The Shift
Rise of a Geoeconomic and Power-Based System in Trade
Europe is confronted with a changing geoeconomic trading environment, characterized by economic rivalries, trade conflicts and coercive trade measures. During the height of globalization, the European Union (EU) and others built a global net of supply chains, based on efficiency considerations. This is now being called into question, as existing trade interdependencies are increasingly weaponized by major powers to achieve strategic goals in international relations. This geoeconomic and power-based approach to trade no longer only relates to China, but also increasingly to the United States.
China has been using coercive geoeconomics as the central anchor of its geopolitical approach for some time – and certainly since the start of the Belt and Road Initiative. This approach involves tying other countries into its overarching strategic goals through commodity agreements and major infrastructure projects, thereby creating economic dependencies, which can also be weaponized. Ultimately, these economic measures serve the goal of developing China’s geopolitical power. In addition, China uses its dominance in critical raw materials as a weapon to pursue its global interests and to punish other states. A case in point: Its 2025 rare earth export restrictions in response to US tariffs have been suspended, but only for a year. They will come up again at the end of 2026.
The United States has also developed a distinctive geoeconomic approach under the administration of US President Donald Trump. With trade and investment becoming a prime currency of international power, the United States uses its large market as a lever to push for strategic interests in a variety of policy areas, most notably trade, investment, technology, and geopolitics. The weapon of choice is tariffs, which Trump imposes to unilaterally open foreign markets for US products, and to change the behavior of major trading partners, including the EU. These tariffs are based on national trade laws (Trade Act of 1962, International Emergency Economic Powers Act IEEPA from 1977), violating global trade law. This new approach is embodied in the “America First” strategy which takes a zero-sum attitude toward international relations – the view that America can only gain if others lose out.
The US tariffs are applied to rivals (China) and allies alike (the G7 countries Canada, Japan, and European countries). Examples include the reciprocal tariffs on “Liberation Day” (April 2025) or the threat of tariffs against individual EU countries to push for the “purchase” or annexation of Greenland.
The Implications
Weakening of Global Trade Governance and International Cooperation
Due to these unilateral and coercive approaches by major trading powers, the World Trade Organization (WTO), which has guaranteed open and rules-based trade for decades, is under threat. Even though 72 percent of world trade is still governed by WTO rules, the international institution has become a status quo organization at best, with a lack of progress for reform.
Right now, none of the major pillars of the WTO system are working: (1) The dispute settlement function is blocked because the United States has refused to appoint members to the Appellate Body since December 2019. (2) The rule-setting and trade liberalization functions are deadlocked because growing geoeconomic rivalries among member states have led to a blockade of reform efforts, preventing its modernization. Even though the digital economy – and now artificial intelligence – along with industrial policies and a new focus on national security have altered the world economy, the WTO still works under the rules of the last century. Because of geoeconomic fragmentation, many modern trade topics can no longer be addressed at the multilateral level. (3) The monitoring function has become dysfunctional because member states, in particular China, no longer make required notifications of subsidies that distort trade. This counteracts global rules meant to manage industrial subsidies and ensure competitive neutrality.
The WTO and multilateral trade governance are therefore in crisis mode. This runs counter to the EU’s rules-based principles. The EU has profited immensely from the global trading system and therefore has much to lose from the shift to a power-based order, which brings with it protectionism and trade fragmentation and the reduction of global and European welfare.
The Response
New EU Alliance with Middle Powers to Strengthen Rules-Based Trade
The old world order is not coming back. Therefore the EU must be prepared to actively shape the new trade order. For this, it must become a more assertive actor, capable of defending its rules, norms, and values in this tough new trade environment that is overseen by ineffective multilateral institutions.
The European Commission is rightly focusing on three pillars: promote, protect, partner. Promote and protect are direct answers to the power-based trading system, strengthening European autonomy in strategic sectors and protecting investment and trade through stronger trade defense measures, investment screening, and the EU’s Anti-Coercion instrument.
The most crucial element, however, is the focus on new partnerships to shape the new trade order. The idea is to stabilize relations with strategic partners to diversify present trade relationships and create reliable alliances. The so-called middle powers, including the emerging economies of the Global South in Asia, Latin America and Africa, are particularly important partners in this regard.
Therefore, the European Parliament’s decision to refer the EU-Mercosur trade agreement to the European Court of Justice is disastrously short-sighted. It will delay the agreement for years (in the best case) and endanger European credibility as a partner. However, there are more agreements in the pipeline, particularly in the ASEAN region. The EU signed a free trade agreement (FTA) with Indonesia in September 2025, while it continues to negotiate with Thailand, Malaysia and the Philippines. It also concluded negotiations for an FTA with India at the end of January 2026. The aim is to convert these agreements into a broader EU-ASEAN regional agreement. The negotiations have not been easy, and there is still the (open) risk of difficult ratifications in the European Parliament. But this is the best and only way forward for the EU.
In addition to existing bilateral efforts, new partnership structures between liberal states are needed. The obvious partnership for the EU is the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), which consists of 12 member states, all of them middle powers - including Australia, Canada, Japan, Mexico, and the United Kingdom. Both sides want to advance new trade issues to promote modern trade rules (e.g., relating to digital trade) with a “coalition of the willing.” This arrangement could potentially be opened to the Mercosur countries and interested countries in Africa.
Thanks to Donald Trump’s volatile power dominance approach, countries are increasingly lining up to enhance stable and rules-based trade with the European Union. Despite increasing isolationist tendencies and stricter US tariff policies, global trade continues to grow. Therefore, the EU’s new engagement with middle powers makes sense as an immediate response to the protectionist trade policy of the US and the lack of multilateral alternatives. It can be used as a stepping stone for maintaining rules-based trade, which is important for Germany and Europe.
