A global climate trade war is looming. Here’s how to avert it

US and EU announcements of new tariffs and other restrictions on ‘dirty’ steel and aluminium could presage a climate-focused trade war
China can help avoid this and boost the climate fight by pressing the WTO to take up the issue of overcapacity in the global steel industry

James Bacchus

Published: 1:30am, 15 Nov 2021

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A global trade war about climate change is approaching, and it could make the current trade clash between the United States and China seem like a mere preliminary skirmish. To avoid extensive, widespread economic damage and help combat climate change, this looming new trade conflict must be prevented through a commercial ceasefire and multilateral negotiations.

The US and the European Union have fired the latest salvo, indicating the approach of a conflict over trade-restrictive climate actions, with their joint announcement that they will impose tariffs or other trade restrictions on imports of “dirty” steel and aluminium. They say this is to help them take action to limit greenhouse gas emissions and inspire more ambitious climate action worldwide.

Details are yet to come, but their announcement appears primarily aimed at imports of these metals from China, where old-fashioned means of making steel and aluminium are still used and thus production is considerably more carbon-intensive. Although China was not named in the announcement, it referred to “non-market practices” that are undermining the world trading system.

This announcement follows the recent proposal by the EU to impose climate-related trade restrictions through fees on imports of steel and several other carbon-intensive products in a new carbon border adjustment mechanism. Although framed for general application, the mechanism likewise seems aimed mainly at “dirty” imports from China, which is the world’s biggest emitter of greenhouse gases.

These experiments in linking trade to climate actions will not start immediately. The US and EU aim to introduce their new transatlantic climate trade restrictions by 2024. The EU mechanism will take effect in 2023.

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The US and EU are already encouraging other like-minded countries to participate in their new international arrangement. The US, Canada and Japan are reportedly considering new trade-limiting domestic climate legislation akin to the EU’s carbon border adjustment mechanism.

The momentum for climate-related trade restrictions is gathering worldwide. So far, the developing countries whose exports and imports would be most affected by such measures seem to have mustered no strategy for dealing with them. China has denounced such measures but has not said what it will do about them.

These proposed climate trade measures could raise legal questions under international trade law. China could challenge them in the World Trade Organization once they are applied, and it might win the right to impose lawful trade sanctions if the challenged measures were not removed.

China could also engage in trade retaliation once the measures are applied by taking action against its imports from the US and EU.

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But what would this accomplish? Retaliation would only beget more retaliation. Instead, there is an urgent need for multilateral negotiation to avoid a climate trade war and secure trade peace while enhancing mutual climate action and prosperity.

Negotiators discussing national responses to climate change should ask what kind of climate response measures that affect trade are justified. There is no definition of a climate “response measure” in the Paris agreement, and one is needed to help distinguish genuine responses from those that are pretexts for green protectionism.

In addition, trade negotiators at the upcoming WTO ministerial conference in Geneva should address the question of industrial overcapacity, especially in the global steel industry. The WTO has rules for supply shortages but not for dealing with situations involving overcapacity.

According to the Organisation for Economic Cooperation and Development, excess global steel capacity in 2020 reached 700 million tonnes. China accounts for about 57 per cent of global steel production. While Beijing can point to some actions it has taken to rationalise production, steel overcapacity is still an issue that unavoidably centres largely on China and its steel production subsidies.

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Starting in 2016, the Group of 20 and the OECD convened a Global Forum on Steel Excess Capacity to seek mutual understanding on reducing overcapacity. But then-US president Donald Trump and Robert Lighthizer, his trade ambassador, preferred unilateral tariffs to multilateral solutions. They gave short shrift to the forum, and it has since made little progress.

Unlike the G20 and OECD, the WTO can agree on rules that bind all 164 member countries. It is past time to confront this seemingly intractable trade issue in the WTO, where all steel-producing and steel-consuming countries can have an equal say.

China has consistently expressed its support for multilateralism in freeing trade and fighting climate change. It would do well to seize this opportunity to prove its commitment to multilateralism by urging negotiators to take up the issue of trade-limiting climate measures and the related issue of overcapacity in the global steel industry and strive for a negotiated solution.

In exchange for offering to negotiate multilaterally on these issues, China could request a global moratorium on the imposition of trade restrictions for climate reasons. It has nothing to lose and much to gain by making such an offer.

The US and EU would have little to lose by accepting it, with only a few months of delay in their current plans. As they are likewise committed to multilateral solutions, could the US and EU afford to turn down such an offer from China at the risk of all-out climate trade conflict?

James Bacchus is professor of global affairs at the University of Central Florida and adjunct scholar at the Cato Institute. He is a former chief judge for the World Trade Organization and a former member of the United States Congress. His latest book, Trade Links: New Rules for a New World, will be published in early 2022