Trade has the chance to be an accelerator for positive change, writes the European Commission’s director-general for trade
There is an opportunity to harness trade to tackle the major challenges of our time but there are limits, says the EU’s top trade official
WHEN I WAS a visiting student at Cambridge, my way to class led along the banks of the River Cam. Every morning fellow students rowed in eights, fours or pairs. I have never been a rower, yet I have always been fascinated by it. The boats are light but can carry a lot of weight. An eight-person shell can hold more than 1,000kg, although it weighs less than 100kg itself.
The Economist todayHandpicked stories, in your inboxA daily newsletter with the best of our journalismSign upWhen I think about trade, I think of boats for rowing. Let me explain why.It has become normal today to ask what trade can do to address the big tests of our time. How can it help combat climate change? How can it promote labour rights globally? How does it impact security? Not so long ago, trade officials would have regarded those questions as outside their competence. According to the standard view, trade policy was all about boosting economic growth and creating jobs, by lifting trade barriers and opening markets.
However trade is seen as a tool to attain broader objectives more than ever. These go far beyond climate, the environment and human rights to include geostrategic interests, security, public order and more. This trend is part of a general blurring of boundaries between different policy communities. Trade can no longer be seen in isolation but has become a tile in a complex mosaic. headtopics.com
At the same time, the international context is shifting. What used to be a rules-based order founded on predictable norms and stable procedures is now harmed by the same countries that once helped to shape it, and destabilised by new, emerging ones. Multilateral institutions to foster co-operation like the World Trade Organisation are themselves mired in conflict and not allowed to reform. This invites power politics and paralysis. Coupled with a pandemic, the challenges are immense.
This environment presents opportunities and dangers. Trade, now in the spotlight, has the chance to be an accelerator for positive change. The danger is that when a single policy instrument is called on to accomplish several policy objectives, it faces difficult trade-offs and eventually shows its limitations. Thinking of trade as rowing boats, it feels as if trade policy now has to carry a much heavier load while navigating rougher waters.
When I took up the role of director-general of the European Commission for external trade, one of the first tasks was a critical examination of the EU’s trade policy. It was particularly clear that sustainability needed to be a priority. Trade remains one of the EU’s essential tools because it can be exercised on an almost exclusive basis at the supranational level, and given the sheer size of the single market, it offers significant leverage.
The new strategy from February 2021 is the greenest ever. Multilaterally, the EU is integrating climate goals in the reform of the World Trade Organisation and pursuing the liberalisation of environmental goods and services. This is fundamental because everybody needs to have access to resources supporting their own green transitions. Bilaterally, the EU is building on its network of trade agreements—the largest in the world, of 46 deals with 78 countries and territories—that already include ambitious sustainable-development provisions. headtopics.com
The EU is also making the respect of the Paris Agreement an essential element of future bilateral trade deals. These deals matter for sustainability because they are a platform for dialogue to bring change on the ground. Yet for that to happen, the agreements cannot just be negotiated; they need to be ratified and implemented. And the EU, on its own, is adopting new regulatory tools to protect public goods, such as a proposal for a Carbon Border Adjustment Mechanism (CBAM), that would equalise the price of carbon between domestic goods and imports to prevent production being shifted to places with weaker policies, thereby potentially nullifying our climate ambitions.
Of course the fight against climate change is the fundamental challenge of our times—and trade policy, like all others, has a role. First, a stable international regulatory environment is needed where tariffs and non-tariff barriers on environmental goods and services are reduced or removed. Second, dialogue is required so different jurisdictions can contribute towards achieving common climate goals. Finally, national actions have to respect international rules so that they do not trigger political and economic tensions.
That is why a rules-based trading system is critical for achieving the transition to a carbon-neutral economy. Yet realism is also required. As much as we want to use trade to support sustainability, there will always be limitations.Consider the EU emission trading system and CBAM. These policies, along with other measures in the European Green Deal, can ensure that the EU is on track to achieve a 55% emissions cut by 2030 from the level in 1990, and climate neutrality by 2050. But the EU accounts for only 9% of global carbon emissions. To meet the target of limiting global warming to 1.5°C above pre-industrial levels, the biggest carbon emitters, notably America and China, need to follow the same path. This cannot be achieved through trade or one’s own policies.
Although the CBAM might create incentives for non-EU firms to improve their carbon footprint, there is no guarantee that this will happen or that emissions will decrease in other countries as a result. These objectives can only be achieved through international co-operation and co-ordinated efforts negotiated in international fora other than trade, such as at UN climate talks. headtopics.com
The same approach applies to elements of sustainability beyond climate change. For example, EU legislation that is being drafted on forced labour, due diligence to curb environmental and labour abuses in supply chains and deforestation address problems that require global solutions. To combat forced labour, the EU has the power to ban products in the European market—but that is only part of global demand. If we want to eradicate the problem entirely, we need an international arrangement that includes both supply and demand countries.
Trade policy is a powerful tool but has its limits—just as a boat does. As a student, I was regaled with the story of a group who enjoyed a drop too much and decided to go for a midnight row. They tried to fit everyone in the boat…and it sank at the first bend. The moral? No vessel can carry it all.
Likewise trade: it will never be able to, nor is it meant to, solve all the problems of the world. But with the right international and domestic policies and instruments, trade can achieve significant progress on the critical challenges of our day.______________Read more: The Economist »
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