Europe’s growth in recent decades has been driven by its economic integration and the significant opening of the world economy. This expansion accelerated in 2001 with the accession of China to the World Trade Organization (WTO) and the global trade and growth shock it provoked. What enabled this development was, in essence, the combination of, and the interplay between competition and trade policy, potentially the two central levers of Europe’s growth strategy. 

Despite its remarkable success, Europe’s economic enlargement also brought challenges, including the massive displacement of industrial and manufacturing jobs inside and outside the continent.¹ Still, Europe held the promise of economic growth and progress, grounded in a consensus that backed free and fair competition in the internal market, conservative fiscal policy, monetary rigour, limited state interventionism, and the promotion of free trade.  

Now, this economic consensus is unravelling. Although domestic competition policy has been fairly effective in Europe, its lapses in the US as well as trade liberalisation have given rise to globally dominant corporate giants that have compromised free and fair competition, particularly in the tech space.  

However, there are two corrections underway. The Biden administration championed a Neo-Brandeisian policy (hostile to excessively centralised private power) which amounts to a form of alignment with EU competition policy. Meanwhile, as the EU has committed to strengthening Europe’s strategic autonomy and competitive edge in global markets that remain open because of trade policy, its competition regulations appear to be growing more tolerant of the dominant position carved out by large firms.²   

The limits of the WTO 

The economic consensus is also shifting internationally with the constant decline of the WTO as China and – more recently – the US have turned hostile towards the organisation. These hostilities started with criticisms of the caselaw of the WTO’s dispute settlement mechanism (which was dubbed as the cornerstone of the organisation), but they soon morphed into a full-fledged defiance with the refusal of the Obama administration to re-appoint judges at the WTO’s Appellate Body in 2016.  Eventually, this led to the body’s demise as it no longer had the minimum required number of adjudicators.³ The last two governments in Washington have confirmed and cemented this trend, with Donald Trump piling tariffs and Joe Biden shunning the WTO completely with the green subsidy scheme of the Inflation Reduction Act (IRA).  

In the absence of a real lever to activate industrial policy in the same way as the US or China, Europe is considerably loosening its competition policy.

This new reality has had a considerable impact on competition policy in Europe. In the absence of a real lever to activate industrial policy in the same way as the US or China, Europe is opting for the time being to considerably loosen its competition policy. Notably, there are now larger exemptions for state aid, particularly through matching exemptions, which will have two consequences: massive distortions in the European level playing field as not all member states have the fiscal capacity to support their companies, and a clear competitive advantage for domestic firms. In practice, whether as a response to the US’s IRA, Chinese subsidies, or geopolitical threats, competition policy is increasingly shaped by the dynamics of global markets in which EU companies operate, highlighting the need for the bloc to better define its strategic autonomy. 

For its part, China managed to achieve its impressive economic expansion in the last 25 years while shunning the constraints of the WTO (via forced technology transfer, circumventing the protection provided by intellectual property rights) and using its loopholes (to grant subsidies⁴). By the time the US and Europe awakened to the damage caused by Beijing and decided denying China, under WTO rules, the status of market economy in 2017 (therefore maintaining the very high anti-dumping duties which could potentially be imposed on Chinese goods), it was was too little, too late to decisively tip the balance and meaningfully curb China’s rise. 

The WTO’s inability to overcome the formidable challenge to its authority posed by its two main powerhouses, coupled with its failure to advance its agenda and conclude negotiations between WTO contracting parties, accelerated the irrelevance of the institution. For the first time in more than 70 years, the future of trade will not be written in Geneva but in Washington DC, Beijing, and Brussels. This paradigmatic change has profound consequences for Europe that are yet to be fully appreciated.  

Europe’s new dilemma 

The EU legal order was largely built on the assumption that the bloc would play a leading role in a stable, liberal, and rules-based economic system. The best testament to this belief is the treaties which recall that the EU shall uphold and promote the strict observance and the development of international law,⁵ that capital should move freely between the EU and third countries,⁶ and that the bloc should have a unified trade policy.⁷ This framework served the mercantile interests of the EU well, eventually leading it to record a constant and growing trade surplus with the rest of the world between 2000 and 2018. It was also combined with an aggressive competition policy that largely ignored global markets and focused somewhat narrowly on consumer welfare. 

The flip side of the EU’s total embrace of globalisation (both in trade and finance) has been a dramatic increase in the bloc’s exposure to the two major economic players now vying for global dominance even as competition policy has remained largely blind to these undercurrents. In fact, the EU’s competition regulations proved largely powerless to curb the corporate imperialism of American big tech firms and equally toothless in competing with China in the manufacturing and industrial space. The EU’s significant financial exposure to the US can best be observed in its reliance on the dollar and the need for its financial institutions to raise capital in the US.  Moreover, the collapse of private transatlantic finance in 2008 and the need for dollar liquidity support highlighted the acute European reliance on the US Federal Reserve System’s role as a global lender of last resort. On top of that, the Covid-19 pandemic revealed the EU’s structural dependencies on the US across many critical supply chains. 

While the EU has a comprehensive framework to regulate subsidies within its internal market, the framework at the international level has historically been deficient.

Brussels is also facing considerable commercial and industrial exposure to China, which has become the first market for EU goods while also emerging as the preferred supplier of goods to European companies and consumers. This creates fundamental vulnerabilities for European economies, but the EU remains an export-led economy holding back on public-private investment and domestic consumption. In the area of fiscal and monetary policy, further changes would be needed to engineer a new economic model. 

While dependence on the dollar has somewhat declined since the global financial crisis, the exposure to China has kept growing. The EU is facing an important dilemma due to this dual exposure as the simmering tensions between China and the US increasingly force countries to choose which of the two to engage with. Caught between a rock and a hard place, the EU is virtually at the mercy of US retaliation in the field of trade and finance and Chinese retaliation in commercial matters.  

This complex situation creates important tensions between the EU’s internal and external policies. While the EU has a comprehensive framework to regulate the delivery of subsidies within its internal market, the framework at the international level has historically been deficient as the WTO’s competence is minimal.⁸ This issue is compounded by the WTO’s inability to agree on new rules to regulate subsidies (as has been the case with the long-winded talks to phase-out subsidies that have contributed to overfishing globally) as well as its failure to efficiently adjudicate breaches in the absence of a functioning dispute settlement mechanism – despite a constant flow of cases.  

In this context, the EU’s recent adoption of the Foreign Subsidies Regulation⁹ should be seen as an acknowledgement of the bloc’s failure to reach any achievements on subsidy control within the framework of the WTO, choosing instead to pursue a unilateral road. It is also a clear sign of trade policy and competition finally coming together and being somewhat internalised. However, the actual effect of these new trade and competition policy instruments remains to be seen, and they may well remain largely symbolic. 

The negative impact of the growing competition between the US and China on the EU is exacerbated by the securitisation of trade policy. As the US increasingly expands the list of economic issues falling under the national security exception to trade, it undermines transatlantic cooperation and forces the EU to consider its own options. The most telling example of this escalation is the steel and aluminium tariffs introduced by the Trump Administration in 2018. Since then, the EU has been compelled to expand its toolkit considerably to be able to respond to a more hostile trade environment. These new tools include additional powers to cover dumping and subsidies as well as a newly created anti-coercion instrument¹⁰ (which is designed to act as a deterrent against economic coercion on the global stage following China’s retaliation against Lithuania and the export of Lithuanian goods to the Chinese market).¹¹ 

However, progress in this field has also been hampered by the fact that national security remains a national prerogative in Europe. Export controls and inward and outward investment screening remain national competencies and most member states are wary of harmonising their positions at the European level (as seen recently with the largely decentralised framework for investment screening).¹² Consequently, the more national security becomes a central part of trade policy, the less the EU framework and consensus will be fit for the purpose. This shift also affects competition policy by pushing European authorities to consider the global reach of European companies more seriously. The quest for strategic autonomy undoubtedly leads to more tolerance for sacrificing domestic consumer welfare in the name of broader geopolitical objectives.  

Trade meets climate policy 

The growing fragmentation of the international economic order is a huge liability for a player like the EU which aims to control climate change via its economic agenda. Historically, the EU has been a committed and active player at the international level when it comes to supporting and participating in environmental and climate treaties, believing that international cooperation is crucial for effective global climate policy. Brussels believed that a combination of the rule of law, international collaboration, and market mechanisms – particularly through carbon taxation and pricing models – was the backbone of the climate and energy transitions. This was the foundational intellectual basis for the 2015 Paris Climate Conference.  

The quest for strategic autonomy undoubtedly leads to more tolerance for sacrificing domestic consumer welfare in the name of broader geopolitical objectives.  

Divergences first came to the fore with the 1997 Kyoto Protocol. The US signed but did not ratify the protocol, while China was actively involved in the negotiation process but was not obligated to reduce emissions under the treaty because it was classified as a developing country. Although the Paris Agreement was an impressive step in the right direction, it failed to sufficiently address the perceived risks of divergent implementations. In addition, even though the Paris Agreement entails binding procedural requirements, the actual targets and measures that countries committed to are not legally enforceable and are likely to be diversely implemented across the 195 signing parties. Finally, the absence of a mechanism for adjudicating and policing climate-change commitments ex-post has undermined the effectiveness of the landmark treaty, especially given the limited effects of peer pressure.  

Recent COP conferences and the US’s policy choices have highlighted these challenges facing the EU as it seems clearer than ever that the European hope of a gradual expansion of carbon pricing and international taxing is unlikely to materialise. While the UK, Turkey and China have formally adopted carbon pricing schemes, the reality is that their measures are still marginal. Moreover, the US has never been farther away from implementing such a scheme, and even the most progressive climate policy passed by the Biden Administration specifically excluded carbon taxing.  

Washington has been trying to undermine Europe’s efforts to introduce a carbon border adjustment mechanism (CBAM) for years. The Biden administration has even threatened to restore steel and aluminium tariffs if Brussels imposes a carbon levy on energy-intensive American imports. While Ursula von der Leyen’s European Commission has made significant efforts to reach a consensus with the US on these issues, for instance by trying to expand the coverage of European car companies by the IRA and seeking compromises on steel and aluminium, these efforts have not come to fruition.  As things stand, a more hostile policy is now expected from the US, which will pose fundamental challenges to the EU’s trade and climate policy. What is more, the establishment of a CBAM is likely to trigger further trade actions by the US and possibly by China, effectively contributing both to intensified global trade “balkanisation” and the destruction of the international cooperation framework on climate policy.  

A new trade policy is emerging 

In light of these significant challenges, a new trade policy is emerging in Europe. It will inevitably have to be more aggressive at levelling the playing field vis-à-vis China to offset its dumping capacity and subsidies. The very recent decision of the Commission to levy tariffs up to 38 per cent on Chinese electric vehicles is a testament to this new approach (which, however, remains controversial).¹³ 

This new reality requires the adjustment of parts of the EU competition policy by relaxing state aid for projects of European dimension¹⁴ and/or embracing a more global definition of the relevant market where European companies are operating when it comes to assessing mergers.¹⁵ The EU will have to be able to respond to more friction from the US which has increasingly invoked national security concerns in its trade and competition decisions. Additionally, Brussels needs to revisit existing trade agreements to expand climate and social clauses, as seen in the free trade agreements with Singapore and Canada, even as recent discussions around Mercosur have highlighted future challenges. Finally, the EU must decide how to position itself in the global race to secure critical raw materials. While Brussels has so far attempted to pursue its own critical raw materials club,¹⁶ it will soon have to decide whether to chart this path independently or in collaboration with the US.  

These choices will all have profound geopolitical and economic consequences for Europe. They will not only redefine our relationships with the US and China but will determine our ties with the Global South, where trade openness has long been a critical bargaining chip. Europe is at a crossroads for its economic, climate, and trade policy, yet does not fully grasp the extent to which these changes could upset its relationship with the world.  

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1. The export-led model of capitalism embraced by the EU has served Nordic countries, Germany and the Benelux very well while it has accelerated the deindustrialisation of others (France, the UK, etc.). Similarly, this model has allowed many countries from central Europe to have on their territory plants and manufactories from Western global firms.  ↩︎
2. Two key reports by former Italian Prime Ministers Enrico Letta and Mario Draghi propose to facilitate the scalability of European companies so that they can reach the necessary size to compete on a global scale. 
   Available at <https://bit.ly/47RY703> & <https://bit.ly/3Y5YDEf>   ↩︎
3. The EU provided a proposal that tried to take into account US criticism by clarifying that the Appellate Body does not include the meaning of domestic legislation or that it only addresses issues necessary to resolve disputes. Also, the EU proposed introducing annual meetings between WTO members and the Appellate Body. ↩︎
4. For a reasoned criticism of the deficiencies of subsidies control at the WTO, see Joint Statement of the Trilateral Meeting of the Trade Ministers of Japan, the United States and the European Union (2020). Washington D.C. Available at <https://bit.ly/4eqDZVb> ↩︎
5. Article 3(5) of the Treaty on the European Union. Available at <https://bit.ly/4dtd4GT> ↩︎
6. Article 63(1) of the Treaty on the Functioning of the European Union. Available at <https://bit.ly/3N99dUJ> ↩︎
7. Article 3(1) of the Treaty on the Functioning of the European Union. Available at <https://bit.ly/3N99dUJ> ↩︎
8. In this regard, it should be reminded that subsidies in services are not covered by WTO law and that the control on these subsidies remains deficient. ↩︎
9. Regulation (EU) 2022/2560 of the European Parliament and of the Council of 14 December 2022 on foreign subsidies distorting the internal market. Available at <https://eur-lex.europa.eu/eli/reg/2022/2560/oj> ↩︎
10. Regulation (EU) 2023/2675 of the European Parliament and of the Council of 22 November 2023 on the protection of the Union and its Member States from economic coercion by third countries. Available at <https://eur-lex.europa.eu/eli/reg/2023/2675/ ↩︎
11. Matthew Reynolds & Matthew P. Goodman. “China’s Economic Coercion: Lessons from Lithuania”. Center for Strategic and International Studies. 6 May 2022. Available at <https://www.csis.org/analysis/chinas-economic-coercion-lessons-lithuania> ↩︎
12. Regulation (EU) 2019/452 of the European Parliament and of the Council of 19 March 2019 establishing a framework for the screening of foreign direct investments into the Union. Available at <https://eur-lex.europa.eu/eli/reg/2019/452/oj> ↩︎
13. China immediately decided to challenge this decision before the WTO judicial body and opened an anti-dumping investigation of its own into imports of EU pork to retaliate. Also, some Member States (Germany, Sweden or Hungary) remain to be convinced about the long-term prospect of such strategy.   
    Edward White & Alice Hancock (2024). “China challenges Brussels’ electric car tariffs with WTO complaint” 
    Financial Times. Available at <https://bit.ly/4dtQI8k>.  ↩︎
14. Communication from the Commission. Criteria for the analysis of the compatibility with the internal market of State aid to promote the execution of important projects of common European interest 2021/C 528/02. Available at <https://bit.ly/4gPZUqw> ↩︎
15. In this respect, it is interesting to note that the recently revised Notice from the Commission on Market Definition admits that the definition of the geographical market can have a global dimension. See Commission Notice on the definition of the relevant market for the purposes of Union competition law, para 69. Available at < https://bit.ly/4erUvEr> ↩︎
16. Communication from the commission to the European Parliament, the council, the European Economic and Social Committee and the Committee of the Regions, Critical Raw Materials Resilience: Charting a Path towards greater Security and Sustainability, COM/2020/474 final. Available at <https://bit.ly/3N7fP6b> ↩︎