The European Union in the New Trade Disorder

Global trade and its governance are being reconfigured. Beyond the problems that the war in Iran is causing for oil and gas flows—which will also affect global supply chains and could call into question freedom of navigation—the wave of protectionism that began on the Trump administration’s “Liberation Day” is giving rise to a new structure of global trade. International exchanges have not collapsed, but patterns of trade and investment are changing rapidly in a context where the World Trade Organization (WTO) is losing relevance. As Richard Baldwin, one of the more sophisticated observers of economic globalization, suggests, trade is being reorganized around two major hubs: the European Union (through bilateral agreements of varying intensity) and the Trans-Pacific Partnership (CPTPP). These networks of preferential agreements provide rules and predictability in the absence of a WTO that continues, unsuccessfully, to try to reform itself and regain relevance.

Since the 2008 financial crisis, distrust of free trade has been on the rise. But the neo-protectionist wave reached a point of no return with the second Trump administration. The world’s largest importer, the United States, chose to weaponize imports. In April 2025, it sharply raised tariffs. And despite the setback from the Supreme Court in February 2026, which declared most of them illegal, the United States rebuilt its protectionist measures through other legal instruments that will very likely remain in place for many years, even if governments change. For its part, China, the world’s largest exporter, responded to U.S. tariffs by weaponizing its exports. It restricted the sale of critical minerals, rare earths, magnets, and pharmaceutical components, putting the U.S. economy under pressure—much as Iran has done by closing the Strait of Hormuz. However, China’s export controls also affected the rest of the world, which discovered that the use of trade as a weapon and the exploitation of choke points in the global economy could be used for economic coercion in areas previously considered safe.

In any case, despite the clear intention of the Trump administration to de-globalize the U.S. economy and the rapid contraction of economic ties between Washington and Beijing, international trade has not collapsed. While bilateral exchanges fell by 30 percent over the past year, China has managed to increase its exports to the rest of the world. This trade diversion has been directed especially toward African and Association of Southeast Asian Nations (ASEAN) countries, some of which—particularly Vietnam—are serving as platforms to circumvent part of the tariff barriers imposed by the United States.

Most countries chose not to retaliate against the Trump administration’s tariffs and, for the moment, according to WTO data, trade is growing faster than global output (it expanded by 2.4 percent in 2025), driven above all by the dynamism of exchanges among emerging economies, the acceleration of services trade, and the trade in certain manufactured goods linked to investment in artificial intelligence and data centers. What is taking place, however, is a process of nearshoring and friendshoring, whereby trade intensifies with neighboring and geopolitically aligned countries.

Faced with this new situation, the European Union has deployed a dual strategy. First, it is seeking to modernize and integrate its single market, especially in services. The “Letta report”—from former Italian Prime Minister Enrico Letta and the lesser-known companion to the “Draghi report”—and the regulatory simplification agenda aim to dismantle barriers that today amount to high hidden tariffs.

At the same time, the European Union has adopted a strategy of trade de-risking vis-à-vis both China and the United States. It has signed several trade agreements that will allow it to diversify its exports and should reduce risks stemming from external economic coercion. Indeed, it is striking that, in just a few months, the European Commission and the European Council have negotiated and approved agreements that had been under discussion for decades, showing how the new geoeconomic context has softened some of the resistance to trade liberalization that has always existed in Europe, especially in France and in some Eastern European countries. Several landmark deals now define the contours of this emerging European trade strategy:

• The most ambitious agreement is the one signed (and already ratified) with Mercosur, whose provisional application began on May 1. However, the Court of Justice of the European Union will review it in the coming months due to challenges filed in the European Parliament by various far-right groups. This treaty took 25 years to materialize and establishes a free trade area of 700 million people in which virtually all tariffs are eliminated, while also facilitating trade in services, investment, and public procurement.
• The agreement reached with India, under negotiation since 2013, is less comprehensive and much shallower in scope, but it carries great potential value. India is not only the fastest-growing emerging economy today, but also one of the most protectionist in the world. The pact gives European exporters access to a highly dynamic market of 1.5 billion consumers while underscoring both economic giants’ support for rules-based trade.
• Also in Asia, the European Union has rapidly concluded an agreement with Indonesia that eliminates 98.5 percent of tariffs applied to European products (some of which reached 150 percent) and provides access to a market of 280 million people.
• Finally, an agreement has been reached with Australia–one of the world’s major agricultural exporters–a country with which negotiations had collapsed in 2023 due to European protectionism in the primary sector. This agreement highlights how Trump’s trade policies have substantially altered countries’ cost-benefit calculations regarding trade liberalization and how Australia pushed for the agreement once the EU-Mercosur deal was concluded and Latin American agricultural products were going to enter the tariff-free EU market.

These agreements go beyond tariff reduction. Those signed with Mercosur, Indonesia, India, and Australia include commitments on climate and labor rights, and all reflect an interest in building a new framework of rules to complement the weakened WTO. They also contain a strategic component aimed at increasing European firms’ access to critical minerals, which are essential for the energy and digital transitions, and where dependence on China is particularly risky. For example, Mercosur supplies 82 percent of the niobium imported by the European Union, and has abundant reserves of lithium, copper, silicon, and nickel; Australia is a major global producer of lithium, aluminum, and manganese; and Indonesia holds key reserves for the electric vehicle value chain.

Finally, although it is not strictly a trade agreement, the European Parliament approved in March the deal reached last June between the European Commission and the Trump administration, which in principle caps U.S. tariffs on European products at 15 percent while reducing EU tariffs on U.S. products to zero. It is an asymmetric agreement, reluctantly accepted by the European Commission to avoid worse outcomes, and it is unclear whether it will remain unchanged, as the United States may unilaterally modify it once it completes its investigations into allegedly discriminatory trade practices under Section 301 of the Trade Act of 1974.

In any case, the European Parliament included several safeguard clauses. One states that the agreement expires on March 31, 2028, reflecting Europe’s hope that a new U.S. administration will reverse some of Trump’s protectionist policies. Another stipulates that the agreement will cease to apply if the United States raises tariffs on European products above 15 percent—a possibility given the president’s protectionist inclination. These agreements go far beyond tariff reduction: they aim not only to boost trade but also to strengthen the rules-based system and improve European industry’s access to critical minerals essential for the green and digital transitions.

From Cathedrals to Solar Systems

With a nationalist United States imposing tariffs and acting in a predatory manner, China weaponizing its dependencies and increasing its trade surplus, and the WTO severely weakened, the future of the multilateral trading system is uncertain.

What is emerging is a new, disordered network of trade agreements. If the previous system resembled a cathedral—with a well-defined center in the WTO, supported by U.S. leadership and firmly anchored in international rules—the new paradigm, still evolving, is structured more like two solar systems.

The first, more institutionally anchored, revolves around the European Union, whose vast single market attracts a wide range of countries linked through preferential agreements of varying intensity. Baldwin distinguishes among those that are part of the single market, such as Norway; those with deep bilateral agreements, such as Mexico, Korea, Japan, or Vietnam; and those with lighter agreements, such as the countries of the Maghreb.

The second, looser and more decentralized, orbits around the CPTPP, a mega trade agreement originally promoted by former President Barack Obama but abandoned by President Donald Trump during his first term. The CPTPP includes Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, Vietnam, and the United Kingdom, which joined in 2023. China maintains close trade ties with many of its members but is not part of the group. It applied to join in 2021, but its trade practices currently appear incompatible with the standards upheld by existing members. The CPTPP has considerably less institutional depth than the European Union (it is not a customs union and does not even have a common external tariff or negotiate as a unified bloc), but it is increasingly expanding its agreements with third countries.

Furthermore, convergence between the two blocs is facilitated by existing preferential bilateral agreements between the European Union and various CPTPP members, as well as ongoing negotiations aimed at deepening economic ties with partners such as Canada, the Philippines, and Vietnam. The result is that an ever-growing share of global trade and supply chains is concentrated within these two hubs (and their interactions), operating under rules that continue to provide certainty, predictability, and transparency—often aligned with WTO principles. India, for example, has free trade agreements with both the European Union and several CPTPP members. It is also likely that more countries will seek closer economic ties with these two emerging mega-blocs, as their export sectors will not want to face worse access to these lucrative markets than countries that have already signed such agreements, a dynamic known as the domino theory of preferential trade integration.

In short, the European Union has clearly demonstrated its willingness to sustain open, rules-based trade and has only considered using its new geoeconomic trade defense instruments against Russia, China, and the United States. More importantly, from a strategic perspective, it is succeeding in ensuring that many of its trade and investment priorities are reflected in the new preferential agreements it has signed, even if it has had to soften some of its traditional environmental or labor requirements. This suggests that the so-called Brussels Effect is still at work, although it would function better if the European Union had greater capacity for growth and innovation, particularly in cutting-edge technologies. It remains to be seen how Washington will react to this evolution of global trade, which for now does not appear to concern it.

Despite the challenges of a fragmented global landscape, the European Union is uniquely positioned to emerge as a stabilizing force and a primary architect of the new trade order. By deepening its own single market and leveraging its extensive network of bilateral agreements, the European Union can champion a more resilient, rules-based system that balances strategic autonomy with international cooperation. As the world moves toward regional hubs and friendshoring, the European Union’s commitment to high standards and predictable governance provides a compelling alternative to economic coercion, ensuring that it remains an indispensable leader in shaping a more stable and integrated global economy.

Federico Steinberg is a visiting fellow with the Europe, Russia, and Eurasia Program at the Center for Strategic and International Studies in Washington, D.C.