EU focuses on free trade as it seeks order from chaos

The Trump administration appears to be doing everything it can to alienate America’s traditional European allies. Old certainties around shared Western values are disappearing as the US pursues a nakedly protectionist and self-interested agenda.

America first puts everyone else a distant second. President Trump’s on-again, off-again trade tariffs might be a self-inflicted wound to the US economy, but they are hurting everyone else as well.  We estimate that global economic growth will be reduced to 2.3% annually in 2025 and 2026, a 1.1 percentage point downward reduction over this period. 

For reasons perhaps only known to the President himself, Trump also appears to be favouring Russia over Ukraine, in direct contrast to EU policy. His oft-repeated ambition to annex Greenland - an autonomous territory of Denmark - is further ruffling European feathers.

All of which present an unwelcome challenge for the EU but also - perhaps - an opportunity. Could a proactive Europe become the chief driver of global free trade in America’s absence, grasping the opportunity to forge new trade relationships with global partners? 

And in a multipolar world with a volatile US on one side and an assertive China on the other, could the EU become the torch bearer for rules-based order?

The transatlantic relationship crumbles

Pursuing these ambitions requires a reaffirmation of free trade principles, and a new commitment to opening markets around the world.  

“Transatlantic strains are arguably their worst in decades and will give the EU added impetus to expand trade relationships with other parts of the world,” says Christian Bürger, senior editor at Atradius. “Trump’s move confirms the US abdication as guardian of the global trade system. Even if the US and the EU mend fences, trust has been lost.”

Against this background, China may appear the more reliable partner, and Beijing clearly hopes to draw more countries into its economic orbit. But trade with China is problematic. The EU recently imposed heavy tariffs on Chinese electric vehicles in response to what it regards as unfair government subsidies, and suspicions around Chinese trade practices are widespread. 

Trump creates political urgency

In the face of transatlantic uncertainty and Chinese intransigence, an obvious path for Europe is to forge new or better trade agreements with the rest of the world. It has done so before, notably during the first Trump presidency.

“Tariff threats during Trump's first term triggered the EU to finalise trade negotiations that had stalled for years - with Canada, Japan, Singapore and Vietnam,” says Atradius economist Theo Smid. “According to Cecilia Malmstrom, then EU trade commissioner, when the US imposed tariffs, it gave the EU political urgency to close the negotiations.”

These agreements have generally been successful. According to the Vietnamese Ministry of Industry and Trade, Vietnam’s export value to the EU has surged by nearly 50% since the agreement, while imports from the EU have grown by over 40%.

With a second Trump presidency creating even more volatility, the process has begun again. Since November, the EU has updated deals with Chile and Mexico, and talks are ongoing or planned with Malaysia, Thailand, the Philippines and the UAE. 

“Next to these conventional trade agreements, the EU has concluded negotiations for Digital Trade Agreements on cross-border data flows, privacy and personal-data protection with Singapore and South Korea,” adds Smid. 

Two potentially game-changing agreements are also in the pipeline. Since the election of President Trump, a new sense of urgency has emerged over potential free trade deals with Mercosur, the huge South American trade block, and India, the world’s fifth largest economy at an aggregate level.

The lure of South America

A free trade agreement (FTA) between the EU and Mercosur was finalised in December, a month after the US presidential election. President Trump’s victory helped push the deal over the line after 25 years of hitherto fruitless talks. 

Once ratified, the deal will create the world’s largest free-trade zone, bringing together 700 million people. It will remove tariffs on 90% of existing trade between the two blocs over the next 10 - 15 years, boosting EU exports to the region and offering an alternative American market to the US. It will also improve European access to a continent rich in critical minerals.

“The deal would greatly extend the EU’s influence in world trade and reduce competitive disadvantages with China and the US in South America,” says Smid.

But it is not ratified yet, and some EU member states oppose the deal. Powerful farming lobbies in countries like Austria, France and Ireland warn of dire consequences for European producers from a flood of South American imports. 

Unknowingly, President Trump may ride to the deal’s rescue. While opposition in the EU remains, the US tariff threat is helping to forge a new consensus.

“We think that current US policies have made it probable that a ratification will happen sometime this summer,” says Bürger. “While France is officially still opposed, Paris is the strongest advocate for the EU´s strategic autonomy and economic resilience. But we acknowledge there is a downside threat of the deal’s rejection.”

Passage to India?

An agreement with India has also been long in the making, with talks resuming in 2022 after stalling in 2013. The UK is negotiating its own FTA with India which is said to be nearly complete. 

Potential roadblocks still exist for any EU/India deal, particularly over tariffs on pharmaceuticals and vehicles, intellectual property rights and access to agricultural markets. Nevertheless, US trade policy has made a speedy resolution far more likely, and the two parties hope to finalise a deal this year. 

It is in their interests to do so. The EU is India’s largest trading partner for goods, accounting for around 17% of India’s total exports. India currently only accounts for 2% of European trade turnover but trade between the two has grown by 90% or so in the last decade and there is plenty of room for improvement. 

“For the EU, it is becoming harder and harder to ignore India as an attractive market and part of a de-risking strategy from China,” says Smid. “For India, the EU is a significant export market. But Indian exports suffer from the absence of duty-free access, so there is a serious case for both sides concluding an FTA as soon as possible.”

A new world order

Deals with India and Mercosur are not magic bullets. The macroeconomic impact would be modest at first, though trade would most likely grow over time. In the short term, there is little the EU can do to offset the effects of a transatlantic trade war.

But there would be considerable symbolic impact. Politically, signing important new FTAs with major players in the global south would signal the EU’s commitment to multilateralism, free trade and global economic development, and help position Europe as a trusted trading partner of choice. The bloc’s openness would sit in stark contrast to President Trump’s inward looking protectionism. 

But there is work to be done, and much of it in the EU itself. “The EU and its member states have to accept that in the current environment, players like India and Mercosur have gained more political and economic leverage, increasing their bargaining power,” says Bürger. “Compromise will be necessary to make these deals happen, but current US policy is focusing minds.”

An unpredictable US and troublesome China are persuading member states and EU leaders of the need to strengthen Europe’s credentials as an open and dynamic trading bloc in a new multipolar world order. The first fruits of this strategy could include FTAs with two emerging economic powerhouses.