Environment and International Trade: The New European Posture

I. International trade and the environment: a complex and debated relationship at the theoretical level, though certain principles now seem to be established, if not recognized

Since the 1990s, when environmental issues — and in particular climate change — began to occupy a prominent place in international affairs, the relationship between environmental protection and open trade has been the subject of theoretical debates at the economic and political levels, from which we can infer some principles. ¹

Economic debates

In terms of economic science, there are three broad schools of thought when it comes to the issue of global warming caused by greenhouse gas emissions.

The first one emphasizes the harmful effects of the opening and growth of trade on the climate. They are attributed to the effects of scale, to the lack of adequate or homogeneous quantification of environmental externalities, and to the resulting displacement of production.

The effects of scale are those linked to emissions due to the growth of international trade, whether in transport or in the make-up of trade (which includes a relatively larger share of high-emission sectors: steel, aluminum, cement, animal production).

To the extent that environmental externalities are only minimally taken into account, as in the case of transport, or in an overly heterogeneous way between trading partners, decisions based on skewed cost-benefit ratios lead to biases in choices of location, imports, or exports which can lead to an increase in trade due to the segmentation of value chains, which increases environmental impacts. This also results in the displacement of production and relocation to less restricted areas, with subsequent carbon leakage, particularly for the most energy-intensive industries. This can be measured through the carbon footprint of a country’s consumption by adding the carbon footprint of imports to that of production, which is often substantial.

In contrast, the second school of thought emphasizes the positive effects of international trade on the environment. These are due to the effects of specialization, the spread of technology, and well-being.

The effects of specialization are those traditionally attributed to the international division of labor: under the effect of increased competition resulting from the opening of markets, producers specialize where they have comparative advantages, whether in terms of natural resources or specific expertise, resulting in efficiency and productivity gains. This also leads to a better allocation of production factors, including resources that can be depleted or are fragile, such as water resources. This is also true for early adopters who, ahead of other producers, reduce their negative environmental externalities and thus build a competitive advantage in the hope that “greener” production will become the rule in the future.

Another classic advantage attributed to open trade is the spread of innovation and progress in technologies — in this case green technologies — and the possibility of prioritizing so-called “environmental” goods and services when reducing barriers to trade.

More indirectly, there is the effect on well-being that comes from the aforementioned favorable impact of an international division of labor on productivity — and therefore on growth — which leads the populations that benefit from it to integrate quality of life parameters, including the environment, into their choices as consumers or citizens once they are freed from the constraints of satisfying basic needs.

A third school of thought synthesizes the two previous ones by measuring the effects highlighted on both sides as precisely as possible and comes to the conclusion that the results vary considerably from sector to sector, or from country to country, and depend on the hypotheses formulated concerning the appropriate levels of environmental constraint. This is the case, for example, for “producing locally”, whose benefits are not always as obvious as they seem. More broadly, this perspective repositions the trade-environment relationship within a much broader set of concerns, that of the ecological transformation of the systems of production.

While it is not possible, from the point of view of economic science, to resolve the matter of the positive or negative effects of international trade on the climate, this approach takes into account the debate in the economic (and demographic) field as a whole and puts forward the theory that the role of international trade is only marginal when compared to the significant transformations that the ecological transition requires as well as the necessary revolutions in production and consumption systems, whether in terms of decarbonization or the transition to a ‘circular economy’. These issues must therefore be given priority, and the modalities of international trade must be adapted, downstream as it were, to these new conditions of production and consumption. For example, in the energy sector, renewable energies are, by definition, better distributed and require less international trade than fossil energies.

We can also connect this more “neutral” approach to the theories which state that trade barriers in the name of the environment would more often than not be more costly in terms of efficiency losses than beneficial in environmental terms, since they are mainly played out at the domestic level and not at the international one.

Policy debates and institutional factors

Economic debates on the trade-environment relationship coexist with several international debates that are more political or ideological than scientific in nature and that concern both North-South relations (and the related conditions of competition) as well as international governance as resulting from the 2015 Paris Agreement.

North-South relations are marked by a historical legacy that is as burdensome as it is inescapable, and which is found at every international meeting where the trade-environment nexus appears: the CO2 emissions stock is to be cut in the industrialized North, and the consequences in terms of climate change or biodiversity loss have a proportionately greater impact on the less industrialized countries. Given these conditions, questioning the openness of trade in the name of the environment, whose main beneficiaries over the past several decades have been the countries of the “South” appears to be a sleight of hand in their eyes. Worse, this subject raises suspicions of “green protectionism”, which echoes the debates that have accompanied political decolonization in the past, and which is still often unfinished in economic terms.

Hence the extreme reluctance of developing countries to become involved in discussions about a new connection between environmental protection and the opening of trade.

This also explains why the “South” pays little attention to the argument that, in the case of trade measures designed to protect the environment, it is no longer a question of protectionism (in the sense of protecting producers against foreign competition), but of a legitimate exercise of precaution (in the sense of protecting the population and the planet from the effects of environmental degradation).

In a way, the symmetry of this position can be found in the “North”, with the argument of “environmental dumping” in the name of the aforementioned phenomena of competitiveness differentials due to less restrictive environmental systems.

Another political and institutional dimension of the trade-environment relationship at the international level stems from the well-known shortcomings, which we will not discuss here, of an international governance system that remains, by the will of States, based on national sovereignty in the Westphalian sense of the term. In this case, one of the effects of this theory is to restrict the responsibility for consistency and arbitration between the environment and trade to the national level, with the inevitable differences that arise at the international level, given the spectrum of collective preferences between countries with heterogeneous situations, interests, and values.

An additional difficulty lies in the compartmentalization, among the various areas of international life, of issues in relation to each other, insofar as inter-state arrangements (treaties or institutions) are dedicated to particular issues and are the responsibility of different authorities. For example: World Trade Organization (WTO) on the one hand and Multilateral Environmental Agreements (MEAs) on the other. In order to remedy this, we need a matrix of preferences granted at the international level, a sort of collective utility function that would facilitate the management of global public goods, starting with a few major principles.

A third institutional determinant is the revolution that the 2015 Paris Agreement represents in terms of the nature of international arrangements as they have been constructed since the Second World War. This revolution is clear if we compare this agreement to the 1997 Kyoto Protocol. In Kyoto, a binding agreement in all its provisions was reached between a limited number of countries and thus had a fixed impact on the emissions of a limited number of countries; a kind of “menu” approach. In Paris, a nearly universal voluntary agreement with a potentially much greater impact was reached, though its impact on global warming was poorly defined, apart from the statement that it would limit the increase in temperature to “well below 2 degrees” and was based on Nationally Determined Contributions (NDCs). The advantage of this approach is that it has more participants, which is essential, and that it is likely to grow in strength as the political pressure to decarbonize increases. The disadvantage is that it is an “à la carte” approach, where each participant chooses both the level of commitment and how it will be implemented.

A few principles

Out of the debates mentioned above, we can infer a few constant principles which, although not recognized internationally, now seem sufficiently agreed upon to establish a framework within which to construct a new relationship between the preservation of the environment and the opening of international trade, including at the European level. Four of these principles are proposed here.

The first concerns the role of international trade in preserving the environment, and primarily in the fight against global warming: most of the transformations necessary for the ecological transition lie in domestic production systems, with international trade playing an accompanying role, whether positive or negative. But the negative effects must be corrected, starting with emission-intensive sectors. This is all the more true if we add to domestic emissions those linked to imported goods, the dynamics of which have accompanied the multi-localization of production over the past several decades.

The second is the need to reintegrate environmental externalities into market pricing so that the resulting changes in relative prices produce the necessary reallocation effects in the international division of labor, for example in modes of transport.

The third is to take into account the effects on all trading partners resulting from the necessary changes in relative prices, and thus to establish the necessary forums for discussion at the international level, bringing together both environmental and trade-related mandates and expertise.

The last principle, that of equity, requires that the relative positions of producers in emissions and in trade take into account the differences in capacities resulting from different levels of development. This is one of the rare areas of agreement between WTO and MEA principles, although they are expressed differently: “special and differential treatment” on the WTO side, “common but differentiated responsibilities” on the MEA side.

II. The heterogeneity of States’ decarbonization policies and the measures they implement affect the conditions of their trade. This explains their use of a range of new measures designed to reconcile trade and the environment, which generate even more friction as they are only partially regulated by international law.

Although the handful of principles suggested above appear to be sufficiently accepted to serve as a framework for trade policy reforms and measures designed to better link trade openness and environmental protection, they do not in any way provide operational instructions which remain the discretion of the States party to the Paris Agreement, and the same is true for most Multilateral Environmental Agreements (MEAs).

Indeed, assuming that the long-term decarbonization objectives of these economies are shared and reflect a willingness to cooperate, as is now provided for in international agreements, their timelines and means of achieving them are left to the individual will of States for the reasons already mentioned.

The result is a wide variety in levels of ambition, policies, and instruments, the overall consistency of which is by no means guaranteed, with consequences for international trade that can create tensions, unless ways of coexisting with different regimes are found, which raise legal and institutional problems, many of which remain to be resolved at the international level.

Multiple heterogeneities in decarbonation policies and their instruments

In terms of climate, the freedom given to countries to choose the modalities of their decarbonization results in strong heterogeneity, which is added to the differences in emission volumes between countries, whether measured in total or per capita, and which span a very large scale: more than 15 tons per capita in the United States, compared to nearly 10 in Europe, 7 in China, and only 3 tons in India. These differences are undeniably due, at least in part, to each country’s degree of industrialization and development.

There is heterogeneity, first of all, with regard to both ambitions and trajectories. For some (EU, US), peak emissions are in the past and emissions are declining; for others (China, India), they are expected to peak around 2030 and to increase sharply between now and then. Some timelines for decarbonization have been set at 2050 (EU, US), others at 2060 (China), and others remain undetermined. References to starting points vary from country to country, as does the precise definition of “net zero” or “carbon neutrality”.

Secondly, there is heterogeneity in countries’ ability to mobilize the resources needed to complete the decarbonization process, whether in terms of financial resources for investments in transformation, particularly in the energy sector, or the availability of technologies, for example for photovoltaics.

Last but not least, the range of instruments used to decarbonize production systems is heterogeneous.

The most popular instrument among economists is to put a price on CO2 so that the markets for goods and services internalize the environmental damage caused by emissions. This is a solution that is as ideal as it is utopian in its version of a common global price generalized to all production. Hence, prices that are differentiated both in their sectoral coverage and in their levels. There are two extremes: on the one hand is the EU, which has made this its main instrument through the ETS, and where the price is currently around 85 euros/t, and on the other hand is the US, which is resistant to any direct increase in the price of goods or energy and prefers to use other methods, except at the sub-federal level, such as in California. There are also many intermediate situations, such as China, which has an ETS with modest sectoral coverage and a price of around 10 euros. In total, it is estimated that about 20% of global production is currently covered by such an instrument.

Many other tools are used in varying proportions by public policies to influence and accelerate decarbonization. To name a few, in decreasing order of coercion: consumer taxation, technical regulation of the chemical composition or carbon footprint of products, emission standards, public procurement, subsidies, labeling. There are also private initiatives by economic actors, producers or distributors, who wish to demonstrate more virtuous behavior, generally grouped under the term ESG (environment, social, governance)

All these methods have one thing in common: they impact the relative prices of factors of production linked to the environment, modify the comparative advantages of producers and countries, and therefore impact trade at the risk of causing friction.

Significant consequences for the conditions of international trade

When trade measures based on environmental protection throw the previous conditions of competition out of balance, the question arises as to their consistency with international trade rules.

The problem does not exist when trade-restricting provisions are provided for in MEAs, such as for protected species (Convention on International Trade in Endangered Species of Wild Fauna and Flora — “CITES”), or hazardous chemicals (the 1987 Montreal Protocol and the 2001 Stockholm Convention on Persistent Organic Pollutants). But these cases are not common, and the 2015 Paris agreement does not contain them. It is relatively easy to resolve when these provisions are included in bilateral or regional agreements through which the partners agree on specific conditions, such as in Chapter 20 of the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP) Agreement, or Chapter 24 of the Canada-United States-Mexico Agreement (CUSMA), which is focused on the environment.

In other cases, the WTO provisions apply and must be considered in the event of a dispute.

These provisions include principles and rules whose scope has been defined by the WTO dispute settlement mechanism in case law that has evolved over time.

The principles: the Marrakesh Agreement that established the WTO in 1994 stipulates in its preamble that trade openness must allow for “optimal use of the world’s resources in accordance with the objective of sustainable development, seeking both to protect and preserve the environment and to enhance the means for doing so in a manner consistent with their respective needs and concerns at different levels of economic development”.

Rules:

• Article XX GATT/WTO provides exceptions for certain restrictive trade measures to protect human health, animals and the conservation of exhaustible natural resources.

• The agreements on technical barriers to trade (TBT) and on sanitary and phytosanitary measures (SPS) establish the conditions under which trade-restrictive measures are admissible or not.

• The agreement on subsidies, which regulates those that distort competition and prohibits them from being made conditional on local content obligations.

Since 1994, there has been an abundance of case law, which has gradually evolved in a direction that is more favorable to the measures in question (except for local content) as the environmental issue has emerged in the international system.

To summarize — and at the risk of simplifying — a trade measure aimed at protecting the environment by establishing a barrier to trade is now compatible with WTO law under certain conditions that must be assessed on a case-by-case basis:

• Its impact on trade must be proportional to the environmental damage it is supposed to combat;

• It must not discriminate in favor of national products (not be a “means of arbitrary or unjustifiable discrimination”).

• It is compatible a priori without further proof if it is based on an internationally recognized precautionary standard.

Although this “corridor of compatibility” has been substantially widened over the last 30 years, it has not disappeared and many proposals to widen it further have emerged. This could be done either by establishing a more clearly defined link between trade openness and environmental protection, through renegotiating or reinterpreting WTO rules. Or by expanding the use of environmental exceptions. Or by reinstating the “green waiver” for subsidies that applied from 1995 to 1999 and that has not been extended. Or by renegotiating local content. Or, in a restrictive sense, by regulating fossil fuel subsidies or by integrating the environmental dimension into the disciplines on agricultural subsidies based on the recent precedent concerning fishery subsidies.

All in all, a new configuration of international trade disciplines that is more favorable to environmental protection is not out of reach, but given the diversity of environmental policies and collective national preferences in the assortment of incentive or constraint measures and their consequences on trade, such an undertaking is more a matter of the complex management of different coexisting systems than of the collective organization of convergence through cooperative harmonization.

In order for this to happen, four conditions would have to be met that are currently absent: the first is a standardization of the price of CO2 and of the sectors covered by these prices, which would avoid carbon leakage and level the playing field in this respect; the second would be the establishment of international standards for the portion of decarbonization that falls under product regulation; the third, which is institutional, would establish a common space for international environmental and trade agreements; and the last would give greater prominence to environmental precautions as distinct from trade protectionism by recognizing that protecting the planet from environmental risks is more legitimate than protecting producers from foreign competition.

III. In these circumstances, the European posture becomes particularly important because of its leadership in both environmental and trade matters; especially since the 2019 European elections that gave rise to the Green Deal.

If all the roads of the countries participating in international trade lead to zero carbon, as all roads lead to Rome, their vehicles, as well as their speeds, differ and merge together at the risk of various traffic incidents and new tensions in a world that has no shortage of them. In these circumstances, the European posture takes on particular importance because of the Union’s specific characteristics. In this case, the EU is a true leader — which is not often the case — because of its environmental ambitions, its commercial openness, and its market power.

Greater ambitions

Compared to the rest of the world, the European Union is a zone of high political pressure concerning environmental issues. It is insufficient for environmentalists, excessive for conservative forces, but stronger than elsewhere. So much so that it is the envy of leaders from other continents who would like to have similar support.

This political reality, while not expressed in the same way or in the same format in the Union’s 27 member states, has been steadily gaining ground since the 1990s. It received a new boost during the European Parliament elections in 2019, which resulted in the Green Deal. The result is new environmental ambitions in terms of decarbonization, preservation of biodiversity, product quality and water quality. This also gives rise to a form of ecological planning under the leadership of the European Commission, with regular benchmarks or assessments, such as the -55% emissions target for 2030 on the way to carbon neutrality in 2050, along with interim targets, which give greater credibility to targets that are otherwise distant and therefore less binding in the eyes of public opinion or economic actors From this point of view, the Union presents an image of earnestness to the outside world. This credibility is also nurtured by the regulatory developments underway or already announced which have a high international profile, as was the case in the past for REACH (on the chemical composition of products) or now for the end of internal combustion engines as of 2035, or the traceability of cultivation or production methods (which must be free of deforestation).

Greater trade openness

Compared to other entities of comparable economic size, the European Union has more trade with the rest of the world, both in exports and imports. The EU economy is more dependent on exports than the US economy. Its ratio of (extra-European) exports to GDP is 15%: it is almost twice as dependent on exports as the United States, whose ratio of exports to GDP is 8%, and almost as dependent as Japan, whose ratio of exports to GDP was 15.6% in 2020. It is a major trading partner for many countries. It is the largest trading partner for both imports and exports for 61 countries, and the largest trading partner in terms of imports from the EU for 21 countries. And while it is true that China has recently taken the lead in a growing number of areas, this statistical reality will be tempered in the future as China adds more domestic value by developing its economy, and therefore imports comparatively less as a proportion of its GDP than in the past.

Greater market power

Considered by some as a vulnerability in a geopolitical context that has been rocked by, among other things, Russia’s war against Ukraine and the U.S.-China rivalry, Europe’s trade openness is, on the other hand, a strength, a lever at its disposal to “green” its international exchanges, first and foremost through its imports, because of the size of its economy and the depth of its market. Europeans are not as rich as the Americans, but there are more of them, and they are fewer in number but richer than the Chinese for several more decades.

This gives them market power over the norms and standards of their trading activities, the effects of which have been seen in the past, as in the case of the GDPR (General Data Protection Regulation). By importing products, Europeans export their standards, and this market power increases as other countries adopt European standards, as is the case for non-EU European countries with significant economic weight. From this point of view, the course of desired divergence (or accepted alignment) that Great Britain, which shares the EU’s environmental ambitions, will take with Brexit could significantly alter the situation.

As a result, there is also an important responsibility in terms of coordinating legal trade systems, whether they be bilateral treaties or the multilateral system at the WTO.

In short, because of the Green Deal, the European Union is in a position to exert a major influence on the rest of the world by “greening” its trade policy in the name of greater consistency between environmental protection and trade openness. However, this statement must be qualified because it is not (yet?) accurate for the agricultural sector, which is very important not only for the European budget, through the financing of the CAP, but also for international trade. Despite the ambitions set out in the “Farm to Fork” Communication, Europe is still struggling to put them into practice because of resistance from the relevant lobbies.

IV. A range of new European measures to better link trade opening and environmental protection

The Green Deal has brought about a paradigm shift in the principles and practice of EU trade policy.

Previously, the European Union tended to limit as much as possible the inclusion of what academic literature refers to as NTPO (non-trade policy objectives) among its objectives. Respect for human and social rights (as defined in international law, in particular in the Universal Declaration of Human Rights, the United Nations Convention on Human Rights, and the International Labour Organization agreements) were, until recently, the only elements clearly and firmly tied to European trade instruments in the form of conditionality, whether in bilateral trade agreements or in the Generalized System of Preferences (GSP) for developing countries.

By giving its environmental objectives a new place of priority in the hierarchy of its trade opening conditionalities, the Green Deal has, since 2019, led to a reform of European trade policy. It is currently reflected in the discussion within the institutions of new measures proposed by the European Commission and in a range of initiatives that will affect the Union’s trade either directly (trade measures at the border) or more indirectly (regulatory measures for application “beyond the border”). In the future, it will also have to take the form of global initiatives, which are more difficult to bring to fruition, but which should benefit from European leadership in due course.

This new panoply is available at three levels: unilateral, bilateral, and multilateral.

Unilateral measures

If the CBAM (Carbon Border Adjustment Mechanism) ² , has become the symbol of the Union’s trade policy reform, it is not the only new instrument to use the power of the European market as a lever for better protection of the commons, namely the climate, forests, ecosystems, natural resources, oceans, and biodiversity. Other measures are also at different stages of the European legislative process: proposal by the Commission, deliberations by the member states in the Council, which acts by majority in these matters, deliberations in the European Parliament, and finally, reconciliation of the positions adopted by each of the two chambers in a Commission/Council/Parliament trialogue.

The European Carbon Border Adjustment Mechanism (CBAM)

Long treated as a challenging legal-technical fiction by the academic world, the CBAM is on its way to becoming a European reality. The legislative process leading to its adoption should be concluded before the end of 2022. It should then come into force for an initial three-year pilot phase. Its purpose is to align imported goods with the European carbon price under the emissions trading scheme in order to avoid carbon leakage. It will result in a gradual reduction in the free allocations currently enjoyed by the highest emitting industrial sectors (cement, steel, aluminum, electricity, chemical fertilizers) under the European Emissions Trading Scheme (ETS) and in a charge at the border equivalent to the average price paid by European industries per tonne of CO2 emitted. In the institutional game, the European Parliament has — as is often the case — has shown itself to be the most ambitious institution. Under the initiative of its rapporteur, Mohammed Chahim, in June 2022 the Parliament succeeded in adopting a position that strengthens the scope of the CBAM by extending its application to three other sectors (polymers, organic fertilizers and hydrogen), by taking into account indirect emissions (known as “scope 2”) in addition to emissions resulting from production processes alone, and by proposing the creation of a centralized body at the European level to ensure the mechanism’s management. This ambition was countered by concessions concerning the postponement of the date when free allocations will be completely phased out from 2028, the date initially proposed, to the end of 2032, and the inclusion of a provision providing for export rebates, whose legality in the WTO and compatibility with the CBAM’s climate objective are more than questionable. It remains to be seen whether they will survive the final stage of the trialogue. Indeed, they risk compromising the relatively favorable reception that the European initiative has received so far. So far, the Commission’s proposal has elicited moderately hostile reactions at the international level. The United States is taking a different route to carbon neutrality than ETS/CBAM, but has shown a willingness to find common ground with the EU. China (which has an ETS covering energy production) and India, on the other hand, have not hidden their hostility. The EU has engaged in discussions with its trading partners that are particularly affected by the products subject to the CBAM, which have helped to explain the purpose of the measure and to allay fears. The CBAM is currently limited to industrial products covered by the ETS. The agricultural sector is therefore not included. If, however, a price is put on the carbon emitted by agricultural practices in the EU, then a carbon border adjustment mechanism for these products will have to be adopted, and we can expect defensive reactions from developing countries that depend heavily on this type of export.

The regulation of deforestation-free products

As part of its biodiversity strategy and the first steps of its “Farm to Fork” agri-food strategy, the European Commission launched an initiative in November 2021 to address the deforestation embedded in European imports, which according to the WWF are responsible for over 16% of tropical deforestation. As the expansion of agri-food operations is responsible for more than 90% of deforestation, the regulation focuses on trade in food products considered to carry a high risk of deforestation: cocoa, coffee, palm oil, soybeans, beef.

The regulation goes beyond what is considered to be illegal deforestation in other countries, and represents, in this sense, a major advance and a unilateral instrument that has an extra-territorial effect. Specifically, the regulation sets new market access conditions for a limited list of sectors: to be free of deforestation, and to be legally produced and to have met a series of new risk management requirements. The European Parliament, in its position adopted in September 2022, proposes — as is the case for CBAM — to extend the scope of the regulation. In addition to livestock, cocoa, coffee, palm oil, soy and wood, the Parliament is proposing to include in the scope of the requirements products that contain, have been fed with, or have been produced with the above-mentioned commodities (such as leather, chocolate, and furniture). The Parliament also wants to include pork, sheep, and goats, poultry, corn, and rubber, as well as charcoal and paper products. The Parliament is also proposing to increase the percentage of audits to 10% of operators audited each year. Verification by the relevant authorities would be based in part on the geographical origin of the products, whose precise location and connection with the progression of deforestation would be verified using the European satellite system “Copernicus”.

The directive on Corporate Sustainability Due Diligence (CSDD)

The Commission’s initiative to harmonize the rules on corporate social responsibility has raised strong opposition from some stakeholders, in particular from organizations representing economic and industrial interests at the European level. Corporate duty of care regarding social and environmental issues already exists in certain legislations such as those of France, Germany and the Netherlands. The challenge here is to define common rules for all member states. The Commission’s proposal, whose publication has been postponed several times, is currently being discussed by co-legislators. Given the slow pace of the legislative process, there is still some uncertainty as to whether the European Union will be able to bring this project to a successful conclusion before mid-2024, when the current mandate ends. The rapporteur Lara Wolters has taken up part of the proposals published by Europe Jacques Delors for a more ambitious version ³ by proposing to expand the responsibility of companies over the practices occurring throughout their value chains and pleads for the removal of the concept of “established commercial relations” which would have severely restricted the scope of application of the duty of vigilance. It also adds two provisions: the requirement for companies to correct their practices in the event of a violation, and the requirement for deeper and more frequent consultation with stakeholders.

Through constraints placed on economic actors legally based in the European Union and the harmonization of rules within the Union — an essential element in the preservation of a stable and predictable single trading environment for economic operators — the European Union can truly put itself in a position in the coming years to remedy a significant part of the human rights, social, and environmental abuses that occur along the value chains of products consumed in the single market. However, it will have to be accompanied by significant strengthening of the capacities and budgets of national market surveillance authorities in order to avoid loopholes and maximize the impact of this new legislation. 

Bilateral trade agreements

Whereas the environmental clauses in the Union’s trade agreements were relatively unbinding in the past, the Green Deal reform is based on a different strategy developed in June 2022 by the Commission which provides for a series of measures — halfway between cooperation and sanctions — that will seriously strengthen the effective application of the these agreements’ environmental protection provisions. To only name a few, these are the integration of the trade and sustainable development chapter into the general dispute settlement mechanism, and therefore include the possibility of sanctions for violation of these provisions and the adoption of a “tailor-made” approach to environmental issues depending on the partners concerned, to name just a few of the points mentioned in the announced action plan.

These provisions are in addition to the pre-existing ones, which have been strengthened concerning the need to couple trade agreements with environmental impact studies that involve civil society and local authorities in the negotiation and monitoring of the agreements.

The EU-New Zealand agreement, whose negotiations were concluded in June 2022, is the most ambitious trade agreement ever negotiated on sustainable development and climate. In addition to incorporating the trade and sustainable development chapter into the general dispute settlement framework, making the Paris Agreement a “core provision” (thereby making their voluntary commitments binding between the parties), and including a list of environmental goods and services that benefit from additional trade preferences, the EU-New Zealand agreement introduces innovative chapters on trade and gender as well as trade and indigenous (Maori) peoples’ rights.

At this stage, one of the main uncertainties concerns the willingness of some partners to reopen negotiations to integrate this new approach into agreements already negotiated but awaiting publication and subsequent ratification. This is the case for the modernization of the EU-Chile agreement and for the controversial agreement negotiated between the EU and Mercosur countries. The election of Lula, a president whose policies are committed to the fight against deforestation, should re-launch the political process on the European side for the vote and ratification of this agreement. The European Commission has announced that it will propose an appropriate instrument by the end of 2022 to strengthen the trade and sustainable development provisions of the EU-Mercosur agreement. Once the instrument is on the table — and if the agreement’s opponents are satisfied — a vote in the European Parliament and ratification at the member state level could take place in 2023. If this happens, the EU-Mercosur agreement would become the largest bilateral trade agreement in the world, covering a market of more than 750 million consumers.

At the multilateral level: new global dynamics to develop

Although the European Union has been firmly committed to the reconciliation of trade and environment since 2019 at the unilateral level and, to a lesser extent, at the bilateral level, it has so far been less bold at the multilateral level.

There are several reasons for this cautiousness, which is mainly due to the concern to not alienate developing countries.

The first has to do with the past: the unfair regimes of colonial trade have been only slowly, and sometimes incompletely, erased; the Union is often considered, like the United States, to have protectionist tendencies in agriculture; in these circumstances, the possibility of working towards a new division of labor in the name of environmental protection which is unfavorable to countries of the South is never far off, as has already been noted.

The second is due to differences in the capacity of countries to move towards less carbon-intensive production systems or those less unfavorable to biodiversity, while the responsibility for these situations lies with those who are now creating new barriers to trade. This is not to mention the discussion on “loss and damage”, which is also connected to the past and of which we saw the beginnings during COP 27 in Sharm El-Sheikh.

The third is the recent deterioration of the global geo-economic and geopolitical context with its accompanying East-West and North-South tensions, hence the concern not to deepen antagonism.

The last one is due, as we have already explained, to the absence of a multilateral forum that would bring together the protagonists on both sides.

Nevertheless, the European Union could show more initiative and signal to its global partners that it is acting in good faith and that it is attentive to the difficulties that its new measures create for certain countries. In this sense, the EU could, for example:

assume leadership of the coalition of trade ministers for climate that was created during the last ministerial conference at the WTO

advocate more energetically for the “trade and environment” committee to take up the new measures that it is implementing or planning, even if it means facing questions or criticism in order to respond to them

propose the creation — as proposed by Europe’s Jacques Delors — of a WTO comparability forum mandated to examine CBAM-type border measures with the collaboration of UNEP, UNDP, OECD, IMF and the World Bank

suggest that future negotiations on disciplines governing agricultural subsidies take into account their effect not only on trade but also on the environment; to do so, it could build on recent progress at the WTO on fisheries subsidies

launch a “trade-environment” financing initiative for developing countries to support their efforts to ensure that their exports meet the new environmental criteria with which they must, or will in the future, comply, including in implementing the decisions of the COP 26 in Glasgow to end deforestation by 2030. Within such a framework, the EU could allocate the revenue generated by the establishment of the CBAM instead of paying it into the EU budget.

Conclusion

The European posture which, following the Green Deal, made it a pioneer in attempting to find a better balance between open trade and environmental protection, exposes it to the rest of the world. The positive side of this is that it has taken a leadership role in an unavoidable ecological transition. There is also a negative side: the criticism of international partners whose economic interests are affected by this. The EU’s position would probably be less uncomfortable if it were to equip itself with a true green diplomacy, of which the trade aspects would be one element among others. This is one of the initiatives recently launched by Europe’s Jacques Delors in Brussels.

1. This paper is based on the work of the two authors published in the “Greening Trade” series of the Jacques Delors Institute.
2. See Lamy, P., Pons, G., Leturcq, P., GT3 – A European Border Carbon Adjustment proposal, Policy Paper, Europe Jacques Delors, Bruxelles, June 3, 2020.
3. Lamy, P., Pons, G., Garzon, I., GT10 – EU Corporate due diligence proposal: game changer or paper tiger?, Polcy Paper, Europe Jacques Delors, Brussels, July 2022.