This 'moment of opportunity': a new rulebook for pragmatic cooperation around clean trade and industrial policy
Trade tensions and declining compliance with trade rules are likely to further fragment an already strained trade system, frustrate international climate cooperation, and stymie clean energy investment into new markets if left unaddressed. The authors of this commentary propose a modernised rulebook in response to the UN Secretary-General’s calls to ‘supercharge the new energy era’ through climate-aligned trade and industrial policy and explain how Europe can lead on implementation.
In his major address on Tuesday, the UN Secretary-General shone a spotlight on the limitations of the multilateral trading system created in the 1990s. He diplomatically explained that trade policies and investment agreements can serve as barriers or enablers to the economic opportunity before us.
US tariffs are putting up barriers to development and slowing the global economy down, with an acceleration in intervention since President Trump took office for the second time. Analysis suggests that US voters accepted the risk of being poorer in the hope of long-term gain in jobs and reshoring of manufacturing. There is recent precedent for this in Europe with the UK’s severing of trading links from the EU in 2020, the hit to UK exports being consistent with a GDP reduction of 4 to 5%.
But being poorer or more isolated is not going to fix the shortcomings of globalisation.
Globalisation has driven extraordinary improvements in human welfare – though the gains have been unevenly distributed. Many developing countries lack the resources and policy space to leverage market access for economic development, let alone climate-aligned growth. In addition, trade rules can constrain governments’ ability to balance the demands of trading partners with their own national priorities such as supply chain resilience, decarbonisation or clean energy access, and economic growth. Where for many years the constraints of international rules written by others were a preoccupation of developing countries, in the last decade this has become a concern of the US, leading to its policy since 2018 to refuse to appoint judges to the Appellate Body of the World Trade Organization, effectively hobbling its critical role in settling trade disputes.
The lack of redress for these issues has contributed to declining compliance with trade rules and fuelled major trade tensions and– including, most recently, national trade policies relating to decarbonisation and clean energy: the EU’s Carbon Border Adjustment Measure, U.S. Inflation Reduction Act, and Indonesia’s nickel export controls. If the trade system becomes more fragmented, and climate action and clean energy investment suffer, this will undermine a just transition for industrial workforces, increase the risk of future supply chain shocks (and the cost of goods) and imperil climate progress and sustainable development.
That is why the Secretary-General called on trade policies and investment agreements to be designed to boost the energy transition and support greater resilience and security of the future energy source: global clean energy supply chains. He calls on governments to pursue cooperation to this end.
Europe can rise to this challenge and continue to lead the world in an opt-in model for cooperation on cross-border solutions. The continent faces the gravest set of challenges since the end of the Cold War. Its institutions are pulling out the stops: policy and fiscal responses are emerging on a Member State basis (e.g. the German government’s proposal for a EUR 1 trillion fiscal stimulus budget) and at the European level (e.g. the proposed EU competitiveness-focused Multi-annual Financial Framework).
But to harness the clean energy opportunity, there needs to be an alternative model for trade cooperation. Europe is well placed to lead the application of such a model. To do that, it needs an updated and creative rule book that it can use to trial a new ‘simplified’ approach to rule making.
The opportunity: a modernised rulebook for the clean energy economy
The ideal starting point would be a coalition led by those with a history of trade openness and commitment to pragmatic multilateralism. The goal of the rulebook would be to provide governments with expanded policy space to attract investment and manage risk in the organisation of clean energy supply chains and ensure smaller and poorer countries can share in the economic opportunities associated with decarbonisation.
The rulebook should not seek to permanently supplant existing trade rules and institutions or grant broad licence to countries to adopt nakedly protectionist trade policies: rather, it should be a time-bound, narrowly scoped initiative organised around concrete and measurable goals. Some precedent to this exists (e.g. with the use of a time-limited ‘peace clause’ relating to trade in agricultural products). At a time where the political economy would allow, the coalition of countries who adopted the rulebook could propose it as a WTO reform.
Twin objectives
The rulebook could be structured around two interrelated goals:
1. Deconcentrate clean energy supply chains to encourage investment, promote resilience and strengthen economic security
There is no precedent in the modern trade system for the level of sectoral concentration that now exists in the clean energy sector, dominated by China. This concentration has made clean energy goods more abundant and affordable but it has also made supply chains more vulnerable to disruption and volatility and raised barriers to investment in other markets. And it has impaired importing countries’ ability to strike a politically durable balance between consumer interests, retention of manufacturing capacity, and a managed transition for industrial workforces that avoids future supply side shocks. Understandably, governments have concerns about the opportunity costs and risks of relying on one country, or supplier, to furnish the material needs of their clean-energy powered economy.
A trade system aligned with the modern global economy would provide both pathways and guardrails for deconcentrating supply chains. Much of the international conversation around clean energy supply chains has focused on whether China has engaged in unfair trade practices, raising thorny questions about where subsidies and other non-market behaviors end and legitimate competitive advantage begins. This debate has generated more heat than light. Even if China abandoned state support to exporters of clean energy goods, it would likely still maintain a commanding position in global markets because of its tightly integrated industrial ecosystems and unrivalled efficiency in manufacturing. Imposing steep tariffs will only have a meaningful impact if producers from outside China can export at scale and at reasonable cost.
Rather than waste time quarrelling over howwe arrived at current levels of concentration and whether to sanction the relevant actors, countries should develop new approaches and tools to attract investment into alternative supply chains with the aim of diversifying, not diminishing, access to clean energy goods.
2. Build climate-centered economic partnerships to promote trade in clean energy goods and align industrial strategies
China and India account for the lion’s share of global economic growth since 1995. And with respect to participation in global trade, since the 1980s China and India’s share of exports surged, middle-income countries collectively stagnated (with some countries faring better than others), while low-income countries remained near zero.
It is clear that WTO membership and participation in free trade agreements (FTAs) have not been an engine of economic growth for most low-income countries and many middle-income ones. This is especially true for climate-aligned growth: as the Secretary-General’s report notes, “the biggest challenge [to achieving climate goals] lies in scaling up clean energy-transition financing and investments for [emerging markets and developing economies] beyond China.”
The resurgence of industrial policy is likely to entrench, if not exacerbate, these asymmetries. Governments with large fiscal resources, global market power, and sophisticated industrial planning capabilities will have an edge in attracting investment into new manufacturing projects and building competitive export industries. Low- and even middle-income countries may be locked into supplying raw materials to more powerful industrialised nations rather than moving up value chains.
With 30 years of globalisation in the rear-view mirror, there is a strong case that the multilateral trade system should evolve to provide flexibility for countries to pursue tailored economic partnerships focused on specific development goals, market gaps and supply chain opportunities.
In reality, WTO rules limit members’ options over FTAs, which cover nearly all trade between countries, or multilateral/open plurilateral sectoral agreements. Both options are challenging to negotiate and encourage a ‘tit-for-tat’ mindset in which governments haggle over favourable terms for their exports rather than work collaboratively to address shared challenges.
Defining the toolbox
Sectoral agreements: Countries that would otherwise be disinclined to pursue FTAs with one another may see value in reducing barriers to trade on specific goods and services to take advantage of complementary specialisation. Sectoral agreements of this nature are generally disallowed under existing trade rules. This principle is sensible in most contexts, but it is an impediment to diversified clean energy supply chains. A climate-aligned trade rulebook should self-authorise sectoral agreements for a defined list of clean energy goods.
Investment conditionalities: Bilateral investment treaties (BITs) and many FTAs contain provisions designed to encourage foreign direct investment, but as a rule they do not mandate investment. However, modest conditionalities could be incorporated into clean energy sectoral agreements, for example by linking tariff reductions to investment into clean energy manufacturing activities.
Changes in bound tariffs: Every WTO member commits to maximum tariffs it will impose on the goods it imports, known as ‘bound tariffs’. Different countries commit to different bound tariffs, subject to renegotiation. Diversification may require a country to impose tariffs far higher than the bound tariffs it has pledged, but the costs of seeking that change at the WTO may be prohibitive. A climate-aligned trade rulebook could authorise countries to raise their bound tariffs on an identified list of clean energy goods for a limited period to facilitate new supply chain relationships.
Export restrictions: With limited exceptions, the trade system does not allow countries to ban exports of merchandise. However, in recent years several resource-rich countries have restricted exports of unprocessed minerals used in clean energy supply chains to encourage domestic refining and processing. Exports restrictions have a checkered record, but for some countries with constrained fiscal resources they may serve as an effective industrial policy. A climate-aligned trade rulebook could set conditions on the use of export bans relating to clean energy supply chains, for example limiting them to specific commodities or establishing sunset provisions.
Subsidies: WTO rules relating to subsidies do not provide a mechanism for weighing a subsidy’s trade-distorting effects against its climate impacts. A climate-aligned trade rulebook could provide an alternative vehicle for implementing an approach to subsidies that would allow governments flexibility to subsidise clean energy manufacturing and consumption of low-carbon goods, including coordination between countries to address supply chain vulnerabilities and diversify manufacturing.
Strategies for success
Countries are already pursuing alternative approaches to trade in response to the WTO’s inability to enforce its rules and US tariff policy. The role of carbon in industrial policy and the international trading system has been growing in a unilateral and largely uncoordinated manner. Most countries, however, still want a rules-based system but have yet to design one to fill the vacuum.
Between accepting the marginalisation of the WTO and jettisoning its fundamental rules there is a middle path, which would involve some time-limited adjustments to the system to make it more relevant to, and to put guardrails around, state practice; and to give some reassurance and predictability to less powerful states who are the least likely to be able to take unilateral measures but most likely to suffer from a degradation in global trading rules. The rulebook proposes such a way forward. But it will only shape reality on the ground if governments are able to leverage their expanded policy space to tap into and further develop global supply chains, all the while attracting investment into their domestic industries at some level.
Developed countries that adopt the rulebook should support developing countries with low levels of trade and limited experience in industrial planning to achieve these aims, such as government-to-government technical assistance and consultations with the private sector. These strategies would also help avert potential tensions in implementing the rulebook by setting out the measures that governments intended to pursue under the arrangement, allowing constructive dialogue in advance of implementation.
A place to start could be piloting cooperation around electric vehicle battery supply chains between key African countries, such as Kenya and Tanzania, and the EU. While it would require the EU to adjust (at least temporarily) its approach to WTO rules in the interests of climate-aligned development, the EU as a champion of rules-based order and climate action is well placed to build a coalition to adopt a rulebook, complementing its new Clean Trade and Investment Partnerships, and bring this new approach in time into the WTO.
About the authors
Trevor Sutton is a Senior Research Associate at the Centre for Global Energy Policy at Columbia University. Peter Hill is a Visiting Professor in Practice at the Grantham Research Institute and was the COP26 CEO and Director General of the COP26 Unit from October 2019 to December 2022. Yasmine Moezinia, writing in a private capacity, is a former senior advisor to former Chancellor of the Exchequer Lord Philip Hammond and former UN Special Envoy on Climate Action and Finance Mark Carney. Harriet O’Brien, writing in a private capacity, has held roles at the Foreign, Commonwealth and Development Office and World Bank, and in the office of UNSG, António Guterres.
The views in this commentary are those of the authors and do not necessarily represent those of the Grantham Research Institute.