Ngozi Okonjo-Iweala made history in March 2021, when she became the first woman and first African to serve as the World Trade Organization’s director general. Just as significantly, she pledged to push the WTO to support environmental initiatives that activists had long criticized the body for undermining.
But Okonjo-Iweala has faced head winds in her efforts to align climate and trade. The WTO is trying to keep industrial policy from eroding the global trade regime — even if that undermines the political bargains that could help decarbonization.
Okonjo-Iweala wants governments to fight climate change by making carbon-based economies more expensive. Although trade economists and lawyers like this approach, the U.S. government has opted for a more politically attractive route. The United States is using industrial policy to build up U.S. manufacturing, along with subsidies to try to create a greener economy. Major trading partners in Europe are now facing pressure to follow suit.
Two recent rulings reveal the added challenge to the WTO, whose rules were largely designed to forbid industrial policy that favors domestic producers.
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The WTO wants Indonesia to stop blocking nickel exports
In 2019, the European Union brought a dispute with Indonesia to the WTO. The E.U. disagreed with Indonesia’s policy of banning the export of raw nickel ore, and instead requiring the commodity to be processed domestically. Nickel is a key component in electric vehicles and batteries, and Indonesia is the world’s leading nickel producer, which should position it well for the green economic transition. Indonesia wants higher value-added activities like processing to create jobs at home, rather than offshore. However, WTO rules require members to refrain from restraining exports and imports in all but the most exceptional circumstances.
Indonesia argued that it did indeed have exceptional circumstances, since its restrictions were essential to economic development and maintaining green supply chains in accordance with its climate change mitigation plans. However, in November the WTO found in favor of the European complaint, on the basis that WTO rules don’t allow countries to protect or promote a domestic industry or create an industry that doesn’t yet exist. WTO panelists didn’t buy Indonesia’s argument that it was trying to prevent critical shortages.
And the WTO pushed back on Trump’s national security tariffs
The WTO’s second report, released Dec. 9, ruled against the steel and aluminum tariffs imposed in 2018 by the Trump administration. China and other countries had brought a complaint, and the Biden administration had mostly maintained these tariffs. The Biden administration defended its predecessor’s policy by claiming that nothing in WTO rules is meant to prevent a member country “from taking any action which it considers necessary for the protection of its essential security interests … in time of war or other emergency in international relations.”
The Trump administration imposed the tariffs in response to the “China Shock” — shorthand for the relatively rapid displacement of domestic production in the United States by imports following China’s 2001 accession to the WTO. In the case of steel, the Chinese government subsidized production, leading to a global glut that cut into the profitability of U.S. producers, who are key suppliers to the U.S. military and government more broadly. As longtime Monkey Cage readers might recall, I predicted in 2019 that the WTO might rule against the Trump tariffs, when panelists showed a willingness to second-guess Russia’s national security-motivated restrictions on trade with Ukraine — long before the current war escalation in 2022.
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In the wake of the ruling, U.S. trade officials pointed out that the United States has maintained for over 70 years that a country can invoke the security exception when “it considers necessary,” and that the WTO has no business second-guessing that judgment. The WTO’s panelists could have avoided challenging the security exception, since the United States took action under Section 232, a legal statute that links traditional defense concerns to the health of the broader civilian economy. But instead, the WTO panelists ruled against the U.S. position, finding that U.S. law offered no protection from the requirement to refrain from trade discrimination.
Could these rulings dampen climate mitigation efforts?
In both cases, the WTO interpreted trade rules in ways that minimize the ability of governments to claim exceptions to global trading rules. WTO panelists suggested that countries could only invoke the security exception under emergency circumstances, such as war. Under this standard, protecting domestic industries in response to the “China shock” doesn’t count. Similarly, WTO panelists suggested that Indonesia could only block exports in acute crises like mass starvation — and not in response to the needs of economic development.
Both rulings seem to suggest the WTO won’t leave much room for countries to manage economic transitions for the benefit of their own workers and producers. However, the practical implications of these rulings may be limited. The WTO’s dispute settlement process has been hobbled for years, making it harder to enforce rulings. And, in fact, countries had already started retaliating against the Trump-era steel and aluminum tariffs.
Still, other cases could build on these rulings in awkward ways. A new E.U. complaint is challenging the green subsidies in Biden’s Inflation Reduction Act, for instance, while China may soon challenge the U.S.-E.U. “carbon club” for steel and aluminum. While these disputes are more straightforwardly climate-related than either the Indonesian or U.S. cases, they present similar conflicts with the trade regime — namely, trade lawyers impose a high bar for justifying distortions in global commercial flows.
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Countries like the United States are trying to fight the climate crisis by offering industries green incentives, rather than simply taxing industrial emissions. That’s likely to require some assurance that the WTO will permit exceptions for what countries deem to be nationally appropriate decarbonization pathways.
If WTO trade panelists don’t offer more deference to national policymakers than these two recent cases suggest, we are likely to see greater calls by environmental groups for a substantial paring back of trade rules for the duration of the climate emergency.
Todd N. Tucker (@toddntucker) is the director of industrial policy and trade at the Roosevelt Institute.