Trade must play its part in saving the planet

For decades now, environmentalists and free traders have circled each other warily in mutual suspicion. Going back to the time when environmentalists helped bring down the legendary disastrous 1999 World Trade Organization conference in Seattle, each tends to regard the other as, respectively, planet-wrecking neo-liberals or Luddite protectionist ignoramuses.

This dysfunctional long-term relationship means a major missed opportunity – the strong trade dimension is notably absent from the COP27 climate conference, which concludes in Sharm El-Sheikh this week. There has been an increase in defensive environmental measures in trade, which has leveled the international playing field to protect companies from imports produced to lower standards. But given the massive improvements in green technology, from renewables to electric cars, the drive to reduce carbon emissions needs a stronger component of open trade and technology transfer.

In recent years, addressing the environment has essentially meant fixing increasingly complex additional chapters into traditional preferential trade deals, or preferential trade agreements, that set conditions for better market access. Oftentimes, environmental issues stop business deals from ever being completed. The prospects of an EU-Indonesia deal have been dimmed for years by the European Parliament that in effect blocked imports of palm oil over concerns about deforestation — a concern that is now broadening to include restrictions on a whole range of different products.

In the context of not giving the environmental bad guys a competitive advantage, the EU’s other big contribution to the trade and environment debate is the proposed carbon cap adjustment mechanism to prevent “carbon leakage” of emission-intensive industries offshoring.

Some of this may be as good as it gets, although the skeptics are right that green provisions can be misused for protectionist ends. Research certainly shows that green clauses have reduced exports from countries to the EU under preferential trade agreements, although whether or not this actually benefits the environment is debatable.

But the environmental standards equation does not by itself produce and disseminate the technology that makes a prosperous, low-carbon future possible. Indeed, the growth of new sectors often triggers new trade wars, as producers attempt to establish a dominant position in markets with first-mover advantage and economies of scale.

Installing solar panels in the world’s major economies has been delayed and complicated by a series of trade disputes dating back a decade, and European and American producers complain of competition from China. There have been similar controversies over trade in e-bikes and wind power equipment.

To be fair, in the years since the solar trade wars broke out, the risk of dependence on China for hard-to-replace technology has clearly increased. Beijing became increasingly willing to use economic coercion, although its early foreclosure against the advanced economies (Australia and Lithuania) was not entirely successful.

It makes sense for economies, middle-income as well as developed, to diversify their supply networks. But flexibility often leads to an overbalance in protectionism. Reducing dependence on China should not mean automatic supply. If every economy in the world tried to develop its own technology and its own domestic industry, there would be a vast and inefficient archipelago of discrete markets instead of an effective critical mass.

There is a compelling case for government investment in green technology, given the environmental benefits it can bring. But tying that spending to domestic content requirements, as the US does with the electric car tax credit, is not a sensible way to do it.

Governments might do well if they invest generously in subsidizing new cutting-edge products, rather than creating a glut by building capacity in mature sectors such as semiconductor manufacturing. But a subsidy race in which supply concerns trump efficiency is not the way to create and deploy the most efficient technology. It is likely to anger trading partners who then respond with import duties against products they consider to be unfairly covered or subsidized.

The business side of technology and climate change has been seriously neglected. Talks between a coalition of (initially) willing nations about cutting tariffs on goods in favor of the environment began at the World Trade Organization in 2014. But they soon ran into trouble when the European Union in particular objected to China’s perfectly plausible claim that bicycles were green products And the talks stopped.

Moreover, the vague sense that global trade is bad for the planet because of freighters and cargo planes burning fossil fuels has often been allowed to wander around political and public opinion circles virtually unchallenged. In fact, international freight transport is on average well under half the carbon footprint of traded goods.

As always, globalization and open trade are not all good or all bad, although they tend to the former. They certainly do not bear the main responsibility for the state and climate of the planet, but they can play a much larger role in improving it.

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