Europe, in denial, longs for rules-based global trade order

ABU DHABI — Call them phantom pains: The European Union is the economic power that longs most for a return to the rules-based order that the World Trade Organization once embodied.

As the global trade body went into overtime in an attempt to salvage a difficult ministerial meeting in Abu Dhabi, this week's gathering showed again how other players have already come to terms with the new reality created by China’s long economic rise.

Europe’s closest ally, the U.S., argues that the WTO rulebook — most importantly on resolving trade disputes — is outdated and needs reform. But Washington is in no rush, ruling out a deal until after the U.S. presidential election in November.

“We’re trying to fix [the WTO]. We're trying to make it work for everybody, and, of course, make it work for ourselves,” U.S. Ambassador to the WTO María Luisa Pagán told POLITICO in an interview on the sidelines of the WTO’s 13th Ministerial Conference.

While Brussels and Washington share a similar diagnosis of what ails global trade — which grew by an anemic 0.8 percent last year — they have different remedies in mind. And that is complicating a transatlantic relationship that is looking less and less like a partnership.

Hard-to-resolve disputes between Brussels and Washington — ranging from tariffs on aluminum and steel, to aircraft and green subsidies — come down to their views on how trade should work. 

“The Americans want the Europeans to engage in practices vis-à-vis China, which the Europeans believe would be contrary to WTO rules,” said Keith Rockwell, a senior research fellow at the Hinrich Foundation and veteran former WTO spokesperson.

“The Americans don't care. They say: ‘Well, that's too bad,'” he added. 

Technical knockout

Donald Trump paralyzed the WTO’s highest appeals court in 2019 by blocking judicial appointments over long-standing U.S. concerns that it had repeatedly favored Washington's adversaries and infringed on its sovereignty.

In doing so, he effectively stripped the Geneva-based body of its standing as an impartial referee, making disputes more likely to escalate.

A potential return by Trump to the White House is deepening unease in Brussels. The Republican contender has announced his intent to amplify his ‘America First’ agenda — which would include imposing blanket import tariffs against friend and foe alike. 

“Trump is better prepared this time around. And if we don’t fight for the system, maybe in 10 years, we’ll look back and regret it,” said one European diplomat, who was granted anonymity to speak candidly. 

Trump’s former top trade official, Robert Lighthizer, has denounced the WTO as a “self-aggrandizing institution” that imposed new rules on its members and infringed on countries’ sovereignty. It was a “colossal and tragic failure,” he wrote in a recent book. 

And although the tone has changed under Joe Biden, the objective remains the same: to slow the rise of China and reassert U.S. sovereignty over cutting-edge technologies such as semiconductors.

The transatlantic divergence over the rules-based trading system came more sharply into focus last year when Washington proposed creating a protective moat around the U.S. and Europe to keep out carbon-intensive Chinese steel. 

The American idea of a joint tariff wall was seen as heresy in the European Commission’s trade department. Instead, Brussels wanted to achieve adequate protection through more traditional trade defense methods — in a bid to appear compliant with WTO rules. This led to a collapse of the talks on the eve of a major summit in Washington last October — and they have now been put on ice until after the next U.S. president takes office.

Reform conundrum 

The multilateral body — which grew to 166 members in Abu Dhabi with the addition of microstates Comoros and Timor-Leste — remains an attractive forum for smaller countries. However, because it operates by consensus, it can be paralyzed by a single member — such as India, which is holding up a range of initiatives in Abu Dhabi to defend its policies on food security.

Still, Brussels still sees a path to salvation — restoring the WTO’s power to issue binding rulings on trade disputes. 

“The focus on WTO reform should not detract … from the fact that it continues to be the guardrail against discrimination, economic fragmentation, and protectionism,” Sabine Weyand, the EU’s top trade civil servant, told an event on the sidelines of the Abu Dhabi ministerial.

“And yes, without reform, it will become increasingly difficult for the WTO to exercise these functions. But at the moment it is doing the job,” she added. 

After Trump blocked the WTO’s Appellate Body, the EU teamed up with more than two dozen other countries — including China but not the U.S. — to create a parallel interim court, and adopted a regulation that empowers the bloc to retaliate if countries breach its decisions. 

Washington doesn’t quite see things that way.

“From the beginning of the WTO, the European Union and the United States have had very different conceptions of what was agreed in the dispute settlement understanding,” Pagán said. 

WTO tightrope 

And yet, for all its love of the rules-based trade system, Brussels has also faced criticism for steps that other countries see as infringing those very rules. 

Key among those is its Carbon Border Adjustment Mechanism (CBAM) — essentially a tax on carbon-intensive products entering the bloc. China has questioned whether the levy complies with WTO rules, while India, Brazil and South Africa have expressed “grave concern” that the carbon levy, due to take full effect in 2026, is discriminatory.

“The EU is moving slowly but surely in the U.S. direction. We are testing the limits of the WTO system with tools like the CBAM and deforestation,” said a second European diplomat. 

The two measures have been seen by the EU’s trading partners as imposing environmental conditions on them. “We will need to be persuasive on top of being creative if we want to move in that direction,” the diplomat added. 

In another step that brings Europe closer to Washington’s world view, Brussels has also come up with a blueprint that factors national security considerations into its economic policy. Its proposed economic security strategy seeks to shield strategic assets and research on semiconductors and artificial intelligence from competitors.

“It’s not about free trade anymore, it’s about strategic trade, where everyone is making rules that are convenient to them,” the second European diplomat added.