The Trump administration's trade wars, unrelenting despite the Supreme Court's rebuff, continue to sow distrust in Europe. New tariff threats against many European countries (over Greenland and more recently against Spain over the Iran war) have convinced even the most diehard Atlanticists that Europe must look for alternative and less risky trade alliances.
A major source of concern now is the future of the US-EU Turnberry deal of last summer. It set an all-inclusive US tariff rate of 15 percent applied to most European sectors, but its future is uncertain following the Supreme Court's rejection of the International Emergency Economic Powers Act (IEEPA) tariffs that formed the basis of the deal and the European Parliament's decision to postpone the vote on the agreement while Trump ponders other tariffs to replace the ones that have been invalidated.
The European Union is now trying to avoid escalation with the US administration while forging new alliances. For this shift of focus to work, however, the European Union also needs to become stronger economically while ensuring that its new emphasis on industrial policy does not become a tool to discriminate against economic partners.
Is the European Union ready to reform?
Whoever is in the White House, Europe must work to revive economic growth, innovation, and competitiveness. Trade conflicts with both the United States and China have accelerated the need for more self-sufficiency in key sectors. The European Commission is rolling out proposals to simplify rules and regulations, as recommended in the two reports by former European Central Bank (ECB) president Mario Draghi and former prime minister of Italy Enrico Letta. The commission's newly presented Industrial Accelerator Act will determine whether industrial policy can facilitate cooperation with trading partners under a kind of "Made with Europe" umbrella, avoiding protectionist pitfalls.
For example, the proposal introduces low carbon requirements for public procurement and public support schemes. The focus is on increasing European manufacturing production and made in Europe requirements, but partners with a free trade agreement (FTA) with the European Union, as well as signatories to the World Trade Organization (WTO) General Procurement Agreement, will be allowed into procurement bids, under certain conditions. But there are complex rules for screening and tracing every component in the value chains of such bids, which could be deemed protectionist.
Yet the new industrial policy proposal is less protectionist than indicated in early leaked drafts, which raised doubts over whether non-European companies could participate on the same conditions as companies in the European Union. Full reciprocity, meaning no discrimination for European company bids in the partner countries, will be an important part of public procurement on the European market, which could complicate the objective of promoting the green transition while guarding against unfair competition from China. The European parliament and EU member states must now agree on the final provisions of the proposal, determining whether what is intended as a strategic tool ends up increasing administrative and protectionist obstacles.
Derisking and seeking new friends
Reducing the risk of reliance on the United States also means creating new alliances and trying to open new market access possibilities for the European Union. As of today, there are more than 40 trade agreements between the European Union and its trading partners. More are in the making. A flurry of new trade deals with large economies have been forged in the last year, paving the way for closer economic cooperation but also a broader partnership. The agreement with Indonesia was politically concluded last September. In January this year, the European Union signed an agreement with the four countries of the South American customs union Mercosur (Argentina, Brazil, Paraguay, and Uruguay).
The Mercosur agreement was decades in the making and concluded despite some countries´ strong opposition, notably from France, which worried about its effect on farmers. The European Commission has just decided that the agreement will enter into force provisionally on May 1, provided that the four Mercosur countries have fulfilled their own ratification procedures (Uruguay and Argentina have already done so). This action is legally possible despite the fact that the European Parliament has sent the agreement to the European Court of Justice, questioning its legality in the agricultural chapter.
Similarly, an agreement with India, also in the making for two decades, was concluded at the end January. As with the Mercosur agreement, geopolitical considerations from both sides pushed negotiators to make a final effort to conclude. The agreement contains several carve-outs, especially in the agricultural sector. Nevertheless, it is more ambitious than many expected, and tariffs of more than 90 percent on EU exports to India will be eliminated or reduced. The accord illustrates India´s willingness to open up its economy and play a more active role at the global trading scene, as PIIE senior fellow Arvind Subramanian argues.
The European Union is also trying to conclude agreements with Australia, Thailand, Malaysia, and the Philippines. An updated agreement with Mexico has been pending for a while, but a signing ceremony is planned for the end of May. Furthermore, there is an ongoing review of the existing agreement with the United Kingdom to facilitate easing some non-tariff barriers in the phytosanitary sector. A deal to facilitate trade with Switzerland was also just agreed.
These agreements send a powerful geopolitical signal that participating countries want to trade and cooperate on predictable, rule-based terms as defined in legal, transparent documents.
Can the EU and CPTPP lead a new alliance?
Beyond all these agreements looms a promising rapprochement between the European Union and the dozen countries participating in the Asia-Pacific free trade agreement known as the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP). Most of the European Union´s allies in the Pacific region are in this partnership, which was originally an initiative by President Barack Obama as part of his "pivot to Asia." US participation was killed by President Donald Trump in his first term, but the other countries agreed to move on, and the cumbersomely named CPTPP entered into force in December 2018.1 Since then, the United Kingdom has joined CPTPP.
The European Union has bilateral trade agreements concluded or in the making with almost all of the CPTPP member countries. Just before Christmas, the EU commissioner for trade, Maroš Šefčovič, held a ministerial meeting with the 12 CPTPP countries. They launched a trade and investment dialogue and agreed to support reform at the WTO. Other aims are to facilitate digital trade between the European Union and CPTPP members, strengthen supply chains resilience, address non-tariff barriers, and streamline border and regulatory processes. After his much-quoted speech in Davos, Mark Carney, the prime minister of Canada, a CPTPP member, seeks to take a leading role in forging closer ties with the European Union and other so called middle powers.
The European Union and the 12 countries of the CPTPP could be the core of a sort of anti-Trump alliance as Carney envisions, perhaps a broad "coalition of the willing" in trade and investments. One could imagine the European Union and CPTPP aligning rules of origin and facilitation of trade in climate goods and services, for example. They could also try to find common ways to address or mutually recognize the various different versions of carbon pricing among CPTPP members. Updated rules on subsidies would be another potential area of cooperation. Other like-minded partners could be invited to join, including the Mercosur countries and South Korea.
The EU needs to remain open for business
The European Union and its economic partners have a window of opportunity to lead the world on a new path of updated multilateralism. Ideally, they could fashion new rules on subsidies and economic security, while navigating among different models of carbon pricing. In addition, they could deepen cooperation on rare earth and critical materials, under the WTO or plurilateral arrangements. Such bilateral and regional trading agreements can lead the way to rules that help countries diversifying, "derisking" and increasing the resilience in their value chains.
But to remain a trustworthy partner, Europe must stay open. The new European industrial policy aims to strengthen Europe´s competitiveness in manufacturing, speeding up the green transition and facilitating foreign investment. But this goal could be undermined by the different administrative requirements and the full demand of reciprocity in public procurement. Europe should avoid alienating partners and allies by making trade and investment more difficult. If the Industrial Accelerator Act does not resolve these problems, Europe's goal of leading a new economic alliance could be jeopardized.
Note
1. The following countries are members of CPTPP: Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, and Vietnam. The United Kingdom officially joined in December 2024.
Data Disclosure
This publication does not include a replication package.
