U.S. trade war heating up, EU memo says

The global trade war is about to get worse, according to an internal memo circulated among European Union governments.

The disputes between the United States 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.

The 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. After imposing punitive tariffs on steel and aluminum imports from Europe, Trump now threatens a 20 percent levy on European cars.

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

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 [World Trade Organization] 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. 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 World Trade Organization rules in hopes of preserving the agency.

At their meeting in Brussels Thursday and Friday, 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 obtained by Bloomberg.