– Deputy Director-General Jean-Marie Paugam said on 4 July, 2024 in remarks delivered at the Trade Horizons Conference in Dublin. With uncoordinated green actions having the potential to fragment world trade and trigger unnecessary conflicts, the cause of the environment “will oblige us in the WTO to invent new forms of trade commitments and global cooperation.”
By Jean-Marie Paugam
Just two days ago, four countries; Costa Rica, Iceland, New Zealand and Switzerland completed negotiations on a groundbreaking agreement on climate change, trade and environmental sustainability.
I think this remarkable achievement will inspire and motivate us at the WTO: although we have covered a lot of ground on the trade and environment front, especially in recent years, we need to accelerate our efforts in leveraging trade policy for sustainable development.
Surprisingly, the issue of trade and the environment is not so new. It dates back to the inception of the multilateral trading system itself. The topic was first formally recognized during the inaugural World Environment Summit in Stockholm in 1972, leading to the creation of a working group on trade and the environment within the framework of the GATT.
Although the term “environment” was not explicitly included in the GATT when it was established in 1947, the agreement acknowledged the paramount importance of environmental protection. It incorporated provisions for the conservation of natural resources and the protection of animal and plant health.
Then came the Rio Earth Summit in 1992, which established the paradigm of “sustainable development”, as outlined by the Brundtland Report.
This concept recognized the equal importance of economic, social and environmental pillars. Two years later, in 1994, the WTO was created with a mandate to contribute to sustainable development. Its institutional framework included the establishment of a dedicated Trade and Environment Committee, tasked with exploring the synergies between trade and environmental protection.
In 2001, the WTO Doha Declaration further advanced this agenda by initiating negotiations on trade and the environment. These negotiations addressed the relationship between the WTO law and the Multilateral Environment Agreements, the liberalization of green goods and services, and the reform of harmful fisheries subsidies.
As you can see, the issue has always been present with a trend towards greater sustainability. However, it must be acknowledged that until very recently, these efforts resulted in interesting discussions but few concrete outcomes, and even fewer changes in the course of international trade.
For a long time, the environment was treated with a form of benign neglect by trade negotiators: environmental losses were often considered unfortunate externalities to be corrected by non-trade measures and policies. The environment was mostly considered if it could help promote further trade liberalization, such as through the elimination of tariffs and restrictions on the trade of green goods and services.
Recently, there has been a radical change in this attitude. The reason is simple: yesterday, we saw only one direction, that of trade externalities harming the environment; today, it is the environment which is attacking trade.
Just think of the impact of natural disasters on trade infrastructures, or the drought in the Panama Canal, to understand this shift. Global supply chains, producers, traders, consumers are already under tremendous strain from climate change, extreme weather patterns, pollution and loss of resources.
In the last three to five years, we have witnessed a paradigm shift within the WTO. What was the change?
First, WTO members explicitly recognized the role of trade in addressing sustainability challenges, including climate change, biodiversity loss and pollution, in their Ministerial Declaration of 2022.
In the same year, our members achieved a major milestone by concluding a landmark agreement on the reform and prohibition of subsidies benefiting illegal and unreported fisheries. We are now negotiating the second part of this agreement, focusing on subsidies contributing to unsustainable fisheries, with strong hopes of concluding by the end of this month.
Second, a critical mass of our members has initiated in-depth discussions on several trade related environmental topics. One focuses on plastics pollution supporting the broader UN negotiations for a global treaty against plastic pollution. Another dialogue is dedicated to the issue of reforming fossil fuel subsidies. A third addresses various interactions between trade and sustainable development, including the liberalization of green goods and services, trade of clean energies, environmentally harmful and trade distortive subsidies, and good circular economy practices.
Third, the Secretariat has been a strong advocate for advancing global understanding of the trade and environment nexus. The WTO Director-General, Dr. Okonjo-Iweala, frequently asserts that “the future of trade is green”. Under her leadership, the Secretariat of the WTO has engaged in significant efforts to enhance our members’ knowledge. We have also intensified our contributions to the Climate Change COP, in the framework of the Paris Agreement on Climate. Last year in Dubai, our efforts culminated in organizing the first ever “Trade Day” at the COP28 and the joint mobilization of ICC, UNCTAD, ITC and the WTO in operating a “Trade House Pavilion”.
Where do we stand after this? Significant progress has been made that is setting the stage for future action.
As I mentioned previously, ministers have recognized the stakes of climate change and global sustainability challenges in the WTO rule book. It is also happening within our Dispute Settlement Mechanism, which you would be glad to hear is still operating, even if not fully functioning for the moment. For instance, a recent Panel report stated that “global warming and climate change pose one of the greatest threats to life and health on the planet” and that “climate change is inherently global in nature”.
Our members have identified and mapped out very concrete trade actions that can contribute to promoting sustainable trade. For instance, best practices for increasing the transparency of trade flows of plastics, reducing plastics that are harmful to the environment and the promotion of substitutes and alternatives.
The WTO Secretariat has proposed a conceptual framework about the relation between trade and climate. One key finding is that an integrated world trading system enables and can potentially accelerate the fight against climate change, whereas fragmenting trade will only worsen the climate crisis and prevent nations from achieving their net-zero objectives.
The WTO has partnered with other international economic organizations to develop a global approach to carbon pricing policies. We have published an inventory of trade policy actions for climate as a sort of toolkit for the use of governments. We are intensively working with the private sector and with standards-setting organizations to promote convergence in the methodologies of calculation of the carbon content for “green steel”. And, if successful, we hope that this work may be replicated later in other sectors. Together with the World Bank and WEF, we are helping developing countries to develop their capacity to analyse and find new trade opportunities arising from the growing new climate economy.
Is this enough? In truth, it is not. The pace of this development remains too slow within the multilateral trading system.
Private investments in the green transition are advancing much faster than the WTO, as highlighted in our panel discussion. The magnitude of these investments decisions is unprecedented: for instance, one estimate of the investments needed for decarbonizing the steel sector before 2050 revolves around US$ 1.4 trillion. These investments need legal predictability at national and global levels.
Governments are implementing their net-zero strategies in the framework of the Paris Agreement. In doing so, countries are adopting unilateral, bilateral, sometimes regional polices against climate change and biodiversity.
Yet, they do so without coordination regarding the trade dimensions or consequences of these policies on the world trading system. This is becoming a problem.
Why? Because while very legitimate on their own, uncoordinated environment actions have the potential to fragment world trade.
— Take carbon pricing strategies, which are certainly a first best to fight climate change: some countries choose to implement a carbon price, creating a risk of carbon leakage that must be addressed through carbon levies on imports. We have identified nearly 70 carbon taxes schemes in development worldwide, with several countries considering mechanisms similar to the EU’s CBAM.
— Take industrial and agricultural subsidies. Subsidies can accelerate the green transition and reduce carbon emissions. However, depending on their design they can also have adverse effects on the pace of the green transition and on trade, leading to competitive distortions, building of overcapacities, and discrimination. We have also seen in the past that “subsidy wars” can hurt the poorer, smaller nations that do not have the same capacity to subsidize.
— Take export restrictions of rare earths, critical minerals or recyclable materials like steel scrap, which can also pose challenges. These restrictions can slow down the global path toward decarbonization, since access to these materials is essential for the green transition and the development of a green industry.
— Take standards, regulations and labels: in the steel sector alone, which we are closely working with, we have identified more than 25 standards, public and private, with different measurement standards and methodologies of decarbonization. The same could be said in other sectors.
At a minimum, this landscape can increase trade transaction costs for businesses, complicate border operations, reduce transparency and traceability of traded goods. At worst, it can lead to discrimination, unfair competition, consumer abuse and unnecessary trade conflicts.
This would be detrimental for both trade and the environment. A fragmented and conflictual trading system would disincentivize green innovation, reduce resources optimization and economies of scale, slow down technological dissemination and technology transfers. Last but not least, there is a real risk of eviction of poorer and most vulnerable producers. We already see that happening when traceability requirements for goods become unmanageable for small producers.
So we are at a crossroads in the multilateral system, with an opportunity to shape a global win-win approach for trade and the environment. We can combine green transition, green industrialization and trade cooperation. This is what “reglobalization” is about. And the time to act is now.
Our members have started recognizing this. A first and very constructive ministerial conversation was held on these topics during our last Ministerial Conference in last February. Several of our major members have presented interesting propositions to elevate the level of urgency of the discussions and thematic approaches aiming at practical outcomes. They have started discussing topics such as: how to manage the green industrial transition while preserving globally a level playing field; how to provide sufficient policy space for developing countries to grab the opportunities associated with this new industrialization wave.
What will come out of these discussions? And when? Will we one day at the WTO open partial or full trade, climate and sustainability negotiations, just as the four pioneering countries that I initially mentioned have done?
I have no doubt that we will move in this direction, or the current world trading system will lose its relevancy. There is no shortage of substantive issues, as you could hear: green tariffs, export restrictions, green subsidies, fossil fuel subsidies, border adjustments, standards and regulations, ecolabels, public procurements…Where I still have doubts is in how our trade negotiators will address these daunting issues within the WTO.
Inherited patterns of negotiation and a certain lack of trust will not help them. The truth is, the WTO is not used to negotiating for a public good that benefits all people, not just “my people”: the mindset remains very impressed by the old mercantilist scheme which does not make room for public goods. However, we succeeded once with the Fisheries Subsidies Agreement, which is truly a public goods agreement.
This is not the only approach. Beyond binding multilateral treaties, there are many distinct kinds of rule-making and international cooperation methodologies that could inspire environmental action in the WTO.
We have plurilateral commitments. Recently, a milestone agreement within the WTO saw some members adopting new disciplines for the transparency of their trade regimes in services domestic regulations. This approach could be a model for environmental action.
We also have experience with flexibilities in the adoption of trade commitments: agreements including “opt-in” and “opt-out” options can be designed in the WTO and, of course, special and differential treatment of developing countries is always a major principle in our legal architecture.
We may also look outside of the WTO to search inspiration from non-binding rules, soft laws or others. The Paris Agreement on Climate stands as a very inspiring model with its common objectives and “national determined contributions” for implementation. Regional cooperation experiences such as APEC also provide very insightful examples of voluntary trade action for the environment.
I trust that the cause of the environment will oblige us in the WTO to invent new forms of trade commitments and global cooperation.
Greening trade and making it sustainable stands as the defining challenge of our generation. Our daughters and kids will look back and judge us on what we achieved. They have already started, believe me!
Let me thank you from the heart for the inspiration that green Ireland provides, at this very time when we urgently need to act about green. I hope that this inspiration will help foster and accelerate the pace of the WTO toward shaping a sustainable trade for the future.
