James Bacchus spoke with Rob Francis about the European Union’s carbon border adjustment mechanism, trade in medicines and medical products, how the Biden Administration is progressing on trade policy – and the World Trade Organization in all this.
Q: What do EU political decision-makers need to be mindful of when it comes to formulating a carbon border adjustment that is compatible with the WTO?
It depends how it is structured and applied. The great risk for the EU is that it will be structured and perceived as a form of green protectionism, and in particular as a disguised restriction on international trade.
The more that such a measure is seen to be structured in pursuit of economic motivations instead of purely climate motivations, the less likely it is that it will be compatible with WTO rules.
The difficulty in threading this legal needle is why I have proposed a WTO climate waiver in my book, The Willing World. A well-crafted climate waiver would permit climate-related measures that also have economic motivations.
Q: An EU industry association recently commissioned a legal analysis that says that the CBAM and free allowances within ETS can continue to co-exist, with the proviso that “EU products and imports should face an equivalent regulatory burden that is applied on an even-handed basis.” What’s your view?
In my view the current structure of the EU Emissions Trading System is already in violation of WTO rules because it provides free emission allowances for domestic producers.
As I see it, these are subsidies to these producers, and to the extent that these subsidies have adverse effects in the marketplace, they are inconsistent with EU obligations under the WTO agreement on subsidies and countervailing measures.
That said, if domestic allowances are offset by credits in some form for like imported products, the potential that the CBAM will be in violation of other WTO rules is diminished.
Phasing out domestic free emission allowances is a good idea, but as long as they continue to exist, they pose legal problems for the EU, even if there are offsets that are granted to like imported products. The legal outcome will be determined by how precisely the CBAM is applied to particular imported products.
Q: The United States is not on board with the CBAM – but is this something they could potentially live with, or should the Europeans expect some form of trade retribution, were it to enter into force?
US climate envoy John Kerry has encouraged the EU to refrain from proposing this measure until after COP26, but he is not opposed in principle. He is concerned that the CBAM may deter countries from increasing their climate ambitions ahead of the Summit.
Other than that, not much has been heard from the US, and no similar measure is likely to be taken up by Congress anytime soon.
I don’t think we’re likely to see any immediate reaction from the US, especially given that the EU measure is unlikely to take effect for at least two years.
The outcome of the US congressional elections next year may have a lot to say about this, but any reaction now is more likely to be characterised by emulation rather than retaliation.
Q: Should the EU’s CBAM include special treatment for developing countries? Is there a way for them to be wholly or partially excluded from the scope that is compatible with the WTO?
In my view, a general exception for all developing countries would be a violation of the WTO most-favoured-nation principle. Such a broad exemption for developing countries would be arbitrary and unjustifiable discrimination that would prevent such an approach from being accepted by WTO jurists.
However, I am of the view that if the EU exempted the 46 least-developed countries, then such an exemption could conceivably be justified under one of the general exceptions in the WTO treaty.
I would be surprised if the Europeans do not propose such an exemption, since the EU has been very mindful of the fact that the LDCs have done the least to cause climate change and are currently suffering the most. This is extraordinarily unjust, as the EU readily acknowledges, so we shall see what happens between the CBAM’s publication and when it is enacted.
Q: Regardless of the final version of the CBAM, is there not the possibility that third countries will appeal “into the abyss” at the WTO, given the lack of a fully-functional Appellate Body?
Yes, unfortunately. This is why we must move immediately to reconstitute the WTO Appellate Body.
As it is, any judgement within the framework of the WTO dispute settlement system can be appealed into the abyss, as there is no body of jurists to hear the appeal.
We are back to the pre-GATT days. Under the GATT, the losing party could block a ruling, and that is in effect what we have now.
The Europeans have tried to circumvent this through a side agreement that has been signed by several dozen WTO members, creating a parallel process of appeal that is virtually a carbon copy of the Appellate Body.
The problem with that system is that it is only binding on the parties, which does not include the US, a country that is involved in over half of all disputes. This may be one reason why the Biden administration has been dragging its feet on reconstituting the Appellate Body.
Q: You’ve come out strongly against export restrictions for vaccines and against a TRIPS waiver, since you believe it will have little impact on access to Covid-related vaccines and medical equipment. Why do you think the TRIPS waiver is being pushed so hard at the WTO by so many countries, when the flexibilities in TRIPS could already solve a lot of the headaches?
The vaccine nationalism from various developed countries has been shameless. I’ve spoken up against this from the outset as I believe the antidote to vaccine nationalism is vaccine multilateralism.
The developing countries have been left in a desperate situation. As we speak, only about 2% of people in Africa have been vaccinated, the delta variant continues to rage in India, and there are new reports that this variant may soon spread to Indonesia with devastating effects. Multilateral efforts outside the WTO, such as COVAX, are well-intended but have fallen short, in large part because wealthier countries haven’t come forward to do what they should be doing, namely buying up vaccines and distributing them for free to poorer countries.
The developing countries know that they can at least be heard at the WTO, and they have dark memories of the HIV AIDS crisis a generation ago and the slowness with which the pharmaceutical industry responded to urgent global need at the time. That was a long and emotional battle.
In my view the proponents of a waiver are aiming at the wrong target. The problem is not that patent holders have abused their intellectual property rights, but rather the shortage of supply. There has been too little production and much too little effective distribution worldwide. The focus should be on increasing the production of these new vaccines and getting them more quickly to where they are needed, especially in developing countries.
This is why I propose that the US and developed countries buy up billions of doses and give them to developing countries. This will be expensive, but the pandemic isn’t over until it is over everywhere. This sum of money will pale in comparison with the costs incurred by developed countries if they don’t do all they need to do to end the pandemic.
Q: More broadly, how can the WTO ensure that what took place during this pandemic – such as “vaccine hoarding” leading to inequitable access – will not happen again?
In my CATO Institute paper Trade is good for your health I talk about the relation between trade and health. I am amazed and appalled that more than 18 months into the pandemic, the WTO has so far done nothing but talk about freeing up trade in medicines and other medical goods. This is unacceptable.
The new Director General is trying to get the WTO members to focus more on this issue, and she rightly said it should be their highest priority, but it’s WTO members who set the agenda.
I have proposed that the WTO membership adopt a medical trade agreement – this could begin as a plurilateral agreement between some members and could expand over time eventually to cover everyone.
There would be several elements to this agreement – first, eliminate all tariffs on medicines and other medical goods. This would involve the expansion of the WTO pharma agreement to cover all medicines, not just some, and all other medical products, and to include all WTO members.
Second, a new medical trade agreement needs to include new disciplines on export restrictions, including transparency, prior notice, and the need to take into account the impact of such restrictions in other countries.
Third, the new agreement should focus on non-tariff barriers to trade. There should be prohibitions on “buy local” requirements for medical goods, incentives to harmonise standards or agree mutual recognition of standards, and the elimination of needless red tape in trade in medicines and other medical goods. The example of the customs “green lane” between China and Europe for their trade in medical goods should be implemented everywhere.
Q: The Biden Administration is perceived to be stalling on trade and preferring to focus on domestic issues. Is this a fair criticism?
President Biden has been reasonably forthright in his desire to resolve some of our domestic problems before he focuses on international trade. My understanding of economics does not work that way. You can’t separate domestic issues from international economic relationships including trade. Slowly the Biden Aadministration is coming to the realisation that I may be right about this.
Today there are reports that the Biden administration may be interested in concluding a baseline digital trade agreement with a number of countries in Southeast Asia, and I’m very much in favour of that. It looks like they want to build on and borrow from the recent digital economic partnership agreement among Singapore, New Zealand, and Chile, which would be a good idea.
The Biden administration sees every trade issue through the prism of China. Certainly, this is critical, but the world is bigger than just the US and China, and even their bilateral issues can best be resolved, and perhaps only be resolved, multilaterally though the WTO. I hope they will come to understand this, too.
Q: Will there be a functioning Appellate Body at the WTO by the end of the current Administration?
I hope so, however there is no indication that there will be.
I am concerned that in an effort to accommodate the US, the EU is suggesting they might be willing to engage in a process that would only begin at MC12 and be implemented at the next Ministerial Conference in 2 years. That’s a long time to go without a binding dispute settlement mechanism.
I’m of the view that the supposed concerns of the US are disingenuous at best and at worst motivated by political and protectionist concerns from Republicans and Democrats.
Q: Do you foresee any progress on the WTO Environmental Goods Agreement negotiations?
I am encouraged that a number of Democrats in Congress seem to have seized on this issue as one way in which they can advance their concerns about climate change. It certainly is!
This agreement should have been concluded many years ago. I trust members are doing all they can to conclude it by the time of MC12. But it’s going very slowly and it’s not at all certain this will happen.
The WTO simply must prove that it can do something, not just talk. I’m not certain that all WTO members fully realise that or fully understand how critical this particular crossroads is for the WTO as an institution.
James Bacchus was a founding member and twice Chairman of the WTO’s Appellate Body. He currently is Distinguished University Professor of Global Affairs and Director of the Center for Global Economic and Environmental Opportunity of the University of Central Florida. He has also served at the Office of the United States Trade Representative and as a Member of Congress.