When globalization becomes a geopolitical weapon
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Geopolitics
Can trade blocs withstand China Shock 2.0?
A wave of regional trade deals is creating a new trading system without central leadership. Conflict over subsidized Chinese goods poses a risk.
Rapid read:
- Regional trade deals are getting done at speed. In January, the EU signed a deal with Mercosur and, 10 days later, concluded talks with India. Baldwin sees these deals as building blocks of a new trading system with nobody in charge.
- The real threat is China Shock 2.0: a flood of subsidized Chinese goods that could push rich economies into an anti-China coalition and split the world into fighting blocs.
- Two shock absorbers could help: managed trade in a few industries, and talks to limit subsidies, which the EU should lead, probably without the US.
In January, the European Union signed a trade agreement with the South American bloc Mercosur after more than 25 years of talks. Ten days later, it concluded negotiations with India that had begun in 2007. Deals that had been in suspense for years, sometimes decades, are getting done in months.
The age-old question is whether regional deals are stumbling blocks that break the world economy into rival camps or building blocks toward a more open one. My view is building blocks, and they are building a new trading system with nobody in charge. The real danger lies elsewhere: a flood of subsidized Chinese goods that pushes rich economies into an anti-China coalition and splits the world into fighting blocs.
The other 75%
Since April 2025, when what I call World War Trade began, the headlines have been about Washington and Beijing. If you add up US and Chinese imports, you get only about a quarter of world trade. What the other 75% is doing is what really determines the trading system.
They did not fight – they adapted. Almost nobody retaliated against the US. They built defenses against coercion, worked to reduce their dependence on Chinese and American supply chains, and rushed to sign free trade agreements.
These deals are gathering around two pools of predictability: the EU and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), the Pacific pact that stretches from Vietnam to Peru to the United Kingdom. Their rulebooks reach far beyond tariffs. Underneath, the World Trade Organization rulebook still works for everyone except the US, the one country that has switched from trade law to jungle law.
Nobody designed this. Canadian Prime Minister Mark Carney has called on middle powers to lead, but that will never happen. Middle powers are like cats at feeding time. Each time a bloc grows, exporters in the countries left outside lobby their governments to join, and another domino falls. The system is building itself on autopilot.
Deep integration does not lock outsiders out, either. A single rulebook across many markets makes business easier for any company selling into them, Chinese companies included. It is one reason Beijing has not worried much about the CPTPP.
The Hinrich–IMD Sustainable Trade Index, now in its fifth edition, points the same way. “Statistically, we find significant progress for those countries that have been members of the trade agreement,” my IMD colleague Arturo Bris, Director of the IMD World Competitiveness Center, said at the Index launch.
All trade policies are partly political. In the US, trade policy is only political.
China Shock 2.0
The threat comes from China’s factories. Subsidized Chinese electric vehicles, batteries, solar panels, chips, and machines are flooding every market, and importers are responding one by one, badly. Suppose the rich economies gang up on China, and Beijing retaliates. Each side sees its own moves as defense and the other’s as attack. In this pessimistic scenario, the world fragments into two or three fighting blocs. Trade falls, prosperity falls.
China has already shown how it would fight. When Washington put tariffs on everybody, Beijing answered with export controls on inputs such as rare earth magnets, which are technically critical but financially trivial. They cost China almost nothing to withhold, yet they shut down car production lines in the US and Europe.
Washington, by contrast, picked the wrong weapon. US tariffs are self-retaliatory: they raise costs for American manufacturers. When the 25% tariff on Canada and Mexico hit, the carmakers called the White House and cars were exempted. All trade policies are partly political. In the US, trade policy is only political.
The US cannot talk sensibly about subsidies and China; the EU can.
Two shock absorbers
The first absorber is surge control: managed trade for a handful of industries, such as electric vehicles and batteries. I was in the White House in the early 1990s, when Japan and the US were fighting over trade, and managed trade put out the big fires. The second is what I call Subsidy Arms Limitation Talks, in which China and other countries, probably without the US, agree on guardrails for subsidies.
The EU should lead. The US cannot talk sensibly about subsidies and China; the EU can. China would listen because the alternative is worse. Individually, none of these markets is large enough to bother China. Collectively, they represent 75% of the world market.
Japan was the lead elephant, and the whole herd came along.
A herd, not a secretariat
Deborah Elms, Head of Trade Policy at the Hinrich Foundation and founder of the Asian Trade Centre in Singapore, doubts that regional groups could ever agree to limit subsidies.
“At the moment, we have both CPTPP and RCEP [Regional Comprehensive Economic Partnership], for example, who can’t even agree on how to deal with accessions of new members,” she said. “If you can’t get a secretariat and decide where it’s going to be located and who’s going to manage the budget for that, I cannot imagine a world in which you actually will tackle these subsidies.”
But the best recent fixes in trade did not need one. When the US walked away from the Trans-Pacific Partnership, Japan turned it into the CPTPP with no title and no chairmanship. Japan was the lead elephant, and the whole herd came along. When Washington blocked the WTO’s Appellate Body, the EU put together a stand-in with no formal committee and no formal structure, and China joined. A leadership herd can do the same on subsidies.
Even Elms left the door open: “If you’ve learned anything over the last year and a half, it’s sort of never say never.”
Getting the house in order
Elms and I agree on what all this means for countries outside the clubs. Those with “their domestic house in order” have always made more attractive partners, she said. “What I think is a little different now is that that’s, in my mind, been put on steroids. If you have your domestic position together and if you are prepared to engage with others, the payoff to you, the ultimate payoff to you, is a building block towards greater prosperity and economic growth.”
When the WTO’s 166 members moved together, countries could be swept along. Now each government must find its own partners, and her worry is that “countries that are laggards on this index are going to find it even harder to get growth and economic development moving forward.”
And the US? It is turning inward while the rest of the world moves on. That is bad news. The world got along without India and China for most of the postwar period, but it was better off once they opened their economies. The 75% will get along just fine without the US, too. But it is better if it participates.
The blocs are a reaction to coercion and to the loss of predictability, and they get more attractive as they grow. If we keep the doors open and absorb the shocks, they will be building blocks. Beware China Shock 2.0. It could turn them into stumbling blocks.
Richard Baldwin made these arguments at the launch of the 2026 Hinrich–IMD Sustainable Trade Index, alongside Deborah Elms of the Hinrich Foundation and Arturo Bris of IMD. The webinar was moderated by Chuin Wei Yap of the Hinrich Foundation.
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