EU Said to See Nearing Trade Breakdown as It Seeks Rules Revamp

(Bloomberg) -- The global trade war is about to get worse, as the rules-based system of international commerce is poised to revert to an environment where the strong impose their will upon the weak, according to an internal memo circulated among European Union governments.

The disputes between the U.S. and its closest trading partners are set to escalate “in the coming months, as more unilateral measures are threatened and imposed, leading, in some cases, to countermeasures, or to mercantilist deals,” according to the memo drafted by the European Commission, which manages trade policy for the entire bloc.

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Our world will go back “to a trading environment where rules are only enforced where convenient and where strength replaces rules as the basis for trade relations,” according to the memo.

The dire warnings come as the exports-based European economic model risks crumbling under pressure from President Donald Trump, who has sought to narrow the U.S. trade deficit at all costs, even if that means an unraveling of global rules. After imposing punitive tariffs on steel and aluminum imports from Europe, Trump now threatens a 20 percent levy on European cars, in a measure that would deal a massive blow to the EU's auto industry.

The internal document, a copy of which was obtained by Bloomberg, singles out three main drivers of the upcoming trade apocalypse:

• Gaps in the rulebook of global trade “leading to distortions, many of which associated with non-market policies and practices in major trading nations, that the WTO does not seem able to address adequately”
• Aggressive unilateral actions by the U.S. targeting allies and foes alike with punitive tariffs
• The U.S.'s decision to block appointments of members to the World Trade Organization's Appellate Body that serves as the final arbiter in trade disputes.

“As more appellate body members leave office while the new appointments are being blocked, the dispute settlement system will soon fall into paralysis, rendering enforcement of the rules impossible,” the commission says in its memo circulated ahead of this week's summit of EU leaders to discuss trade, among other topics. “That would equate to a 20-year step backward in global economic governance.”

The EU, which shares some of the U.S. concerns about shortcomings in the global trade order, is developing proposals to revamp WTO rules, as it seeks to save it from what is sees as an all but certain demise.

At their June 28-29 meeting in Brussels, the leaders of the world's largest trading bloc, will invite “the commission to propose a comprehensive approach to improving, together with like-minded partners, the functioning of the WTO in crucial areas,” according to a draft of their joint statement also obtained by Bloomberg.

To contact the reporters on this story: Richard Bravo in Brussels at rbravo5@bloomberg.net;Nikos Chrysoloras in Brussels at nchrysoloras@bloomberg.net

To contact the editors responsible for this story: Vidya Root at vroot@bloomberg.net, Richard Bravo, Jones Hayden

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