The outgoing European Commission has upscaled the use of unilateral trade instruments to achieve security, competitiveness and sustainability objectives. In times of environmental crises and rising geopolitical tensions, the incoming European Commission should implement the ambition to embed European trade within planetary boundaries and revive international cooperation around environmental trade goals.
On 13 September 2020 European Commission Executive Vice-President Valdis Dombrovskis took over the Trade portfolio and was asked in his mission letter to upscale the EU’s trade toolbox. Since then, the European Commission has introduced numerous so called ‘autonomous’ trade instruments contrasting with the EU’s previous preference for bilateral trade agreements or multilateral negotiations at the World Trade Organisation (WTO).
At the same time, several cooperation targets, for example with Mercosur, Australia and China have remained unmet, and medium-term goals such as WTO reform and the UN Sustainable Development Goals still seem distant. The following analysis takes stock on how the EU’s trade policy has changed between 2019 and 2024, where it has continued as before and what small steps have been taken from the international standstill at the WTO.
The rise of unilateral trade instruments – and environmental leadership?
The outgoing European Commission centred its trade policy during the Covid-19 pandemic on the concept ‘open strategic autonomy’, defined as the ‘EU’s ability to make its own choices and shape the world around it through leadership and engagement’. Subsequently, the European Commission proposed more than seven ‘autonomous’ trade instruments, for instance on anti-coercion, procurement, foreign subsidies or direct investments.
This unilateralisation of EU trade policy can be explained externally by rising trade interventions of other actors such as Chinese state subsidies and a more adverse geopolitical context through US-China trade tensions and Russia’s invasion in Ukraine. All together, domestic sustainability concerns led for the first time to the incorporation of sustainability as a major objective in the EU’s 2021 trade policy review and related instruments on deforestation, due diligence and carbon leakage.
All these instruments have intended so called ‘extraterritorial’ effects, as for example requirements on imported products parallel to EU products such as maximum levels for pesticide residues or a carbon price for carbon intensive imports. Whereas other countries expressed trade concerns about protectionism, regulatory flexibility, and the potential disparate impact on low-income economies, the European Commission justified these new trade instruments with common objectives of international treaties, the reciprocity between the EU and third countries, and possibilities of engagement for third countries.
The continuity of the EU’s bilateral trade agenda and sustainable development
The rise of unilateral trade instruments does not mean that the EU has abandoned its bilateral trade agenda – quite the opposite. The EU has launched a Trade and Technology Council with the USA, and signed trade agreements with Kenya, Chile, New Zealand and the United Kingdom since 2019. Sustainable development is further mainstreamed in these recent EU trade agreements. The agreement with Chile includes a chapter on gender equality. The agreement with New Zealand agreement adds chapters on indigenous peoples’ rights, animal welfare and sustainable food systems. It further broadens the general dispute settlement mechanism of the agreement to the chapter on sustainable development. This means that serious breaches of the core conventions of the International Labour Organisation or the Paris Agreement on Climate Change could result in trade sanctions. Negotiations with Mercosur and Australia even failed around an environmental protocol the European Commission wanted to include and Australian agricultural exports to the EU.
The EU has also expanded the conduct of additional instruments. Since 2019 the EU has conducted seven ex-post evaluations of its trade agreements. It remains unclear though how the insights of these assessments are taken into account in the design of trade agreements. Eventually, the EU has also concluded more than ten partnerships on raw materials and digital trade. These sectoral agreements are faster to negotiate in comparison to full-fledged trade agreements, but might negatively affect civil society scrutiny and long-term environmental objectives.
Still a standstill at the World Trade Organisation – or small steps forward?
The EU has maintained its support for the WTO as a rules-based multilateral trading system based on non-discrimination and predictability. Whereas its strategic plan recognized the need to reform the WTO, the EU has stressed the importance of the WTO’s norm-setting function and dispute settlement mechanism. The WTO Appellate Body has remained dysfunctional though due to the US blockade of new judges.
In this stalemate, the EU has supported various WTO initiatives such as the Multi-Party Interim Appeal Arbitration Arrangement (MPIA) as a temporary solution to the outstanding appointment of judges. The EU also joined the Fossil Fuel Subsidies Reform initiative to search for pathways to reduce fossil fuel subsidies. At the Trade and Environmental Sustainability Structured Discussions, the EU revived the attempt to liberalize trade in environmental goods and services, after the plurilateral negotiations on the Environmental Goods Agreement collapsed in 2016.
In addition, the EU acceded to the WTO’s Fisheries Subsidies Agreement - lauded as the first WTO agreement to primarily pursue a sustainability objective, albeit further rules to address overcapacity and overfishing are yet to be reached. Finally, in a dispute against Malaysia in April 2024, the WTO Panel decision recognized the EU’s right to adopt measures affecting greenhouse gas emissions occurring extraterritorially to address climate change.
Preparing for 2030 in turbulent times – charting priorities for the EU’s next agenda?
The use of unilateral measures has enabled the EU to act on critical economic and environmental problems but has raised concerns on protectionism and social justice and intensified the trend of unilateralisation in trade policies. Whereas the EU’s bilateral agreements have increasingly mainstreamed sustainable development, environmental obligations remain often unspecific, reactive and do not reach the ambitions set out in the European Green Deal.
The increasing nationalist tendencies in trade policy signify the importance of a functioning multilateral system. At the same time, the WTO needs to be reformed to be better aligned with the UN Sustainable Development Goals. The next European Commission should focus on addressing these core issues, while building on the achievements of the outgoing Commission.
Enhancing cooperation on the socio-economic impacts of extraterritorial requirements
Reducing the EU’s environmental footprint in trade requires balancing the need for ambitious standards and ensuring a just transition along the principle on common but differentiated responsibilities and respective capabilities. The EU’s trade policies need to include mechanisms to better assess and mitigate the economic and social impacts of environmental trade policies, which disproportionately affect the most vulnerable societies and regions. One option to do this would be to allocate the revenues from the Carbon Border Adjustment Mechanism (CBAM) towards climate change mitigation and adaptation projects in vulnerable countries. This would strengthen the environmental justification of the CBAM as a climate measure under the WTO, whilst addressing the socio-economic implications of such policies.
The EU should also strengthen pathways for regulatory cooperation, through technical and financial assistance, capacity building, and technology transfer to enable low income trading partners to raise their production standards, while ensuring regulatory space to pursue their sustainable development priorities and the fit to local conditions. This would increase the legitimacy of the EU’s trade policies, foster international support and address allegations of green colonialism.
Increasing bilateral ambition: setting the path towards sustainable trade agreements
The EU should seek to increase the environmental ambitions of its trade agreements together with its trading partners. Whereas the EU-Chile and the EU-New Zealand trade agreements marked an improvement towards previous agreements, the linkage between trade agreements and multilateral environmental agreements (MEAs) could be strengthened further. For example, providing guidelines on what actions beyond leaving the agreement would ‘materially defeat the object and purpose of the Paris Agreement’ could further enhance its utility.
Many other environmental provisions merely reiterate well-established environmental practices of the EU and its trading partners, mostly preserving the status quo. To alleviate this, the EU should link the results of environmental impact assessments (EIA)s with the design of its trade agreements to reduce the environmental impact of bilateral trade flows. Currently, EIAs are often considered as a box ticking exercise, as it remains unclear how the insights generated by EIAs are used in decision-making. Instead, sustainability assessments could serve as conditions for establishing preferential tariffs and quotas. Products with a high environmental risk should be subject to sustainability standards to benefit from preferential tariff rates.
One step further would be to redesign EU trade agreements towards sustainable trade agreements, prioritising trade of goods and services that have a net positive environmental and social impact, whilst deprioritising environmentally harmful commodities. A first example of such an approach might be the Agreement on Climate Change, Trade and Sustainability which Costa Rica, Fiji, Iceland, New Zealand and Switzerland are currently negotiating.
Embedding the trading system within planetary boundaries – Towards a WTO reform
The EU should continue to support the WTO in carrying out its functions as a norm-setting body and in enforcing binding international trade rules. It should strategically use existing WTO mechanisms to foster regulatory cooperation and explore short-term solutions such as the MPIA to ensure the functioning of the WTO enforcement mechanism. At the same time, the EU should strive to reform the WTO with the goal of embedding the multilateral trading system within planetary boundaries. To do so, the EU should work towards ambitious standards in regulating fossil fuel subsidies and support stringent exemptions under the Fisheries Subsidies Agreement, while ensuring a just transition for vulnerable countries.
The recent rise of trade measures on environmental grounds will affect both the achievement of trade and environmental objectives. The deputy director of the WTO, Jean-Marie Paugam even warned in June 2024 that ‘a fragmented system of uncoordinated environment-related trade policies will only hinder decarbonisation efforts’. The question is therefore whether WTO members can agree on effective trade measures on environmental goods and on environmental harmful goods as potentially powerful leverage in the current climate and biodiversity crises.
The views and opinions in this article do not necessarily reflect those of the Heinrich-Böll-Stiftung European Union.
