A multilateral green trade pact?
International trade has faced multiple shocks in recent years, making the need to reform the architecture of global trade more urgent than ever. Aligning new trade rules with global net-zero ambitions will be crucial to providing the necessary incentives for firms and economies to decarbonise. Many have already recognised the need to “green” trade. But how to do it?
The Lowy Institute’s Grace Stanhope and Robert Walker are joined by Ryan Mulholland, a senior fellow for international economic policy at the US-based Center for American Progress, to discuss what green trade is, how it fits into global decarbonisation efforts, and how governments could go about designing green trade agreements. They also discuss how major economies like the United States and China fit into a green trade future, where Australia might fit, and what it’s like being at the forefront of negotiations.
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TRANSCRIPT
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Grace Stanhope:
Hello and welcome to Development Futures, a podcast brought to you by the Indo-Pacific Development Centre here at the Lowy Institute, from Gadigal land. My name is Grace Stanhope, and I'm very happy to be co-hosting today with my colleague, Robert Walker, a research fellow and economist in the Indo-Pacific Development Centre. Welcome, Rob.
Rob Walker:
Thanks, Grace.
Grace Stanhope:
The international trade system has been under serious pressure in recent years. The US has pulled back from multilateralism, and Trump has imposed unilateral tariffs on the world, while China has called for other countries to respect global trade rules while heavily subsidising its own manufacturing industries and crowding out other economies.
Rob Walker:
Stepping back: several energy shocks driven by conflicts — the most recent being the Iran war driving a fuel crisis — have shaken the global economy's reliance on fossil fuels. In this context, the more enduring questions of decarbonising international trade and creating a more resilient future seem even more salient challenges now than only a few years ago.
Grace Stanhope:
Luckily, our guest today might have the answer. Ryan Mulholland has put forward a new proposal for a green trade agreement to deal with some of these issues. Ryan is a senior fellow for international economic policy at the Centre for American Progress, and a widely renowned expert on economics, climate, and trade and industrial policy. Welcome, Ryan.
Ryan Mulholland:
It's great to be here with you.
Grace Stanhope:
So, let's start with the very basics. What do people mean when they say 'green trade', and why is it important?
Ryan Mulholland:
I think you could put a lot of things under the green trade bucket. One of them is: how do you use trade policy to advance the climate agenda? Traditionally, climate policy and trade policy have been thought of as two separate things. But increasingly, I think we understand that both have to work together to have the biggest impact, particularly on the clean transition that the world needs to go through. Another way to think about green trade is: how do you use trade policy to help companies that produce things for the clean transition get the goods, the materials, the component parts they need? And you could also think of green trade as how you make trade policy useful in deploying green technologies around the world. There are a lot of different facets, but when you think about green trade, you could be trying to make progress on any one of those things — or all of them. It's about thinking of climate and trade as two sides of the same coin.
Rob Walker:
So, Ryan, you've put forward this idea that a green trade pact might actually help the global economy decarbonise and prioritise green trade as you've just described it. Can you outline what that looks like from your perspective, and what you hope to see?
Ryan Mulholland:
I think, first and foremost, you have to think about where we are in terms of trade policy around the world. Prime Minister Carney from Canada was in Davos not too many months ago talking about a rupture in the international system. I think that's marked, certainly, by the Trump administration's use of tariffs and other forms of trade coercion. It's also marked by China weaponising some of the dependencies it has developed with other countries — holding back critical minerals, holding back other exports that countries need. So there is a desire around the world to do something different on trade, and an acknowledgement that the previous way the world organised itself around trade didn't deliver the benefits it could have — for the climate, or for plenty of communities around the world. In the US, where I come from, our blue-collar industrial base really took a lot of hits from non-market competition, particularly from China. So that's where we've come from. Then the question comes up: what do you want to do differently? What could potentially offer solutions that are good for working people, good for global stability and prosperity, and also genuinely good for the climate? What we've talked about and worked with colleagues around the world on developing is a concept for an open, plurilateral green trade pact, particularly for sectors like steel and aluminium. Steel and aluminium accounts for anywhere between eight and twelve per cent of global emissions. So the question becomes: how do you use trade not just to facilitate or incentivise whoever can make something cheapest, but to write trade rules so that companies are rewarded for producing in a high-standard way — paying their workers appropriately, providing benefits, and decarbonising their production and supply chains? The 'open' and 'plurilateral' parts are important. Plurilateral means not every single country has to join, but open means any country that wants to join can. What that does is essentially say: if you want access to this potentially lucrative green metals market, you need to meet certain preconditions. We're not going to sign an agreement and hope that standards align at some point in the future. There are strong preconditions — things like fair pricing for steel and aluminium, R&D cooperation, industry-wide decarbonisation — that countries would have to commit to in order to get the best benefits. Within the agreement, tariffs would be based on whether a product is considered high or low carbon. Low-carbon steel and aluminium could be traded freely without tariffs. Higher-carbon products would face tariffs, which would incentivise companies to make the investments needed to decarbonise. The other part that's a little different from the traditional free trade agreement model is that in addition to agreeing on the rules, we should think about this as a playbook for how we're going to cooperate going forward. Can we develop a collaborative investment agenda where all partners in the agreement are investing in ways that mutually benefit themselves and each other? There's a lot of investment needed to decarbonise the steel sector globally, and doing that in coordination with ambitious, like-minded partners offers the opportunity to achieve more than if each country acted alone.
Rob Walker:
So a more cooperative trade model that uses a tiered tariff system to incentivise decarbonisation over time, and looks to raise industry standards without unfairly crowding out other partners within the agreement.
Ryan Mulholland:
That's exactly right. And I recently published a piece with some colleagues at the E+ Institute in Brazil, looking at how something like this would be good for both the global north and the global south — for developed and developing countries alike. Part of this is about making the benefits of global trade reach a much broader cross-section of the global community than has been the case in the past.
Rob Walker:
The other big proposal for how to decarbonise trade on the agenda is the carbon border adjustment mechanism put forward by the European Union. Australia is now considering its own CBAM. Why should Australia be paying attention to an open, plurilateral green trade pact as an alternative to the unilateral CBAM approach that the EU and other governments are considering?
Ryan Mulholland:
This is a big topic of conversation around the world. First and foremost, I think the EU deserves credit for putting forward a CBAM — they were the first mover in this space, the first to do something substantial to make trade policy and climate policy work together. But I think the difference between a CBAM and the open plurilateral concept we've been exploring is that a CBAM is really trying to restrict trade. And if you look at the climate impacts of the EU's CBAM, they're not particularly impressive. What it does do is protect European industry, which is important — they're facing a lot of competition, some would call it predatory, from high-carbon producers in China who have dumped, and will likely continue to try to dump, steel and aluminium into their market. The open plurilateral concept is about doing more by facilitating trade in low-carbon products, not restricting it. You can create a better investment climate, and mutually beneficial opportunities, by doing more together than you could do alone. And that's the challenge for climate and trade officials — it's not enough to just complain. Saying you don't like what the EU is doing, or what someone else is doing, isn't sufficient. You have to propose something better — something that actually achieves more from a climate perspective, a supply chain resilience perspective, and, I would argue, a worker prosperity perspective as well.
Rob Walker:
I really like this proposal because it pushes forward the idea that we need a plurilateral or multilateral response, rather than a unilateral CBAM approach. I think the world needs a lot more cooperation at this time.
Ryan Mulholland:
That's exactly right. At the last COP, in Brazil, all of the attention was on unilateralism in trade. There was focus on the EU's CBAM, but you can certainly throw Trump's tariffs into that unilateral bucket, and a lot of actions China is taking as well. The way to respond to that is, again, not to complain — not to chest-thump as the Trump administration likes to do — but to actually come up with a new model that does more and does better than what's currently on offer.
Grace Stanhope:
I wanted to draw you out on the question of the developed and developing worlds — this podcast is called Development Futures, so this is obligatory. We've seen some Global South leaders, like India, Thailand, and Indonesia, oppose these kinds of green trade policies in the past. And as you mentioned, you've recently written about Brazil's stance on this. Can you expand on the question of cost and capacity for developing economies to participate in a scheme like this?
Ryan Mulholland:
One of the benefits of doing this in a plurilateral context is that there's an opportunity to invest in developing country partners in a way that a CBAM simply doesn't allow, because a CBAM is so defensive and protective of domestic industries. One of the things we've talked about is that some of the revenue raised from a plurilateral arrangement could be invested in developing country economies — helping to green their industries so they can participate in the clean economy of the future in a way they may have been held back from in the past. And countries come at something like this from different perspectives. Some are potentially large consumers of green metals. Others, like Australia and Brazil, have huge green iron opportunities — significant investments in green iron ore development. If there is a sustainable, resilient, large global market for green iron, that not only helps the export profiles of certain countries, but also ensures there's a consistent, diverse market that can handle swings in the economy. There's a real economic resilience piece to this.
Rob Walker:
And how do you see China fitting into all of this? It's considered an emerging economy in some metrics, yet it's the second-largest economy in the world. It's a provider of a lot of the green goods and technologies the world needs right now, and it's also the world's largest emitter by far. Where does China fit in this picture? Do you think Beijing is likely to sign on to an agreement like this, given what you've said about fair pricing and the impact of non-market economies driving overcapacity?
Ryan Mulholland:
It's a great question. When you talk about China, it's useful to level-set on where things stand. China is the largest emitter. It's one of the most important economies in the world. It's home to over a billion people, so it should be an important player in global trade. It has also been a bad actor in a lot of ways on global trade issues, particularly in sectors like steel and aluminium, where it has dumped products all over the world and continues to invest in overcapacity. What that does is reduce revenue for firms that would otherwise be available to invest in decarbonisation. There's a direct link between greening the steel industry and dealing with overcapacity, much of which comes from China. But this agreement is not meant to be exclusive, and it's not meant to be an anti-China thing. The 'open' in 'open plurilateral' means you set the terms for what it means to be part of a pact like this, and you welcome countries that are willing to meet those strong preconditions. Would China sign up today? Probably not, because I'm not sure it would be able to meet some of the preconditions around fair pricing or worker empowerment. But if it did, that would be a good thing — a good thing for the climate, and a good thing for the world. Keeping standards high and keeping the door open for others to join is a pretty sound trade policy going forward.
Grace Stanhope:
Ryan, you've been a negotiator at the front lines of these agreements, including as part of the Biden administration's efforts to develop a green metals pact with the EU. Can you share what that experience was like, and what lessons you take forward?
Ryan Mulholland:
I think the Biden administration deserves a lot of credit for being creative and ambitious when it came to trying to advance decarbonisation, both in the United States and around the world. The green metals agreement you mentioned was called the Global Arrangement on Sustainable Steel and Aluminium, and it essentially failed to get off the ground. The hope was that we could bilaterally — between the US and the EU — facilitate trade in low-carbon steel and aluminium by removing tariffs on the lowest-carbon products, keeping tariffs on high-carbon goods, and applying even higher tariffs on countries that drive overcapacity. Those talks never really got off the ground because the EU had its CBAM in train and was, I think, pretty unwilling to deviate from that. But the global environment has changed a lot in the last four or five years. The EU now realises that the threat of dumped Chinese steel is even more of an issue than it was back then. Their safeguards are set to expire, and they're trying to figure out what comes next. They've also faced significant blowback from developing countries around the world about their CBAM. So offering a credible alternative that would be more impactful from a climate perspective, and that would help maintain and build positive economic relationships with developing country partners, might be quite attractive to Brussels now in a way that the Global Arrangement conversations weren't five years ago. The other thing to mention is that the EU may or may not choose to join something like this. But if there's momentum from other countries saying 'this is good for our industries, our supply chains, our workers', that global momentum might be enough to push Brussels towards it. That kind of outside pressure — other countries raising their hand and saying this is a good idea — just wasn't there when we were talking to them about the Global Arrangement.
Rob Walker:
You've mentioned that the green trade pact proposal might find more room with the EU and others now. Obviously, with Donald Trump in the White House, the US probably won't be a partner in consideration for some time. And the prospects of China joining early on are likely quite low, for the reasons we've outlined. Do you see more room for middle powers to drive forward a proposal like this?
Ryan Mulholland:
The short answer is yes. We've seen momentum from Prime Minister Carney from Canada, for example, circling the globe, meeting with other middle powers, talking about teaming up and working to shape the future. There's a real appetite to do something that is not the past — because we know we're not going back to the rupture that Carney talked about in Davos — but also not go down the Trumpian, far-right approach to trade policy, the sort of hyper-nationalist approach the Trump administration has pursued. If we're not going back, and we're not going the Trump way, what is that other path? What paints the picture of what's possible in the future? Having a model that is something new, attractive, and compelling — something middle powers can rally around — is genuinely powerful. We've seen Carney gain politically in Canada because he's not just angry about Trump's tariffs and not just complaining about someone else's policies — he's proactively doing something about it. Something like this, where there's a new model that people can be part of, offers a vision of future international collaboration that can be impactful, not just for the climate, but for everyday people as well.
Grace Stanhope:
Thanks, Ryan. This has been a great conversation, but unfortunately that is all we have time for today. Thanks Ryan, and thanks Rob for joining me. You've been listening to Development Futures, a podcast from the Indo-Pacific Development Centre at the Lowy Institute, hosted by Institute experts, produced by Andrew Griffits and supported by the Australian Department of Foreign Affairs and Trade. Development Futures is part of the Lowy Institute Podcast Network. You can find all our podcasts on our website, lowyinstitute.org. Thanks for listening.
