The world’s ever-growing consciousness and urgency in addressing the climate crisis and its adverse effects has indubitably reached the realm of international trade. The European Union (EU) has sought to place itself at the forefront of these developments by making sustainability a key agenda issue, and announcing policies that promote increasingly environmentally-friendly trade relations with partner countries. The extent to which this has become an imperative for trade policy thinking could be observed, for instance, in the indefinite shelving of the EU-Mercosur free trade agreement due to concerns around intensive deforestation in Brazil. More recently, the EU made waves by announcing the Carbon Border Adjustment Mechanism (CBAM), which is aimed at preventing carbon leakage through imports into the bloc, by tying trade to the emissions trading scheme (ETS), and incentivising producers in partner countries to green their production processes.

These recent developments have sparked questions about how genuine the EU’s sustainability drive is in trade, and whether mechanisms like the proposed CBAM are simply the newest tools to pursue protectionist policies at the expense of producers in developing and middle-income countries. This tension is central to the question of whether such EU policies are adequate and fair - a question that seems to have no easy answer.

EU: Sustainable Trade Pioneer?

As the EU seeks to move towards a sustainable economic model - outlined in its Green Deal - numerous consequences for its economic relations with external actors loom. In the economic realm, the EU aims to promote sustainability across the value chain and incentivise its firms to deliver goods at high environmental standards. To green operations, the EU includes dealings with trade partners outside of the EU, most prominently through proposals for supply-chain due diligence and the CBAM. The rationale behind these proposals is that, by setting high environmental standards for the common market, sustainable production is incentivised, but the competitiveness of EU firms may be worsened vis-a-vis external actors whose production practices are inexpensive and environmentally-harmful. As a result, and as will surely be argued by EU representatives at the World Trade Organization, measures like the CBAM represent a necessary market correction - not a distortion.

As a secondary effect, the EU would be exercising what LSE Professor Lloyd Gruber has aptly termed “go-it-alone power”.

That is, when policies or measures by a powerful actor unilaterally create a new status-quo within international political or economic relations that weaker actors have no choice but to adhere to due to a lack of alternatives. While the new environmental conditions for trade will be arguably worse than the previous status-quo for partner countries, this outcome is still preferable to the alternative of being excluded from EU markets entirely due to an unwillingness to cooperate. A ripple effect, under which other nations - predominantly of a similar developmental level to the EU - explore and institute similar policies, is already taking place as a consequence of this go-it-alone power. Hence, EU policy can be a blueprint for the overall reordering of international trade relations with a supposedly bigger focus on sustainability. A good thing then, right?

Kicking Away the Ladder

The picture blurs when considering the position of many developing and middle-income nations that trade with the EU. These actors argue that certain nations have developed and industrialised in heavily polluting ways, including in the production of goods, and consequently mark them as outsized producers of historical emissions. In their view, environmental trade measures deny the late-comers that same chance, undermine the principles of the liberalised trading order, and penalise their attempts at economic development despite very low historical contributions to emissions. This narrative that developed nations are “kicking away the ladder” (a term coined by economist Ha Joon Chang, originally in regard to intellectual property and other institutional requirements for developing nations) casts doubt on the fairness of EU environmental policies, and invokes the creeping spectre of trade protectionism by other means.

It is true that, historically, countries like Germany and France figure among the largest polluters, and that the average lifestyle in a European country is more emission-intensive than its equivalent in India, Botswana, the Philippines, or Brazil among others. All in all, European nations have a vastly outsized share of the global emissions output compared to their share of the global population.

Nevertheless, it is also true that current trends are quickly catching up middle-income nations in their cumulative historical emissions; China is currently the world’s biggest polluter and already in second place for historical emissions per the Carbon Brief. Similarly, intense deforestation has led Brazil and Indonesia to catch up to or surpass many European nations in this metric. One may argue that these nations’ share of the global annual emissions output has not yet reached their share of global population, meaning that they should be able to further increase their emissions. However, in order to lay the foundations for successful long-term economic development, the fundamental objective - especially for smaller developing countries - should be to develop while maintaining emissions as low as possible, consequently staving-off the heaviest adverse effects of the climate crisis.

The Way Forward

While recognising the interlinked nature of trade, and the role that demand from Europe plays in accelerating these trends in other places, these developments highlight the need for ways of pricing environmental externalities into the choices of consumers in Europe. Therefore, the EU’s go-it-alone power may be necessary at this point to establish momentum for a more environmentally conscious trading system. In order to make these changes effective, however, this cannot be allowed to simply make developing nations (especially smaller ones) worse-off compared to before. Should this be the case, it may undermine EU influence abroad and make future cooperation and concessions considerably more difficult.

Instead, the EU needs to put money behind its environmental proposals and actively help other nations and companies that export to the EU in their transition toward lower-emission production processes. By funding emissions-effective economic development in countries that need such assistance, fears of protectionism and uncooperativeness can be preempted. While the system of providing monetary and technical assistance to developing countries will not be perfect and will have to be contingent on numerous conditions in practice, it will emphasise that these policies also create winners and are based on the principle of international cooperation. It is, thus, absolutely crucial that monetary assistance is not just lip-service but translates to tangible outcomes. Excluding least-developed countries, which are not large polluters in production in the first place, from requirements under policies like the CBAM would provide a simple first-step for EU policy-makers, and further weaken potential resistance.

Brussels also needs to set an example by credibly pursuing and incentivising domestic initiatives for lower-emission production processes in all of the member states, reducing preferential treatment for domestic companies under schemes like the ETS, and meeting (or, ideally, exceeding) its 55% GHG reduction target by 2030. This way, a “do as I say, not as I do” situation can be avoided, and partners will more readily accept cooperation and dialogue on new requirements, like supply chain due diligence and the CBAM.

Hence, while the new environmental measures proposed by the EU are imperfect and not ideal for a large number of nations, they represent one of the only material manners in which change that counteracts the climate crisis can be achieved across nations on the supply and the demand side. Thus, they represent the best course of action within the constraints posed by the international trading system, given the urgency of the matters at hand. As outlined, significant commitments from the EU nations will be required to make these policies palatable to partners abroad and prevent “silent protectionism”. Yet, if these commitments are credible, Brussels could keep the (proverbial) ladder in place, while creating second-order effects that extend far beyond the realm of trade and invigorate sustainable economic development in partner states.

Future Thought Leaders is a democratic space presenting the thoughts and opinions of rising Energy & Sustainability writers, their opinions do not necessarily represent those of illuminem.