EU Pivots to Developing Economies with Mercosur and India Deals Amidst Rising US-WTO Tensions

The European Union is aggressively pursuing a new trade strategy, forging major alliances with developing economies in a stark contrast to the United States’ recent protectionist turn. According to a report from Herbert Smith Freehills, the EU and the South American trade bloc Mercosur sealed a free trade agreement on January 17, 2026, after a quarter-century of negotiations. The deal, which includes Argentina, Brazil, Paraguay, and Uruguay, will establish one of the world’s largest free trade zones and is seen as a significant strategic move in the global trading landscape.

This agreement with Mercosur does not stand in isolation. It is part of a broader EU strategy to forge new alliances, coming just ten days before the EU concluded a similar landmark deal with India on January 27, 2026. The EU is also deepening ties elsewhere, with The Japan Times reporting that the EU and Vietnam have upgraded their relations to a comprehensive strategic partnership to bolster trade and investment. This strategic shift by Europe aims to diversify markets and strengthen cooperation in key areas like semiconductors and critical raw materials amidst global trade uncertainties.

The EU’s push for multilateral agreements comes as the United States’ relationship with the global trade system faces new strains. On January 30, 2026, the World Trade Organization (WTO) circulated a report finding that certain U.S. tax credits under the Inflation Reduction Act are inconsistent with WTO rules. The WTO panel, responding to a dispute initiated by China, concluded the tax credits violate national treatment obligations and act as prohibited subsidies.

The office of the United States Trade Representative (USTR) sharply criticized the findings. In a statement, the USTR said the report “only underscores the serious doubts that the United States has long expressed regarding the capacity of the WTO to regulate trade in a world marked by severe and sustained trade imbalances.” The USTR affirmed that the U.S. remains committed to its policies aimed at reindustrializing its economy, supporting American jobs, and securing supply chains. This divergence highlights two distinct paths being taken by the world’s economic superpowers: the EU’s embrace of new, large-scale FTAs versus a US focus on domestic industrial policy, even at the risk of friction with the established global trade body.