Trade and Climate: an Effective Multilateral Cooperation?

Trade and climate are tightly linked. While the liberalisation of international trade has had a direct impact on the environment, the effects of climate change (extreme weather conditions, rising sea levels, changes in shipping routes, etc.) are also disrupting international supply chains and trade flows. Given the climate emergency, how can multilateral cooperation on trade and climate be designed? Can it be effective in preventing potential conflicts? How is the European Union combining its trade and climate ambitions? Denis Tersen, associate researcher at IRIS, specialises in international economic issues.

What impact does climate change have on international economic issues, in particular the strategic gateways for world trade?

Generally speaking, trade policy specialists are obsessed with the possible negative impact of environmental policies on trade. They forget that complacency or inaction in the face of global warming will be far more disruptive to the development of trade than adaptation or remediation measures. Production bases will be shaken. The sectors most exposed to climate change are well identified: agriculture, tourism, but also industry, with the impact on productivity of exposing workers and equipment to extreme temperatures or through the multiplication of climatic disasters that will impact and sometimes interrupt global value chains. We need only think of the impact of the 2011 floods in Thailand on the production of electronic components. Trade also involves transport, particularly maritime transport, which is highly exposed to climate risks. The Panama Canal, through which 5% of international trade passes, has been forced to reduce its activity in 2023 because of an unprecedented drought in the isthmus, which has dried up the lakes that feed the canal. Even the International Monetary Fund (IMF) has expressed concern. Finally, the last big-ticket item is that the fight against global warming will increase demand for materials critical to the energy transition (cobalt, copper, nickel, lithium, rare earths), creating new trade flows and heightened geopolitical tensions. This phenomenon has been called the « weaponisation of trade ».

To what extent can multilateralism prevent climate trade conflicts?

The climate is a common good and there will be no climate safe harbour where a virtuous country can take refuge and protect itself in a world that is not. The commitment must therefore be collective, with each major stowaway eroding the fragile internal consensus that may exist on the implementation of measures in favour of the climate. It is also important to prevent the adoption of non-cooperative climate strategies, particularly if they are designed solely from a national perspective of collective inefficiency and wasted resources. They also carry the risk of trade conflicts. This was clearly seen in the adoption of the US Inflation Reduction Act (IRA), which was initially welcomed in Europe for its climate ambitions, but was later denounced for its mercantilist rationale. As Sébastien Jean and I pointed out in a paper published by Terra Nova, while it is better to have a climate without (multilateral) rules than rules that ignore the climate, we must not give up on the prospect of multilateralism that is both climate-friendly and capable of containing trade conflicts.

This raises the question of the « right » multilateral forum for dealing with these issues. In the absence of a world environment organisation, the World Trade Organisation (WTO) has been the de facto forum for regulating the relationship between free trade and the environment. It was the only body capable of both laying down the law and settling disputes between trading powers by enforcing it – or else exposing the « offender » to the risk of « legitimate » trade retaliation. Contrary to a caricatured view, it has not been the great ultraliberal bogeyman devouring all policies favourable to the environment that stood in the way of free trade. WTO rules recognise a form of environmental exception, albeit a restricted one – it must not lead to discrimination between local and foreign products or between trading partners. Article XX of the General Agreement on Tariffs and Trade (GATT) provides that « nothing in this Agreement shall be construed to prevent the adoption or enforcement by any contracting party of measures: (a) necessary to protect human, animal or plant life or health; (b) relating to the conservation of exhaustible natural resources, if such measures are applied in conjunction with restrictions on domestic production or consumption… ».

The WTO, through its dispute settlement mechanism, has therefore had to rule on a number of environment-related disputes. These have generally pitted a developing country denouncing « green protectionism » against an industrialised country claiming to be ecologically virtuous. The institution has often ruled in favour of the environment. But today the system has seized up and is no longer adapted to the climate emergency: Firstly, because trade rules prevent the possibility of creating internal pro-climate coalitions – the alliance of trade unionists and environmentalists, for example, as in the case of the IRA – with all that this can imply in terms of preferential treatment for local production; secondly, because since the Trump presidency the WTO’s dispute settlement mechanism has been paralysed and the WTO is no longer able to say what the law is and play its role as a commercial judge of peace. We therefore need both to develop multilateral rules and practice to put the response to climate change at the forefront – the peace clause, climate-related preliminary questions, broad definitions of legitimate green subsidies – many solutions exist – and to find the right forum to discuss them, for example by getting climate negotiators and trade negotiators to work together, by bringing the WTO and the United Nations Framework Convention on Climate Change (UNFCCC) closer together.

How does the European Union (EU) combine economic strategy and climate ambition? Can the EU be considered a climate leader?

The outgoing Commission’s term of office was clearly marked by a desire to commit the EU to the fight against global warming, with the launch of the « Green Pact for Europe » at the start of its term in December 2019, followed in July 2021 by the Commission’s presentation of the « fit for 55 » package of legislative proposals. In the area of trade, the climate shift has also been made. Compliance with the Paris Agreement is now considered an « essential clause » in the economic partnership agreements signed by the EU with the United Kingdom and then New Zealand, and would allow the bilateral agreement to be suspended in the event of a breach of the Paris Agreement. A border carbon adjustment mechanism has been adopted in response to a French request for the introduction of carbon locks at EU entry points in May 2023. A regulation to prevent imported deforestation was adopted the same month. Environmental mirror clauses now exist, but not only in agriculture. They still need to be completed, of course, as current agricultural demands show. For the EU, this move towards climate change does not conflict with economic competitiveness, with many responses expected from technology and business support, including the first elements of a European industrial policy.

Is this enough to assert the EU on the international stage? Not really, not very much. The EU remains a very incomplete power. It has jurisdiction over trade and the issuing of standards, but lacking the budgetary resources it cannot really intervene in the form of subsidies. It is often paralysed by the divergent interests or dissensions of its members. Lastly, it aims to set an example in terms of climate change, but it is also a good multilateral student, which has led it to adopt texts that are intended to comply with the letter of the WTO rules, at the risk of weakening their environmental effectiveness, with no guarantee of appeasing trading partners who are quick to denounce its green protectionism. As a net exporter of goods and services, barring an atypical year such as 2022, it is reluctant to sacrifice its economic interests on the altar of climate change.

In addition to these fragilities and systemic contradictions, the broad climate consensus that had prevailed in the past is now being called into question by the rise of climate-sceptic populism and the rejection of the constraints of the Green Deal. The continuation of the EU’s commitments will be one of the issues at stake in the European elections in June. The climate has not won the day.

 

Translated by Deepl.