The explosion of trade in biofuels

I have some truly exciting strands of thinking that are starting to come together on many things trade & environment. I will hopefully be able to have time to write and post them here soon. In the meantime, today I thought I’d quickly go through the current surge in biofuels trade that we are seeing globally and discuss some of the drivers and controversies.

Biofuels, by which I here mean primarily bioethanol and biodiesel, are a truly intriguing type of renewable energy. First of all, unlike most renewable energy types, biofuels can be traded on a large scale between nations. This is no small advantage when one considers the heavy criticism levied against solar and wind with regards to the rather static character of their energy supply. Second, biofuels are relatively “plug-and-play” with much of the existing transportation fleet, especially with regards to biodiesel.

In the last 10 years, and especially in the last 5, we have seen a remarkable increase in the international biofuels trade between nations. Today, it is a booming industry where many players compete fiercely for market share and international competitiveness. It is staggering to see that world biofuels production has experienced actual exponential growth. World biofuel production grew from below 30 PJ in 2000 to 572 PJ in 2009 for biodiesel and from 340 PJ in 2000 to over 1540 PJ in 2009 for bioethanol.

Why so quickly and why now? Well, other than general environmental awareness, arguably one of the most important factors has been the establishment of relatively predictable markets. For example, the EU Renewable Energy Directive (EU-RED) from 2009 has stipulated that 10% of EU transport fuel is to come from renewable energy sources by the year 2020. Together with a few other instruments, this has meant that demand for biofuels has soared in the European market as the transition to meet the target is underway.

Though the EU is arguably the most important market in the world right now for biofuels, the story is similar in many other countries as of late. In the US, the Energy Independence and Security Act from 2007 mandates an aggregate of 36 billion gallons of renewable transport fuel to be in use by 2022. In Brazil, which by the way has the oldest and most fleshed out program of any nation, has an entire national program (commonly referred to as “Proalcool”) that dates all the way back to the 1970’s. That story is a fascinating one in its own right but I’ll here just quickly mention that Brazilian bioethanol (from sugarcane) is generally considered the most price-competitive in the world. In China there has been some hesitancy towards biofuels, but in August 2007 the National and Development Reform Commission announced a Medium and Long Term Development Plan for Renewable Energy which said that renewable energy as a share of total primary energy consumption should rise to 15% by 2020, and biofuels are expected to play an important part in this target. In India, an ambitious plan has been set out to have a 20% share of biodiesel and bioethanol blended in with gasoline and mineral diesel by 2017.

With these commercial interests quickly ramping up, this has also probably been one of the most contentious areas of all in the whole trade & environment field, and that is saying something. The EU has already slapped the US in 2009 with anti-dumping duties which dramatically limited their market share on the European market. Meanwhile, draconian tariffs and highly questionable biofuel standards in terms of fairness continue to be rife in this area. Especially Brazil has been a vocal critic of the rather blatant protectionism that has been raised against its highly efficient and cheap bioethanol production. Critics argue that the EU renewable energy directive is essentially geared towards biofuels (and especially biodiesel) produced from rapeseed which, incidentally, happens to be what fits European producers especially well. Meanwhile, in the US, comparatively inefficient biofuel products made from maize have enjoyed massive subsidies while creating questionable overall environmental benefit, while also being protected by sky-high tariffs on competing imports. It really is a testament to the extreme competitiveness of Brazilian ethanol that despite these tariffs they are still a viable player on the US market.

I could go on and on about the unlevel playing field and thoroughly skewed nature of the international biofuels market, but suffice it to say for our purposes here that it is not exactly free and open in its makeup.

With that said however, there is still considerable trade going on and in 2009, net biofuel trade reached 130 PJ of energy. Trade flows are directed at the most lucrative markets, which at the time of writing is still the EU and the US. It is important to understand that this is a heavily government-dominated area, where trade policy, tax exemptions and the plethora of implementational instruments all play a significant role in affecting the markets that exist.

On a political level, this is an interesting field because it straddles goals of energy security, environment and climate, as well as development. It is very hard to separate these when looking at the production and trade of biofuels and its accompanying policies. Several developing countries are today vibrant players in the global biofuels market and it looks likely that this trend will only continue due to the natural comparative advantages that often arise for developing countries from land availability and feedstock options.

Unfortunately, trade restrictions are not the end of the controversies surrounding biofuels. The popular Food vs. Fuel debate runs like a river through all things biofuels and in all honesty one can probably not say that the debate has been decided yet. The fear is that land, which is already becoming very scarce in the world, is more productively put to use growing food for people instead of fuel. Especially, the more inflammatory arguments often went, fuel that go into cars in rich countries. This Food vs. Fuel debate is an area all of its own and if you are interested in more info, I really recommend a book, aptly titled Food vs. Fuel which is co-written by Francis X. Johnson, whom I’m currently working with at SEI.

Many people raise concern over the wisdom of proceeding with biofuels at all, whereas many people advocate that biofuels are a great and environmentally friendly option when the policies are done right. International trade complicates the matter. Since verification mechanisms are typically a lot harder when feedstock growth occurs halfway across the world from the end-market, there is much worry that huge and bustling markets will incentivize environmentally unsustainable practices in developing countries that desire market access in the lucrative biofuels trade. Mozambique, for instance, has been observed by some as being a place where national policies are outlined specifically to conform with EU criteria so as to gain market access. Some arguments have been raised that this in practice means that the governments that control the “best” markets essentially has the role of a soft imperialist that readily affects national policies in third countries. This of course raises certain troublesome political issues with regards to sovereignty. These are exceedingly tough questions and one of those ethically “sticky” areas that are a hallmark of many intersections in trade and environment policy.

I’m currently writing on the WTO law implications of biofuel trade, so I will surely return to this very interesting and fast-moving area.   

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An overview of the WTO principle of MFN and bilateral/regional agreements: How does it work?

I’ve been getting some questions lately both at work and through mail from people curious about just what the relationship is in the WTO between the multilateral rule of Most Favoured Nation and the “further deepening” of preferences that is evident in the plethora of preferential trade agreements, whether bilateral or regional. “How can this go together with MFN in the WTO?” I am asked. “Shouldn’t MFN mean that if they liberalize something in a regional or bilateral deal that everyone else in the WTO should get the same since they are members too? What am I missing here?” Is another commonly heard phrasing.

I’ll do an overview of the main issues here, because these are truly important things to understand and examine, not just in Trade & Environment, but for geopolitics at large.

Note before I get into it 1: Please understand that there is enough material here to write a book or three and that by necessity I’ll have to keep it breezy. Hopefully this small overview will iron out most of the general confusion.

Note before I get into it 2: This is highly relevant to Trade & Environment issues. I have previously noted that we seem to be moving towards a “messier” landscape of global governance where alternate pathways forward will be explored while multilateralism remains stalled. Understanding the general gist of how bilateral and regional deals interact with current multilateral WTO rules is obviously very important in such a landscape (hence the recent questions from people not usually interested in the WTO I suppose).

Note before I get into it 3: Loose use of terminology confuses a lot of people in this area. In WTO Article XXIV, which regulates exceptions to MFN through preferential agreements, there are only two things mentioned: Free Trade Agreements (FTA:s) and Customs Unions (CU:s). Thus, the key thing to get in terminology is that the vast majority of agreements that people talk about when they go on about “bilaterals” or “regional agreements” or “preferential trade agreements” etc etc are strictly speaking to sort under FTA:s in the WTO terminology. Customs Unions are relatively rare by comparison.

First things first – Yes, it is allowed and possible to veer from the principle of MFN in the WTO through FTA:s (whether they be bilateral or regional agreements) due to Article XXIV in the GATT. There is also a special “enabling clause” adopted by the WTO in 1979 that particularly and even more favourably allows such exceptions between developing and developed countries and between two or more developing countries.

Great. So WTO law does technically leave room for exceptions to MFN, and countries lately use these exceptions a lot to create preferential trade situations and “play favourites” through these agreements. So what is all the fuss about? Let me do my best at explaining.

The role of preferential trade agreements have been debated since the very formation of the GATT itself and the history of this is fascinating. None other than John Maynard Keynes himself was at first against the rule of MFN, arguing with passion for keeping the freedom to impose discrimination as a country saw fit i.e. “preferentialism”. Of course, he disliked the word discrimination and phrased it rather as freedom of choice for countries to conduct their own trade policy rather than being universally bound by MFN (and arguably thinking in no small part about the welfare of the fraying British Empire).

Displaying some impressive intellectual flexibility however, he later on came to embrace the MFN criteria fully and instead became a vehement opponent to the preferential “freedom” that he had previously espoused, fearing instead that it would lead to just the type of rampant protectionism and dangerous regional blocs mentality that had been at cause for the second world war.

Thus, Keynes ultimately came to hold the view that lately has become pretty much unanimous among trade economists: MFN good, preferential possibilities bad because they ultimately lead to beggar-thy-neighbor policies between nations by opening up the possibility of “playing favourites”. As we all know, when someone is the favourite, there are others who aren’t, and this leads to bad political relations. Add a couple of other negative factors that hollows out trust between nations and before you know it, you have world war two.

Historically, it’s really interesting to note however that this unanimous embrace of MFN didn’t become prevalent until pretty late in the game. When Free Trade Agreements (FTA:s) were still relatively rare in the world trading system, a lot of people did not see much harm in them. Tipping my hat to Jagdish Bhagwati of Columbia, it could perhaps be fair to say that he saw where this “death by a thousand cuts” was taking us, giving some early warnings about the dangers of setting upon the path of undermining the principle of MFN through exceptions.

Wait, you may say, if this possibility for “preferentialism” was recognized as bad by both Keynes and as of late by everybody else, then why was Article XXIV instituted in the first place? Surely there must be lots of explanation in its origin containing rigorous logic and very carefully laid out reasons?


The origins of this main MFN exception provision of GATT Article XXIV is shrouded in mystery. Bhagwati posits that it was probably envisioned as being used extremely rarely. If that is the case, paying mind to the hundreds of FTA:s we now have and counting, that rationale was mistaken.

If one looks at the text of Article XXIV, it actually does seem to put up quite harsh requirements. The definition in Article XXIV says that duties and regulations on substantially all the trade between the two trading partners should be removed for an agreement to qualify as a Free Trade Area. Also, these agreements cannot mean that the “duties and other regulations of commerce” are higher to third countries than they were before the FTA was made (i.e. leaving the door arguably quite open for huge trade diversion while focusing more on the technical similarity of treatment as before the FTA).

But wait, you say, surely a lot of the regional and bilateral trade agreements that we are seeing can’t qualify for such a high treshhold? What exactly does “substantially all the trade” mean? From a textual interpretation, such a critical view is perfectly understandable, as it does seem like a very high treshhold to fulfill to qualify for MFN exception. In 1994 there was an interpretative aid to article XXIV adopted that tried to give some clarity on this mysterious Article. Maddeningly, the interpretation of Article XXIV (8) where the “substantially all the trade” requirement is located, is left out however. Why? Perhaps due to a mix of disagreement, confusion and an unwillingness to rock the boat when everybody is “doing the preferential”.

The WTO Appellate Body gave a bit of guidance in the case Turkey – Textiles where they essentially said, speaking of customs unions, that the meaning of “substantially all” was not agreed upon by WTO members, but that it “accords some flexibility” (to customs union members). They also said that it did not mean “all the trade” and it definitely meant more than “some of the trade”. And that was about as much clarity we received from the Appellate Body in this case regarding the meaning.

With such confusion mixed with widespread use, it’s no wonder that the late Gardner Patterson, a former Deputy Director General of the WTO remarked:

Of all the GATT articles, this is [Article XXIV] one of the most abused, and those abuses are among the least noted. Unfortunately, therefore, those framing any new [free trade area] need have little fear that they will be embarrassed by some GATT body finding them in violation of their international obligations and commitments and recommending that they abandon or alter what they are about to do.”

This statement succinctly summarizes the situation, although the “least noted” part is probably not true today, now that people are getting worried about just where this will all lead.

There is no consensus rule in the WTO with regards to making Free Trade Agreements for WTO Members. The only requirement is that they (when using Article XXIV to avoid MFN) have to be notified to the other WTO members. Now, technically, there is a requirement that these notifications are to be examined in the Committee on Regional Trade Agreements (CRTA) with regards to their WTO consistency. However, due to never being able to reach consensus, which is required, these reports are basically never adopted, leaving this to be of marginal relevance in practice.

On a final technical note: Article XXIV is thus widely used to avoid MFN, which is Article I of the GATT. Can Article XXIV be used as a defence in other WTO Agreements than the GATT? The jury is still out on this one with regards to general applicability, but trade professor Michael Trebilcock of University of Toronto posits that Turkey-Textiles gives certain indication that this may be possible if another WTO Agreement “incorporates” Article XXIV of the GATT by referring to it somehow (though not necessarily directly).

So what does this all mean?

It means, in my opinion, that by leaving the door open for “preferentialism” through Article XXIV we did not inoculate the trading system to the “beggar-thy-neighbor” policies that brought the world to the brink of destruction once before.

This was all well and good when there were still relatively few FTA:s in existence, but with the “explosion” of agreements that utilize the exceptions to MFN, we are starting to see some eerie similarities to the “Untrusting Trading Blocs” situation that ultimately ended so poorly in the 1930’s. Particularly as I believe there is a high degree of risk that such trading blocs will tend to be dominated by a single economic hegemon. Proponents for this approach tend to say that its main benefit lie in being able to achieve a deeper degree of economic integration due to having less players at the table. This of course can be true. But it’s important to not stop there when looking at this. Assumptions tend to be made that once these huge regional blocs have been built up through preferential agreements and “playing favourites”, that they will then just naturally sit down and start negotiating and integrating with each other. I believe this to be a Pollyanna version of reality, and am quite unconvinced that it will happen. More generally, I believe it was simply a big mistake to put in exceptions to MFN, because it has made it much easier to avoid the hard questions on global economic governance cooperation.

Yet here we are.

For our purposes here, I hope this basic primer on a deceptively deep area of international trade has been useful.

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Reflections on a statement by Pascal Lamy, the current state of the economy, decoupling and limits to growth.

Remember how 2011 was going to be the “make it or break it” year for Doha? I guess it broke then, because we are now facing a situation where Pascal Lamy, DG of WTO, has said outright not to expect anything major to happen in the way of trade (i.e. the Doha Round), climate change or on macroeconomic coordination, all due to the current economic crisis (14th of feb, WTO General Council Meeting).

Other than being something of a downer, there is more subtlety to his statement than what one might see at first glance. Why exactly should we assume, as the statement does, that these important things are to be held in a noose by the poor economic outlook? When did the hope for progress in these areas transmute into waiting for “better times” to come along and rescue us, somehow magically sweeping along everything else with it?

If one buys the argument that we are living in a world where physical resources are constrained and likely to get moreso in the coming decades, then there must by necessity also be limits to economic growth along traditional models of resource usage to achieve that growth. Put differently, we are not in a position to expect a prolonged period of unabated growth along traditional models anytime soon. Thus to say that we cannot solve climate change or coordinate macroeconomic policy because the financial times are bad, is essentially to make the argument that to progress in the very areas that would take us away from this narrow and unsustainable view of economic growth, we must first have lots and lots of traditional economic growth! This is an interesting catch 22.

In terms of “realpolitik”, Lamy is right of course. Strong progress looks unlikely to happen in these crucial areas at this point (multilateral trade, climate change & “macroeconomic coordination”). But, unwittingly, such statements go a long way to show how much our mental models still need to change for us to even have a prayer of solving these issues. When blaming non-proggression on the financial crisis it becomes a perfect example of how the truly major and important issues of our time are still mentally construed as something exogenous to the “normal” of continuing with traditional growth models that we are familiar with, and everything else having to adapt to that. Put simply, what in fact are the most important issues is in practice seen as the “other stuff” to deal with once the “real stuff”, i.e. traditional economic growth, is taken care of. The UN in a number of reports have warned against this type of thinking, but it still seems highly prevalent. Quite literally, sustainable development and other important issues are not “core” in our economic thinking to the degree that they need to be for truly positive change to happen in these areas.

Among many environmentalists and environmental economists the argument is often heard, perhaps most famously in the book Limits to Growth, that at some point attempts at continuing on a path of unsustainable economic expansion and growth will lead to a form of perma-crisis that simply does not let up without abandoning traditional growth models. What we now term “crisis” from our expectation of unceasing economic growth will become a state of continued economic contraction that is caused not by inefficiencies or market dynamics, but simply by hitting inherent limitations from conducting unsustainable economic activity on a planet with finite resources. This state, warns the environmentalists, is unavoidable unless the transition is made ahead of time to a growth model that manages to do a “decoupling” of the concept of economic growth and environmental degradation, separating them from each other.

Lamy’s statement shows that we are still a long way off from this fabled decoupling of growth and quality of life from environmental degradation and overexploitation. Indeed, it would seem it is still hard for us to even think about it, steeped as we are in the traditional growth model that currently prevails.

This problem of adapting mental models to account for changing circumstances is at the heart of some of my studies as of late. I’ve come to read much interesting work on the psychological aspects of decision making and now believe that this has a lot of relevance for progress in climate change. Primarily I have looked into the findings of behavioural economics, which I believe holds a lot of keys for understanding some of the subtler aspects of how the mind works when complex decisions must be taken.

It can be pretty grim reading at times. Especially since the impression I get is that environmental progress, and particularly the type that goes toward solving the “ultimate intangible” of climate change, seems to be as much a fight against our own basic psychological wiring as it is a moral struggle.

From reading primarily Nassim Nicholas Taleb and Kahnemann/Tversky, it’s become clearer to me that not only are many of the issues confronting us on the climate side of things technically difficult, but also that they quite literally are psychologically punishing for us to confront. According to much of the recent research that’s been done, our emotional wiring is essentially in an obsolete, or at least very unhelpful, state with regards to dealing effectively with the climate crisis that we face. This due to a rather simple reason: the human population at large does not particularly like dealing with intangibles. A sobering thought I had from this was the following: If our “climate survival” thus depends on us transcending a large part of what makes up our own hardwired emotional system, how good are our chances really? Psychological aspects of environmental and climate work is a field within which I am quite sure there are fascinating discoveries to be made. Hopefully, some of the findings in general decision making theories will find their way to being translated to futhering environmental aims as well.

On a more humorous note and speaking of Lamy, is it just me, or wouldn’t it be better to have a go-getter like him at the head of the UN where dynamism is always needed and to have a “grey eminence” like Ban Ki-Moon heading the stability- and predictability-minded WTO? I would be all for some type of “visiting boss” program instituted here between these two organizations to try out my theory…

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A Look at Key Recent Developments in Trade & Environment

There are a lot of things flying in the air right now in the nexus of trade & environment. I’ve decided to outline a few of the major ones that have caught my attention lately. 

First, the UN very recently came out with what perhaps could be described as a spiritual successor to the Brundtland Report that came out in 1987 (which popularized the term ‘sustainable development’). In this new report, which you can read and check out here, the attempt is essentially to try and further make sure that this concept of sustainable development is actually operationalized.  It’s a good initiative, since without further leadership on this concept it has the distinct possibility of degrading into a shorthand for being interpreted as everybody getting everything they want, which would be an unsustainable concept if ever there was one.

I have not had time to go through it in detail, but there are some truly key concepts included in this report. The move away from GDP (on which there is more here), the crucial importance of developing actual sustainability indicators and get some measuring going, and several other “big ones” are brought up.

Trade is also mentioned in several places, essentially by saying that all this needs to be done without instituting unfair trade practices and creating green protectionism.

Point 27 I think is so important that i’ll quote it here in its entirety:

“Governments should establish price signals that value sustainability to guide the consumption and investment decisions of households, businesses and the public sector. In particular, Governments could:

a. Establish natural resource and externality pricing instruments, including carbon pricing through mechanisms such as taxation, regulation or emissions trading systems, by 2020;
b. Ensure that policy development reflects the positive benefits of the inclusion of women, youth and the poor through their full participation in and contribution to the economy, and also account for the economic, environmental and social costs;
c. Reform national fiscal and credit systems to provide long-term incentives for sustainable practices, as well as disincentives for unsustainable behaviour;
d. Develop and expand national and international schemes for payments for ecosystem services in such areas as water use, farming, fisheries and forestry systems;
e. Address price signals that distort the consumption and investment decisions of households, businesses and the public sector and undermine sustainability values. Governments should move towards the transparent disclosure of all subsidies, and should identify and remove those subsidies which cause the greatest detriment to natural, environmental and social resources;
f. Phase out fossil fuel subsidies and reduce other perverse or trade-distorting subsidies by 2020. The reduction of subsidies must be accomplished in a manner that protects the poor and eases the transition for affected groups when the products or services concerned are essential.”

That’s quite a list. From an economical viewpoint, what this means is of course that things will have to get a lot more expensive if we are serious about sustainable development. Not exactly news for anyone engaged in climate and environment issues, but still as unpopular as ever with the general public. However, I’m very glad they went after subsidies so directly. The current levels of fossil fuel subsidies are a disgrace, and subsidies more generally can pose a serious threat for sustainable change. As the report rightly alludes to, this goes especially for countries that do a less than impressive job of actually disclosing their subsidies.

Time will tell what kind of impact this report will have. To be sure, it has the stamp of approval from many key figures in international politics. The key realization that the report makes clear early on is that we don’t really need more sweeping statements about the wonders of nature or the fight against poverty. What we need is to actually put those statements into practice and “operationalize” what we already have. Put simply, to make it actually work. This report, between the lines, is thus probably also equal parts frustration and reminder that we are moving much too slowly on these issues. A quote I found poignant may illustrate:

“There is another answer to this question of why sustainable development has not been put into practice. It is an answer that we argue with real passion: the concept of sustainable development has not yet been incorporated into the mainstream national and international economic policy debate. Most economic decision makers still regard sustainable development as extraneous to their core responsibilities for macroeconomic management and other branches of economic policy. Yet integrating environmental and social issues into economic decisions is vital to success.”

There’s no real need for comment on that and I simply couldn’t agree more. This report is a major one that will likely be referred back to for years, so it is worth checking out to see where the UN is currently at with regards to sustainable development.

Speaking of operationalizing sustainable development, this is exactly what the buzz concept of “green growth” is about as well. I highly recommend that you read this new article by the SG of OECD in its entirety, as it is a good example of the strong connect there is between what the UN says needs to be done now about sustainable development and what the OECD is talking about with regards to green growth. It would seem a lot of organizations are basically on the same page about what is needed at this point, though the use of the terminology differs somewhat. It is no secret that not enough progress is being made in global, regional and national environmental policy right now. Hopefully we will start to see a strong compounding effect that gets us out of the current rut and moving forward strongly on sustainability and climate issues.

In the trade world, people have been tightly focused recently on the so called raw materials case, in which China lost against the US, EU and Mexico with regards to their right to impose export restrictions on certain key “rare earths”. These are essentially mining products that are crucial for a multitude of manufacturing purposes, where the export to the world currently happens to be dominated by China. This skewed supplier picture has had many countries worried for a long time about predictability and access to rare earths, further compounded by allegations that China purposefully instituted policies to favour their own manufacturers with rare earths for below market prices. The recent report by the AB was thus a major event not just for trade but for international politics and it signifies some very important clarifications on export restrictions that will undoubtedly have an effect for the future of attempting these types of measures. It was especially interesting to see China use an environmental and conservational rationale (among other things) as attempted justification and not getting away with it.

In all honesty, this decision was expected, and I do think the AB made very much the right decision. The temporary nature of Article XI 2(a) of the GATT doesn’t rhyme very well with how the Chinese conducted their policy of controlling rare earth exports.

Now, a really interesting thing to come out of this case for the intersection of trade and environment is of course the AB’s reasoning on article XX. In the case, China made the claim that even if they were found to be in breach of their obligations to remove their export duties, as seen in their accession protocol, they could still be excused under one of the exceptions found in Article XX of the GATT. The AB did not agree, hence the hooplah in the trade world that finally we have some more clarity about the applicability of Article XX outside the GATT.

Does this mean that Article XX can never be used for any of the WTO agreements, most especially the subsidies agreement and the TBT? No. An accession protocol is certainly not a WTO agreement in the same sense that the subsidies agreement is, and one should not go too far in thinking “that’s it” for article XX justification of anything other than the GATT. What this gives is an indication about a certain sense of restriction for wielding article XX left and right. However, the truth at this point is that we simply don’t know about its further applicability other than in the strict sense when applied within the confines of the GATT. Perhaps future cases will clarify since it doesn’t seem impossible that using article XX for other WTO agreements might come up again before long. For a delightfully wonky bonanza of speculation on the applicability of Article XX, go here.

Just a brief note also on the continuing spat between the EU and almost everyone else on introducing emissions permit requirements for international flights. This is quickly getting vitriolic and both China, outright, and the US, de facto, have told its airlines not to comply with the EU’s directive regarding their flights. If you are not familiar with the background to this, or just generally want an excellent discussion of it, go here as Joshua Meltzer of Brookings has made a fine summary of what this actually means for international trade (unsurprisingly, the usual suspect of article XX rears its head again). This row still centers more around issues of national sovereignty than it does around WTO commitments, but that could change very soon as there are very strong trade implications to the EU’s measure here. In any case, the EU does not seem to be backing down, as can be seen here.

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Survival of the sustainable – Choices and culture in a new era of geopolitics, international economics and environmentalism

“The era of cheap natural abundance is over. We must now compose common rules for an era in which nature is valuable.”

The above quote is from Paul Collier’s book The Plundered Planet, and it cuts to the heart of many of the themes that I have been exploring here that are fundamental for understanding the link between environmental concerns and international economic governance.

Somewhat starkly put, as the relationship between economically available natural resources and parties interested in those resources grows tighter and more strained, nation states are essentially faced with two broad options in dealing with the competitive interests of other nation states:

Option one is to opt for the path of cooperation by recognizing the inherent incompatibility of fully sating the desire of all parties for limitless growth on a planet with finite resources. In practice, this essentially boils down to a form of mutual suppression of desire for traditional growth through recognition of the ultimate unfeasibility inherent in limitless material expansion for all parties and instead adopting a changed societal paradigm. Option two is to refuse to suppress any desire for traditional economic growth and attempt to keep satisfying these demands unabatedly, hoping to outcompete other nations with similar interests in the process, thus accepting economic conflict with other parties that attempt the same.

I put “common rules” in italics in the above quote to underline the paramount importance of these two words in navigating the two options so as to hopefully strike upon the path of cooperation rather than conflict.  However, a fundamental prerequisite for arriving at such rules is to first arrive at agreement about what these rules should consist of. After all, agreement does not come from making rules. Rules come from being in agreement.

I don’t presume to here lay out the exact “medicine” needed to arrive at the grand agreement that would make such common rules possible. Indeed, a Nobel peace prize is likely waiting for anyone managing to fully bridge the divide between current norms of economic activity and environmental concerns. I will however discuss some important facets of this that I believe have not received much attention.

In previous posts I have stated that world geopolitics right now are looking uncomfortably similar to the situation that reigned circa 1870-1910, i.e. the era of the “Great Powers”. For a more detailed argument on this, I recommend not just previous posts but also a recent speech at Chatham House, a think tank, which can be found here.

As we all know, the last era of the great powers did not end well. However, the current situation is different. Above all, we have international institutions now that did not exist then. The “million dollar question” that now faces the international community is consequently how robust these “modern” institutions are in holding together the above mentioned path of cooperation while under increasing pressure from forces that may cause conditions prone for increasing levels of conflict and international competition.

Informed by this question, it is quite safe to say that institutions for international cooperation will be very important in navigating the uncertain times ahead to avoid an “uncontrolled” sequence of activity with negative consequences. This of course begs the question, how ready are our international institutions to handle this role? The Italian dictator Benito Mussolini once quipped about the League of Nations that:
The League is very well when sparrows shout, but no good at all when eagles fall out.”

Unfortunately, this remark is quite translatable to our own day. Our “eagles” of course being the nations and regions that today comprise our Great Powers. Would the WTO and other fora for international cooperation be well equipped to withstand if the eagles of the current political landscape fall out with one another? Hopefully, we will never have to find out, though there are indications that we might just have to.

Put differently, the current set of international instutions that we have can be considered the “insurance policy” that the world community has had time to build up since the last great global conflict that sprang from the Great Powers situation of that era. Indeed, for such a short time as 70 years, we probably deserve a pat on our backs for having come quite a long way in creating the avenues for global cooperation that we now already take quite for granted.

Of course, this insurance policy is not only part of the solution for the precarious time of transition that we find ourselves in, but also part of the problem. To many it represents an order that is outdated and inadequately reflects the dispersed modern landscape of geopolitical power, one that is now decidedly less centered on the developed countries. Thus, it is not unthinkable that such frustrations about the very origins of this “insurance policy” creates a lessened degree of acceptance for it. Needless to say this would make it harder for international institutions to serve its role as a force for continued cooperation and stability.

I believe there is an interesting connect here to culture, and thus a connect to the very heart and soul of what makes up regions and nation states into at least somewhat coherent units that then face each other to cooperate in international fora. The overall point would be that many of the cultural norms prevailing in many societies are rather poorly prepared to deal successfully with the transition to greater sustainability and lessened material wealth. For example, one could make the argument that much of the culture of the US is “geared” towards resource abundance, and that indeed this is taken quite for granted. Consequently, its social structure, like many other countries, at this point has comparatively few cultural “built-ins” to tackle prolonged times of economic and material contraction of growth. The US managed to navigate the great depression and the economic crises of the 1970’s, but arguably they did so with an eye towards something to “fix” before going back to a “normal” state of strong continued economic growth along traditional models. As a case in point, how may such a culture relate to a situation where limits to growth and resource abundance are not something temporary, but comes to constitute a new state of normalcy? I don’t know, and the US is just an example, but I suspect there may be some inherent difficulties here without some shifting of the very cultural norms on which several modern societies rest.

Why does this matter? It matters because it connects back to what I began this piece with – the choice between the path of cooperation, that may entail some mutual suppression of the common desire for unlimited growth, and the beggar-thy-neighbor approach of conflict that takes no heed to constraints while progressing with business as usual. The ease of cultural adaptiveness may be a key factor in what choice is ultimately preferred between these two.

The key point is that what we are facing is not something to “fix” in order to keep on trucking with our currently prevalent modes of operation. Yet this mindset can be seen everywhere. These issues and the transformational changes they will require are not “real” to most people. And, curiously, behavioural economics teaches us that this is to be expected. In that very interesting field, there is an expression called WYSIATI, or What You See Is All There Is. Basically what it means is that it is very hard for us to relate rationally to non-events. We are fundamentally beings of existence, and we prefer things and events to exist before we deal with them. This is probably one of the factors that makes difficult the changing of the societal norms that are firmly based in the currently existing state of economic normalcy. It is psychologically difficult for us to comprehend such a change, let alone to proactively and efficiently make it come about.

This is problematic since it seems, from having read a number of pivotal books on these issues, that we have gotten quite accustomed to what is in reality a rather brief anomaly in human history. One that began with the industrial revolution, which put us on the path to unparallelled material prosperity, and that looks likely to soon be coming to an end by pushing up against some of its inherent physical limits.

Gregory Clark of University of California Davis, in his much discussed book “A farewell to alms”, makes the rather bleak argument that this end of cheap material prosperity may essentially see us return to malthusian economic conditions, where poverty and strife regulate much of human activity due to hitting the limits of global zero-sum resource constraints. I underline that this view is bleak, because it presupposes the path of business as usual in facing these challenges. However, it is hard not to look at this line of reasoning on our economic future without being struck by the above mentioned connection to culture. This stretches beyond just the above made argument on how certain societies are “geared” towards abundant resources and cheap energy. It goes further and cuts to the heart of even the way we govern our societies. I believe, for instance, that the culture of extreme individualism that has been profligate in the west for much of the latter half of the 20th century could only have been possible during condtions of material superabundance. I also think that the wisdom of democracy has clear links to material abundance and may be a superior form of managing large amounts of wealth, when the pie is big, but not necessarily the superior system of governance in times of scarcity due to its high propensity for gridlock when individual interests become vastly separated. This is a controversial argument, to be sure, but the main point is that cultural adaptation to expected averages of material wealth is as much a part of this as anything technical in the way of economics or law. There are powerful cultural non-technical aspects that will influence whether or not we succeed with our transition to societies that embrace sustainability.

Importantly, this shift will affect all nations. The path of cooperation in dealing with these issues is not an argument for the abstract superiority of general do-goodery. It is recognition that nothing else will work. Even under the hypothetical situation that one single nation would completely outcompete every other under the go-it-alone scenario and thus succeed in its strategy to sustain unabated growth, this success would still be short lived. In his book Collapse – why societies choose to fail or succeed, geographer Jared Diamond makes a compelling argument for why an argument that says “as long as I am rich I will make it” is delusional when it comes to navigating the times ahead. He tells the story of the doomed viking colony on Greenland to illustrate his point. The vikings, quite by luck, happened to settle in Greenland in one of its most fertile and warm periods. Thinking this was the norm, they quickly expanded due to their relative abundance and soon had many farms, though the new ones were consistently less and less attractively located than the first ones that were settled. When the climate changed back to what was in fact its true normal, many of these farms simply ran out of food. Rather than starve, the vikings would then either raid or join the better located farms that were still able to produce food during the harsher times. In a domino effect from the collapse of the poorest farms, even the richest ones were suddenly put under great pressure by the scores of destitute vikings who were either seeking employment, shelter or quite simply to steal whatever they could to survive. This in fact continued until there was only one farm left on Greenland, Gardar, which was the richest of them all and the last domino to fall. The moral of the story is of course that it ultimately did not matter how rich Gardar farm was when it found itself under constant attack from raids and having to deal with scores of viking refugees from the collapsed poorer farms. Its richness had solved nothing, so to speak.

This little fable illustrates that no society is immune from global environmental concerns, nor from issues related to international economics and trade, regardless of its individual position, good intentions, or attempts at isolation from either.

Perhaps it is not as the famed Porter hypothesis believes then, that it will be profit based  economic considerations (i.e. efficiency from innovation) that will lead to understanding and salvation for environmental problems. But perhaps rather it will be a matter of basic survival instinct, when understanding that without a functioning environmental baseplate all economic activity ultimately fails. And without economic activity, we fail.

Curiously however, our era of hyper-speed communication may actually make such a realization harder due to what is known as “creeping normalcy”. In other words, gradually accepting worsening economic conditions while persisting with an outdated mode of continued externalization due to the gradualness masking the deteriorating conditions. Creeping normalcy is the phenomenon that led people to cut down the last tree on easter island and shoot the last dodo. We often marvel at such folly, but creeping normalcy makes it perfectly understandable. When the last tree on easter island was cut, trees had long since ceased to be a meaningful economic resource on the island. Why not cut down the last one? After all, at that point it must have seemed to not really matter anymore.

It is not unthinkable that similar processes can reappear in our modern era where immediate communications makes events seem more gradual than ever, thus masking overall deteriorating effects (but also positive ones) even more efficiently.

In the hope that we do not fall into such traps however, perhaps it will be this focus on our own survival that will be the rallying call to understanding for societal change towards sustainability, moreso even than a focus on either the environment as such or the increasing of our material prosperity through innovation. And if we do come to such an understanding, we will have taken a major step towards finding the agreement that might just lead to embracing the path of cooperation and common rules.

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China’s look at a carbon tax – the connection to developed country border measures

China has been causing quite a stir lately in the environmental community through its proposed carbon tax. As is the case with China’s tightly controlled media landscape, this announcement came somewhat from the blue and caught many by surprise. Especially the announcement that this decision might be taken before the current five year plan is out (2011-2015).

What does this mean? Well, reactions have generally been very positive and this is seen by many as a serious attempt by China to curb their very sizable emissions profile. Of course, it is early days still and details will matter. However, an article in the Wall Street Journal caught my eye that commented on this turn of events. You can find it here. I choose to bring it up here because I think it points to a general sentiment that I have observed for some time now with regards to the rather widespread sentiment of wariness that is displayed towards new Chinese policy measures. Especially ones that have clear foreign policy implications.

In the article, the writer essentially makes the point that China is launching their proposed carbon tax as yet another policy tool designed to be a ‘just enough to shut people up’ mechanism. But one that ultimately does not actually solve (or even is intended to solve) the problem of climate change first and foremost.

This exact same line of argumentation can be seen on the currency exchange rate manipulation side of things where there is a sizable frustration with China’s willingness to balance only just enough to give hope, but not enough to actually cause a sizable change in the skewed valuation of the renminbi.

These arguments tread perilous and rather emotional waters. Consequently, as is the case with such “soft” sides, they tend to be sadly overlooked, despite their often high degree of importance in the actual functioning of forming personal opinion.

There is no doubt that it is not unknown for countries to indeed engage in strategic politicking of the type described above. Every country engages in this, indeed must engage in this, to a certain degree for at least reasons of polity, if not outright advantage. However, I am slightly disturbed by the China bashing undertone that runs through many of these arguments. China is very aware of the threat of climate change. Their coastal areas and water supplies will be badly hurt by the estimates of climate models with tens of millions of their citizens adversely affected by its consequences. China is neither ignorant of this threat from climate change nor uncaring for its population.

The more simple truth may be that China simply is in the tough spot of needing to successfully balance both high growth (in the material sense that it is currently defined) and strong mitigation and adaptation measures, with both of them being very important policy priorities. Simple point? Alas, it is an unfortunate contingency of the human condition to face surprising hardship whenever one needs to focus on two things at the same time.

So if they simply have double priorities, what then of these virulent accusations that essentially portray China as a sneaky political strategist at every turn? In my opinion, these are essentially fear-based arguments. I believe they have their roots in fears over competitiveness. It harkens back to the position that China is generally considered to be in, moreso than whatever the actual gripe may be at the moment. The truth, as so often, is in the context in these matters.

But my first reaction to the Chinese carbon tax was not political, but technical. On the legal technical side of things: How might this affect the measuring of so called ‘upstream carbon’?

Among trade lawyers looking at the permissibility of border climate measures, it is well known that one of the main bones of contention is trying to institute an instrument that fairly levels the carbon playing field for imported goods. To do this unilaterally is, to put it mildly, difficult. A large part of that difficulty comes from trying to accurately gauge the carbon “content” of foreign produced products so as to make sure they are not discriminated against due to the climate border measure. With this carbon tax, will we see the Chinese open the door to make such calculations more feasible by perhaps allowing the chinese domestic system to be used as a yardstick for fairness appraisals in developed country border carbon measures? If so, how exactly? The proposed carbon tax only deals with major energy emitters of course, but somehow these taxes must be calculated and levied with the system perhaps expanding into other areas over time. The procedure in doing this might be of great interest in creating a larger degree of certainty in what might constitute permissible border measures down the line. This is an interesting question, that still holds many uncertainties, but one that also will benefit over time from more detailed specifics.

As always, interesting times ahead in the field of trade & environment.

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Trade and Water – an area increasing steadily in importance

Water and the sustainable use of it is an area that has clear trade implications. Here I will present a quick overview of the main issues and how they relate to the current trade framework. 

Whenever you hear about the trade implications of water use you are likely to brush up against the term ‘virtual water trade’. Simply put, ‘virtual water’ is a name for the amount of water that is used to produce goods that then go on export.

In other words, one makes a calculation of the amount of water that was used to produce an exported product, with its water use thus “virtually” integrated, though of course not all of it necessarily defacto included in the finished product itself (think irrigation of crops, runoff etc). Personally I prefer the more straightforward “embedded water”, but virtual water trade is what stuck in the trade vocabulary.

The core rationale for bothering with this concept is to hopefully achieve some efficiencies in the world’s increasingly scarce fresh water sources. As a rule, water in many countries is grossly underpriced. With such low cost inefficiencies often follow, leading to perverse situations where water-deficient countries engage in water-demanding economic activity.

Ideally, from an economic perspective of water usage, the countries with the largest fresh water reserve ought to produce the most water-demanding products, while the water constrained countries can improve their water balance by importing these products. With rapidly increasing populations around the globe, trade can thus be a tool to perform this global water balancing act with a greater degree of efficiency.

In theory.

In practice, perverse incentives with regards to water abound. It is not uncommon for industries in water-deficient countries and regions to engage in highly wasteful economic activity through massive subsidization of available fresh water resource. Though this may work for a while, particularly for the beneficiaries of such arrangements, it quickly becomes unsustainable. It’s important to understand that there are currently no international agreements on sustainable water use. Thus national sovereignty is very much absolute in these issues, even when national decisions are detrimental to national water resources. There have been voices raised to include sustainable water use in the WTO Doha round (under agricultural negotiations). However, this is currently considered by the WTO to be better negotiated in environmental agreements before any attempts are made at integrating it into the global trade regime itself. As per previous post, this area is thus another facet of what we have already been discussing with regionalism and bilateralism routinely proggressing more quickly with this than what is possible from within the confines of multilateralism.

This is of course where it gets exciting, because in Rio this year we might hopefully see some real progress on these issues. Water is one of the 7 critical issues for this years much hyped sustainable development summit. If you haven’t done so already, I highly recommend taking a look at the Rio+20 website, and particularly their briefings on the critical issues.

For a technical and compact run-through for how to implement virtual water trade issues into national and global trade policy (i.e. water labels, water footprint permits etc) I recommend “The relation between international trade and freshwater scarcity” which can be found here. Also, the Rio+20 “critical issue” special water report can be found here.



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The difficulty of linkage – the current multilateral frustrations in the trade & climate nexus

Where are we now with regards to the interface of trade and climate change?

It is a rather frustrating time at the moment for moving multilateral governance forward. In the climate negotiations, what has been agreed on in the form of financing, technology
transfer and, most importantly, emission cuts, is far from perfect. Many propose for the
current situation to be an opportunity to do a bit of soul searching in trying to find the ways
forward. However, it does not seem certain that such soul searching will lead one to any easy or comfortable conclusions, though more of the same is clearly not working in the multilateral setting. With regards to climate, there seems to be more than just economic strategizing holding the handbrake. An intangible crisis might simply not exert an intrinsic pull on the human being, with the mind-set of ex post reactiveness still carrying the day. In trade, we seem to have reached some of the limits of the common ground that would allow countries to engage multilaterally in a resolute fashion.

If one thinks about the intersection of trade and climate specifically and as an own entity, these fundamental difficulties are further exacerbated by rather superficial integration of the two communities and poor communication of priorities. Put simply, there is no strong linkage occurring at the moment in trade and climate between international institutions. The bridge we have built is mostly in the form of exogenous analysis and commentary rather than serious and lasting multilateral institutional linkage. This is not all that surprising, perhaps not even inappropriate, considering the very slow movement on both sides of the trade and climate interface. Simply put, neither side is probably ready to conduct any meaningful linkage yet, which harkens back once again to the failing negotiations on both sides and the wider member tensions in both multilateral settings. Brring such direct multilateral progress, it might be that a ‘messier’ landscape is emerging on both sides of the trade & climate divide with a greater deal of regional and bilateral activity and generally a greater degree of dispersing of energy away from the multilateral institutions and towards national initiative. The multilateral institutions would have important but very different roles to play in such a landscape, and very interesting legal issues might arise concerning the applicability of progress made in other fora for the multilateral institutions. In other words, we would see whether a more heterogeneous new environment of international cooperation is ignored or somehow acknowledged, accepted, and perhaps even integrated into the current institutions of international governance. In a scenario of good fortune, perhaps taking a timeout from multilateralism and entering a more fluid state can over time be conducive to solving some of the differences of the international community in these two areas. In such a scenario, the multilateral institutions could be reawakened from their negotiation slumber land if such a landscape of change once again settles into something sufficiently homogenous to once again be codified multilaterally. This is of course highly speculative at this point, and many of the avenues for resolving power tensions may not be of a positive nature. Whatever the scenario, the non-negotiable loss that faces further multilateral action seems to be, at the very least, time.

The result of the current failings in the multilateral spheres of both trade and climate is
that we are left with very important issues that are essentially orphans lacking a clear
institutional home. If one adopts the lens of viewing the world as an international community, this makes us basically unable to deal with some of the most important issues facing us at the moment with the tools that we are most used to. If this is indeed the way we are headed, the factor of time cannot be underestimated. Whereas new forms of international cooperation is not inherently a good or bad thing, what is certain is that it will take time for such a new landscape to emerge, let alone to figure out what melding, if any, there will be with multilateral institutions. Time, unfortunately, is not on our side with regards to the climate change mitigation side of things, whereas it is probably less of an issue on the trade side. The loss of time that might ensue from a prolonged period of uncertainty could be of pivotal significance, even when accounting for national and regional action on both climate change and trade. Such a state of affairs could even provide an incentive for sliding the scale further towards national and regional self-sufficiency, in order to strengthen national and regional policy effect while minimizing the threat and impact of potential trade and climate policy conflicts with third parties.

For the time being, the dispute between Japan and Canada, DS 412, that is currently
making its way through the WTO DSM is helpful to follow. How this case is argued and the
eventual statements made by the Panels and the Appellate Body might improve our
understanding somewhat of where we currently stand with regards to interpreting current
WTO rules in a way that accounts for new realities. Unless parties to these and other
disputes bring highly aggressive lines of argumentation that essentially boil down to
ultimatums for the Appellate Body, we are likely to see a continued focus on easy solutions to hard questions while keeping the door as open as possible for national policy flexibility.

There have been several disputes which commenters have feared could threaten the integrity of the WTO DSM, and each time it has been shown that such fears were overblown. Hopefully, this is indication that there is a good deal of awareness about the balancing act that is likely to grow finer and finer as the pressure for interpretational evolution increases. If we do see a messier policy landscape steadily gaining in strength as multilateral non-progression lingers on, one could imagine the increased momentum of the non-multilateral sphere and its resulting initiatives risking to put both WTO centricity and WTO trade adjudicators in a tough spot before long.

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Two recent articles of interest

Before I make another more analytical post on the multilateral trade-climate negotiations link, I would like to interject with a tip on two articles that touch on what we have been discussing here.

The first is a brief note from New Scientist Magazine here:

This brief piece is interesting because it indicates a mainstream realization starting to take form on what is somewhat sloppily called “world environmental governance”. The writer puts great hopes indeed on Rio+20, as do all of us, but to think that a Bretton-Woods type world environmental governance structure would come out of it is perhaps a stretch. I am already seeing some signs of unwillingness to define Rio+20 too much beforehand, probably to maintain as much as possible of the aura of hope and purity that surrounds it.

The second is from the Harvard International Review here.

This is a longer piece that gives an overview of the trade & climate link as it stands right now according to the authors. The authors themselves are from the Brookings institution, which I have a lot of respect for. However, as tends to be the case with such promethean scopes, there is not much depth, though most of the major issues are touched upon. I will recommend it however, because big picture narratives such as these can be very helpful in making sense of trade & climate issues.

I am again heartened here that more and more authors are more fully acknowledging the importance of the political undertones that run through trade & climate issues. I just have to make three clarifications on points that I would have put a bit differently.

First, the Canada vs. Japan renewable energy case, ds 412, that is currently ongoing in the WTO is not exactly the “war on renewable energy” that you might think it is from reading the article. It is primarily a battle over what is called “local content requirements”, meaning that the Ontario feed-in-tariff has a requirement that for building the renewable energy capacity stated by law, a certain amount of locally produced goods and services must be used. This is hardly a war on renewable energy as such, and local content requirements can be trade distorting whatever they happen to deal with. This case is very helpful and interesting to follow, but let’s avoid getting too dramatic about its implications.

Second, much of the article deals with Environmental Goods and Services in the Doha negotiations. As I said in a few posts back, you could fully liberalize every one of the products on the EGS list and it would hardly make a dent in the problem that is climate change. I felt this was not made quite clear by the article. It is very helpful and positive that these products are in the Doha Round, but it is also important to keep the big picture clear on what these negotiations actually mean in the larger scheme of things.

Third, the discussion on barriers to trade in environmental goods is a bit antiquated with its clear focus on “market access for market access” type trade opening. Tariffs are of course very important in trade negotiations, but the “new breed” of trade negotiations looks to have its eyes just as much on Non-Tariff Barriers (NTB), especially for things like EGS. Things like IP and other avenues for creating a better business climate can be just as important as tariffs, which would have been good to discuss a bit more. I highly recommend a piece by professor Richard Baldwin who has written a policy insight on the move where “market access for market access” type trade negotiations is giving way to “market access for domestic reform” type negotiations. Highly interesting for anyone who wants to understand the new trade landscape and can be found here.

I will post the final part of my trade-climate link discussion series tomorrow. 

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The move to regionalism – trade and climate as symptoms of a greater shift

How will the trade and climate intersection be affected by a more regional world in the face of the continually stalling multilateralism that we are seeing? What are the positives and negatives of this new landscape?

That we are seeing significant regional action in national trade and investment policy
seems rather clear at this point and is a phenomenon that has increased its pace for some time already. Whether or not we would see the triggering of a trade ‘spurt’ of new bilateral and regional trade agreements in the case of a conclusively withered Doha Round seems less clear however. The Round is already at a serious stalemate and further certainty of this stalemate continuing is not likely to be a deciding force in providing extra momentum for regionally customized progress. Indeed, Doha generally does not seem to exert much force at all on regional and customized progress. What is clear, and problematic, at this point is that we currently lack an up-to-date and accurate theoretical model for analysing the current state of trade and any trajectory it might signify towards a new state of normality. With regards to the positives and negatives of such an uncertain landscape, a few overall points can probably still be made regarding the role of Doha and the potential impact of regionalism on trade and climate concerns. First, countries are well aware of who their main trading partners are, and any potential move towards a lessening focus on multilateralism is not likely to change overall trade flows in any drastic manner in the near future. However, with regards to increase in trade, it is beyond question that regional progress has added to absolute trade figures and liberalization ‘booming’ despite the intractable multilateral situation.

Exclusion issues, transparency, and the resurgence of power politics in trade
negotiations are often put forward as the potential negatives that may come out of this new
landscape. These concerns are probably not wholly unfounded as negotiating costs for trade agreements are rather high and WTO accession especially for smaller and poorer countries provides an exceedingly good deal of value in relation to time invested in negotiations. In a world of greater regional customization, repeatedly bearing these costs toward an entire diaspora of new trade hubs might have the effect of unevening the playing field for certain countries, as some would simply lack the economic and political force to ensure the degree of fairness and transparency that is available in the WTO. Of course, this is not saying that the current WTO framework is perfectly fair to all nations, and neither are the UNFCCC negotiations for that matter. Generally speaking though, there does seem to be some legitimately founded concern that a move towards non-multilateralism would negatively impact the voices of small and, particularly, LDC nations. Quickly zooming out a bit from such worries, it would seem crucial however not to fall into an ‘either-or’ mind-set when discussing these issues. It is perfectly natural that a country is engaging in regionalism to some degree, while also keeping and taking seriously their WTO commitments. The more interesting point may be that the regionalism we now see no longer concerns ‘market access for market access’ type regionalism but rather one of ‘foreign factories for domestic reform’. In other words, the ‘prize’ of the new regionalism may no longer just be market access, but domestic political reforms that facilitate business and investment.

Undoubtedly, such negotiations have difficulties of their own, and jumping to the
conclusion that this new landscape, were it to be accurate, is an ‘easy’ way forward in the face of stalled multilateralism is decidedly premature. Despite such caution, it is striking to note that especially developing countries seem to be much more willing to engage in dealing with issues such as NTB outside the WTO than inside. At UNCTAD developing countries are fully engaged in, for example, questions of labour and competition law and how to deal with their problems in these areas, whereas within the WTO framework such discussions are less than likely to be fruitful. Obviously, the ‘hard’ consequences that can result in the WTO are a major reason for this, but the same seems to hold true for investment treaties and other types of customized agreements in which developing countries seem much more willing to engage in reform. This once again comes down to WTO-centricity and the potential loosening of it. It is important to remember that such loosening is not a moral issue to be judged good or bad but probably more simply has to do with the logical mechanics of negotiation, where less players typically mean less wills to align and thus having an easier time reaching an agreement. The days when a handful of very powerful countries with relatively homogenous interests effectively set the WTO agenda are clearly over. The trading system today is characterized by many important players and very diverse interests, making the collective action problem harder and more intractable.

Why is this important for the intersection of trade and climate change? Among other
things, these developments may affect which fora for discussions on the link between trade
and environment that is ultimately chosen. As mentioned above, specific text concerning
legalization of climate change related trade measures is very unlikely to originate from the
UNFCCC negotiations, although a clear signal can be sent from such negotiations concerning what needs to be done to remove trade as a barrier to climate change mitigation. The orthodox view seems to be that WTO really is the only place that could effectively receive and translate such signals into effectively removing trade barriers as it is the only place with enough credibility, institutional leverage and participation to effectively carry through such proceedings. Though this may be persuasive from an institutional standpoint, one should perhaps not wholly rule out the possibility of such progress being made elsewhere, particularly if we do see an increase in the move towards ‘local customization’ of both trade and environment solutions. It is interesting to recall that if one talks to ‘old GATT hands’, not infrequently these veterans are upset that the WTO handles environmental issues at all, seeing this as a failure of the environmental movement and an usurpation away from the original purpose of the international trading system. Such criticism may be indicative that negotiating the legal permissibility of trade-related climate change measures in other fora than the WTO, though at the moment unlikely, is not quite so dramatic a proposition as one might instinctively think it to be. Indeed, on the trade side of things, environmental provisions contained in FTAs and RTAs are often more progressive than what is feasible within the WTO. If the climate negotiations stall continuously, it would not be surprising to perhaps see a similar trend of exogenous deepening there.

Seeing more regional climate agreements with deeper trade provisions included is an
intriguing yet still highly uncertain avenue for progress. The possibility for stronger and more customized elements of capacity building that could be included in such agreements
(compared to multilateral negotiations) is often lifted out as a positive of this approach. Yet, if any such agreements were to be deep and serious, it would surely have to deal with the issue of competitiveness and carbon leakage in some way. If a multitude of such regional climate agreements started taking form due to perpetually intractable UNFCCC negotiations, and thus came to include some form of competitiveness provisions against third countries, such agreements could put tremendous pressure on the WTO and even act as a rupturing force within the organization. Assuming that such regional agreements would be likely to divide along the lines already visible in the UNFCCC negotiations, a ‘business-as-usual’ WTO could then be put in the severely unenviable position of trying to tidy up the unresolved issues of various UNFCCC negotiation positions as subsequently embodied in regional agreements.

In the next post, I will tie up my big-picture exposé on the link between the trade and climate negotiations.

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