Jennifer Hillman Breaks Down the WTO’s World Trade Report on Climate and Trade

12/14/2022 | Silverado Policy Accelerator

Photo Credit: iStock, Grafissimo

In November, the World Trade Organization published its annual World Trade Report, an in-depth analysis of a pressing issue in international trade. This year, the report focused on the intersection between trade and environmental policy, examining the ways that the WTO can leverage trade tools to advance and support global climate objectives. Released during the first week of the UNFCCC Climate COP in Sharm El Sheikh, the report marked a major recognition by the international climate community that trade policy presents a powerful set of tools to combat climate change.

To make sense of the report, Silverado sat down with one of the most respected names in international trade: Jennifer Hillman, a professor of practice at the Georgetown University Law Center and a member of Silverado’s Strategic Council. Prior to joining Georgetown, Hillman served as a member of the World Trade Organization’s (WTO) Appellate Body, the standing body of seven experts charged with settling appeals and disputes brought by WTO Members. Before that, she served for nine years as a commissioner at the United States International Trade Commission (USITC) and general counsel at the Office of the United States Trade Representative (USTR), where she had previously been an ambassador and chief textiles negotiator.

To Hillman, the new World Trade Report showed that the WTO is getting serious about using trade to combat climate change while also reckoning with the environmental downsides of global trade.

“The WTO recognizes that there is an absolute, inviolate link between trade and climate change, on both the good and the bad side,” she said. “If we marry together trade tools and climate change tools, we can go much farther and much faster in fighting climate change.”

The following has been edited for clarity and concision.

Silverado Policy Accelerator: As someone who has watched the WTO closely from both the inside and the outside, what stood out to you about the most recent World Trade Report?

Jennifer Hillman: It’s important to understand the context of the report. The WTO issues a world report each year, and they always focus on a specific issue. It allows the WTO to highlight what is perceived to be the most important, cutting-edge issue of the day. It's intended to be a beacon of hope — pointing to a place in which there are opportunities to use the trading system to do good in the world. But at the same time, it's a guardrail and warning system to signal that there could be serious problems [in that area].

To me, that is exactly what this report is trying to do on trade and climate change. It's saying that the WTO recognizes that there is an absolute, inviolate link between trade and climate change, on both the good and the bad side. They're recognizing that trade in and of itself results in  more greenhouse gasses than if we all bought everything locally, just because it involves longer transport and more greenhouse gas emissions to package and move that bottle of Fiji water or any other goods from one place to another. There's also a lot of greenhouse gas emissions embedded in all of our traded goods, so the trade system is giving an opportunity to those willing  to purchase goods that may be cheaper because they were made dirtier in another country. The WTO is clearly recognizing that the trading system has got to deal with those downsides.

On the other hand, the vast majority of the report is saying, “Here are the amazing opportunities — if we can do it right.” If we marry together trade tools and climate change tools, we can go much farther and much faster in fighting climate change.

Silverado: One of the opportunities that the report mentions is reopening negotiations on an environmental goods agreement. What did you make of the report’s approach to that possibility?

Hillman: It’s an important possibility. It won't solve all of our problems, but I think it is very significant. This is a negotiation that began in 2014 to try to eliminate all of the tariffs and duties on a whole series of environmental goods, covering wind turbines, solar panels, and a whole lot more. If countries could eliminate tariffs on all of those goods, it would allow for much freer and faster trade in those green goods, which would help everyone fight climate change.

The problem in the past negotiations was that countries could never come up with an agreement as to which goods belonged on the list and which did not. For instance, does a bicycle contribute to fighting climate change or not? There ended up being disputes over what products should be on the list  and those disputes led to a complete breakdown in the talks.

To me, the report is making it clear that the negotiators need to get back to the bargaining table, and that countries need to reach an agreement on as broad a set of products and services that would help in the fight against climate change as possible. The WTO did some serious economic modeling to show that if countries eliminated the tariff and the non-tariff barriers on just a small subset of energy-related environmental goods and services, that alone could both increase exports and reduce emissions by 0.6 percent. So just that one measure alone would lead to a significant reduction in greenhouse gas emissions.

Silverado: Is there reason to believe that negotiators could overcome the barriers that caused negotiations to falter before?

Hillman: To some degree, yes. First, it’s the urgency of the problem. Secondly, it is the willingness of countries to move ahead without everyone in the WTO. In the past, the notion has been that all 164 members of the WTO need to be in on every  agreement, which led to a lot of problems when certain countries did not want to go along.

To me, the environmental goods and services agreement is an area that is ripe for a coalition of those who are interested to move ahead. If there are other countries that do not join, then you think about whether or not you're going to allow free riders — everybody else is going to agree to eliminate their tariffs and their non-tariff barriers, and those that are not part of the agreement get the benefit of it anyway— or whether you're going to say that only those that are inside the club get the benefit of the tariff reductions.

Either way, it's important to move ahead with everyone that is willing to join. Part of why it's important is because the highest tariffs on a lot of these goods are in developing and low-income countries, and they are the ones who need to be importing renewable energy products.. So the benefit of an agreement would accrue to those who agree to bring down higher tariffs on renewable energy products.

Silverado: Were there issues that weren’t included in this year’s report that you hope to see the WTO address in the next iteration of the report?

Hillman: The biggest issue that was left out was a fulsome discussion of the circular economy. A circular economy is one that focuses on goods that can be shared, leased, reused, repaired, and recycled from existing materials so that they remain in circulation for very long periods of time and fewer new materials need to be mined or extracted.  Because I believe circular economy concepts are both the future and a key part of fighting climate change, I think the report might have included a discussion of it and of moving  beyond the idea of recycling materials. The notion of a circular economy is that you don't even produce goods in the first place unless there is the prospect that they can be maintained within a set circle of production.

To the extent that this report touched on those ideas, it was with respect to plastics, which was noted because the Informal Dialogue on Plastics Pollution and Environmentally Sustainable Plastics Trade is one of three new climate-related initiatives at the WTO. So this question of creating a circular economy for plastics might end up coming under this particular dialogue that's already been started.

Silverado: As you mentioned, countries are moving forward with climate-focused trade policies like carbon border adjustment mechanisms (CBAMs) and carbon clubs outside of the WTO framework. Do you think those policies could ultimately work in concert with the WTO’s efforts, or could they create conflicts that might impede WTO movement on those issues?

Hillman: The honest answer is both. They could cause huge friction. We are already seeing this with the European Union, which is moving the farthest and fastest with respect to establishing a carbon border adjustment mechanism. Europe is going to start imposing tariffs on imports coming into the European Union on a set number of products that have a high amount of greenhouse gasses embedded in them — iron, steel, aluminum, fertilizer, cement and electricity.

The question is, can Europe just do that consistently with its WTO obligations? The general rule under the WTO is that you cannot charge a tariff above what is in your tariff schedule. There is a big exception, however. If you are charging this border measure and it is consistent with what you are charging at home for your own producers, there is an exception from the rules. Europe can put on this carbon border adjustment charge as long as European producers are also paying the equivalent of that in some form of a tax. So I think Europe is in good shape, because the European Union has an emissions trading system that charges its domestic producers for the amount of greenhouse gasses that they are emitting when they are producing the same iron, steel, aluminum and other products.

So can it be done consistently with the WTO rules? My answer is absolutely, yes. You do have to be careful not to discriminate in favor of your own domestic producers, but it can be done.

The issue then is whether it contributes overall. There, I think the issue will be whether other countries join the European Union or whether other countries fight it. My own hope is that more countries will join, because I think we will all be better off if there are the incentives that a carbon border adjustment mechanism and a pricing mechanism on carbon creates for every country to become more efficient in their own production. It also creates an incentive for countries not to try to rig the system by keeping their dirtiest goods at home and exporting their cleanest goods into a market like Europe that has a CBAM.

What you're trying to prevent is the leakage of greenhouse gas emissions, which is occurring all the time. When Europe puts in place an Emissions Trading System, what happens is either the production of a product like steel moves outside of the European Union in order to get around the ETS system, or alternatively, Europe starts importing more steel from countries that don't have carbon controls because it's cheaper. To avoid the gaming of the system and to get the entire steel industry across the whole world on board with the idea of creating net-zero steel, I think you need to have these kinds of border mechanisms or carbon clubs and these kinds of programs. So I think it's a huge opportunity and one that the WTO rules and the WTO system need to figure out how to embrace.

Silverado: The WTO report was released at the UNFCCC Climate COP, which is arguably the most prominent forum for international discussions about climate change and the strategies for combating it. Do you think the idea that trade policy is a powerful tool for combating climate change is gaining traction outside of trade-focused circles?

Hillman: I absolutely do, and in part, it’s reports like this one that begin to say, “How can trade tools actually be used to fight climate change?” The report is saying, “Think about subsidies,” and then trying to figure out a way to prevent subsidies on fossil fuels and other things that are bad, while also  figuring out how to use subsidies for good, for instance to promote and support developing countries’ ability to limit their carbon emissions. Importantly, this report also focuses on how the WTO could use subsidies to help the developing world on the adaptation side.

So the answer is absolutely yes, and I think the report makes it very clear that one of the key things here is going to be technology transfer. How do we create a fast lane for decarbonization technology and clean energy technology to be spread throughout the world? How do we use trade tools — i.e. the elimination of tariffs and non-tariff barriers and even intellectual property rights and other tools — to create a fast lane to move technology to where it needs to go? I do think there is a recognition around the world that the only way we're going to address this problem is by using all of these trade tools — subsidies, reducing barriers, technology transfer rules and so on. That’s the only way we're going to get there fast enough.

I will also say that I think the report does a very good job of recognizing that a lot of these tools are initially focused on the mitigation side — how do you stop emitting as much? And yet both the report and COP27 also underscored the point that there needs to be a focus on the adaptation side and the need to help those countries that will suffer the most from the effects of climate change. There needs to be an understanding of what all of these things are doing for the developing world. We have to look at climate change in part through a development and developing country lens. I think the report does a really good job of showing why it's valuable for the developing world to bring the trade and climate worlds together.


Trade and Industrial Security