Why Is There a Need to Delink International Trading Rules From Climate Goals?

National trade policies can play a complementary role but international trading rules that are being proposed to the WTO can constrain developing countries’ progress towards environmentally sustainable growth.

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As leaders proceed to Glasgow for COP26, the paramount issue remains how the world commits to a reduction in greenhouse gases. Climate adaptation will be an urgent agenda for developing countries. But to achieve their environmental goals developing countries need access to affordable green technologies, additional financial resources and capacity building.

National trade policies can play a complementary role but international trading rules that are being proposed to the World Trade Organisation (WTO) can constrain developing countries’ progress towards environmentally sustainable growth.

While greenhouse gases are rapidly rising, carbon emissions in traded goods and services comprise only 27% of global carbon emissions, indicating that the scope of international trade policy, particularly the international trading rules, in achieving global green growth is limited, argues UNCTAD’s recently launched Trade and Development Report.

Issues around trade and environment have gained momentum in the WTO since November 2020, when a group of countries initiated ‘trade and environmental sustainability structured discussions’ (TESSD) with an intention to report concrete deliverables, initiatives, and next steps at the 12th ministerial conference. Various proposals have been tabled like liberalising trade in environmental goods and services; carbon border adjustment mechanism and climate actions; and circular economy and biodiversity.

The report argues that while these international trading rules are being pushed into the WTO, apparently to meet climate goals, these rules may diminish the chances of developing countries to progress on their sustainable development goals, making structural transformation more challenging. Not only will these rules undermine developing countries’ structural transformation by raising the cost of industrialisation, limiting their export capacities but will also constrain their budgets for promoting green growth.

Also read: ‘Tackle Climate Change With Same Urgency Shown to Pandemic’

Trade liberalisation

Push to liberalise trade in environmental goods and services will benefit mainly exporters in the developed countries and constrain the fiscal space of developing countries. Using the OECD’s Combined List of Environmental Goods (CLEG), the top five exporters of environmentally related goods were found to be EU, China, US, Japan and Korea with the combined share of top ten exporters estimated at 88% of global exports. Most of the developing countries are net importers of these goods.

The report estimates that developing and least developed countries will lose tariff revenue amounting to $15 billion per annum if duty-free imports of these goods are allowed. Furthermore, cheaper imports of these environmental goods will undermine developing countries’ capacity to produce these goods, forcing them to remain net importers.

While there are considerable doubts on the goods that should be included in the list of environmental goods, there are attempts to widen the scope of environmental services to include engineering, architecture, design, general management and construction. The report warns that forced commitments in these services will take away the flexibility offered to the developing countries through the positive list approach in the General Agreement on Trade in Services at the WTO.

Developing countries require technical know-how, additional financial resources and capacity building to progress towards environmentally sustainable growth. Identified key green technologies should be declared as ‘public goods’ and their access made affordable for all. To increase the use of environmental goods and services for meeting the climate goals, it is not trade liberalisation that will help but facilitating patent-free green technology transfers, argues the report.

Carbon border tax in the era of global value chains

Some developed countries including the EU are considering to establish Carbon Border Adjustment Mechanism (CBAM) which entails taxing imported goods at a rate commensurate with the amount of carbon emitted (CO2 emissions) in their production. This is done to avoid ‘carbon leakage’ i.e., shifting out of polluting industries from countries that tax their emissions into those where carbon price does not exist.

The report highlights that CBAM is not justified in an interconnected global economy. The push to form global value chains (GVCs) by the North in the past two decades has led to outsourcing of many carbon-emitting production activities to developing countries, while associated low-carbon pre-production and post-production activities have been retained by the lead firms mostly based in the North. The comparative energy efficiency of the North is therefore closely linked to the energy inefficiency of the South.

High carbon emissions are linked to mainly seven industries, namely, mining and extraction of energy-producing products; textiles, wearing apparel, leather and related products; chemicals and non-metallic mineral products; basic metals and fabricated metal products; computers, electronic and electrical equipment; machinery and equipment; and motor vehicles, trailers and semi-trailers. These are also the industries with high foreign value-added content in their exports indicating a high proportion of their trade linked to GVCs.

The estimates in the report show that the share of OECD countries in CO2 emissions embodied in global exports is almost double that of non-OECD countries (minus China), i.e., 31% as compared to 16%. Further, while the average per capita CO2 emissions based on production has declined over time in OECD countries, it still remains much higher than those in the non-OECD countries. It is also estimated that the CO2 emissions in gross exports of OECD countries to non-OECD countries have grown much faster than the CO2 emissions in their imports from non-OECD countries. These facts indicate the growing inter-connectedness of the global economy which makes it impossible to disintegrate the emitters from non-emitters in the global value chains.

The use of CBAM therefore cannot be justified for counterbalancing carbon pricing in the developed world, argues the report. These would further undermine the export capacities of the developing and least developed countries where these industries primarily reside and make structural transformation more challenging for them.  

Also read: What’s at Stake for India and South Asia at COP 26?

The circular economy

The circular economy can help in achieving climate goals. The report highlights that while there are no doubts about this, attempts are being made in the WTO to liberalise trade in remanufactured or recycled goods and waste and scraps to promote a circular economy. But this agenda dates back to 2004 when it was rejected because many developing countries argued that second-hand, refurbished or remanufactured goods may lock their economies into outdated and less efficient technological solutions and therefore delay the achievement of environmental goals.

Concerns were also raised on liberalising trade in waste and scrap as that would put additional pressure on the waste management system of developing countries. Furthermore, imports of second-hand clothes and footwear were found to have significant negative impacts on the revamping of the textiles and leather industries, especially in Africa.

The report argues that national trade policy can at best play a complementary role in achieving climate goals while international trading rules will hinder global green growth. Expanded policy space with legal tools such as waivers and peace clauses in the WTO can help developing countries to develop capacities to move towards climate goals.

Incentive-based approaches, for example, optional preference schemes that provide ringfenced climate financing additional to ODA or preferential market access in exchange for progress towards Nationally Determined Contributions (NCDs) could help ratchet in climate action without punitive (and development-threatening) measures like the CBAM and promotion of export interests of big businesses.

In conclusion, the need of the hour is a range of climate adaptation policies that must benefit developing countries, which are currently facing economic crises due to the COVID-19 pandemic. It is important to ensure that climate adaptation policies take precedence over constraining and overly burdensome international trade rules. Ultimately, it is the developmental role played by the state that would matter most in these exceptional circumstances. Hence, the need for waivers and peace clauses at WTO to bring about affordable access to green technologies.

Rashmi Banga is senior economic affairs officer at UNCTAD.