The European Union's trade policy amid rising global protectionism

Global trade is undergoing a fundamental shift, and protectionist policies, once considered an exception, are increasingly shaping economic strategies across major economies. Countries are creating trade barriers, imposing tariffs, and prioritizing domestic industries, with the United States reinforcing this through policies such as the Inflation Reduction Act, and China leveraging state-controlled enterprises to gain an edge in global markets. The European Union, traditionally advocating for free trade and economic cooperation, now faces the challenge of adapting to this new reality while maintaining its core principles.

A Legacy of Free Trade

For decades, the European Union has played a key role in global trade, negotiating over 40 trade agreements covering more than 70 countries. The bloc operates as the world's largest trading entity, accounting for approximately 15% of global trade in goods and services. Through agreements with major economies such as Canada (CETA), Japan (EPA), and South Korea (FTA), as well as developing nations under Economic Partnership Agreements, the EU has expanded its economic influence. By maintaining tariff rates between 0% and 4% on industrial goods post 2020 and actively supporting World Trade Organization (WTO) principles, the European Union has not only strengthened growth within the member states, but also contributed to global stability by promoting interconnected markets and investment opportunities.

The Shift Toward Protectionism

However, this liberal trade order is now being undermined. The US, under Donald Trump's presidency, recently imposed 25% tariffs on key industries such as steel, aluminum and automobile imports, arguing that national security concerns justify these trade barriers. 

As protectionist measures gain popularity worldwide, the EU finds itself at a crossroad: whether to retaliate and risk escalating trade conflicts or uphold its commitment to free trade at the expense of short-term economic vulnerabilities. One of the most significant retaliatory actions came in response to the Trump administration’s tariffs, prompting Brussels to introduce countermeasures worth €26 billion on American goods. Beyond traditional tariff-based responses, the EU has also turned to regulatory instruments to safeguard its economic interests. This shift signals a departure from the EU’s previous reluctance to engage in direct trade conflicts, as the bloc increasingly recognizes the need to defend its industries against external pressures.

Defensive Strategies in a Changing Landscape

Imposing tariffs as a retaliatory measure presents challenges. In 2023, the EU had a trade surplus with the United States, with exports to the U.S. totaling €501 billion and imports reaching €352 billion, resulting in a positive balance of €149 billion. Despite this surplus, a tariff-based approach remains risky, as it could disproportionately impact European industries that depend on American goods, such as energy (the US supplied 47% of the EU’s liquefied natural gas imports in the first quarter of 2024) and pharmaceuticals (€58 billion in imports from the US). A tariff war of this scale could lead to increased production costs for European manufacturers, many of whom rely on American-made aircraft, semiconductors, and medical equipment. 

To address trade imbalances and safeguard economic interests, the EU has prioritized regulatory oversight, industrial policy, and diplomatic negotiations. This includes antitrust actions against U.S. tech firms like Apple and Google under the EU’s Digital Markets Act (DMA), subsidies such as the €43 billion European Chips Act to boost domestic semiconductor production, and cooperation through the EU-US Trade and Technology Council. 

Furthermore, the Carbon Border Adjustment Mechanism (CBAM), set for full implementation by 2026, aims to prevent carbon leakage by levying imports of high-emission goods like steel, cement, and aluminum. It ensures that foreign producers face the same carbon costs as EU manufacturers under the Emissions Trading System. While designed to promote fair competition and climate responsibility, CBAM has sparked trade tensions with major partners like China, India, and the US, who see it as a disguised protectionist measure. Critics argue it may violate WTO rules, disproportionately burden developing economies, and invite retaliatory tariffs, prompting the EU to explore revenue reinvestment mechanisms to help affected countries transition to greener production.

Additionally, to reduce dependence on geopolitically sensitive supply chains, the EU is advancing strategic autonomy in key sectors. The €43 billion European Chips Act aims to double the EU’s share of global semiconductor production by 2030, while the Critical Raw Materials Act seeks to secure lithium and rare earth metal supplies from domestic sources and trusted partners like Australia and Canada. Pharmaceuticals are another focus, with efforts to reduce reliance on China and India, which supply 80% of the EU’s active pharmaceutical ingredients. This shift reflects their strategy to boost economic resilience while maintaining global market integration.

Another measure that hasn’t been announced yet, but could be considered, is the Anti-Coercion Instrument (ACI), adopted in 2023, but not yet used. Referenced by some experts as a "nuclear option" in trade policy, it grants the EU the power to suspend intellectual property rights, restrict foreign firms' access to public contracts, and even limit financial services in response to economic coercion from global rivals. This framework provides Brussels with additional leverage in trade disputes, allowing it to push back against coercive economic tactics employed by powerful trading partners such as the United States, especially after failed negotiations in Washington. 

Internal Challenges and Global Reactions

Despite these efforts, the EU’s evolving trade policy has sparked internal debates among member states. Some governments advocate for stronger defensive measures to protect their domestic industries, arguing that the EU must take a more assertive stance against unfair trade practices. Others, however, warn that excessive protectionism could undermine economic growth, disrupt supply chains, and create further tensions, with Georgia Meloni, Italy’s Prime Minister, publicly calling for a reasoned approach that wouldn’t harm transatlantic unity. This division complicates Brussels’ ability to implement a unified and effective strategy.

Moreover, external trading partners have raised concerns about the EU’s shifting trade policies. The CBAM, for instance, has faced opposition from exporters who argue that it serves as a disguised protectionist measure rather than a genuine environmental initiative. Developing nations, in particular, fear that these policies will disproportionately impact their economies, limiting their access to European markets. 

What Lies Ahead

The future of global trade remains uncertain, with protectionist sentiments continuing to shape economic policies worldwide. If these trends persist, the EU will need to further adapt its strategies to safeguard economic resilience. Strengthening domestic industries, diversifying trade partnerships, and investing in strategic sectors such as technology and renewable energy will be crucial in mitigating the risks posed by an increasingly fragmented global economy.

At the same time, the EU must balance economic pragmatism with its long-standing commitment to free trade. While defensive measures can provide short-term protection, excessive reliance on protectionist policies risks undermining the very economic openness that has driven the bloc’s prosperity. Moving forward, Brussels must find a balance—ensuring that its industries remain competitive while upholding the principles of fair and sustainable trade. Yet the Commission is set to “deliver firm, proportionate robust, and well calibrated and timely response to unfair and counterproductive measures from the US,” as spokesperson Olof Gill recently shared, solidifying the EU’s position as a leader in global trade.

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