Tough questions for the World Trade Organization at COP27

Tough questions for the World Trade Organization at COP27

The World Trade Organization (WTO) has a message for COP27: free trade can help green the global economy. Unfortunately for the WTO, the quote that makes headlines is that “[w]We do not want a subsidy war.

In an interview with Bloomberg at the United Nations Climate Change Conference, Ngozi Okonjo-Iweala, Director General of the WTO, insisted that free trade in environmental goods and services is one of the keys to reaching net zero by 2050. This theme is the centerpiece of the WTO’s World Trade Report 2022, entitled “Climate change and international trade”, and it was expected to sell out well at COP27.

But the Okonjo-Iweala answered some tough questions. Will countries race to the bottom for locally produced renewable energy subsidies? Is the recent European Carbon Border Adjustment Mechanism (CBAM) kosher under WTO law? And is the welfare of cobalt miners in the Democratic Republic of Congo a commercial issue?

These questions were timely, if awkward. The day after COP27 began, the European Union (EU) complained about the US Cut Inflation Act, raising “serious concerns about how the financial incentives under the act are designed…” Consider electric vehicle tax credits. The EU insists that local content provisions run counter to WTO rules. Japan and Korea agree. Okonjo-Iweala warns that governments should avoid writing provisions favoring domestic content over foreign content, but politically speaking, this is much easier said than done.

Next, Okonjo-Iweala was asked if there should be a “free pass to help climate change?” That’s right, a free pass. Okonjo-Iweala replied that “there are subsidies which are useful”. Maybe, but given how the WTO subsidy deal works, that answer is unlikely to go down well in Sharm el-Sheikh.

Green technology subsidies often require domestic content to be used rather than foreign content. An ever growing list of cases from WTO, Canada-Renewable Energy, US-Renewable Energy UK-CfD (EU), show that this temptation is irresistible, no matter how many times these provisions have been struck down as illegal under the WTO.

Finally, Okonjo-Iweala was asked if the EU CBAM is legal at the WTO? She said “the devil is in the details” of how it is implemented. What about cobalt miners in the Democratic Republic of Congo? The Director General promised that their welfare goes to the very purpose of the WTO and its predecessor, the General Agreement on Tariffs and Trade.

Free trade in environmental goods and services can help fight climate change. Obtaining a broad agreement on environmental goods should be a priority in this regard, removing tariffs on clean technologies and opening markets to exports of related services. The WTO is also the place to discuss any unique challenges governments will face in achieving net zero.

That said, the WTO is a trade institution, not a second-best environmental (or labor) agreement. Okonjo-Iweala is careful to say she doesn’t want to see much litigation over climate change measures. Yet that is exactly what will happen unless governments address the environment (and labor) directly, rather than indirectly through trade.

The truth is that we already have a subsidy war, and the most impassioned advocacy at COP27 will only add fuel to the fire.

Marc L. Busch is the Karl F. Landegger Professor of International Commercial Diplomacy at Georgetown University’s Walsh School of Foreign Service. Follow him on Twitter @marclbusch.

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