The meeting of WTO trade ministers in Abu Dhabi (MC13) represented a historic opportunity to address the issue of trade cooperation for the environment and the associated challenges in industrial policy. For the first time, a ministerial discussion was held on these themes. What were the reasons for this?
In the world of international governance, trade policies and environmental policies have different legal and institutional histories which make it seem like they belong to different planets. Environmental and trade policies are set with little regard to their reciprocal implications, and their respective decision-makers have few opportunities to meet in international fora. While the law of multilateral trade is rooted in the principle of “non-discrimination”, most environmental policies rely precisely upon the objective of discriminating between “good” and “bad” behaviour as regards the environmental impact of the production and exchange of goods and services. The tension between their basic principles is readily apparent.
Despite this, the governance architecture of the GATT/WTO was up to now able to efficiently manage this tension and overcome potential divergences between the two sets of policies.
— Does the WTO recognize the values of environment and sustainability? Yes. Sustainable development is one of its statutory objectives.
— Does the WTO discuss trade and environmental issues? Yes. Several mandates and a dedicated forum (the Committee on Trade and Environment — CTE) have been assigned that purpose.
— Does the WTO negotiate rules related to sustainability? Yes. In 2022 a landmark agreement was adopted to prohibit subsidies for fishing boats practising illegal, unreported or unregulated fishing. Negotiations on subsidies reform have continued – and almost succeeded – to build upon this agreement during MC13 to promote more sustainable fisheries.
— Does the WTO deal with trade disputes generated by environmental measures? Yes. Several cases of disputes arbitrated through WTO dispute settlement have outlined ways to reconcile environmental policies with trade policy requirements.(1)
Thirty years after the WTO’s creation, new global environmental challenges of an unprecedented magnitude have intensified, with climate change, biodiversity losses and pollution topping the list. The global community has engaged in an unprecedented effort to tackle these challenges, in particular through the adoption of the UN Sustainable Development Goals (SDGs), the Paris Agreement, the Kunming-Montreal Global Biodiversity Framework and the ongoing negotiations for a global plastics treaty. At MC12 in 2022, trade ministers recognized these global challenges and the contribution of trade and the WTO to the achievement of Agenda 2030.
A growing amount of evidence shows that global endeavours for the environment have significant trade implications requiring global trade coordination. The WTO registered a 25% increase in the number of environment-related notifications over the last 10 years. The environment-related entries in the Trade Policy Reviews of WTO member also grew over 70% during that period. The World Trade Report for 2023 took note of a ninefold increase in trade concerns raised at the WTO’s Council for Trade in Goods between 2015 and 2022, out of which several were related to unilateral environmental measures, such as export restrictions on critical minerals, carbon pricing policies and related carbon border adjustments, subsidies and regulations.
Beyond these trends, there are strong reasons to think that environmental challenges will put the multilateral trading system under increased tension in the future.
Firstly: the global scope of the environmental challenges. Major environmental policies seldom result from individual country preferences (such as protecting local waters or specific local species) but rather from global objectives recognizedby the international community. Achieving these objectives requires global cooperation, which frequently involves dealing with the issue of “free-riding” in cases where some parties benefit from the actions without undertaking commitments of their own. This coordination challenge was identified very early by Professor Jagdish Bhagwati, an uncompromising free-trader economist:(2) one key question here lies in whether potential trade-restrictive measures against free-riders would be coordinated or would remain uncoordinated. It is naturally anticipated that non-coordination would lead to suboptimal outcomes due to increased trade uncertainty, tensions and disputes.
Secondly: the depth of the green economic transformation. For instance, “net-zero strategies” adopted by governments under the Paris Agreement (and emulated at corporate level) aim at eliminating carbon emissions. To achieve their “Nationally Determined Contribution” (NDC) under the Paris Agreement, governments resort to a variety of instruments, such as carbon pricing policies (carbon taxes or emission trading schemes) regulation of production and products, or subsidies. These policies will impact trade costs and market signals, thus influencing companies’ decisions, global supply chains and the capacity of developing countries to integrate into supply chains. Yet, there is currently no accepted methodology nor globally recognized trade forum to evaluate the equivalence of such policies, verify their non-discriminatory nature, and ensure their interoperability. Finally, the same tools can also be mobilized for industrial policy purposes. Trade tensions can easily proliferate from a lack of coordination.
Thirdly: environmental policies increasingly based on the differentiation of production and process methods (PPM). A cornerstone of the WTO approach to non-discrimination is based on the capacity to compare similar products competing in a market (i.e. “like products”). Yet, the accepted meaning of similarity does not easily determine the differences in the sustainability footprint of different products when they do not appear in physical characteristics or qualities of the product itself. For instance, differentiation between products according to their carbon emissions intensity may raise technical and legal challenges. Concerns with some policies aiming at regulating and tracing production methods have already emerged in several WTO discussions. Some harmonized or mutually recognized environmental standards as well as some global convergence on carbon content calculations or traceability methodologies will be needed.
All things being equal, implementation of environmental policies without sufficient trade coordination would increase the risk of trade fragmentation and potential for trade tensions. Conversely, cooperative approaches to environmental challenges could leverage the power of trade policy to support the achievement of global objectives and accelerate a just and green transition: to repurpose market incentives and fiscal resources (such as tariffs, subsidies or regulations) for sustainability objectives; to promote sustainable innovation through market liberalisation for a higher return on investments and economies of scale; to lower the costs of clean technology dissemination and transfers; to help developing countries take advantage of green opportunities.
For the past two years, three pivotal groups of WTO members have been driving substantial initiatives within multiple WTO dialogues: the Structured Discussions on Trade and Environmental Sustainability (TESSD), the Dialogue on Plastics Pollution (DPP), and the Fossil Fuel Subsidy Reform (FFSR). These efforts have culminated in a sophisticated mapping of the intricate interplay between trade policy measures, plastics pollution, climate change, renewable energy transition, circular economy dynamics, and agricultural subsidies.
Under the leadership of the WTO Director-General, Dr Ngozi Okonjo-Iweala, the WTO Secretariat has provided members with resources for addressing the growing gap between trade, environment and climate cooperation. A “Trade Day” was organised for the first time at COP28 in Dubai last year, with many related discussions held in a “Trade House” jointly hosted by the International Chamber of Commerce, UNCTAD, the International Trade Centre and the WTO. The Secretariat has also issued several research publications (including the World Trade Report 2022 on climate change and international trade, and “Trade Policy Tools for Climate Action” in 2023), fostered an international task force on global carbon pricing, and facilitated a public-private sector dialogue aiming at convergence of “green steel” calculation methodologies and standards to support decarbonization of the sector.
The WTO can be used further as a platform to foster trade cooperation for the environment, in a flexible manner, taking into account different members’ appetite, development needs, levels of ambition, and expectations for a just green transition. This can take place through exchanges of experience and best practices, as in the current CTE discussions, through improved transparency and problem solving as is currently taking place in different WTO committees and fora and through capacity building and consideration of collective trade actions/negotiations geared toward achieving “win-win-win” objectives for trade, development and sustainability, such as those proposed by some members and groups of members.
The ministerial conversation in Abu Dhabi has underscored a growing discomfort among many WTO members regarding the rise of environmental unilateralism, the limitations of current trade rules, and the “policy space” left open to address the challenges of ecological transition and industrialization. Thirty years after the establishment of the WTO, what its members must decide boils down to a simple question: do they want more WTO, meaning more trade multilateralism, to better tackle the challenges of green industrial transition and the preservation of global public goods?
Notes:
- Such as famous cases known as “shrimp/turtle”, “tuna/dolphin”, “reformulated gasoline”.
- “Trade and the Environment: Does Environmental Diversity Detract from the Case for Free Trade?” by Jagdish Bhagwati, Columbia University, and T.N Srinivasan, Yale University, January 1995, Discussion Paper Series N°718.
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