The global economy is in tatters. On the one hand, a small black swan in the form of a virus has created unprecedented social and economic chaos and triggered an adjustment in financial markets that has gone beyond the inevitable correction of the financial exuberance present in those markets for years. On the other, trade wars (in their various forms, such as the one driven by Trump or the one stemming from the Brexit process) loom as a real threat to the globalised economy, which has served the planet so well in recent decades.
In both spheres there are sufficient reasons for concern, but also for hope. On the COVID front, the decisive measures taken by governments and central banks are easing tensions and helping to reduce the long-term consequences of the pandemic. Meanwhile, the last-minute transformation of trade wars into trade agreements shows that politicians understand that a bad deal is always better than a good war.
However, there is another threat on the horizon that we may be underestimating: trade wars that do not stem from populism, but from the very necessary and long-awaited fight against climate change.
What do we know so far about this? We know there is broad public support in Europe for the fight against climate change, a mixed attitude in the U.S. (with the private sector and certain states leading the fight, but with a federal government opposed), and more limited awareness in the emerging world. We also know that large corporations view the implementation of ESG factors (environmental, social and corporate governance) as decisive pillars of their future strategies. The outcome of the climate change conference held in Madrid (Chile COP 25) is good reason for hope. Although governments could not or would not reach agreements, civil society as a whole showed an unprecedented level of commitment. Particularly striking has been the commitment of financial firms—whether global banks or asset managers—to ESG values and, in particular, to the fight against climate change, even in jurisdictions such as the United States, where governments are stepping away from the global consensus.
What are the chances of reaching a global political agreement on the fight against climate change? Very slim, I am afraid. Realistically, the most likely outcome will be an uneven solution with different levels of ambition and a phased adoption by countries of stricter policies as social demand and technological change push in the right direction.
In this context, Europe has been showing firm leadership, underscored by the European Parliament’s approval of the regulation establishing a framework to facilitate sustainable investment, known as the Taxonomy Regulation, a key element of the European Union’s Sustainable Finance Plan, as it defines harmonised criteria for classifying an economic activity as environmentally sustainable. Likewise, the European Central Bank has launched a public consultation on guidance defining the institution’s supervisory expectations on climate change, and the European Banking Authority continues to develop its Sustainable Finance Plan, in which stress tests will become the cornerstone of this plan.
Therefore, Europe’s decision to lead the race towards a sustainable economy will transform the rules on which global trade has been based to date. Since compliance with ESG principles entails costs for producers of goods and services, those located in countries most committed to the fight against climate change will be less competitive, while those based in countries lagging behind in this fight will become formidable competitors to the former. A situation that is clearly unacceptable.
The only way to restore a level playing field would be to use carbon taxes in the form of tariffs applied to imported goods—tariffs proportional to the differing carbon footprint of the sector and country of origin. This is not a new idea and has already been proposed by the relevant authorities. For example, the Commission has announced that it will propose in 2021 (with a view to applying them from 2023) a digital levy and a carbon border adjustment mechanism that will make it possible to align the price of imports from countries with looser environmental standards with those applied to European production.
However, this solution will probably not be peaceful. Countries will likely disagree with one another about the carbon footprint of traded goods and services, so that importing jurisdictions will overestimate them and exporting jurisdictions may underestimate them. Clearly, the EU and the United Kingdom (after Brexit), which are emerging as global leaders in the fight against climate change, will be able to reach agreements with relative ease. But what might happen to trade between the EU and China, India or Indonesia? Even Japan and the EU may struggle to find a balance on carbon tariffs. It will not be easy to reach agreements and for global trade to continue as normal.
If we also take trade in services into account, the complexity of any agreement may increase considerably. Consider tourism, a CO2-intensive sector, even though the carbon footprint is generated by foreign visitors rather than by the host country. How will the European Union address this circumstance in climate-related trade agreements?
Are these new green trade wars inevitable? Certainly, it will not be easy to navigate them, but I am convinced that we have a duty to avoid, by all means at our disposal, what could amount to another step backwards in world trade and in the globalisation of the economy. To do so, first and foremost, we must understand this new challenge in all its magnitude. It is necessary for political and economic decision-makers to begin to recognise the problem and think about how we can reconcile fair and free trade in a cleaner, more sustainable world.
José María Roldán, Chairman of the Spanish Banking Association
