How can the EU thrive in a world where trade is increasingly weaponised by major powers? Robert Basedow writes that while the EU has developed an impressive range of new trade tools in response to the rise of geopolitics, its success ultimately depends not on trade policy but on whether it can defend itself and revitalise its economy.
Global trade governance has reached an inflection point. The rules-based multilateral trading regime – from the GATT in the 1940s to the WTO in the 1990s – is eroding. Pivotal trade relationships are now subject to new political dynamics: the rise of geopolitics. How is the EU responding, and is it well-placed to defend European interests?
In a new study, I seek to provide an overview. To start it is important to recall that geopolitics – power competition among states over territory and resources – has always been intertwined with trade. For most of history, trade was discussed through the lens of power and security rather than material prosperity.
It was only in the 17th and 18th century that thinkers like Adam Smith and David Ricardo began emphasising efficiency as trade policy’s overriding objective. Yet, it nonetheless took centuries before trade became a predominantly economic rather than (geo)political phenomenon in the perception of Western policymakers. In other parts of the world, notably the Global South, observers moreover never truly accepted this premise.
The intellectual separation of trade and geopolitics in Western thought was largely a product of the post-Cold War moment: the rise of neoliberalism, the Washington Consensus and a period of uncontested Western dominance. For almost a generation, Western policymakers barely perceived trade and geopolitics as intertwined phenomena, as neoliberalism appeared to defer most social and international questions to the alleged wisdom of efficient markets.
The Global Financial Crisis and the geopolitical rise of China ended that. Western states have grown alert to technology transfers, control of critical infrastructure and terms of trade. In a remarkable vindication of hegemonic stability theory, they once again recognise the geopolitical nature of trade now that credible challengers have entered the scene.
The EU’s response – an array of new instruments
The EU has been highly active in adjusting to these new realities. The last decade has seen it develop an array of new tools under the label Open Strategic Autonomy (OSA) seeking to remain as economically open as possible while being as autonomous as necessary. Eight areas stand out.
The first is free trade agreements. The EU’s free trade agreement strategy has been recalibrated twice. In the 2010s, deals like CETA and JEFTA sought to build allied coalitions and set global standards ahead of emerging markets. Following the second Trump administration’s tariff increases, the EU is again pivoting – now urgently pursuing agreements with India, Indonesia and Mercosur to diversify export markets, with somewhat less emphasis on promoting its normative agenda.
Second, there is the EU’s Anti-Coercion Instrument (ACI). Adopted in 2023, ACI Regulation 2023/2675 was triggered by Chinese sanctions on Lithuania and US tariff actions that paralysed the WTO Dispute Settlement Body. The ACI streamlines retaliation – stripping member states of their veto and enabling the Commission to act via qualified majority.
Retaliation can take many forms: tariffs, procurement restrictions, financial sanctions, even pausing enforcement of foreign intellectual property rights in the single market. The EU notably declined to invoke the ACI in response to US “Liberation Day” tariffs in April 2025, arguably reflecting its dependence on American security guarantees.
Third there is FDI screening. Two mechanisms are now in force. Regulation 2019/452 requires all member states to adopt national security screening frameworks for inward FDI. Regulation 2022/2560, in turn, closes a governance gap by screening foreign-subsidised mergers and acquisitions activity within the single market – widely understood as a response to Chinese state capitalism. Another mechanism on outward FDI screening is in preparation, though complex questions of jurisdictional attribution and regulatory arbitrage remain unresolved.
The fourth is export controls. Regulation 2021/821 enhanced intra-EU coordination on dual-use items. A 2024 White Paper goes further, proposing to legally decouple EU export control lists from international regimes – including the Wassenaar Arrangement – that Russia has been able to obstruct. A more centralised and autonomous EU export control regime is likely to follow.
Fifth, there is the EU’s International Procurement Instrument (IPI). Regulation 2022/1031 empowers the EU to restrict third-country suppliers’ access to EU public procurement tenders where reciprocity is absent. Given that EU public procurement amounts to roughly €2 trillion annually, this is a potent tool – recently deployed against Chinese medical equipment suppliers.
Sixth, there is the Global Gateway, launched in 2021, which is the EU’s answer to China’s Belt and Road Initiative and seeks to leverage development finance more strategically in the Global South. The Critical Raw Materials Act, in force from 2024, sets domestic production, processing and recycling targets for strategic minerals and caps import dependence on any single supplier at 65% – primarily targeting China.
Seventh, there is the foreign economic angle to competition and industrial policy. The EU is slowly moving from a critic to a supporter of strategic state aid. Important Projects of Common European Interest (IPCEI) have moved from the margins to the centre of EU industrial strategy, reflecting competitive pressure from Chinese and American subsidies.
Finally, there is the Trade+ Agenda. The Carbon Border Adjustment Mechanism (CBAM) Regulation, Methane Regulation, the Corporate Sustainability Due Diligence Directive and the Deforestation Regulation all sit at the nexus of trade and values. Whether they are primarily environmental or implicitly geopolitical tools is contested. CBAM in particular – still evolving after the 2025 Omnibus amendment – could serve as leverage for Climate Club formation or as a competitive barrier to high-emitting exporters.
What trade policy can and cannot do
Unlike traditional nation states, the EU seems at a disadvantage in our new geopolitical world, not least as the EU is not a sovereign state, but a creature of law that acts through law. It is in many regards a historic experiment to overcome crude intergovernmental power bargains and geopolitics – thus explaining its predominantly reactive and defensive posture in the face of mounting geopolitical tensions.
Can such a highly legalistic agent economically and politically thrive in a geopolitical world? Against this background, the EU’s dynamism in this space is remarkable, and its exclusive competence in trade policy gives it genuine advantages compared to other domains. Yet viewed from a remove, trade policy can only play a supportive role.
Two structural challenges loom larger. First, the EU’s security dependence on the United States creates economic vulnerability. The decision not to retaliate against US tariffs in 2025 illustrates the point starkly: meaningful strategic autonomy in trade ultimately requires military and defence autonomy. Building that capacity is primarily a defence policy question, though trade policy can support it through resilient supply chains and access to critical materials.
Second, the EU faces a stagnant economy as well as an innovation and scaling-up challenge, documented in detail by the Draghi Report. Deepening the single market – particularly in finance and services – and unlocking new technological dynamism are prerequisites for geopolitical relevance. Foreign economic policy can attract investment and open markets but only succeeds in a supportive domestic political and economic environment.
The EU has developed an impressive toolkit for a more geopolitical world. But its ability to thrive ultimately depends on whether it can defend itself and revitalise its economy. Trade policy is best understood as a supportive, not a primary, instrument in that effort.
For more information, see the author’s new study in LSE Public Policy Review.
Note: This article gives the views of the author, not the position of LSE European Politics or the London School of Economics.
Image credit: European Union.
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