EU puts green trade squeeze on developing world

Welcome to Trade Secrets. The big COP climate change conference starts in Dubai on Thursday. Along with it comes the familiar (and well-justified) concern that trade and aid, which ought to be helping in the drive to reduce emissions, aren’t well co-ordinated with climate policy. Today’s newsletter assesses that and particularly the way the EU’s environmental trade tools may inadvertently be hurting low-income countries. Charted waters focuses on the limited impact of the Israel-Hamas conflict, as seen in the currency markets.

Brussels sprouts more red tape for farmers

The two tribes of trade and climate policymakers have never connected properly. They have different vocabularies, principles, treaties and institutions. Even with the future of the planet at stake, this isn’t changing fast enough.

Optimists say this COP is the first to feature a “trade day” of dedicated discussions and a “trade house pavilion” where wonks can hang out and talk about local content requirements for electric vehicle production and other such riveting matters. But proper environmental negotiations barely exist at the World Trade Organization or anywhere else, so it’s hard to see how these discussions will feed into a binding multilateral or plurilateral process.

Enter, with a reasonably convincing air of regret at being forced down this unilateral (sorry, “autonomous”) route, the EU. Brussels has a new array of green trade measures, principally the carbon border adjustment mechanism (CBAM) and a deforestation initiative banning products from recently cleared land.

Those instruments are causing serious alarm among low-income countries. Particular cases such as the likely impact of CBAM on Mozambique, a least-developed country (LDC) with heavy carbon emissions from its aluminium smelters, are now well known, though that’s not to say the EU actually has a plan for softening the blow. It has decided not to exempt LDCs from CBAM using the WTO’s so-called enabling clause, and though it talks about aid helping countries adjust, no one’s ever really managed to make development assistance cohere with trade. Certainly, the EU aid operation isn’t the nimblest.

In any case, a far broader problem is that even countries that objectively meet the criteria still have to compete with the European Commission’s formidable red tape manufacturing industry. Jodie Keane of the UK Overseas Development Institute think-tank (see a good ODI seminar on the issue here) calls this part of the “green squeeze”.

The deforestation initiative, for example, requires geolocation satellite imagery to prove products aren’t grown or raised on deforested land, and the produce to be tracked through the supply chain. A group of 17 low and middle-income countries including Brazil, Indonesia, Nigeria and Mexico complained to the EU in September (see the following clip) that compliance was too complicated and their own measurement and certification schemes were ignored.

As I’ve written before, detailed compliance is one thing if you’re a highly mechanised agribusiness giant; it’s quite another if you’re one of the millions of Indonesian palm-oil smallholder growers. As for CBAM, the EU demands emissions be assessed by one of two EU-approved methods: even the US, let alone less advanced economies, has different ways of measuring them.

It’s probably not helped that the commission’s globally focused trade directorate hasn’t been in the lead on creating either instrument. CBAM is led by the tax directorate, and deforestation by the environment directorate, both of which are less used to designing systems for non-EU countries to use.

The next couple of years will be crucial. Companies importing into the EU are already having to start reporting carbon emissions ahead of CBAM duties first being levied in 2026. The deforestation ban. which has big potential fines for transgressors, starts coming in at the end of 2024. There will be fierce agitation from producers abroad to tweak the schemes and potentially WTO cases that might loosen the restrictions. The EU’s not going to give way on the principle here, but there’s a lot to be gained from lobbying it hard on the process.

Food miles: a bad idea returns

Rest assured, though: in the absence of precision-targeted data-informed green trade policy, there’s always the knee jerk version instead. It’s with sadness I observe the comeback of a persistent, bad idea in development economics, “food miles”. Bans on airfreighted food in particular are spreading, as ESG virtue-signalling claims more victims.

Assuming the carbon footprint of food is closely proportional to the literal distance from farm to fork, or even whether it’s carried by air, is a bad idea that clobbers low-income countries.

What you eat (meat bad, grains and veg good) and how it’s raised or grown (roses in the Kenyan sun rather than in heated Dutch greenhouses) can matter more than where it’s from or how it got there. (See a video I did on this a few years ago). Average versus marginal calculations can really matter: the famous east African flower and fruit exports traditionally fill up otherwise fairly empty air cargo compartments returning to Europe anyway, sub-Saharan Africa being a net importer of manufactures.

But still, an airfreight ban is an easy idea for consumers to grasp. Along with equally clumsy ideas such as a blanket ban on palm oil, no matter how it’s harvested, it looks good and sounds decisive. Now, it’s true that some recent research across the whole food system suggests the cost of transporting it was a lot more carbon-intensive than previously thought. But that’s an argument for doing precise calculations product by product, not banning airlifted food because it sounds like you’re getting tough on climate change.

Charted waters

Further evidence that, with the Hamas attacks and Israeli response in Gaza having as yet failed to trigger wider instability in the region, the local and global impact on growth and trade is likely to be muted. The Israeli shekel fell sharply after the Hamas assault on October 7, causing the central bank to intervene to support the exchange rate, but has now strengthened above the pre-attack level.

Trade links

Research from the Peterson Institute think-tank suggests that foreign businesses are increasing the long-awaited process of selling their investments in China and taking the money out of the country.

More well-judged transatlantic stalling for time as the EU and US, who are already spinning out talks on their steel dispute for another couple of years, are planning to delay December’s planned bilateral Trade and Technology Council into 2024. Anything to avoid public dust-ups with a US election coming up.

China resumed exports, albeit at a low level, of gallium and germanium, two metals whose sales abroad it banned in August. The price of the commodities barely moved despite the export bans, suggesting China’s ability to exert leverage through its control of mineral supply is limited.

Speaking of minerals, the whole scramble-for-lithium (and indeed other critical minerals) thing could diminish before long as the Swedish start-up Northvolt makes a breakthrough on developing a sodium ion battery. Bad news for China and Chile, good news for most other countries.

Speaking of minerals again, an interesting big piece from the FT on how the extractives multinational Anglo American is hoping to conquer the world fertiliser market with polyhalite, a substance it mines from deep under Yorkshire in northern England.

Trade Secrets is edited by Jonathan Moules

Source: Economy - ft.com