[Francoise Nicolas] The end of an era, whither the global trading system?

2025, a watershed moment

From an economist’s perspective, 2025 will likely be remembered as the year when the global rules-based trade order as we had known it since the end of the Second World War came to an end. To be fair the system had been under strain for some time, and gradually sliding into irrelevance, primarily because of its inability to adapt and respond to changing circumstances. What made this time different, however, is the fact that the attacks on the existing order came from the very architect of the system, namely the US.

The use of “reciprocal tariffs” by the Trump administration represents a breach of the non-discrimination principle and an assault on the very bedrock of the multilateral rules-based order. Non-discrimination was one of the major tenets of the post-WWII trading system. Thanks to the so-called most-favored nation clause (encapsulated in the GATT and eventually the WTO), if a member state grants favorable trading terms -- like lower tariffs -- to one partner, it must extend the same benefits to all its trading partners. The implementation of this principle ensures transparency, stability and predictability in the trading environment as well as equality between trading partners.

The International Emergency Economic Powers Act (IEEPA) that allows the US to impose duties on top of the MFN tariffs bound under its WTO commitments, effectively broke the world’s largest economy’s adherence to the MFN principle. Moreover, with the IEEPA duties being neither uniform nor even stable but fluctuating according to geopolitics and fast-moving bilateral negotiations and other developments on the ground, the trading environment becomes unpredictable and uncertain, while there is a shift away from a rule-based to a power-based system.

To be honest, the claim that the MFN principle is dead may be somewhat exaggerated, since over 80 percent of world merchandise trade is still conducted on MFN terms. The WTO still has a role to play although it can no longer be relied upon in its rule-making function.

For the time being, what comes next is unclear, but since the developments highlighted above are particularly detrimental to small and medium-sized export-oriented economies, these can be expected to fill in the leadership vacuum left by the US and lead the way in seeking to shape a new rules-based trade order that is vital for their prosperity.

Over the past years there has been a flurry of encouraging signs and initiatives, with several Asian small or medium-sized countries expressing their willingness to shape a new form of rules-based order.

Capitalizing on the CPTPP

With regards to Asia, one initiative sticks out and is likely to play an increasingly important role, namely the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP), a revamped version of the Trans-Pacific Partnership (TPP). Interestingly the TPP started out in 2006 as a modest agreement between 4 small economies (Brunei, Chile, New Zealand and Singapore), that gradually morphed into an ambitious and wide-ranging trade agreement encompassing 12 member countries after the US joined the negotiations, soon followed by seven other countries (Malaysia, Australia, Peru, Vietnam, Mexico, Canada, and Japan). Despite the US withdrawal in 2017 the agreement did not collapse and was even ratified in record time under Japan’s leadership. This mega-trade deal has been referred to as the most significant FTA in 20 years and for good reasons: it is a comprehensive agreement with commitments that are broader and deeper than those of traditional FTAs and it is ahead of the WTO with cutting-edge chapters on many “new” issues and “behind the border” provisions. The 30 chapters of the agreement cover standard provisions on tariff liberalization, but they also extend to digital trade, environmental protection, labor standards and the like.

The agreement is open to new partners, and the UK was the first country to officially join in 2024. The long list of formal applications (including China, Taiwan as well as several Southeast Asian countries) is a testament to the attractiveness of the arrangement.

In the current context of rising protectionism in the US and Sino-US rivalry, the EU has also expressed interest in cooperating more closely with the CPTPP member countries, due to their converging interests. Although joining the CPTPP may not be a realistic option for the EU, aligning more closely with CPTPP will help preserve rules-based trade but also facilitate the adaptation of trade rules to new challenges. In other words, the coalition of the two groupings could constitute a core group instrumental in shaping a new rules-based trade order. Incidentally, as an outward-oriented middle power, Korea has a definite interest in joining the group.

The revival of plurilateral agreements

One of the weaknesses of the WTO and one of the major reasons for its gradual loss of relevance was its inability to adapt to a changing world and include “new” issues in its disciplines. Plurilateral agreements may provide a way to extend and update WTO disciplines by addressing such issues. These agreements allow for flexibility in decision-making and rules where a sub-set of like-minded countries can agree and move forward on new rules and deeper integration without requiring unanimous agreement from all WTO members. The agreements are open to participation to any country eventually willing to implement a set of agreed disciplines. These open plurilateral agreements are in line with a practice that used to be widespread under GATT but that is no longer acceptable under the WTO rule due to the need to reach consensus. As a result, new style plurilateral agreements have thus to take place outside the WTO.

The countries interested in preserving a rules-based order can resort to plurilateral agreements to reach their goal. Digital trade is one obvious area for such rulemaking, but cooperation on economic security and supply-chain resilience is another area where such an approach can be envisaged.

The Digital Economy Partnership Agreement (DEPA) provides an interesting example of a plurilateral initiative launched by a limited number of countries that may eventually be multilateralized. Signed in 2020 by Chile, New Zealand and Singapore, DEPA is a first of its kind agreement addressing digital trade issues. It aims to support digital trade by reducing trade-restrictive policies, encouraging digital trade facilitation, including the regulation of cross-border data flows, electronic signatures, and cross-border payments among other things, and promoting interoperability across different regulatory frameworks. Korea joined DEPA in 2024, and nine other countries have applied to join the agreement (China, Canada, Costa Rica, Peru, the UAE, El Salvador, Thailand, Ukraine and Uruguay).

Faced with the painful reality that the US has abandoned the rules-based trading system it had contributed to put in place, small and medium-sized trading countries that have an interest in preserving the stability provided by a rules-based trading order can find ways to act collectively and organize a reformed trading system, with the hope that over time more and more countries will join. And in the long term, one cannot even exclude that the US may seek to reengage.

Francoise Nicolas

Francoise Nicolas is a special advisor of Center for Asian Studies, French Institute of International Relations, Paris. The views expressed here are the writer’s own. — Ed.