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FOR DECADES, the dominant view among policymakers was that trade and environmental policy should be kept out of each other’s way. Limited measures to help the environment were allowed under WTO rules, but only so long as they restricted trade no more than was deemed absolutely necessary. Environmental provisions crept into trade deals, but were usually framed as a way to stop partners from gaining an unfair competitive advantage by exploiting natural resources. Trade negotiators tried to slash tariffs on greener goods, including those that measure or reduce pollution, and to agree rules to curb damaging subsidies. But this broadly supported multilateralism while eliminating distortions that they mostly wanted to get rid of anyway.
The most obvious change in recent years has been in the priority that politicians (and voters) now place on environmental goals. In 2008 41% of American adults told the Pew Research Centre, a think-tank and pollster, that protecting the environment should be a top priority for the president and Congress, but that number rose to 64% in 2020. A survey of Europeans in 2021 found nearly one in five saying that climate change was the world’s most serious problem, slightly ahead of poverty, hunger, lack of drinking water and infectious diseases. Ambition has been codified in the Paris agreement on climate change of 2015 and in the UN’s sustainable development goals.
These commitments have increased the pressure on trade policy to contribute by giving unenforceable agreements more teeth. They also point to greater support for direct environmental goals through deals to cut damaging subsidies or to slash barriers to trade in green goods. There is plenty of scope for improvement. According to the IMF, governments spend the equivalent of 0.4% of GDP a year on fossil-fuel subsidies. One study by Joseph Shapiro of the University of California, Berkeley, compares tariffs on products made by polluting industries with those made by cleaner ones, and finds that the more carbon-intensive products are actually taxed less. The difference is equivalent to an implicit subsidy for carbon emissions of between $85 and $120 per tonne.
There is growing acceptance of the links between trade and the environment. Estimates from the OECD, a club of mostly rich countries, find that CO2emissions associated with trade make up over a quarter of the global total. Although economists in the 1990s failed to find much evidence that differences in environmental policy affected trade flows, a newer body of work suggests that they matter. One study found that changed regulatory costs account for as much as 10% of the rise in American trade flows to Canada and Mexico between 1977 and 1986. Another found that new Canadian air-quality standards in the late 2000s had cut export revenues by around a fifth.
It is less clear that trade liberalisation is likely to prompt polluters to relocate to places with laxer environmental standards. Other factors seem more important. But if policymakers want to toughen standards at home, they will also need to take trade into account. Economic modelling has found that, if countries take certain steps to cut carbon emissions, a little under a third of that will “leak” abroad in the form of higher foreign emissions than otherwise. In heavily traded, carbon-intensive industries, like steel and aluminium, the leakage rate can be even higher.
In theory, the WTO should be an ideal forum in which to consider environmental issues. Global problems of the commons require global solutions. The WTO’s 164 members have in the past agreed to curb farm subsidies, as well as to cut tariffs. “I see the WTO and trade as part of the solution to climate change,” insists Ms Ngozi Okonjo-Iweala, the director-general. Yet the WTO’s trade negotiators do not seem to be much good at environmental deals. Talks to liberalise trade in green goods collapsed in 2016 partly because the EU did not want to expose bicycle producers to Chinese competition. Negotiations to curb subsidies for fisheries have been going on for over two decades. According to scientists at the University of California, Santa Barbara, an ambitious deal to remove all capacity-enhancing subsidies could raise fish stocks by 12.5% between now and 2050. But the deal under discussion would increase them by just 1.6%.
Some are also frustrated by the insistence in the WTO’s rules that environmental measures must be applied so as to minimise their effect on trade. In April Ms Tai said that exceptions allowing trade restrictions had been difficult to invoke, one reason why “today, the WTO is considered by many as an institution that not only has no solutions to offer on environmental concerns, but is part of the problem.” This reputation is worse than the WTO deserves. America lost two cases not because it had tried to help the environment, but because it sought to do so in a discriminatory way. But the WTO’s lawyers tend not to approve of discrimination based on how products are made, which is crucial if carbon-intensive products are to be treated differently from cleaner ones.
Without the option of agreements at the WTO, policymakers are pursuing environmental goals in other ways. One is to use trade to reinforce international climate agreements, though so far this has been mainly a European project. The EU refuses to sign new trade deals with countries that have not ratified the Paris agreement or taken steps to combat global warming, and it may add compliance with Paris as a condition for poor countries to gain enhanced access to its market. Its Brexit trade deal with Britain includes “acts or omissions that would materially defeat the object and purpose of the Paris agreement” as potential grounds for suspension.
Greasing the palms
Another idea is to link trade policy and environmental outcomes directly. A trade deal approved in April between Indonesia and the European Free Trade Association, a trade bloc, offers Indonesian palm-oil exporters lower tariffs if they meet certain environmental standards. In May APEC trade ministers launched a process for identifying environmental services to inform future talks. Several countries are trying to conclude an “agreement on climate change, trade and sustainability” by the end of this year, to curb fossil-fuel subsidies, liberalise tariffs on environmental goods and offer eco-labelling guidelines. “It may be hard to get everyone on the same page,” says Damien O’Connor, New Zealand’s trade minister; but he adds, “let’s start with those who do agree.”
Bigger players are also throwing their support behind environmental measures. In 2018 China banned the import of plastic waste. The EU is working on legislation to require companies to show that their supply chains meet certain green standards. It is also considering “digital passports” to contain information on environmental and material characteristics. In theory the European Commission’s negotiators have agreed a trade deal with Mercosur, a South American trade bloc. But after some members protested about Brazilian deforestation and the European Parliament resolved that it could not approve the deal as it stands, the commission is demanding new green commitments before the ratification process is resumed.
A final idea is to find ways to allow ambitious policies at home, while protecting domestic producers against the possibility of leakage and shutting out foreign suppliers from the benefits of green investments. At the forefront, the EU has operated an emissions trading system (ETS) for years, making companies it covers buy permits if they want to emit CO2. Some sectors have been protected from foreign competition with free permits, a handout the commission wants to scrap. In July it unveiled plans for a carbon border adjustment mechanism (CBAM) that would gradually extend the ETS to importers. Where a carbon price has already been paid, the charge will be lower. This is designed to encourage foreign governments to introduce carbon pricing.
Others are watching carefully. Canada’s government has announced plans to develop its own carbon border adjustment mechanism. The Biden administration has called the CBAM a potentially useful tool, and the Britishgovernment took care in a recent report on greening trade not to rule out the idea. Concerns for consistency with the multilateral rules-based system vary. Valdis Dombrovskis, the EU trade commissioner, stresses that the CBAM was designed in a WTO-compatible way. But American officials, who talk about the environment and national security in the same breath seem less fussed about whether this is true.
Ms Okonjo-Iweala believes it is possible to design carbon border adjustments in a way that is not protectionist, but “the devil is in the detail.” Many other measures designed to shore up domestic support for the green transition are less successful in avoiding the label, such as the Indian government’s plans for tariffs of 40% on imported solar modules from 2022, or the Biden administration’s Buy America conditions for infrastructure spending. As governments cultivate more climate-related investments, one can expect similar naked grabs for more jobs at home.
A generous assessment of this mish-mash of trade and environmental policies is that, given the scale of the challenge, it is worth reaching for anything that might work. Waiting while 164 WTO members struggle to reach a consensus might mean waiting a lifetime. Unilateralism from countries with enough clout could deliver quicker results. Carolyn Deere Birkbeck of the Forum on Trade, Environment and the Sustainable Development Goals, a research outfit, says that bans on plastic waste imports started by China have pushed rich countries to take more responsibility for the stuff.
A harsher view would be that policymakers are being pulled along by a mix of evolving domestic green policies and populist outrage, rather than a considered assessment of the right measures to help the environment. Arguably, the collection of countries trying to curb fossil-fuel subsidies are showing more leadership than the many Europeans who are breathlessly demanding that market access be made vaguely conditional on adherence to climate commitments.
Policymakers would be wise to remember a lesson from the old regime: that trade restrictions can have unintended consequences. When a country applying one represents only a small share of the exporter’s market, it is unlikely to effect policy change. Tariffs and local content requirements can cut off cheap suppliers, making environmental goals even more expensive to reach. Pamela Coke-Hamilton, executive director of the International Trade Centre, a UN development agency, says the rising number of sustainability standards, from around 15 in 1990 to more than 250 today, has “significantly increased the stress on a lot of businesses”. She thinks there should be more financing so that companies can build the capacity to become greener.
Policymakers face a delicate balancing act between domestic and foreign interests. Trade liberalisation is supposed to be win-win. Yet climate mitigation involves short-term costs for all, and there will always be a temptation to push these elsewhere. Go too far, and that will have other costs, including retaliation, ill will and less co-operation. Trade policy may sometimes seem like an easy short cut to climate improvement. Unfortunately it is not. ■
Full contents of this special report
World trade: The new order of trade
Trade law: A fraying system
Precautionism: In search of resilience
Labour rights: The urge to protect
The environment: Making trade greener*
The new rules: A changed world
World trade the new order
This article appeared in the Special report section of the print edition under the headline “Making trade greener”