Climate change is having a profound impact on people’s lives across the world. Mitigating and adapting to climate change will require major economic investment and coordinated action to transition to a sustainable, low-carbon economy. The World Trade Organization (WTO)'s World Trade Report 2022 examines the multifaceted and complex relationship between climate change and international trade. The report argues that trade can support climate change adaptation and mitigation efforts, provided that adequate, well-designed, and ambitious climate policies are in place.
While climate change will increasingly disrupt trade, trade can also help to adapt to climate change
If left unchecked, climate change will profoundly impact human lives and reshape countries’ economic and trade prospects. In the short-term, climate change and resulting frequent and intense extreme weather events will disrupt global value chains (GVCs) and affect trade costs. For instance, export growth of agricultural products and light manufacturing from poor countries have been found to decrease, on average, by between 2% and 5.7% in response to a rise in the country's temperature by 1°C (Jones and Olken 2010).
In particular, climate change can affect strategically important ‘choke points’ in the global trade network, i.e. critical junctures on transport routes through which exceptional trade volumes pass. Climate-induced disruptions tend also to be more severe in heavily concentrated global value chains where intermediate inputs are difficult to replace. For example, the 2011 floods in Thailand disrupted the global electronic and automotive industries, causing an estimated 2.5 percentage point decline in the rate of growth of global industrial production (Kasman et al. 2011). Trade infrastructure, including airports, ports, and roads, are also increasingly exposed to climate change, through congestions, damages, and delays, thereby increasing operational and trade costs.
In the medium to long term, climate change, including rising global temperature and sea level, will not only continue to disrupt global value chains but also alter countries' comparative advantages, which in part determine international trade patterns. Trade in agriculture, tourism, and some manufacturing sectors are particularly vulnerable to climate change. Sub-Saharan Africa and South Asia are expected to suffer larger negative crop yield shocks compared to other regions (IPCC 2022) exacerbating food insecurity. Climate change could also increase agricultural trade volatility. For instance, the possibility of simultaneous production losses greater than 10% happening in the four largest maize-exporting economies in any given year could increase from 0% to 86% in a worst-case scenario of 4°C global warming above pre-industrial levels, causing widespread shortages and a surge in world prices of these commodities (Tigchelaar et al. 2018).
Although adapting to climate change will remain costly and disruptive, trade and trade policies can also contribute to climate change adaptation strategies. Countries with more diversified exports and greater openness to trade tend to be less vulnerable to climate change (see Figure 1). International trade can help to prepare for climate-related shocks more effectively by supporting the development and access of climate-resilient technologies, such as new drought-resistant crops. Once climate-related shocks hit, international trade provides access to critical goods and services such as food, medical supplies, and electricity generators. Trade can also contribute to food security by allowing regions that used to rely on domestic agricultural production to import food from less affected regions.
Figure 1 Greater capacity to adjust to climate change tends to be associated with greater openness to trade
Source: WTO (2022), based on ND-GAIN Climate Readiness Index and the trade openness index for 2020 from the World Development Indicators.
Simulations suggest that reducing trade costs in lower-income economies would, all things being equal, reduce their welfare losses caused by climate change (Gouel and Laborde 2021, Nath 2022). Trade openness could also reduce the incidence of climate-induced migrations, as trade and international labour mobility tend to be substitutes rather than complements (Rossi-Hansberg et al. 2021). High trade costs could, however, prevent such trade-related adjustments.
Although international trade generates greenhouse gas emissions, trade can also help to accelerate the transition to a low-carbon economy
International trade has complex effects, both negative and positive, on greenhouse gas emissions, going well beyond the emissions released during the production and transportation of the exported goods and services (Copeland et al. 2022).
On the negative side of the ledger, international trade, like most current economic activities, emits greenhouse gases (GHGs). According to the most recent available OECD estimates, the carbon dioxide (CO2) emissions embedded in world exports in 2018 amounted to about ten billion tons of CO2, or slightly less than 30% of global CO2 emissions. Although this share has been slowly declining since 2011, it indicates the close relationship between production, trade, consumption, and the consequent emissions under current technologies and production processes. The transition to a low-carbon economy therefore requires also decarbonising supply chains, including trade-related transport.
On the positive side of the ledger, international trade can contribute to a low-carbon transition by (i) enabling access to cutting-edge climate-friendly technologies, (ii) incentivising innovation in low-carbon technologies by expanding market size, and (iii) fostering competition and scale economies that help drive down costs. For instance, the price of solar has fallen, by almost 90% since 2010, while the efficiency of solar panels has doubled since 1980. These cost reductions are mainly driven by technological and production improvements, which are in turn driven by strong economies of scale that have been in part enabled by global value chains (Kavlak et al. 2018).
Lowering tariff and regulatory barriers to trade in environmental goods and services could further help to drive downs costs and accelerate their deployment. Simulation results show that eliminating tariffs and reducing non-tariff measures on a set of energy-related environmental goods – including solar panel, wind turbines, and hydrogen – could increase global exports in these products by 5%, corresponding to $109 billion, and lead to a 0.6% net reduction in CO2 emissions by 2030 (Bacchetta et al. 2022).
Despite the benefits of opening trade in the environmental industry, barriers to trade in environmental goods and services remain significant. For instance, in recent years, an increasing number of trade remedies have been applied to some environmental goods, such as solar panels and wind turbines, at often substantial rates (UNCTAD 2014). In addition, tariff and non-tariff barriers tend to be lower in carbon-intensive industries than in clean industries, creating an implicit subsidy to carbon emissions (Shapiro 2021). An analysis of the WTO Trade Cost Index reveals that (see Figure 2).
Figure 2 Trade costs tend to be lower in carbon-intensive manufacturing industries
Source: WTO (2022), based on Shapiro (2021) for carbon emission intensities in manufacturing industries and WTO Import Trade Cost Index for 2011.
Tackling climate change requires greater international trade cooperation
Climate change is a problem of the global commons. While the ‘bottom-up’ approach of the Paris Agreement encourages broad-based participation, it also results in varying levels of climate policy ambitions across countries. Yet, in the absence of coordination, the adoption of individual climate change strategies is likely to be less than optimal (Thube et al. 2022).
In addition, unilateral trade-related climate policies could, depending on their design and implementation, give rise to trade tensions and heighten marketplace uncertainty, which can hamper low-carbon investment and weaken the effectiveness of global climate efforts. Avoiding fragmentation and limiting trade frictions resulting from these measures call for leveraging every opportunity at the WTO and elsewhere for improving cooperation on the trade-related aspects of climate change policies (Grozoubinski and Baldwin 2022).
The Word Trade Report 2022 identifies several areas in which climate-related trade cooperation could be strengthened to enhance climate resilience and accelerate the decarbonisation of international trade. For instance, greater trade diversification as well as stronger information-sharing and monitoring would contribute to food and energy security, while helping to manage risks related to supply chain bottlenecks. Addressing trade and investment barriers to climate-friendly goods, services, and technologies would help accelerate the response to climate change. Pursuing greater alignment on low-carbon standards would further lower compliance costs. Finding a balance between support incentives for low-carbon technologies while minimising negative spillovers on trading partners would also provide more predictable and credible market signals for low-carbon investment and consumption.
References
Bacchetta, M, E Bekkers, J-M Solleder and E Tresa (2022), “Environmental Goods Trade Liberalization: A Quantitative Modelling Study of Trade and Emission Effects”, Unpublished Manuscript, Geneva: World Trade Organization.
Copeland, B R, J S Shapiro and M S Taylor (2022), “Globalization and the Environment”, in G Gopinath, E Helpman and K Rogoff (eds.), Handbook of International Economics, Amsterdam: North Holland.
Grozoubinski, D and R Baldwin (2022), “The ‘WTO rising’ imperative”, VoxEU.org, 3 June.
Gouel, C. and D Laborde (2021), “The role of trade in adaptation to climate change”, VoxEU.org, 6 February.
Intergovernmental Panel on Climate Change (IPCC) (2022), Climate Change 2022: Mitigation of Climate Change, Cambridge (UK): Cambridge University Press.
Jones, B F and B A Olken (2010), “Temperature and Exports”, VoxEU.org, 16 April.
Kasman, B, J Lupton and D Hensley (2011), “Global Data Watch”, New York: JP Morgan Economic Research, 11 November.
Kavlak, G, J McNerney and J E Trancik (2018), “Evaluating the Causes of Cost Reduction in Photovoltaic Module”, Energy Policy 123: 700-710.
Nath, I (2021), “Climate Change, the Food Problem, and the Future of Global Agricultural Specialisation: How Barriers to Trade Can Be Barriers to Climate Change Adaptation”, VoxEU.org, 24 December.
Rossi-Hansberg, E, K Desmet, D K Nagy and B Conte (2021), “Trade to adapt: Changing specialisation to cope with climate change”, VoxEU.org, 4 May.
Shapiro, J S (2021), “The Environmental Bias of Trade Policy”, The Quarterly Journal of Economcs 136(2): 831-886.
Tigchelaar, M, D S Battisti, R L Naylor and D K Ray (2018), “Future warming increases probability of globally synchronized maize production shocks”, PNAS 115(26): 6644-6649.
Thube, S D, R Delzeit and C H C A Henning (2022), “Economic Gains From Global Cooperation in Fulfilling Climate Pledges”, Energy Policy 160, 112673.
United Nations Conference on Trade And Development (UNCTAD) (2014), Trade Remedies: Targeting the Renewable Energy Sector, Geneva: UNCTAD.
World Trade Organization (WTO) (2022), World Trade Report 2022: Climate Change and International Trade, Geneva: WTO.
