Better alignment of trade and climate policies is crucial
Following the conclusion of the high-level 26th Conference of Parties (COP26) of the United Nations Framework Convention on Climate Change (UNFCCC), the world is set to observe another international conference at the ministerial level. This is the 12th meeting of the trade ministers of the member countries (MC12) of the World Trade Organization (WTO) to be held in Geneva from November 30 to December 3. As opposed to the much-hyped climate meeting held in Glasgow, MC12 apparently seems to be a quiet and low-profile meeting. But in effect, MC12 is no less important for the world as trade is crucial for economic prosperity and has a multiplier impact. Of course, there is evidence of the differential impact of trade on various economies, and trade justice has been an issue of debate in the whole discussion of multilateral trade regimes. However, trade has also impacted economies positively through higher export, import, investment, job creation, and so on. Benefits of trade depend on how the rules are designed and how cross-cutting issues are considered, and how challenges related to those issues are addressed.
One such issue is the impact of climate and environmental change. The links between trade and climate change are now clear and recognised. While trade can be a source of climate change-related challenges, it can also help reduce climate and environmental challenges and achieve climate ambitions. However, with growing awareness on climate change, countries are resorting to various climate measures, which have potential negative implications for trading nations. Poor countries will particularly be affected if such climate-related trade policies are pursued, since those will result in trade protectionism. Therefore, the WTO has an important role to play in helping countries reap benefits of trade while addressing their climate and environmental challenges.
Within the WTO, environmental issues are dealt with at the Committee on Trade and Environment (CTE). The CTE aims to promote the understanding of the nexus between trade and the environment. It also discusses how trade and environmental policies together can work for sustainability. The work on trade and environment received momentum with the new initiative with the WTO, namely "Trade and Environmental Sustainability Structured Discussions (TESSD), which was launched on November 17, 2020. Currently, 57 WTO members are part of this initiative. The objective of the TESSD is to complement the existing work of the CTE and other relevant WTO committees and bodies on climate and environmental issues. All members can join TESSD. Another objective of the TESSD is to provide technical assistance and capacity-building support to countries—particularly to least developed countries.
While the objective of CTE and other environment-related WTO rules require countries to pursue their environmental objectives, a major task is also to monitor protectionism due to climate goals. However, a number of issues which are being discussed in the WTO may have negative implications for both developing and least developed countries (LDCs). Since the launch of the TESSD, discussions are taking place on issues such as liberalising trade in environmental goods and services (EGS), reforming environmentally harmful subsidies, carbon border adjustment mechanism and climate actions, and circular economy and biodiversity.
Each of these issues have implications for LDCs and developing countries. The focus of today's discussion is liberalisation of environmental goods. Liberalisation of EGS through reduction or elimination of tariffs on EGS is a part of a single undertaking of the Doha Ministerial Declaration of the WTO in 2001. This is a critical trade and climate change agenda for these countries.
Environmental goods are needed for adapting to the impact of climate-induced extreme weather events, and transitioning to low-carbon production. Climate-friendly technologies are crucial for these countries. Reduction or elimination of tariff and non-tariff barriers (NTBs) to environmental goods is expected to reduce the cost of such goods and make them affordable to poor countries. These countries need technologies for wastewater management and potable water treatment, renewable energy generation, and solid and hazardous waste management and recycling systems.
However, the current discussions on liberalisation of environmental goods in the WTO has become difficult, since many countries have submitted several proposals in line with their trade interests and specialisations. Developing countries are not interested in the negotiation either, since the list is dominated by goods produced by developed countries. The share of export of environmental goods from developing countries (including LDCs) is insignificant. They are net importers of environmental goods. The top exporters and importers of environmental goods are countries with higher gross domestic product and trade. According to the "Trade and Development Report 2021" of the United Nations Conference on Trade and Development (UNCTAD), the top 10 environmental goods exporting countries in 2019 were the EU, China, the US, Japan, the Republic of Korea, the UK, Hong Kong SAR, Singapore, Canada, and Switzerland. Together, these countries exported 88 percent of global exports of environmentally related goods.
There is also another challenge for the LDCs related to liberalisation of environmental goods. With liberalisation, imports of environmental goods are likely to be cheaper as tariffs will be eliminated from imports. Hence, developing countries may continue to remain net importers of environmental goods instead of building their own technologies. Such dependency will restrict their capacity development. There are also apprehensions that the choice for imported advanced technologies could undermine innovation of simple, local and cost-effective technologies. Being apprehensive about becoming a dumping ground for obsolete technology from advanced countries is also prevalent among developing countries.
The other concern is about preference erosion due to tariff reduction of these goods. Many environmental goods may fall under various preferential programmes offered to the LDCs. In that case, tariffs imposed on those goods will be reduced at a faster pace when liberalised. This will erode LDCs' preferences in those markets and reduce their competitiveness. It has been estimated that 99 developing countries could lose USD 15 billion in tariff revenue annually if tariffs are removed on imports of environmental goods. Bangladesh's tariff revenue loss will be about USD 187.2 million per year.
In the run-up to the MC12, discussions on liberalisation of environmental goods and other trade and climate change-related issues have drawn attention of developing countries as their concerns are often neglected in the multilateral negotiations. These issues could very well become trade prohibitive, rather than trade enhancing, for developing countries. Therefore, while setting global rules for a clean and green trade regime, it must be accompanied by technology transfer and adequate climate finance for developing countries. Technology should be modern, efficient and cost-effective, and should come along with capacity development for the users in developing countries. A new financial mechanism in the form of Trade and Environment Fund, as proposed by some countries back in April 2011, could help the developing countries in pursuing their green and sustainable growth. Green aid for trade should be another source of finance. These are the central issues if the development dimension is to be upheld in the trade and climate negotiations.
Dr Fahmida Khatun is executive director at the Centre for Policy Dialogue (CPD).