The connections between international trade and climate are closely intertwined. While the liberalization of international trade has had direct consequences on the environment, the effects of climate change (extreme weather events, sea-level rise, changes in shipping routes, etc.) also disrupt supply chains and commercial flows on a global scale. In a context of climate emergency, how can we conceive multilateral cooperation regarding trade and climate? Can it effectively prevent potential conflicts? How does the European Union combine its trade and climate ambitions?
How does climate change impact international economic issues, particularly concerning strategic trade routes?
Trade policy specialists are often fixated on the possible negative impact of environmental policies on trade. They overlook that complacency or inaction in the face of warming will be much more disruptive to trade development than adaptation or remediation measures. Productive bases will face upheaval. The sectors that are most exposed to climate change have been clearly identified: agriculture, tourism, and industry, especially concerning the productivity impacts of workers and equipment being exposed to extreme temperatures or through the increasing frequency of climate disasters that disrupt, and sometimes halt, global value chains. One must remember the impact of the 2011 floods in Thailand on electronic component production. Furthermore, trade relies on transportation, particularly maritime transport, which is highly vulnerable to climate risk. The Panama Canal, through which 5% of international trade passes, had to reduce its activities in 2023 due to unprecedented drought in the isthmus, which depleted the lakes that supply the canal. Even the International Monetary Fund (IMF) expressed concern over this. Lastly, the fight against warming will increase the demand for critical materials for the energy transition (cobalt, copper, nickel, lithium, rare earths), creating new trade flows and also generating greater geopolitical tensions. This phenomenon is referred to as the “weaponization of trade.”
To what extent can multilateralism prevent climate-related trade conflicts?
Climate is a common good, and there will be no safe climate harbor where a virtuous country can find refuge and protection in a non-virtuous world. Commitment must therefore be collective, as every significant free rider undermines the fragile internal consensus that may exist regarding the implementation of climate initiatives. It is also essential to prevent the adoption of non-cooperative climate strategies, especially if they are designed only from a national perspective that leads to collective inefficiency and resource wastage. These strategies also carry risks of trade conflicts. This was evident when the U.S. Inflation Reduction Act (IRA) was initially welcomed in Europe for its climate ambition and then criticized due to its mercantilist logic. As we noted with Sébastien Jean in a report published by Terra Nova: while it’s preferable to have climate action without (multilateral) rules than to have rules that ignore climate, one should not abandon the perspective of a multilateralism that is both climate-friendly and capable of containing trade conflicts.
This raises the question of the “appropriate” multilateral setting for addressing these issues. In the absence of a global environmental organization, the World Trade Organization (WTO) has de facto been the forum where the relationship between trade freedom and the environment is regulated. It was the only institution able to both interpret the law and resolve disputes between trading powers, enforcing it in the process, or exposing the “offender” to the risk of “legitimate” trade retaliation. Contrary to a caricatured view, it has not been the great ultraliberal bogeyman devouring all environmentally friendly policies in the name of free trade. The WTO rules recognize a form of environmental exception, although this is regulated—it should not lead to discrimination between local and foreign products or between trading partners. Article XX of the General Agreement on Tariffs and Trade (GATT) states that “nothing in this Agreement shall be construed as preventing any contracting party from adopting or enforcing measures: a) necessary to protect human, animal, or plant life or health; b) relating to the conservation of exhaustible natural resources if such measures are made effective in conjunction with restrictions on domestic production or consumption…”
Through its dispute settlement mechanism, the WTO has had to adjudicate many conflicts related to the environment. These generally pitted a developing country denouncing “green protectionism” against an industrialized country trying to appear ecologically virtuous. The institution often ruled in favor of the environment. However, today the system is stuck and no longer suited to the climate emergency: firstly, because trade rules hinder the creation of internal pro-climate coalitions—like the alliance between labor unions and environmental advocates seen in the IRA case—that may suggest preferential treatment for local production; and secondly, because since the Trump presidency, the WTO’s dispute resolution mechanism is paralyzed, and the organization can no longer interpret the law or fulfill its role as a trade peacekeeper. Therefore, it is crucial to evolve both the rules and multilateral practices to prioritize responses to climate change—such as peace clauses, climate preliminary issues, broad definitions of legitimate green subsidies. Numerous solutions exist, and it is essential to find the appropriate forum for discussion—potentially by coordinating climate negotiators and trade negotiators and bringing the WTO closer to the UN Framework Convention on Climate Change (UNFCCC).
How does the European Union (EU) combine economic strategy and climate ambition? Can the EU be considered a climate leader?
The outgoing Commission’s mandate has clearly been marked by a desire to engage the EU in the fight against climate change, starting with the launch of the “Green Deal for Europe” at the beginning of its term in December 2019, followed by the Commission’s presentation of the “Fit for 55” legislative package in July 2021. Regarding trade, the climate shift has also been initiated. Compliance with the Paris Agreement is now regarded as an “essential clause” in economic partnership agreements signed by the EU with the United Kingdom and, later, New Zealand, which would allow the suspension of the bilateral agreement in the event of violations of the Paris Agreement. A carbon adjustment mechanism at the borders was adopted in response to a French request for a carbon lock at the EU’s entry points in May 2023. A regulation to prevent imported deforestation was voted on in the same month. Environmental mirror clauses now exist in agriculture, among other areas, and they certainly require further development, as current agricultural demands indicate. For the EU, this movement towards climate is not at odds with economic competitiveness; many solutions are expected to come from technology and support for businesses, along with initial elements of European industrial policy.
Is this sufficient to affirm the EU’s role on the international stage? Not really, not much. The EU remains a highly incomplete power. It has competencies in trade and standard-setting, but due to a lack of budgetary means, it cannot effectively intervene in the form of subsidies. It is often paralyzed by the divergent interests or disputes among its members. Finally, while it aims to be exemplary in climate matters, it also wants to be a good multilateral student, which has led it to adopt texts that seek to comply with the letter of WTO rules, potentially undermining their environmental effectiveness without ensuring the pacification of trading partners quick to denounce its green protectionism. Being, except in atypical years like 2022, a net exporter of goods and services, it hesitates to sacrifice its economic interests on the altar of climate action.
These systemic fragilities and contradictions are now compounded by the challenge to the broad climate consensus that had eventually prevailed, influenced by the rise of climate-skeptical populism and the rejection of constraints associated with the Green Deal. Continuing the EU’s commitments will be one of the stakes in the upcoming European elections in June. Climate action has not yet secured a conclusive victory.
