Reforming the Global Trading System

Guest

Dan Esty

Director, Yale Center for Environmental Law and Policy

Transcript

Dan Esty: There is a very fundamental rethinking going on now about what the trade system needs to look like, what it needs to focus on, how it needs to balance the push toward economic progress with attention to other important policy goals, and I think the inattention to those other policy goals is one of the reasons the trade system has come under such criticism.

Jason Bordoff: Around the world, new policies like the Inflation Reduction Act, or the European Union’s Carbon Border Adjustment Mechanism aim to accelerate the pace of decarbonization, but these same policies have also fueled trade tensions and raised concerns about protectionism. A successful clean energy transition means much more trade in clean energy technologies and products according to the International Energy Agency. The rules-based global trading system underpins much of that trade, but increasingly, the World Trade Organization has faced challenges and calls for reform, particularly around issues of sustainability and climate change.

So what reforms are needed to align the global trade framework with climate goals and policies around the world? How can the WTO support both economic progress and sustainable development? And what does a completely reimagined global trading system look like that is aligned with accelerated decarbonization?

This is Columbia Energy Exchange, the weekly podcast from The Center on Global Energy Policy at Columbia University. I’m Jason Bordoff.

Today on the show, Dan Esty. Dan is the Hillhouse Professor at Yale University and Director of the Yale Center for Environmental Law and Policy. He just finished public service leave working at the World Trade Organization and is co-leading the Remaking Global Trade for a Sustainable Future project. Dan has written numerous books on environmental responsibility and economic progress, including Green to Gold and Greening the GATT. He previously served in a number of leadership roles at the Environmental Protection Agency, including his work on the US delegation that negotiated the 1992 framework Convention on Climate Change. Dan also served as the Commissioner of Connecticut’s Department of Energy and Environmental Protection from 2011 to 2014. Dan joined me to talk about his work at the WTO and how climate policy and trade policy intersect. I hope you enjoy our conversation.

Dan Esty, welcome to Columbia Energy Exchange. It’s great to see you again and thanks for making time to be on the show.

Dan Esty: Pleasure to be with you.

Jason Bordoff: So there are so many things I could talk to you about given your extraordinary career in public service and government at the state and federal level in academia, of course. I want to focus the conversation on something that is getting an increasing amount of attention, but you’ve been focused on for many decades, which is the connections between climate and trade policy. This was the first COP, COP28 in Dubai to have a trade day. Just for people who are kind of broadly unfamiliar and thinking about climate change and the effects of it and the accelerated clean energy transition and solar and electric vehicles, why is there a trade day at COP28 and why should we be spending time talking about trade policy, which may seem like a unrelated topic of international economics? Why are we talking about that in the context of climate change?

Dan Esty: I think there’s a quick answer, which is that the United Arab Emirates is the host of COP28 and wanted to put an imprint on the structure of the two-week-long gathering and Viewed themselves as a trading nation and a trading center for many centuries and thought this would be an interesting additional piece of the story to bring to bear. But of course the bigger answer, the more important answer is that the centerpiece of COP28 was the global stock take. And that, as we all know, revealed quite clearly that emissions are still rising. And even in countries where they’re coming down, they’re not coming down in almost all cases fast enough to hit the Glasgow Climate Pact target of net-zero emissions by mid-century. And that led everyone at the COP and of course before and after to ask a big question, what are we going to do differently? What are we going to do better to get ourselves on the trajectory we need to be on?

And that’s where I think trade emerged. We already knew that there needed to be more finance, that was of course a topic of discussion. We knew there needed to be corporate social responsibility and companies taking on sustainability as a core part of strategy. We knew that sustainability minded investors could help us steer the world towards a sustainable future. But I think for the first time people began to say, “All that we’ve been doing, and it’s still not enough, what new?” And that’s where trade came to the fore. And I do think it helped that the World Trade Organization has a very dynamic leader, Dr. Ngozi Okonjo-Iweala, who really made the case, starting with a recognition that trade does contribute to emissions to the extent that goods are moving across the world largely in ships, but with significant emissions in total, but also with the idea, Jason, as you hinted at that, the key to success here is to move the necessary clean energy technology technologies, products, services, infrastructure around the world at speed and scale. And that’s where trade really can play a big role.

Jason Bordoff: And again, you’ve been thinking about this for a long time, going back to the creation of the World Trade Organization roughly three decades ago and wrote a book at the time, Greening the GATT, the rules of the global trading system, the general agreement on tariffs and trade. Talk about what the initial motivation was, what you were focused on back then, and is that similar or different? How has this issue evolved in that time period?

Dan Esty: So I did come to that moment of writing a book in 1994 after service in the US government at the Environmental Protection Agency. I was one of the US government negotiators of the original 1992 framework Convention on Climate Change. So I began thinking at that moment what needed to be done and where we would get leverage to try to drive the world toward a sustainable future more broadly, but toward a climate change, real action programs more specifically. I also was called upon at that moment to help negotiate the environmental provisions of a trade agreement that was emerging between the United States, or among the United States, Canada and Mexico, and did in fact lead the effort from the EPA side to develop an environmental dimension of that trade agreement for the first time ever. And frankly, a lot of it we were having to figure out as we were going, but I think it stands up over time in a pretty good way. And when I came out of government in 1994, I was asked to write a book about all of this, and that’s when this Greening the GATT book came together.

And the argument I made was a simple one, although one that’s taken a long time to sort of come into sharp focus, and that was the claim of the trade world was that it was going to raise social welfare by increasing economic activity and that economic integration, trade liberalization would lift countries all around the world and improve development prospects for all. And I made the case that unless one focused on the harm that was also arising, the emissions associated with traded goods, there was a risk that these un-internalized externalities, as economists would call them, pollution from the everyday point of view, was going to potentially offset the gains from economic growth driven by trade. And that argument was quite jarring at the time, 1994, when this book came out, jarring to the trade world for sure, jarring more broadly, but I think over time it’s come to be recognized as correct.

In fact, when the WTO was launched in 1995, the World Trade Organization has in its first paragraph of what’s known as the Marrakesh Agreement that set this organization up. Something that says, and I’m paraphrasing, “Trade liberalization is not the ultimate end of this agreement or of the trade system broadly. The end is sustainable development.” Trade is simply a means to get there. And I think it took a long time for the world to come around to recognizing that more needs to be done to really figure out how to make sure the trade system is aligned with that commitment to sustainable development in the broadest sense, but to climate change action most specifically.

Jason Bordoff: Talk a little bit about the World Trade Organization, how it is addressing and thinking about this issue of climate, clean energy, transition and trade, and in particular what you did in the last two years on secondment to that organization. You were inside the WTO for the last two years, what was your experience? What was your role? What were you working on?

Dan Esty: Well, I was invited to come to the WTO and moved, in fact to Geneva on public service leave from Yale at the request of Dr. Ngozi as she calls herself, the head of the organization. Shortly after she arrived, and she had heard about a project I was running at Yale with colleagues around the world called the Remaking Global Trade for a Sustainable Future Project and asked to be briefed on what this team of legal experts, policy experts, environmental experts was doing in taking a look at the trade system, really trying to answer the same question I had looked at in the 1990s, which is how do we get better alignment between the trade system and our other important policy goals, notably environmental goals, now we might call them sustainability efforts.

And I told Dr. Ngozi in this conversation in early, I guess it was late 2021, that I thought her organization was in some challenging places, that there was a risk. The trade system was being neglected and pushed aside, seen as peripheral to global governance. I told her that I thought the underlying economics had moved from where it launched really in the 1940s in the wake of World War II, where the trade system was one of three pillars of the Bretton Woods structure that was created to kind of knit the world together after World War II. And that original trade system was very much focused on bringing down tariffs, bringing everyone a chance to find a sense of common economic opportunity by working together but it also left a fair bit of policy space to pursue other agendas, including environmental agendas.

And over time, I think that vision got distorted, I would call it particularly in the 1980s ’90s by what some would describe as neoliberalism, others would call it market fundamentalism. I myself think that there was a deregulatory focus in a number of countries, in the United States, of course, in Britain and some other places, all coming from the same kind of University of Chicago view that markets could solve all problems. A view which I take strong issue with over many, many years and believe that one needs an economic system broadly, but a trade system in particular that provides boundaries and basically does not permit people to have market opportunity to get competitive advantage from causing harm to others, spilling over pollution or other externalities.

And so it was that argument that I brought to Dr. Ngozi and she was, instead of being upset, got quite excited. And she said, “Dan, that’s really what the trade system needs, it’s a new foundation rebuilt to be fit for purpose in the 21st century going forward. We need to have new rules, new procedures.” And she basically said, “Would you come and help me figure this out?” There’s a great team in Geneva at the WTO, talented, hardworking people, but a lot of them are paying attention to things that are part of a mandate that was given to them at some prior gathering, some other ministerial conference that the WTO holds on occasion every couple of years and didn’t have time to think sort of strategically.

And so that’s what I ended up doing, really helping to define a path forward for the trade system working with one foot inside the WTO and supporting Dr. Ngozi in her efforts, but she asked me to keep my Yale hat on as well and continue to work with this team of scholars around the world and policy thinkers and together we over the last couple of years hosted 10 workshops looking at various ways the trade system and the sustainability agenda connected or sometimes clashed.

And from those 10 workshops, each of which involved 30 to 40, sometimes 50 thought leaders specific to the topic at hand, which included things like climate change and trade, just transition to a clean energy future in trade, food systems and sustainable agriculture and trade. And from each of those conversations, we extracted elements of what became a trade system reform agenda that we released this past September, took to a high level summit of 110 leaders in the Swiss mountain town of Villars, and from which we’ve now released The Villars Framework for a Sustainable Trade System, a comprehensive reform agenda that allows a conversation to begin about how to make the trade system work to support a sustainable future rather than being seen as undermining it.

Jason Bordoff: Yeah. And this is an audio, not a video podcast, but you can attest that I’m holding The Villars Framework in my hand and I’m going to ask you about it. But just help people understand in your mind where the conversation about trade stands today, again, three decades after you did a lot of that work on Greening the GATT, as you said, unfettered market forces alone don’t necessarily deliver the results we want, don’t account for negative externalities like pollution and so you need rules in place to do that, policies in place to do that.

But is it the case that we’ve gone well beyond that now where some of the fundamental principles that allowed a relatively broad segment of the policy world to support more free and open trade is on the back foot now? You, I think on both sides of the aisle in Washington, hear more skepticism about trade, a rise of so-called industrial policy connected to requirements that lots of goods for tax credits be made in the USA or free trade agreement countries. We’ve heard Jake Sullivan, the National Security Advisor comment how, well, the assumptions we made 30 years ago may need to be rethought because China’s not playing by those rules. Are we thinking differently about free trade today? Is that a good thing or a bad thing, broadly, and then for the energy transition in particular?

Dan Esty: So you’ve put a lot into that question, I’ll try to unpack it piece by piece, but the answer for sure is that there is a very fundamental rethinking going on now about what the trade system needs to look like, what it needs to focus on, how it needs to balance the push toward economic progress with attention to other important policy goals. And I think the inattention to those other policy goals is one of the reasons the trade system has come under such criticism, of course in the United States by both parties as you point out. It was the driving force behind the UK’s decision to exit the European Union, the famous Brexit vote. But it’s also more broadly a concern all across the world in developed and developing countries.

And I think the difficulty, again, I would pinpoint, as a narrowness of focus of the trade world. And there is kind of a community in Geneva that has been there in many regards, you see the WTO ambassadors from the 164 member countries often spent prior tours of duty in Geneva as lower level officials in their country missions, and sort of view of the trade system as a thing to protect and to really drive trade liberalization often at the expense of other important policy choices, I think is now discredited. And that what we see is a need to rebalance and ensure that the economic opportunities, which remain important, and let’s not forget that if we look back over the last 50 years, the growth across the developing world is in many cases attributed to export orientation of countries. So it remains an important driver of development. The key, however, is to make sure that those economic opportunities are consistent with this preamble paragraph of the WTO when it was set up that says, “Let’s make sure it’s sustainable development.”

And I think that’s what we’re working out now, how do we make this sustainable? And in that regard, there is a good bit of work to be done. And I would argue there is an opportunity in the upcoming World Trade Organization Ministerial Conference that will take place in the last week of February in Abu Dhabi for the global community, the 164 member nations of the WTO to come together and lay out a path forward that will ensure this greater alignment of the trade world in effect of the rules of international commerce, of global economic activity with the need to move the society we all live in toward a sustainable future, a low carbon future, but one that addresses pollution and other sustainability issues as well.

Jason Bordoff: So is the right way to think about these risks and opportunities, for the reasons you said a moment ago, we need trade, it lowers costs at making sure you account for human rights issues and environmental issues and all the caveats around that. If we’re going to have a clean energy transition at the pace and scale we need, we’re going to need to scale clean energy, solar panels, electric vehicles, on and on, green steel, so quickly, that can’t happen if everybody tries to do this within their own domestic borders and so we’re going to need more trade in clean energy components and technology, not fewer and a rise of protectionism-

Dan Esty: If I can just jump in?

Jason Bordoff: Yeah.

Dan Esty: So it’s more of that, it’s at greater speed of dissemination across the world, so it’s not enough just to have these technologies in a few countries that are at the cutting edge, we need to move it all across the world. And you said something very important that people forget, which is when you drive this process, you drive scale economies that bring down costs and with limited budgets, the ability to really move at speed and scale depends on bringing down costs and you also spread ideas and drive innovation, which is going to be critical. So it’s really a four-part argument that trade is at the center of what it’s going to take to deliver success on climate change, and I think that’s really the key argument here.

Jason Bordoff: And where I was going with that was the idea that sort of broad forces of economic fragmentation, protectionism for a variety of reasons pose a potential serious headwind that could slow the pace of the energy transition. Is that the right way to think about one of the issues of trade and climate? I want to come back in a minute to some others.

Dan Esty: You’re absolutely right. And I think what we have run into is in addition to fears that the trade system was not delivering as it needed to, a balance between economic growth opportunities and other values like protection of the environment, supporting sustainability, but also things like worker protections, human rights, and the trade system has been, I think, inattentive to some of those issues. This is again, an argument I’ve been making for 30 years and that what we need is a trade system rebuilt, restructured with new rules and new processes that ensure that workers are not forgotten.

It turns out that the everyday citizen of the United States or any other country has benefited enormously from lower cost goods as a result of trade, but we’ve also paid a price, workers in particular when jobs have been relocated, and sometimes not based on trade advantages, but on trade policy manipulation, and that does require attention now. And I think the Biden administration is on this issue. One could argue that it’s on it in too big a way, neglecting for, in some regards, the opportunities and the gains that we just highlighted. But there is no doubt that the trade system needs to make sure that the success in the global marketplace is not coming at the expense of workers, at the expense of the environment, or in other ways it might be judged not the logic of markets operating around the world, but rather manipulation of the global marketplace by some countries and some industries and some companies.

Jason Bordoff: Do you share that concern you just articulated, that while there does need to be a rethinking of the rules and making sure that we’re accounting for labor, human rights standards, environmental standards, that the conversation today in this administration, maybe on both sides of the aisle, has sort of lost sight of how significant the gains from trade are?

Dan Esty: I fear that that is correct. I do think we have lost sight of the gains. I think we’ve lost sight of these multiple reasons why trade has been so significant over so many decades. We’ve lost sight of the original vision of the Bretton Woods structure that was set up, going back by the way, to the work of a heroic American, Secretary of State Cordell Hull, the longest serving Secretary of State ever who made the case for this trade system, not so much for economic efficiency, although that was part of his argument, but really as a way to hold countries together to give them this sense of common economic destiny. And as a result, his argument was largely an argument of peace and security.

And I do think that is a fundamental reason to have a trade system that accepts some differences, holds people to account for meeting standards that are commonly agreed upon, but let’s not let the world fragment and break apart. I think it would be extremely difficult to succeed in the climate change challenge if the trade system is allowed to fragment, and particularly if it were to break into two competing blocks. I see it almost impossible to achieve cooperation on climate change in the face of economic fragmentation and even ongoing trade disputes and wars at the same time.

Jason Bordoff: So I mentioned there’s the right way to think about the risks and opportunities, you just articulated well, the risk to the clean energy transition, again at the scale and speed we need if trade is on the back foot. You’ve also talked about the opportunities, and I heard Dr. Ngozi talk about this at COP28 in Dubai as well, when the rules of trade and trade policy might be used to accelerate the pace of the clean energy transition. And that can come with its own risks, the idea of climate clubs and you set standards for green steel or cement or whatever your product is, and people get more favorable terms if they’re part of the club, then if they’re not. Can you talk about that? Is there a way in which you see trade being used as a positive tool to accelerate the transition and what risks might come along with that idea?

Dan Esty: So let’s look at three things I think the trade system could do beginning in the next couple of months that would I think help drive us towards climate change policy success. And again, I don’t think we’re doing terribly on climate change, but I think the fundamental reality is we’re not at the speed and scale required for what I would call real success. And in that regard, let’s imagine that the trade ministers who gather in Dubai in the end of February issue a declaration that says that the trade system should be managed to reinforce and support the nationally determined contributions of each country to climate change policy progress that all 164 members of the WTO have committed to. This wouldn’t be that hard-

Jason Bordoff: This is the WTO Ministerial you’re talking about that’s coming up in February?

Dan Esty: Exactly, the Ministerial Conference that happens to be the 13th such ministerial conference held every two or three years by the WTO. So just as there’s COP28 in the climate change world, this is called MC13 in the trade world. And I think this could be one of the real outcomes of MC13, is a commitment that the trade system will operate and move toward being seen as aligned with and supporting the climate change efforts of each and every member of the WTO, 164 out of 164 of those members have signed up to the 2015 Paris Agreement and have committed to the Glasgow Climate Pact of 2021 target of net-zero emissions by mid-century. So we really need the trade system to be seen as supporting and not undermining that progress.

Jason Bordoff: And what would that, I know there are two other things you wanted to come to, but what would that mean in terms of how that would play out? What would that mean for the rules of the global trading system? What would it look like to actually implement that kind of commitment?

Dan Esty: So the first thing it’s going to require is help to establish the terms on which trade going forward are going to be conducted. And those terms, as you were starting to hint at Jason, have to begin with a question of standards. And I do think there is an opportunity to help those nations and blocks of nations that are trying to create a clean energy future and want to ensure that their companies operating within their jurisdiction are not disadvantaged by adhering to tough climate change standards. And that of course, I’m referencing the European Union and the effort within the European Union to produce something called border carbon adjustment. And that’s the idea that goods coming into the European Union should be tested as to whether they were produced under conditions that have the same degree of commitment to climate change action as producers in Europe face.

Now, I think the European Union has chosen to do this in a rather superficial way, simply asking what’s the carbon tax or carbon charge in the producing nation? How does that compare with the European Union’s carbon charge? And then we invoke this European Union version of border carbon adjustment, which they call the CBAM, or Carbon Border Adjustment Mechanism. And that is going to suggest that if there is $100 a ton, or it’s now about $110 a ton price in Europe and a $10 price in the producing country, the difference, $100 per ton will be a special tariff imposed on those imported goods.

So I would like to say about the European Union’s effort to use trade policy to drive climate change progress, that it is conceptually correct. And by that I mean it should not be that any company gets competitive advantage in the global marketplace by underperforming against agreed upon environmental commitments and standards including the climate change commitments that all WTO members have made. So it’s not just conceptually correct, I think it’s actually, from a policy point of view, essential because this is the one place I think you really do have grip on the global economy, the trade system and the rules it imposes is how you actually get people to move from where they are now to these higher standards and toward a clean energy future.

Now having said that it’s conceptually correct, policy-wise essential, I tell you that from my perspective, the European Union’s specific mechanism, the way it’s set this up is seriously flawed. And that’s where I think the WTO and the trade system more broadly could help set the standards for what this needs to look like rather than having the European Union try to establish this on its own, or as we say unilaterally. And I’ll give you four quick things that I think the European Union needs to fix.

First, it needs to measure the greenhouse gas emissions and traded goods according to agreed upon protocols, not declaring that the European Union approach alone will be used. Number two, it needs to establish an agreed upon price to apply in doing this border carbon adjustment, not declaring the European Union price unilaterally as the one to be used. Number three, it really needs to ensure that there is some recognition of how this plays out in practice and that it requires a structure of measurement, a structure of pricing, and an agreed upon process by which this is applied. And I think the final point here, there needs to be some recognition of how equity considerations will play in. That’s a fundamental principle, in climate change, the common but differentiated responsibility, it’s a long time principle in the trade world where there’s a concept of special and differential treatment for developing nations and the European Union has systematically not explained how it’s going to apply those principles of equity in the context of this CBAM. And I do think that needs to be taken much more seriously.

And for example, the European Union could commit to recycling some of that special tariff revenue to the developing countries that are paying it, at least for a certain period of time, to help them meet the higher standards. Otherwise, there’s an ongoing risk that this European Union push is seen by many as protectionism or green mercantilism, and it needs to be very clear that what Europe’s doing is eagerly moving people to meet standards, not trying to block them from access to the European market.

Jason Bordoff: Yeah, I think I’ve said before that while there are many good reasons to rethink some of the assumptions of the last three decades on trade, it is sort of easy to see how you could bleed in the direction of protectionism in the name of goals like security and resilience of supply chains, and maybe that’s the risk you’re identifying.

This is something I hear often and I’m sure both heard at COP28 from leaders from the developing world and emerging markets, a growing sense of resentment and hypocrisy at how the transition is unfolding and the idea that wealthier countries which historically caused this problem with cumulative emissions have not fulfilled financial commitments that were made to help countries develop in a cleaner way or cope with the impacts of climate change. And now we’re talking about restricting access to markets, that’s how it’s perceived with things like carbon border adjustments, if the exports from these countries are not low carbon enough. There seems like, to me, something quite valid in those concerns, and so how do you navigate… Just say more about how you navigate that, how you balance those equity and development considerations with the opportunities to use trade rules to accelerate a faster transition.

Dan Esty: So I think the truth of the matter is that it is really going to be essential that there is a mechanism of fairness in both how the climate change transition flows and how the trade structure to reinforce it is implemented. And in that regard, I do think some of it is just following through on the financial commitments that have been made. But frankly, Jason, as you and I both know, even the a hundred billion dollars per year target that was identified some now decades ago is not sufficient. The vast bulk of the funds have to be private capital at an even greater scale at a trillion dollar a year scale, not a hundred billion dollars a year scale.

So what would get that money to flow? A recognition that everybody is moving in this direction and that the investments that that money is being put into. Building out clean energy infrastructure, transforming transport systems, remaking the global food system to be on a more sustainable trajectory, if all of those had a market promise of return, the capital would flow.

Now how do we provide the guarantee of that market promise? Well, this is, I think if you dig beneath the surface of COP28, the issue everyone was struggling with. You and I were both there, we saw an amazing array of interesting ideas emerging about how this transition could move from green hydrogen to new plants to better ways to manage forests to new ideas around the blue ocean economy. So there’s an incredible diversity of ideas emerging and a lot of companies coming forward to say, “We want to be part of this” except when you get them after the session over a beer, the CEO says, “Of course I can’t go forward alone and out in front of my competition and bear costs that they’re not bearing without putting at fundamental risks the viability of my business.”

So the real question, Jason, and this is again why I come back to the trade system as fundamental to the progress we need on climate change and sustainability more broadly is this is the mechanism that assures that the companies that are doing the right thing, whether they’re financing or whether they’re actually taking those investments and redoing their business models to be sustainable, that they are not disadvantaged when they do so and that they are in effect going to help lead the way to this transformed economy. And so I think that’s the essence here of what the trade system can provide is the mechanism of enforcement that holds everybody on the clean energy future trajectory. Again, to go back to what an economist would call this, we need to avoid the risk that free riders are going to undermine the push towards this clean energy future. And I don’t see a better mechanism for getting the free riders held in check and ensuring that those that are pushing us forward are able to do so without fear of competitive disadvantage.

Jason Bordoff: I’m not sure if I cut you off before, I know when I asked you about how trade could be used as an opportunity to move faster on the transition, you said you wanted to make three points and I can’t tell if we’re still talking about the first one.

Dan Esty: We still are on the first one. So I think this alignment with climate change helping to flesh out the standards so that countries or economic groups like the European Union that are trying to ensure that everyone adheres to the standards to which everyone’s committed, I do think working those through in a coordinated fashion is important.

Number two, I do think that the trade system of the 20th century was focused first on bringing down tariffs, which it did very successfully. Second, and this is the problem area, it evolved in the 1980s and ’90s towards taking down non-tariff barriers. Now, some of those non-tariff barriers were in fact disguised protectionism, people doing things in ways that insisted on their approach at the expense of others or even to protect domestic industries.

Famously Ontario for a while says all beer had to be sold in glass bottles. Why? Because the Canadian brewers, Molson’s, Labatt’s were putting their beer in the glass bottles, Budweiser and Miller wanted to have you drink it out of aluminum cans. From an environmental point of view, there was actually no good argument for using glass bottles, especially in a climate change era where they had to be washed using hot water. So this was just outright protectionism, so that was a problem. But there was a whole lot of other non tariff barrier stuff that was going on where the non-tariff barriers were countries choices about worker protections or environmental protection that was being cleared away by a trade system that was narrowly focused on economic gain and this idea of trade liberalization at any point and at every point being a good thing.

So that’s the past, the future has two big areas of opportunity. So this is points two and three on my list of critical areas for the WTO to move into. So climate change is number one, number two is standards generally. How do we set sustainability standards in non-protectionist ways, in non-unilateral ways? And this is where it’s important to get people to sit together with a scientific grounding, with analytic rigor, develop standards that are transparent and can be fairly enforced in a way that will be seen as legitimate.

And number three, and very fundamental to the moment we’re in, is there needs to be a new trade system approach to subsidies. Historically, the WTO and before at the GATT when it was even a pre-WTO, asked only one question when there was someone accused of subsidizing an industry for their own protection and advantage. And that was, is this government money, this government subsidy producing trade distortion? My view in the 21st century going forward, that’s not the right question to start with and it certainly can’t be the only question you ask. The right question really has to be, what’s the purpose of the subsidy? And if that subsidy, and this is the question that should be asked, is sustainability enhancing one needs to have a very different attitude toward it compared to a subsidy that is sustainability diminishing.

And we can then ask after we’ve asked the question about sustainability plus or sustainability minus what the trade effect is. And in this regard you’ll have some subsidies that are promoting sustainability and have no serious trade impact, and those should get a green light and go forward. Now there’ll be some other subsidies that are sustainability positive but do have a trade effect, and I think those should be subject to some questions about whether the trade effect can be minimized. Are we taking out elements that aggravate trade partners gratuitously, unfairly? And so there should be some set of disciplines around sustainability minded subsidies, but in general that should be a yellow light, not a red light, which is to say the presumption of the trade system should be if you’re promoting sustainability, you’re promoting what, in that opening paragraph of the Marrakesh Agreement, was said to be the system’s goal, and that’s sustainable development.

You end up then with some number of subsidies that are sustainability negative but not much trade effect. The old WTO would say, “Well, no trade effect, we have nothing to say.” And that’s wrong too. If it’s a sustainability damaging subsidy, fossil fuel subsidies for example, you should say, “No, we’re against this, you should stop it.” And then of course there’s the category that is sustainability damaging and trade disruptive, and in that case there should be a very significant WTO push for people to stop that. And in that category would be things like fossil fuel subsidies, production-based agriculture, fisheries, subsidies that lead to overcapacity and overfishing and damaged natural resources. So that is a new structure I think that would be transformative.

And of course what’s interesting here is how it would treat the US, and particularly the Inflation Reduction Act elements of subsidization for the transition to clean energy. And frankly it would go in that quadrant that is a yellow light, sustainability positive with some trade effects. And I think what the Biden administration could figure out is with minor modifications to the existing framework that minimize the impact on trade partners, this would be within the scope of the system I’ve just defined. And I think it’s fundamental to the trade system being seen as sustainability oriented going forward, that there be this sort of yellow light going green with the right limitations on sustainability oriented subsidies.

Jason Bordoff: And you’re much more of an expert on WTO rules than I am, and we only have a few minutes left so I don’t want to go super down a technical rabbit hole, but just so I understand my understanding of the way the rules were set up is what you described and then when a violation was found, there is this sort of so-called list of Article XX exceptions that say, “Yes, we violated the rules, but we did it for good reason, it’s for the environment.” That’s not sufficient for the sort of world you’re talking about, and what kind of reforms would be needed to get to what you’re talking about?

Dan Esty: So I think you could do in practice what I’ve sketched out in principle, which is that subsidies should be tested against their purpose in a variety of ways. And one would be to open up this so-called Article XX, referring to the Global Agreement on Tariffs and Trade, Article XX, open that up to a more clear acceptance of sustainability minded subsidies and make that a principle of how that article will be implemented. I think it would be better for the trade system to be more front and center behind the idea that it’s promoting sustainable development. And in that regard there is going to be some subsidization of that path towards a clean energy future, towards other ways of evolving. And I do think this is where the United States should fix the system and not let the system fall apart.

The US actually would benefit from a system that allows some degree of clean energy subsidization. I think the US has every reason to want to move away from production-based agriculture subsidies, which doesn’t mean you forget your farmers, it just means you shift your subsidies to support their efforts to become good sustainable agriculture farmers. And I do think this is where the US has got a system near at hand that would very much strengthen how the US engages in international commerce. And my worry about the Biden administration is that if it walks away from the WTO, which at times it has seemed like it’s ready to do, it loses all the benefits we sketched out earlier and risks breaking a system that the US spent decades putting together. And fundamentally, and I think this has proven over and over again in international relations, it is extremely difficult to build institutions from scratch, much easier to fix, reform, refine a flawed system than to break it apart and try to start again.

Jason Bordoff: And are we talking about, I’m just wondering if this conversation is taking place in a vacuum that is divorced in your view from the reality of where we are right now in discussion of the WTO and the global trading rules. I can imagine some people listening to this are saying, “Well, this conversation may have made sense 10 or 20 years ago,” but there’s a set of practices now that are becoming increasingly accepted, motivated by industrial policy objectives and concerns that these violate WTO rules, maybe people used to be concerned about that but they’re not too concerned today. And the WTO, to put it starkly, is perceived by some to be more hollow or be a shadow of what it used to be. Is that an accurate concern? And how big a concern is that if true and what needs to be done to change that?

Dan Esty: So I think this is the stark choice posed for the United States going forward. And I think if you walk away from the WTO, you give up on it, you declare it to be toothless as you’re suggesting, you give up the chance to hold other people and other producers from other countries in check. And I think that is a dramatic problem for the United States going forward.

Now I also think that there have been some serious policy errors made in the United States over the past 20 years that allowed practices that we should not have allowed to go forward to go relatively unchallenged and undisciplined. And I’m thinking in particular of the way China has massively subsidized a whole set of industries to get into the global marketplace in a leadership posture.

And by the way, in some regards, we’ve all benefited by the price of wind turbines coming down, the price of solar arrays coming down, the batteries that make it possible for electric vehicles to really go to scale, all of that have had positive elements, but there’s also been predatory practices associated with those subsidies. And I think if you walk away from the trade system, you walk away from the opportunity to discipline those predatory practices. And my view is that China is ready to do things in a different way, but we can’t accept that on faith. We need a structure of rules and an actual process of WTO enforcement by strong WTO, not a weak WTO that would help ensure that we get the results that we’re bargaining for.

And so this is I think the choice, do you want a system that can hold others in check, but you’re going to have to play by the rules as well. You’re going to have to have the US limiting its burden on its trade partners. But I think that trade-off is a good one and I think it can be done in a way that protects workers, protects the environment, pushes the world toward a sustainable future more quickly than we would otherwise get there, and frankly does so in a way that produces a sustainable world and sustainable development across particularly the developing countries in a way where the US is seen as a leader in helping everyone rise to new levels of prosperity on a sustainable development basis where otherwise we’re at risk of being seen as having held people back and protected ourselves, but at the expense of others.

Jason Bordoff: So as a policy matter, now, so much climate clean energy policy, policy more broadly is motivated by deep concern about China, by forces of economic competition with China. In your view, if solar panels are cheap because of forced labor, because of human rights violations, because of low environmental standards, we can probably agree that’s a problem, we want to raise those standards.

But if once you’ve accounted for things like that, it is the case that China is able to produce things more cheaply, or to what you said a moment ago, is through government investment, maybe for industrial strategy, maybe for concern about climate, whatever the motivation, is putting a lot of government support behind clean energy, and as you said, maybe there should be some acceptance of subsidies if they’re motivated by decarbonization. And then it turns out that they dominate supply chains and they can build better and cheaper electric cars than some other companies can and so you see most of the electric cars sold in Europe are going to be imported from China, and most of the solar panels in the US are going to be imported from China, is that a good thing or a bad thing? How should policymakers react to that development?

Dan Esty: So I think this raises a question about whether the way those subsidies in China unfold is simply producing positive results from a point of view, and this is again a bit of a term of art, from the point of view of global public goods, what we all need to do. And if we are seeing the Chinese subsidize global public goods, some of that should be seen as positive.

But I think when we look at the practice, it was not just that, there was also predatory pricing. And so one can say on the one hand there was a good thing being done, but on another something that was quite unacceptable. And I think we should be willing to take the first piece and say it’s okay, and then come down very hard on the predatory practices, and frankly, the use of workers who are not treated properly or of slave labor or any number of other accusations, and frankly, not only in China, but in other places and say, “No, that is unacceptable. We cannot have progress towards a sustainable future come at that price.”

So it is a question of defining a set of values that are going to structure international commerce going forward. I think the US does better driving that process, being at the center of building that system of creating the global commerce we think is going to help deliver a sustainable future broadly, but also ensure the United States is given a fair opportunity to compete and sees its workers protected in this world that is being remade to deliver sustainability, but also reflect a broader set of values even beyond the environment and economic growth, the values you’re highlighting of human rights worker fair treatment, public health protection, and one could list a number of others.

Jason Bordoff: Can you just say a word about the carbon border adjustment mechanism in the European Union, how it’s being developed? And also, legislative proposals in the US for a similar kind of border tariff here, are these positive things to try to get behind or are you concerned about where they’re headed?

Dan Esty: So as I mentioned, I do think that border carbon adjustment, which is the generic category that the European Union’s Carbon Border Adjustment Mechanism, or CBAM, fits within is conceptually correct. There really cannot be a global commerce structure that allows people to get a competitive advantage by in effect not performing against agreed upon environmental standards including greenhouse gas emissions controls. So I think we should celebrate the European Union for running out on front on this. I think we need to have the United States adopt legislation that does a similar kind of thing. But as I said, while conceptually correct, from a policy point of view, essential, the details matter and the European Union is not where it needs to be in terms of the existing structure of the proposal they’re moving forward.

And I think we need to be very careful in the kind of legislation that moves to the US Congress, we need to again be careful to not unilaterally define how greenhouse gas emissions are going to be measured. We need to not unilaterally set prices, but rather have agreed upon global social cost of carbon. And by the way, even countries that are never going to use carbon pricing as their dominant climate change policy strategy, like the United States, might well want to have a social cost of carbon. In fact, as you know Jason, the US does have a social cost of carbon carefully structured and used in a whole variety of policymaking settings very effectively. So an agreed upon global social cost of carbon would be a good, not a bad thing.

And I do think having a structure within which countries move these policies forward, again, referencing our earlier discussion around fairness and equity, one needs to have a thought about that. The Villars framework that you mentioned earlier has a proposal in this regard, by the way, which is that we repurpose one of the other elements of the international trade system, an organization called the International Trade Center, which has been set up to help small and mid-sized enterprises in the developing world to compete in the world of trade. I would like to see that repurposed as a sustainable trade center with new resources infused to help those small and mid-sized enterprises across the developing world to compete in the sustainable standard setting world that they’re facing going forward.

And if the European Union were to inject some tens of millions of euros into this entity, this ITC, and make it into a sustainable trade center with a goal of helping those enterprises meet the European requirements, and by the way, it’s not just the greenhouse gas emissions requirement of the CBAM, there’s forestry standards and other things that are becoming trade obstacles, this would help the European Union demonstrate that its commitment is to high standards and a sustainable future and not to market obstacles. So I think there is reason to want to move with the European Union towards a world where baseline environmental standards are an obligation, a business requirement to be engaged in trade in the 21st century going forward,. But it needs to be done on a fair and appropriate and transparent basis.

Jason Bordoff: And that point you made about different countries using different policy mechanisms, some subsidies, a carbon price, that’s creating some tensions between the US and Europe where one of the motivations for a border adjustment might be to encourage other countries to move faster on climate, another might be to, so-called, level the playing field. And so you have companies in Europe that are paying a carbon price and say, “Well, we don’t want to be disadvantaged.” And companies in the US are receiving government subsidies, so they feel like… That’s not leveling the playing field. Is that a fair concern on the European side and how do we overcome that?

Dan Esty: It is a very fair concern. And another topic I would add to my list of concerns that should be addressed and where the WTO might be a forum is, what does climate change policy equivalence look like? I think there needs to be some credit given for rough comparability of policy commitments and direction that account for the fact that we live in a diverse world, the policy choices that countries are making are going to be diverse and the trade system needs to be able to accommodate those diverse policy choices and not have them become a point of friction, because the system here would be terribly disserved if the result of the European Union’s CBAM was an exhausting list of trade cases emerging as soon as they begin to launch it.

And I can imagine a scenario whereby they’re challenged not once or twice, but a dozen, 15, 20, 30, 40 times within the first six months of this being really put into action where duties are actually being paid. So I think getting the world focused on how to make the system work fairly, be seen as legitimate and yet lift everyone towards this commitment to higher standards is an essential element of what policy success on climate change looks like out over the next couple of years.

Jason Bordoff: Dan Esty, these are really difficult and complicated issues, a big priority for the work we’re doing here at the Center on Global Energy Policy, and I’m really glad for your being willing to take the time to help us understand it, all the work you’ve done over a very long period of time, your service at the WTO, as well as in the US government. So just thanks for making so much time available to help all of us understand these issues a little bit more deeply, and for all the work you’re doing.

Dan Esty: Jason, a pleasure to be with you and thank you for the center you lead and your contribution on this topic and so many others that are related to it.

Jason Bordoff: Thank you again, Dan Esty, and thank you for listening to this week’s episode of Columbia Energy Exchange. The show is brought to you by the Center on Global Energy Policy at Columbia University School of International and Public Affairs. The show is hosted by me, Jason Bordoff and by Bill Loveless. The show is produced by Erin Hardick from Latitude Studios. Additional support from Sagatom Saha, Gautam Jain, Lily Lee, Caroline Pittman, and Kyu Lee. Rory Campanella engineered the show. For more information about the podcast or the Center on Global Energy policy, visit us online at energypolicy.columbia.edu or follow us on social media @ColumbiaUEnergy. And please, if you feel inclined, give us a rating on Apple Podcasts, it really helps us out. Thanks again for listening. We’ll see you next week.

Around the world, new policies like the Inflation Reduction Act or the European Union’s Carbon Border Adjustment Mechanism aim to accelerate the pace of decarbonization. But these same policies have also fueled trade tensions and raised concerns about protectionism.

A successful clean energy transition means much more trade in clean energy technologies and products, according to the International Energy Agency. A rules-based global trading system, governed by the World Trade Organization, underpins much of that trade. But increasingly the WTO has faced challenges and calls for reform, particularly around issues of sustainability and climate change.

So what reforms are needed to align the global trade framework with climate goals and policies around the world? And how can the World Trade Organization support both economic progress and sustainable development?

This week host Jason Bordoff talks with Dan Esty about how climate policy and trade policy intersect.Dan is the Hillhouse Professor at Yale University and director of the Yale Center for Environmental Law and Policy. He just finished public service leave working at the World Trade Organization and is co-leading the Remaking Global Trade for a Sustainable Future Project. Dan has written numerous books on environmental responsibility and economic progress, including Green to Gold and Greening the GATT. He previously served in a number of leadership roles at the Environmental Protection Agency, and as the Commissioner of Connecticut’s Department of Energy and Environmental Protection from 2011 to 2014.

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