The trade and industrial nexus
Isabelle Brachet is Senior Fiscal Reform Policy Coordinator at Climate Action Network Europe
The EU’s current trade policy was designed to liberalise international trade. In reality, this unfettered economic globalisation has deepened global inequality, concentrated wealth and brought the world to the brink of climate catastrophe and natural resource depletion.
As Europe transitions to a green economy, it faces a critical question: how can trade policy support a new industrial strategy that both generates prosperity and is aligned with climate goals?
For a decade, China has pursued an ambitious industrial policy to develop manufacturing in technology-intensive sectors, shifting away from low-technology and labour-intensive industries1. As a result, Chinese industries now compete directly with European companies in many sectors, such as solar or wind industries and electric vehicles. Meanwhile, Europe has lagged in developing a robust industrial policy, with scattered national approaches prevailing. Nearly 1 million manufacturing jobs have been lost in Europe over the last four years2.
EU decision-makers thought for decades that economic integration would translate into a more stable and peaceful world. Recent geopolitical tensions, including the war in Ukraine and China’s assertiveness over Taiwan3, have made clear that trade interdependence does not guarantee peaceful relations, and can even be weaponised against the EU.
Inward investments can be seen as a security threat while being dependent on a limited number of suppliers for vital or strategic goods and for material resources can become a source of vulnerability. The election of Donald Trump in the United States adds even more uncertainty to an already fluctuating global landscape.
These recent developments call for an ambitious industrial policy in Europe to steer the transformation towards a circular and decarbonised economy. Moving towards renewable energy and embracing circularity and sufficiency will help reduce dependencies and make Europe’s economy more resilient to external shocks—geopolitical but also climate-related shocks. However, such an industrial policy can only be successful if it is backed by a deeply reformed trade policy, in Europe and globally.
There’s no point in being nostalgic for the past. For decades, the European trade policy has aimed for the liberalisation of international trade and investment, granting European companies access to foreign markets, raw materials and cheap labour.
This model, rooted in extractivism and exploitation, has fuelled global inequality, destroyed local agriculture markets in the Global South and to some extent in the EU, as well as locked developing countries in the role of raw materials suppliers. Moreover, it has heavily contributed to climate change4 and the depletion of natural resources.
To move forward, Europe needs a new trade policy articulated around four major pillars: 1) ensuring products and goods put on the EU market abide by the same environmental and social standards as those made in the EU; 2) rolling out renewable energy capacity to end fossil fuel imports; 3) supporting sustainable sourcing and management of material resources via balanced human rights-based partnerships with sourcing countries; and 4) ensuring that the EU trade policy protects the EU toolbox for a green industrial policy–as well as the toolbox of our trading partners.
Ensuring products and goods put on the EU market abide by the same environmental and social standards as those made in the EU
In the last few years, important pieces of EU legislation have been adopted to prevent competitiveness based on the worst human rights abuses and environmental destruction, for example, the Deforestation Regulation, Forced Labour Regulation, Corporate Sustainability Due Diligence Directive and Eco-design of Sustainable Products Regulation.
We need to continue to adopt regulations to ensure that products and goods put on the EU market meet certain social and environmental requirements, regardless of where they are produced or who puts them on the market.
Measures such as the eco-design requirements for products or the standards on internal combustion engines are in fact providing an unprecedented opportunity for the European manufacturing industry to become front-runners. Without standards that ban the most polluting cars, we will end up with an automotive industry that is irrelevant.
The EU should support its trading partners in complying with the social and environmental standards through technical and financial assistance. The current pressure by conservatives in the European Parliament to postpone or even sabotage the Deforestation Regulation5 is a very poor policy choice that would penalise, instead of rewarding, companies who already invested in compliance—without speaking about the harmful impact on forests.
We also need policies to reduce the amount of virgin materials used in Europe and encourage a shared and circular economy, meaning the transition from ownership models to service-based solutions and promoting reduction, reuse, repair and only then recycling.
For example, mature recycling industries for materials such as copper, steel and aluminium currently reach end-of-life recycling rates of between 30% and 60% but for several key energy transition minerals, such as lithium and rare earth elements, the rate is less than 1%6.
The net increase in jobs from transitioning to a circular economy has been assessed at approximately 700,000 across the EU by 2030, particularly in small and medium-sized enterprises. For the sake of European future competitiveness, our trade agreements should be designed to support a circular rather than a linear economy.
Rather than portraying the reduction of international trade as a difficult demand, it is the logical consequence of a trade policy aligned with the objective to make the economy green and fair
Rolling out renewable energy capacity to end our dependence on imported and expensive fossil fuels
Our economy is highly dependent on energy. In an open economy, the competitiveness of European companies, but also the affordability of products and services for the people in Europe, depends on low and stable energy prices. Currently, the overwhelming majority of the EU imports are energy imports7. Most of them are fossil fuels, which are costly and erode the EU’s competitiveness.
A new approach to trade policy can help. For example, there should be a ban on importing fracked Liquefied Natural Gas as it is particularly damaging to climate, nature and human health. The EU should also use WTO rules to increase transparency of fossil fuel subsidies and play an active role in the ongoing WTO process on Fossil Fuel Subsidy Reform8, 9.
The EU’s decision to exit the Energy Charter Treaty was a crucial step in the right direction in ending investment protection for fossil fuels, but we need to replace the whole Investor-State Dispute Settlement (ISDS) mechanisms with more balanced processes that safeguard social and environmental standards from the scope of investors’ protection.
Accelerating the deployment of renewable energy, reducing energy consumption and ending our dependence on fossil fuels is the only viable path for ensuring low and stable energy prices, crucial for European competitiveness and for affordable products and services for European citizens.
Trade policy should support sustainable sourcing and management of material resources
The energy transition, and more broadly our economy, rely on resources available in limited quantity, such as minerals and metals, land, water, food, fibre and fuel, as well as so-called critical raw materials. Most of these raw materials used in the EU are imported.
Trade policy must ensure that these are sourced sustainably, with balanced, human rights-based partnerships that empower sourcing countries to meet their own needs and transition to green and circular economies. Reducing the quantity of virgin materials needed to run our economy has manifold implications – from urban and spatial planning to prioritising public transport and active mobility over automobile use, to mandating preferences for low-demand pathways in all energy and related infrastructure planning10.
Trade defence instruments and trade agreements must not limit the policy space of developing countries to build their own green industries nor lock them into the role of exporters of unprocessed raw materials. Instead, the EU should negotiate balanced human rights-based partnerships that allow them to keep what they need for the transformation of their own economy.
Fair partnerships include technology transfer, respecting the right to Free Prior and Informed Consent (FPIC) of local communities on mining projects, and abiding by the guidelines set by the EU’s newly enacted Corporate Sustainability Due Diligence Directive.
Fair partnerships could also mean accepting export restrictions, domestic processing requirements or licensing requirements so that the countries with the resources can effectively control the mineral export, generate revenue, ensure domestic supply security, promote local processing to higher value goods and protect downstream industries to achieve environmental and social goals11.
It should not be possible anymore for the EU to take Indonesia to arbitration at the WTO over its restrictions on nickel exports and its requirement to process the ore locally12.
EU trade policy should protect its toolbox for a green industrial policy
Protection of the policy toolbox includes supporting strategic home-grown industries—such as those providing key technologies for the green transition as well as food and medicine to a certain extent. This could be done through subsidies that come with conditions for decarbonization, circularity and respect for labour rights, and potentially also direct green subsidies for consumers.
Another tool in the EU’s industrial policy toolbox, public procurement, accounting for 14% of the EU’s GDP, must be leveraged to create demand for green products, foster local job creation, and support the social and solidarity economy actors. Trade agreements must not restrict the inclusion of strong social and environmental criteria in public procurement processes.
It’s not about integrating ‘made in Europe’ conditions in public procurements. It’s about integrating stronger minimum social and environmental conditions in public procurement to steer our economy on the only viable path.
Moreover, performance requirements, such as technology transfer and local purchasing rules, should be considered legitimate and acceptable barriers to trade. It should not be possible anymore for the EU to take Algeria in a dispute settlement for taking measures like local content policies for the automotive sector that restrict EU exports and steer investments13.
What was traditionally considered as non-tariff barriers must be allowed in the future as these so-called ‘barriers’ are the very rules we need to build a green and competitive industry in Europe.
The path ahead is clear – but not easy as there are several stumbling blocks on the road. The first danger would be to develop a self-centred or inward-looking trade policy, preventing partner countries from developing their local green industries. This would undermine global cooperation, which is essential in tackling climate change and an EU obligation under the Paris Agreement.
The second risk would be to protect the incumbent industries, notably by promoting the export of products and goods banned in the EU because of their adverse impact on climate, health and the environment. Currently, our trade agreements promote the export of soon-to-be-banned polluting cars as well as hazardous pesticides and plastic waste that are already prohibited in the EU14. Such an approach is self-defeating, not only locking industries into outdated production models but also slowing down innovation, resource efficiency and transition to carbon neutrality.
In order to send the right signal to the industry, the EU must ban the export of products harmful to the climate, environment or health that are already banned in the EU. We should also remove low tariffs on climate-damaging products and goods, even if they are not yet banned in the EU. Climate and environmental protection needs to be at the core of the EU trade policy.
Last but not least, what about reducing the overall volume of traded goods to a level that respects planetary boundaries? According to the WTO, in recent decades greenhouse gas emissions generated by the production and transport of exported and imported goods and services have increased and represent, on average, 20-30 % of global emissions. According to EU statistics, in 2021, the EU’s consumption-based CO2 emissions (carbon footprint) were 15% higher than its production-based15.
Greenhouse gas emissions embodied in EU imports has to be calculated and accounted for. In fact, the EU emission reduction targets for 2030 are insufficient with regard to the EU’s fair share.
The solution proposed by the WTO is to shift to more carbon-efficient means of transportation and to facilitate trade of environmental goods and climate-friendly technologies. This makes sense, but is not enough.
Reducing the absolute volume of international trade may seem a very difficult demand to champion but considering that we need to shift towards a circular economy, develop home-grown vital economic activities, and ensure that the price of international air and maritime transportation reflects the true carbon cost, it is actually coherent to consider that the overall volume of global trade with the EU will diminish.
So rather than portraying the reduction of international trade as a difficult demand, it is the logical consequence of a trade policy aligned with the objective to make the economy green and fair.
Endnotes
1. European Commission, The future of European competitiveness (so-called Draghi Report), 2024. According to a conservative estimate, in 2019 China spent around three times as much on industrial policy as Germany or France as a share of GDP, and in dollar terms adjusted at PPP, it spent around ten times as much as both countries combined.
2. ETUC, Nearly 1 million manufacturing jobs have been lost in Europe over the last four years, 2024.
3. Ferdi De Ville, The European Union’s unilateral turn in trade policy, 2022.
4. Sustainable Development Solutions Network (SDSN), Global Commons Stewardship Index, 2024. It is estimated that around a third of the GHG emission footprint of the EU is embodied into trade.
5. FERN, Two years after championing the EU Deforestation Law, EU Conservative Lawmakers are now wanting to sabotage it, 2024
6. KULeuven, Metals for Clean Energy, 2022.
7. Eurostat, Euro area international trade in goods surplus €24.1 bn, 2024.
8. WTO, Fossil fuel subsidy reform.
9. CAN Europe, How to stop the never-ending nightmare, 2023.
10. CAN Europe, The Economy of Tomorrow, 2024.
11. UNCTAD, Technology and Innovation Report, 2023.
12. European Commission, EU launches consultation on use of Enforcement Regulation on Indonesian nickel export restrictions, 2023.
13. European Commission, EU begins dispute settlement proceedings against Algeria to defend European companies, 2024.
14. Greenpeace, Toxic Double standards, 2024.
15. Eurostat, Greenhouse gas emission statistics – carbon footprints, 2024.
