EU trade policy: Global enforcer for the European Green Deal

Things are not going in the right direction for multilateralism. After several days of negotiations, world leaders gathered at the 2019 United Nations Framework Convention on Climate Change (COP25) summit failed to agree on ambitious climate actions. Countries such as China, India, Brazil, Australia, Saudi Arabia, the US and Russia have been pinpointed as blocking any progress in Madrid. Just a few days prior to the COP25, another blow to multilateralism was struck when the US confirmed its blockage of the appointment of members to the WTO Appellate Body – leading to the de facto dysfunction of the highest instance of WTO dispute settlement.

Advancing greater sustainability through multilateral fora will not be easy. The multilateral trading system is already facing significant difficulties in advancing its negotiation agenda and modernising its rulebook in areas like digital trade, industrial subsidies and forced technology transfers. With the current collapse of the Appellate Body, there are fears that the multilateral trading system will not only remain static but could very well recede and fail to do what it was initially set up for: combat tariffs and trade restrictions.

The WTO crisis represents a serious blow to multilateralism and rules-based trade, indicating a return to unilateralism and power-based bilateral trade relations. In his first days as European Commissioner for Trade, Phil Hogan announced his intention to upgrade the EU’s trade toolbox to sanction countries violating WTO rules and undermining the dispute settlement system. Such initiatives are necessary to protect EU interests in a more uncertain world. EU trade policy is now expected to focus on new trade defence instruments, levelling the playing field in procurement and tightening the screening of foreign direct investments.

However, the world’s largest trading bloc cannot afford to let its trade policy slip into a merely defensive position. Stuck in a trade war between the US and China, and with little improvement in the WTO, the EU’s trade policy is in need of a new positive and constructive agenda. Fortunately, there just so happens to be such an agenda in the recently unveiled European Green Deal.[2]

The European Green Deal’s ambitious goals will not be reached unless the EU can mobilise all of the policy tools at its disposal – including its trade policy. Beyond cutting emissions, the Green Deal is to represent a “new growth strategy”, thereby enabling the creation of jobs, investing in cutting-edge research and innovation, and becoming a world leader in clean products and technologies. The level of transformations required to achieve climate neutrality clearly denotes the need for a system-wide response. As such, EU trade policy must be modernised to become the European Green Deal’s external dimension.

Trade policy is not the only nor necessarily the best policy for tackling climate change and environmental degradations. The trade-environment relationship is complex and certainly not always positive. Agricultural expansion, deforestation and loss of biodiversity in producing countries have been caused by global agricultural trade. Also, the rapid increase in digital trade and e-commerce shipments has led to increased environmental pollution, emissions and e-waste.

Still, trade policy can be a powerful tool in encouraging or enforcing more sustainable practices. Over the years, the EU has become a global leader in mainstreaming sustainable development into its trade policy, including Trade and Sustainable Developments Chapters in its free trade agreements (FTAs). The EU-Japan trade agreement is the first to include a clause on the Paris Agreement. Nonetheless, there has been criticism that these clauses are rarely enforceable, difficult to monitor and lack sanctions in cases of breach of obligation – in other words, toothless.

With the current stalemate in the multilateral trading system, the EU should take on a more assertive role in promoting the sustainable trade agenda. Avoiding carbon leakage through a carbon border adjustment can be a first step in the right direction. The EU should, however, go further in making the conclusion of FTAs conditional on the partner countries’ ratification and implementation of the Paris Agreement. This should apply to all EU partners equally – including heavyweights like the US and China. EU trade policy remains a tool in reaching EU objectives, and not a goal in itself. If this means fewer but better FTAs, Europe should be ready to pay the price.

Moreover, the EU must find new ways to measure and monitor the implementation of environmental and labour commitments and their respective trade effects. In cases where a partner country does not comply with its provision on trade and sustainable development despite enhanced cooperation through dispute settlement, the EU should consider suspending trade preferences (temporarily). The current negotiations with Australia and New Zealand will be important test cases for strengthened sustainability clauses in EU FTAs and serve as a basis for future negotiations.

At home, the EU should make sure to reduce its environmental footprint, address remaining obstacles to transitioning to a green economy, and to do what it preaches in order to remain credible internationally. 

Those critical of including sustainability in EU trade – even if out of legitimate concern that trade agreements cannot include everything under the sun – should make no mistake: enforcing sustainability in EU trade policy efficiently is a make-or-break issue for Europe’s competitiveness. The Green Deal will require European businesses to invest and transform themselves – and at a significant cost. If the EU allows itself to trade with competitors that do not respect the same sustainability principles, the EU’s new flagship initiative will only lead to a competitive disadvantage for EU industry.