The European Union (EU) has consistently supported the World Trade Organization (WTO) and the multilateral trading system it embodies. However, the EU’s recent use of trade policy to pursue its climate objectives may inadvertently undermine the very multilateral credentials it has vowed to uphold. To continue on its dual path, the EU must harmoniously integrate its climate change agenda with its trade policy, thereby retaining its standing in the WTO.
The WTO Crisis: A Quadruple Threat
The WTO, established in 1995, is currently in crisis mode. The European Commission identifies four key elements contributing to this crisis. Firstly, the WTO’s rules have failed to keep pace with the rapidly evolving global trade landscape, which has in turn weakened its negotiating function. Secondly, the WTO lacks a mechanism to ensure that all members consistently report their trade measures.
Thirdly, the WTO’s dispute settlement system has been immobilized since 2019, when the United States began blocking the appointment of appellate judges. This action stems from the U.S.’s own perception that WTO rulings often reflect judicial overreach or are downright incorrect.
Lastly, the rivalry between the U.S. and China, the world’s largest trade partners, has placed an unprecedented strain on the WTO’s principles and rules. This situation is further complicated by middle-income countries like India and South Africa, which express concerns about the WTO’s inability to incorporate their developmental interests into its agenda.
The WTO’s Relevance Amidst Reform
Despite the numerous challenges it faces, the WTO remains a vital pillar of stability in global trade. WTO members have committed to restoring its dispute-settlement system by 2024. In the interim, 47 members, including the EU, have created a functional interim mechanism. With at least two-thirds of world trade still based on WTO principles and informal talks on WTO reform initiated in 2022, the WTO continues to hold significant relevance.
However, the U.S.’s ongoing prioritization of its competition with China over the stability of the international trading system could marginalize the WTO and contribute to the fragmentation of global trade. China, on the other hand, is unlikely to advocate for reform due to the significant benefits it gains from the existing WTO system.
The EU’s Twin Goals: Trade and Climate Change
The EU, as a significant defender and reformer of the WTO system, faces a complex situation. It is attempting to lead the charge in preserving and reforming the WTO while concurrently using trade policy to support its climate change efforts.
The EU’s Carbon Border Adjustment Mechanism (CBAM), a tariff system for carbon-intensive goods, is a prominent example of this approach. However, this initiative, along with other directives on deforestation and corporate sustainability due diligence, has been controversial due to its unilateral nature, raising concerns about potential behind-the-border protectionism.
Reconciling Trade and Climate Agendas
To merge its trade and climate change goals, the EU should undertake three critical actions.
Firstly, it needs to build more robust and diverse coalitions. Its co-leadership of the Coalition of Trade Ministers on Climate, announced at the World Economic Forum, is a step in this direction.
Secondly, the EU must defend its trade-and-climate measures, ensuring it engages in constructive dialogue with other WTO members about the design and implementation of its instruments.
Finally, the EU should cautiously respond to the U.S. Inflation Reduction Act. Despite the risk to its reputation, the EU’s recent non-confrontational approach suggests it has deemed a confrontation with the U.S. and China too costly. It must, however, strive to promote industrial policy without resorting to local content requirements, similar to the U.S., and boost European competitiveness without clashing with WTO rules and principles.
Maintaining a Rules-Based Trading System
The EU has a strong interest in maintaining a rules-based international trading system. However, it also has a responsibility to ensure that its climate and trade goals align with this system. As such, it should strive to promote a multilateral or plurilateral agreement on permissible environmental subsidies, ensuring the engagement of the world’s largest CO2 emitters.
The EU’s recent actions, such as the adjustment of state aid rules and efforts to include European firms in American supply chains and tax credit regimes, indicate a strategic shift. French president Emmanuel Macron’s advocacy for the adoption of a “Made in Europe” motto underscores this shift.
This approach, however, could potentially tarnish the EU’s reputation as a staunch defender of the rules-based international trading system. Leaders in Brussels must carefully navigate these waters, balancing economic and strategic considerations without compromising the core principles of the WTO.
Looking Ahead: Trade, Climate, and the Role of the EU
The EU finds itself in a unique position to drive global discussions on how to reconcile trade and climate regimes. A successful effort in this regard could not only redefine the WTO’s purpose but also establish the EU as a global leader in sustainable trade policy.
However, this task is not without its challenges. The EU must prove its commitment to both its climate goals and WTO reform, ensuring that its actions do not undermine the international trust necessary for a smooth functioning multilateral trading system. This balance is essential, as the EU’s growth, prosperity, and economic stability are heavily reliant on a functioning multilateral trading system.
The task ahead for the EU is daunting but not impossible. By leveraging its influence and engaging with partners across the globe, the EU has the potential to set a precedent for merging climate and trade goals. This could lead to a more sustainable and equitable global trading system, benefiting not just the EU but the world at large.