EU floats Pacific Rim partnership as a return to rules-based trade

After a disappointing EU-China trade summit and a new EU/US trade deal widely seen as a win for Washington, the EU is looking to countries of the Pacific Rim as it seeks a return to rules-based trade.      
     
The US deal, agreed on July 27, imposes 15% tariffs on most EU goods, half the threatened amount. While it averts a damaging trade war for the time being, the duty is higher than many European business leaders had hoped. For its part, China refused to offer concessions regarding market access and the state subsidisation of business, two long-standing areas of tension with the West.

Concerns around relations with the world’s two largest economies may add impetus to the EU’s Pacific Rim strategy. The bloc’s plan, first voiced at an EU summit at the end of June, involves establishing a structured trade cooperation agreement with the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), a regional trade pact of 11 Pacific Rim countries and the UK. 

The EU hopes the initiative will boost trade with major economies like Japan, Australia, Canada and Mexico, while sending a message to recalcitrant regimes in Washington and Beijing about the benefits of sticking to the rules. It could also sidestep an ongoing paralysis at the heart of the World Trade Organisation (WTO). 

European Commission president Ursula von der Leyen hopes the agreement will “show to the world that free trade with a large number of countries is possible on a rules-based foundation.”

In a tense atmosphere, there is no guarantee of success. But the effort alone tells us much about the difficult state of international trade in an environment increasingly characterised by divided allegiances and growing protectionism.

The background to a crisis

The origins of the EU’s initiative date back to at least 2019, when the US began blocking appointments to the WTO’s Appellate Body, the organisation’s dispute resolution mechanism. The Body has been effectively non-functional ever since, leaving the world without an internationally recognised system for resolving trade disputes. 

That paralysis has left a gaping hole in the economic world order. It’s not at all clear that even a fully-functioning WTO could have tempered President Trump’s scattergun tariff policy, but it may have had more success with other major trade challenges. Disputes around harmful fisheries subsidies and agricultural rules have been left to fester and negotiations have stalled. 

Beyond effective dispute resolution, the other obvious driver behind the initiative is self-preservation. After the EU-US agreement, EU businesses face damaging 15% tariffs  on most exports to the US, with no guarantee against further escalations in future. CPTPP nations face their own tariff ultimatums. The EU also believes unfair Chinese state subsidies undermine European industries, with automotive a prime example.

Against that background, closer ties with a body whose GDP is almost as large as that of the EU itself seems logical enough. According to the World Bank, the two blocs together account for almost a third of world trade. 

“The CPTPP is a major trade bloc, and the composition of the alliance is also interesting for the EU,” says Dana Bodnar, economist at Atradius. “With Mexico and Canada as members, the alliance offers opportunities into North America, one of the EU’s most important trading regions. CPTTP is not just limited to one region of the world.”

Reasons for optimism

If the logic behind the initiative is sound, the question is whether it will work. There is certainly a case for closer cooperation. From the EU’s point of view, engaging with the CPTPP could help to 'friend-shore' supply chains and reduce strategically risky trade dependencies. It could produce a small but important boost to trade.

The initiative also offers the prospect of sidestepping WTO paralysis and creating rules-based trade between two major global economic players. Although the new alliance would be smaller than the WTO, it would be made up of like-minded nations and could function more effectively. 

“By doing so, it could potentially lay the groundwork for an alternative to the gridlocked WTO, overhauling the WTO’s institutional framework and learning from its mistakes,” says Christian Bürger, senior editor at Atradius. “There could also be opportunities for new agreements that go beyond existing WTO rules, particularly in the areas of sustainable supply chains, clean tech and digital trade.”

Without the involvement of the US and China, the practical impact of a WTO alternative may be limited, but the symbolic impact could be significant. If the alliance shows important trading nations working within a rules-based system for mutual benefit, the contrast with current strategies in Washington and Beijing would be stark.

A triumph of hope over experience?

On the other hand, while an example might be set, it might also be ignored. The Multi-Party Interim Appeal Arbitration Arrangement (MPIA) is a mechanism that replicates the WTO Appellate Body’s functions for its 57 participating members (the WTO has over 160 in total), which include the EU, UK and China. 

The US has refused to join. The MPIA is a stopgap measure with very limited influence, and there are fears that the EU’s CPTPP initiative will have similar impact.

Closer EU-CPTPP ties may send a message to Washington, but will anyone listen? The uncomfortable truth is that the current US administration appears impervious to outside influence. President Trump is happy to impose tariffs on his closest allies in Europe and Asia, as well as Canada and Mexico. He may even regard an EU-CPTPP partnership as antagonistic. 

In China, too, the message may fall on deaf ears. Western critics argue that China supported the WTO because it let it get away with state-capitalist practices that stretched regulatory boundaries. Beijing is unlikely to be swayed by a body proposing tougher constraints.

Nor is it clear how the EU-CPTPP partnership would work, what cooperation would look like in practice and what its ultimate aims would be. Outside of boosting trade, would the initiative aim to reform or replace the ailing WTO? 

“Officially the EU’s goal is to complement the WTO and help it forge a new era of rules-based trade,” says Bürger. “But a bilateral agreement outside the WTO runs the risk of weakening the body it seeks to support. We’ve also seen somewhat contradictory statements by European Commission president von der Leyen and German chancellor Friedrich Merz on the initiative, with Merz floating the idea of replacing the WTO altogether.”

In terms of boosting trade, while a trade deal between the two bodies would be useful, it wouldn’t get close to making up for the fall in US demand. The US is both the EU’s biggest investment destination and its most important trade partner.

“In addition, it takes time to strike meaningful trade deals,” says Bodnar. “The World Economic Foundation estimates that it can take, on average, about 18 months to agree a deal, with implementation typically taking a further 24 months. So this is far from a quick economic fix. President Trump’s second term will likely be over by the time any deal starts to make a difference.”  
 

A bargaining position

While signals about the importance of rules-based trade are important, the EU may also be using the idea of the CPTPP partnership to strengthen its hand in future negotiations with Washington.

EU leaders have been split between doing a fast deal with the US to create business certainty and imposing retaliatory tariffs while holding out for a better deal further down the line. 

Either way, promoting closer ties with a powerful economic bloc beyond the US seems like a reasonable way of strengthening the EU’s bargaining position in both the short and longer term. The EU and US may have hammered out a trade deal, but there is no guarantee that President Trump will not revisit tariff threats in future.

Against the background of an increasingly tense geopolitical and trading environment, an EU-CPTPP deal makes sense. Both blocs are reeling from US tariffs and both want to see rules-based order returned to global trade. 

But expectations need to be managed. Many practical obstacles to an agreement remain, and without the involvement of the US and China, any eventual deal can only be a small first step towards the return of a more harmonious and functional world trade model.