its committees, including integrating agreements with very broad membership like the Investment Facilitation for Development (IFD) Agreement. It should also agree on a work programme to support better integration in global value chains of vulnerable developing countries. The WTO would be complemented by an interconnected network of free-trade agreements and plurilateral agreements that would become the main instrument to update the rules of the global trading system.

The coalition would represent at least 50% of world trade and become a more cohesive player in discussions on how to restructure the global trading system. It could therefore provide the collective insurance for the members that used to be provided with an integrated rules-based trading order. In so far as the coalition is able to expand its participation in international trade and develop solid new rules, it may increase the cost for countries remaining outside and the chances of the US and China being ready to engage in good faith negotiations to reform global institutions. It would also increase resilience in relation to possible coercive action by non-coalition members.

2.3. A restructured global trading system

A longer-term perspective would be a restructured global trading system that includes both the US and China. However, such a scenario only has chances of becoming politically feasible if the US and China undertake reforms in domestic policies that go well beyond trade. It is therefore only a realistic scenario if a future US Administration decides to make a major break with Trump’s trade policies. Even then, the fundamental reforms needed in global trade institutions would take time to be agreed upon and may have to be coordinated with reforms of other international economic regimes, notably those relating to macroeconomic and climate policies. So, for at least the next seven to 10 years, scenario two provides the only option to maintain a system of trade based on rules.

A restructured global trading system would have to be based on a reformed WTO combined with a system of interconnected free trade agreements for countries wishing to pursue deeper integration. The reform of the WTO could be based on three core parameters: (a) maintaining as much as possible the rules agreed in 1995 including the MFN principle; (b) updating rules and market access commitments so as to maintain diffuse reciprocity and a level playing field; and (c) changing the WTO institutional structure so that rules can be developed through open plurilateral agreements.

The reformed WTO would need to combine improved disciplines on level playing-field issues (including subsidies), new rules on the digital economy and support cooperation on the trade and climate interface. To be viable, rules will need to accommodate sufficient policy space for countries on the use of industrial policies, contingent instruments of protection and economic security tools. Most of the new rules would take the form of open plurilateral agreements. The WTO agreement would need to be amended to facilitate the incorporation of such plurilateral agreements under a common institutional structure. The resulting multilateral system will be ‘thinner’ and more fragmented than WTO 1.0 although it would retain its essential characteristics. Deeper integration could be pursued through the interconnected network of free-trade agreements that has been discussed under scenario two, although some of the plurilateral agreements developed outside the WTO could now be subject to the common institutional structure.

If agreement can be reached on the substantive rules on level playing-field issues, trade defence and economic security, it should also be possible to reach an agreement on the third-party adjudication of disputes, although this is only likely to include standing second-tier adjudication between countries wishing to maintain that option. Agreement on dispute settlement reform is also likely to require an agreement in a number of areas on a common interpretation of WTO rules relating to trade remedies and economic security matters.

3. Implications for the EU’s trade policy

The first scenario is deeply troubling for the EU, which will see its influence on global trade and regulatory policies substantially reduced. The third scenario depends on factors largely outside EU control and that go well beyond the trade policy sphere. The EU however, has considerable agency in promoting the second scenario, although it would require a real exercise of leadership and a less inward-looking approach to regulatory and industrial policies.

The political case for the EU to invest in the development of a rules-based coalition is compelling. The instability linked to the first scenario can become a major drag on the growth of the European economy, which is highly dependent on trade and vulnerable to external economic shocks. A weaker EU will be less economically integrated and a non-actor on the global scene. On the other hand, the disruptive US behaviour and the limits of Chinese soft power provide an opportunity for the EU to increase its global influence not only on trade but also on global climate policies and, if combined with a reinforced single market and savings union, also reinforce the international role of the euro. By being at the centre of an integrated network of free-trade agreements it could also have a leading role in shaping the new rules of international trade, climate policy and international regulatory cooperation.

This paper therefore recommends five strategic initiatives for the trade policy of the von der Layen Commission:

  • The EU needs to increase resilience by relativising the importance of trade with the US and China. The ‘deal’ concluded with the Trump Administration is at most a ‘tariff truce’ but is not the basis for strategic transatlantic cooperation or sustainable beyond what is left of the Trump Administration. In view of the continued importance of the US for European security, the EU should work on the prospect of concluding a balanced free-trade agreement with a future US Administration. The EU still needs to identify a balanced bilateral agenda with China that maintains cooperation on climate transition and begins to address level playing-field issues. At the same time, the Commission needs to agree with the member states on an economic security doctrine that allows the deployment of all available tools to reduce dependencies that can be weaponised and includes a credible use of the Anti-coercion instrument. Economic security would need to combine the capacity to respond to potential new coercive action from the US or China with sustained action over the medium-term to reduce critical dependencies. The ‘rules-based coalition’ and cooperation with Africa could be critical pillars of the partnership dimension of the economic security strategy.
  • The EU needs to complete its bilateral network of free-trade agreements. The crucial test for the credibility of the EU’s trade policy is the ratification this year of the agreements with Mercosur and Mexico. It should also be possible before the end of the year to conclude negotiations of comprehensive free-trade agreements with Indonesia and India and a sustainable investment agreement with South Africa. This could then be followed by the conclusion of negotiations with Australia and other ASEAN countries.
  • This year, the EU and CPTPP countries should still launch a common initiative to reinforce cooperation on the establishment of a coalition in support of rules-based trade. It is critical for cooperation to have a real content and aim to outreach to a broader group of countries. On the basis of discussions between members of the coalition, it should be possible to identify an agenda where work could start on the negotiation of open plurilateral agreements and on a common protocol of rules of origin. The Group could also support the launch of an ambitious programme for WTO reform at the 14th WTO Ministerial Conference to be held in Cameroon in March 2026.
  • In the context of the WTO Ministerial Conference, the EU should agree on a common platform for cooperation with the AU. This could focus on actions to support investments in green industries and the digital economy, including a substantial Global Gateway package in support of these investments as well as to facilitate compliance with EU regulations and access to EU markets. EU-supported investments should benefit from lead markets under the Clean Industrial Deal.
  • Following this year’s COP in Brazil, the EU should be ready to participate in an initiative to facilitate cooperation on the trade and climate interface. This could consider how to promote interoperability of carbon pricing schemes. It would be critical that key emerging economies such as China, India, Indonesia, South Africa and Brazil are ready to participate in those discussions. The EU could indicate a readiness to introduce changes in its autonomous green legislation to reflect possible areas of agreement arising from the discussions. The EU should also establish a fund to support decarbonisation efforts in low- and middle-income countries. These discussions could eventually evolve into a plurilateral agreement to decarbonise critical industries based on carbon pricing.

The above trade policy agenda is highly ambitious. But at the same time the disruptive policies introduced by the Trump Administration provide a real opportunity for the EU to influence the global trading environment and build up alliances with the large majority of countries that want to maintain rules-based trade. An active external agenda is the necessary complement of action to improve the competitiveness of the EU’s economy as outlined in the Letta and Draghi report. Domestic policies should, however, avoid initiatives contrary to WTO rules and ensure that EU regulations better recognise the importance of agency and cooperation with trading partners.

Conclusions
The collapse of US leadership in the rules-based trading system has left the global economy at a crossroads. With the US and China locked in geoeconomic rivalry and constrained by domestic political economies, the immediate prospects for a reconstructed global system are slim. Instead, the most viable path forward lies in a fragmented but resilient coalition for rules-based trade, led by the EU and like-minded partners.

For the EU, this moment is both a challenge and an opportunity. Failure to act would reduce its influence and leave it vulnerable to coercive pressures from great powers. But by investing in strategic alliances, strengthening FTAs, linking trade to climate action and engaging developing regions, the EU can play a decisive role in shaping the global trading order of the future.

[1] The author is grateful to Bruce Hirsh, Pascal Lamy, Inu Manak, Petros Mavroidis, Simon Nixon, Miguel Otero, Mona Paulsen, Andre Sapir, Federico Steinberg and Alan Wolff for comments and discussions on this paper.

[2] Jamieson Greer (2025), ‘Why we remade the global order?’, New York Times, 7/VIII/2025.

[3] For a good rebuttal, see Inu Manak (2025), ‘No, Trump is not ushering in a new global trading order’, Financial Times, 19/VIII/2025.

[4] There appears to be a broad view amongst Democrats that any future trading system should not be based on MFN. See, for instance, Michael B.G. Froman (2025), ‘After the trade war. Remaking rules from the ruins of the rules-based system’, Foreign Affairs, 12/VIII/2025.

[5] For a discussion of the motivations behind Trump trade policy see Richard Baldwin (2025), ‘The great trade hack: how Trump’s trade war fails and global trade moves on’, Research Institute of Economy, Trade and Industry (RIETI), 19/V/2025.

[6] See Paul Krugman (2025), ‘The economics of Smoot-Hawley 2.O’, parts I and II, Substack.com. The average tariff after Smoot-Hawley was 20%, the Yale Budget Lab has estimated the average US tariff as of August 2025 at 18%. It was less than 3% before the second Trump Presidency.

[7] For the argument that the shift in US trade policy stance responds to structural causes see Pascal Lamy (2023), ‘Le lent virage protectionniste americain?’, Telos, 17/V/2023.

[8] The brief account here is necessarily simplified. For a more detailed discussion see Ignacio García Bercero (2020), ‘What do we need a WTO for? The crisis of the rule-based trading system and WTO reform’, Bertelsmann, 2/VI/2020.

[9] It is worth noting that the Trump criticism of WTO rules is limited to tariffs and certain aspects of trade in goods and not to the rules applicable to services or intellectual property, which were the two main US demands in the Uruguay Round.

[10] Robert Wolfe (2009), ‘The WTO single undertaking as negotiating technique and constitutive metaphor’, Journal of International Economic Law, vol. 12, nr 4, p. 835-858, doi:10.1093/jiel/jgp038. The single undertaking was central both for the creation of the WTO and the launch of the DDA negotiations. It can no longer provide the basis for a multilateral system with a very diverse membership.

[11] Edward Alden (2016), Failure to Adjust: How Americans Got Left Behind in the Global Economy, Council on Foreign Relations, Rowman & Littlefield.

[12] Of particular significance was the ruling by the Appellate Body in 2013 that made it difficult to consider financial support by state owned enterprises as a subsidy.

[13] The EU and the US have different perspectives on the role of the Appellate Body in ensuring legitimacy of WTO dispute settlement. Regardless of these differences, binding third party adjudication and constraints on unilateral action under section 301 of US trade law were at the core of the Uruguay Round bargain.

[14] This paper is exclusively focused on the trade regime, but a deeper analysis would have to consider interactions with the international monetary order and efforts to reinforce an effective international climate regime.

[15] Adam S. Posen (2025), ‘The new economic geography: who profits in a post-American world’, Foreign Affairs, September/October.

[16] The Chinese position on WTO reform is similar to that of Prince Lampedusa in Il Gatoppardo: support reform to better preserve the status quo.

[17] I. García Bercero (2025), ‘How the EU should plan for global transformation’, Bruegel, 21/V/2025. See also Per Altenberg (2025), ‘A new trade policy era: the need for a rule-based trade coalition’, Kommerskollegium-National Board of Trade Sweden, August.

[18] The negotiation of common rules of origin would be simplified if they were complementary to the rules included in bilateral agreements.

[19] This provides for an appeal procedure and therefore maintains a two-tier binding system of adjudication between parties.

[20] The EU has already eliminated most of its tariffs in the EU-US deal and the conclusion of an FTA would be a way of reconciling such a preferential tariff treatment with WTO rules. At any event, an unbalanced trade agreement is not sustainable beyond the Trump Administration.