Climate concerns or trade barriers?

The post-Covid world order is currently witnessing a stratagic move by Western developed economies, particularly the European Union, to champion the cause of environmental justice. In line with this, the European Council has recently adopted the EU Deforestation Regulation (EUDR), the Carbon Border Adjustment Mechanism (CBAM), and the Foreign Subsidy Regulation (FSR). While some applaud these actions for ushering in a paradigm shift, there are serious concerns about their objectives and implementations, particularly among the Global South. Are trade-restrictive measures the only viable approach to addressing environmental concerns? Is the EU, under the guise of combating the global climate crisis, intending to protect its domestic products?

The EU has implemented measures that specifically target goods exported from developing countries. From India’s perspective, these measures could tilt the trade balance in favour of the EU. According to a report by the Global Trade Research Initiative, these measures could affect exports from India by over $74.8 billion out of a total export value of nearly $75 billion in 2023 alone.

The FSR grants the EU the authority to investigate foreign subsidies, such as production-linked incentives and the Faster Adoption and Manufacturing of Hybrid and Electric Vehicles schemes, potentially negatively impacting India’s automobile industry. The EU is currently scrutinising the WTO compatibility of the PLI scheme, a move vehemently opposed by India.

Similarly, the ICRA has predicted that CBAM could negatively impact 15 to 40 per cent of India’s annual steel exports. It has further stated that compliance with CBAM could reduce the profits of Indian steel exports by $60–165/MT. With India producing 122 million tonnes for export to EU countries in 2023, the significant market share of Indian steel in the EU makes CBAM a huge barrier to Indian trade.

Article III of the GATT 1994, addressing National Treatment, prohibits discrimination between imported products and “like” domestically produced goods in terms of tariffs or other regulations. Article I ensures that “like” products from all WTO member states are accorded similar treatment. Here, to be accorded similar treatment, the product should necessarily be a “like” product.

In the Japan Alcohol II case, the WTO panel observed that the determination of the relevant marketplace should considerably be given more weight in determining the likeness.

If consumers treat two goods as non-substitutable, then any preferential treatment of one will not impact the competitive conditions in the market. In the case of EUDR, Marin Duran argues that it is quite improbable that EU consumers will not treat EUDR-compliant and non-compliant goods as substitutable, and thus, it would create a barrier to market access. The same would also amount to “arbitrary or unjustifiable discrimination” under Article III:4 of GATT 1994.

The EUDR’s three-tier country benchmarking system could create adverse conditions of competition for imported products, as observed in the case of Korea’s Various Measures on Beef.

Article XX(g), invoked by the EU, pertains to the conservation of exhaustible natural resources, serving as an exception to the principle of non-discrimination. While the EU justifies these measures by citing an imminent threat to the global environment, it specifically targets goods exported from developing countries so that domestically produced goods could have an advantage.
The EU has completely ignored the concept of Common But Differentiated Responsibility recognised internationally under the Rio Declaration.

Despite Article 1(1)(a) of EUDR aiming to “contribute to a reduction in global deforestation,” unilateral trade restrictions may lead to the leakage of deforestation-intensive goods into countries with less stringent due diligence requirements.

The EU has pledged to hold talks with developing countries to ensure that the measures are implemented to comply with the WTO provisions. As a countermeasure to the CBAM, developing countries like India have come up with their own carbon credit trading scheme through the Energy Conservation (Amendment) Bill, 2022. Moreover, India is deliberating on challenging CBAM in the WTO.

It is pertinent to note the contributions made by the EU in degrading the ‘global’ environment. The total forest cover in the EU region is less than 0.7 per cent, while the global average of forest cover is 33 per cent. According to the European Environment Agency, the EU contributes more to environmental degradation than any other region in the world. Thus, targeting products coming from developing countries would not achieve the EU’s goal of preserving the ‘global’ environment.

(The writers are students at National Law University, Jodhpur)