On August 1st, the EU is expected to finalise a new tariffs deals with the United States, following weeks of negotiations with Trump administration. The US had originally planned to impose a 20% tariff on most EU goods – at one point threatening to raise it to 50%, before revising it down to 30% in response to the EU’s proposed countermeasures. The announcement of these sweeping tariff hikes, which the US has dubbed “Liberation Day”, sent shockwaves through governments and financial markets worldwide.
Unequal trade
This escalation in global trade tensions is not simply a product of volatile leadership. It reveals a deeper flaw in our economic architecture: the myth of so-called free trade. This myth, entrenched in the mechanism of the World Trade Organisation, draws on the 18th Century economist David Riccardo’s theory of ‘comparative advantage’, inferring that countries benefit from specialising in what they do best and can trade freely. However, this overly simplistic view fails to account for the unequal power dynamics that underpin global trade.
Historically, the wealth of many countries has been built through the extraction of resources from others – often at zero or minimal cost – followed by the imposition of strict trade barriers and price controls once their economies had developed. From 1990 to 2020, data show that labour and resources – such as land, energy, and raw materials – were systematically extracted from the Global South to fuel consumption and growth in the Global North. This unequal exchange, rooted in colonial and imperial relationship, continues to drives profit for the few while harming people and the planet.
The global trade system, as it currently stands, not only perpetuates these inequalities, but is also ill-equipped to address urgent challenges such as climate crisis, inflation, and ecological collapse. In response, the European Environmental Bureau (EEB), in partnership with the Cologne Business School, the Wellbeing Economic Alliance and the World Fair Trade Organisation, has proposed a new global ethical trade zone (UNETZ) to align trade with multilateral, social, and environmental goals.
The trade dilemma
Trump’s aggressive tariffs are aimed at reducing the US trade deficit and revitalising domestic industry. Beneath this, however, lies a deeper anxiety: the fear of losing global dominance to China’s rapidly expanding industrial and techological power. The US has not recorded a trade surplus since 1991, and its current account deficit is nearing one trillion dollars – 202 billion euros of that imbalance stemming from the trade with the EU.
Ordinarily, such imbalances would trigger intervention from the International Monetary Fund (IMF), as has happened in Latin America and Africa, where structural adjustment programmes have left deep and lasting harm, up to this day. These regions continue to call for debt cancellation and financial reparations. The US, however, has been shielded from such consequences thanks to its role as issuer of the world’s reserve currency – though that privilege is not guaranteed forever.
Until recently, US government debt was seen as the world’s safest investment, with many governments holding US bonds. The U.S. built this financial hegemony by liberalising markets and reducing trade barriers, positioning itself as the lender of last resort. Yet, as confidence in US assets erodes and the dollar loses value, the contradiction at the heart of this system becomes clear: it is not possible to reduce trade deficits while maintaining the privileges from the reserve currency status. Meanwhile, the World Trade Organiation (WTO) offers no tools to correct persistent trade imbalances.
The EU at a crossroad
Trade has been a core component of EU policy since the 1957 Treaty of Rome. The Common Commercial Policy was designed to facilitate European integration and foster economic growth. While the treaties also reference goals such as sustainable development and environmental protection, in practice, only trade and investment protection remain enforceable.
Following the 2008 financial crisis, the EU responded by doubling down on exports, aided by domestic austerity policies. This propelled it to the top ranks of global trade players. Today, the EU‘s focus on competitiveness and “strategic autonomy” reflects broader geopolitical uncertainties, further intensified by the COVID-19 pandemic’s disruption on supply chains.
However, the EU’s attempt to reclaim its past global influence by engaging in tariff-based rivalry will prove counterproductive, as illustrated by its tariffs on electric vehicles from China. Rather than entering a tariff race, the EU should pursue partnerships grounded in equity, cooperation, and sustainability. This includes reassessing relationships with countries that violate these principles – as for the current EU-Israel Association Agreement.
There are growing calls for the EU to reduce its dependence on the US by expanding trade with Global South economies. Yet the EU‘s long list of ongoing bilateral trade negotiations – many of which are stalled due to political hurdles of civil society resistance, as in the case of the EU-Mercosur agreement – highlights the limitations of the current system. New rules are needed to establish ethical, mutually beneficial trade relationships.
A blueprint for ethical trade
The vision put forth by the Cologne International Business School of a new ethical trade zone offers a bold and necessary alternative. It includes political mechanisms to correct trade imbalances – drawing inspiration from economist John Maynard Keynes, who in 1944 proposed that surplus countries support deficit countries through punitive tariffs or low-interest loans. This idea, resurfaced after the 2008 global financial crash, has renewed relevance in today’s context.
The proposed ethical trade zone would grant preferential market access to countries that uphold international law, including human rights, environmental standards, and tax cooperation. Non-compliant countries could face “ethical tariffs.”
This model would place trade under the oversight of the United Nations, with UNCTAD acting as the regulator. This would integrate trade rules with other multilateral agreements, breaking the WTO’s siloed approach. Under this framework, climate and labour protections would not be treated as trade barriers, but as prerequisites for market access.
This is not an entirely new concept. Efforts to build a fairer global trade system were made in 1944 through the proposed International Trade Organisation, and again in 1964 with UNCTAD and the G77’s New International Economic Order. Both initiatives were ultimately blocked by Western powers prioritising deregulated trade over fairness.
The crisis we face today – environmental crisis, economic instability, social fragmentation – demand more than incremental reforms. They call for structural transformation. A reimagined trade system must advance peace, uphold human rights, promote climate justice, and foster democratic participation.
It is time to rewrite the rules of global trade in the interest of people and the planet. The EU should seize this moment of geopolitical upheaval to realign its trade policy with its own treaties commitments – and with the ethical imperatives of our time.
