Background

While international trade and global supply chains are contributors to climate change, they should also be seen as part of the solution, a new report from the World Trade Organization states.

The report asserts that climate change is reshaping countries’ economic and trade prospects and is a major threat to future growth and prosperity. Higher temperatures, rising sea levels, and more frequent extreme weather events bring the prospect of productivity losses, production shortages, damaged transport infrastructure, and supply disruptions. Without significant reductions in global greenhouse gas emissions, the report states, many countries are likely to find their comparative advantages changing, with agriculture, tourism, and some manufacturing sectors particularly vulnerable to climate impacts.

The report acknowledges that trade opening generates GHG emissions by increasing the production, transportation, consumption, and disposal of products. As a result, some have called for limiting imports in favor of producing and consuming goods and services locally. However, the report points out that such a shift would lead to a rise in domestic production and associated GHG emissions as well as likely decreases in living standards.

Instead of reshoring, the report urges cleaner trade, including reducing the carbon intensity of production, transportation, and global value chains; developing and deploying climate-friendly technologies; and promoting trade in green goods and services (e.g., by eliminating tariffs and non-tariff measures). Such efforts could contribute to reducing GHG emissions by enabling access to cutting-edge climate technologies, incentivizing innovation in low-carbon technologies by expanding market size, and fostering competition and scale economies that help drive down costs.

Trade can also help countries better prepare for and respond to the impact of climate change, including through access to technologies and critical goods and services such as food and healthcare products. “In the longer run,” the report states, “open international markets would help countries smooth necessary economic adjustment and resource reallocation, and more diversified sources of supply for key goods and services would translate into greater resilience against localized weather events.”

Finally, international trade cooperation can make climate actions more effective by minimizing trade frictions and investor uncertainty. “As governments ramp up climate action towards nationally determined contributions,” the report notes, “there is a risk that unilateral measures aiming to prevent carbon leakage and the loss of competitiveness of domestic industry [e.g., border carbon adjustment measures] could stoke trade tensions, create investment-discouraging uncertainty, and impose disproportionate costs on firms and governments in developing countries.” Improved cooperation on issues like carbon pricing and decarbonization standards, possibly through the WTO itself, could reduce these risks.

Copyright © 2022 Sandler, Travis & Rosenberg, P.A.; WorldTrade Interactive, Inc. All rights reserved.

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