TWN Info Service on WTO and Trade Issues (Oct23/03)
3 October 2023
Third World Network

Trade: UNCTAD issues “positive” trade & environment agenda for BRICS
Published in SUNS #9865 dated 2 October 2023

Geneva, 29 Sep (D. Ravi Kanth) — Faced with a barrage of likely unilateral environmental measures by the European Union and the United States, the United Nations Conference on Trade and Development (UNCTAD) on 28 September issued a strong and comprehensive “positive trade and environmental agenda” for the expanded BRICS that would “create a policy framework to provide incentives rather than punitive measures, to promote environmentally sustainable trade, both among BRICS and in their trade globally.”

The newly expanded BRICS coalition comprises Brazil, Russia, India, China, South Africa, Ethiopia, Egypt, Saudi Arabia, the United Arab Emirates, Iran, and Argentina.

UNCTAD’s 37-page report, titled, “A Positive Trade and Environment Agenda for the BRICS”, comes days before the EU’s controversial unilateral carbon border adjustment mechanism (CBAM) or carbon border tax comes into effect for an 18-month trial period on 1 October.

The proposed penalties range from euro 50 per tonne of carbon emissions and it will be formally introduced in 2026.

According to a report in the Financial Times of 17 August, “importers will not be charged the tax, which will be based on the block’s carbon price, during the trial phase but will face penalties if they do not comply with the reporting requirements.”

In a signed piece in the Financial Times on 28 September, the EU Commissioner for Economy, Paolo Gentiloni, extolled the virtues of the proposed CBAM, claiming that it is “fully compatible with the WTO rules” and it is not about trade protection.

However, these claims are being challenged by several members, who argue that the CBAM allegedly violates the core WTO rules and worse still, it goes against the Paris Climate Change Agreement of 2015, particularly the principle of common but differentiated responsibilities, said several trade envoys and analysts, who preferred not to be quoted.

UNCTAD REPORT

It is against this backdrop that UNCTAD’s latest report proposing a positive agenda on trade and environment for the expanded BRICS assumes enormous significance, said a trade envoy, who asked not to be quoted.

The report sets the ground as to how the BRICS members could pursue “cooperation in green industrialization to build resilient supply chains; expand climate financing; facilitate affordable green technology transfers; encourage collaboration in R&D (research and development); and carve out incentives and policy space for green transition in international fora such as the UNFCCC (United Nations Framework Convention on Climate Change) and the WTO (World Trade Organization)”.

The report was prepared at the request of the BRICS presidency in 2022 (China) and 2023 (South Africa) under the guidance of Richard Kozul-Wright, Director of the UNCTAD Division on Globalization and Development Strategies, with a team that included Alex Izurieta, Rashmi Banga, Piergiusppe Fortunato, and Dawei Wang.

It highlights certain important features of the BRICS members such as “their combined GDP reaching 26% of the world’s output in 2022 and their share of global trade reaching 21%”.

It acknowledges that “greenhouse gas (GHG) emissions from BRICS have also increased over the years with each individual BRICS economy now on the list of top 20 emitters.”

But based on overall emissions and on a per capita basis, it says that “the BRICS contribution remains much lower than that of the developed economies.”

However, accelerating climate change underscores the need for “a collective effort across all countries based on the principles of the Paris Agreement and in line with the (United Nations) Sustainable Development Goals,” it emphasized.

Both the EU and the US seem to be in no mood to abide by the multilateral rules as set out in the Paris Climate Change Agreement. Instead, they are on the verge of deploying unilateral, trade-related measures to address climate change in the developed world, which risks damaging the development prospects in developing countries, including the BRICS.

As an example of their determination to plunge into unilateral measures, UNCTAD’s report noted that the EU’s “Carbon Border Adjustment Mechanism (CBAM) which would impose a carbon tariff on imports into the EU from non-EU countries, (is) based on the level of carbon emissions generated in the production of the imported products.”

According to the UNCTAD estimate, the impact of the CBAM on the reduction in GHG emissions will be small (less than 0.1%) while its impact on energy-intensive exports from BRICS countries to the EU will be a drop in exports between 15% to 26% depending on the carbon pricing scenarios adopted.

“The real income of BRICS may fall between $4 billion to $7 billion with maximum fall in Russian Federation ($2.5 billion), followed by India ($1.6 billion) and South Africa ($1.3 billion),” the report suggested, adding that, “Such measures which reduce real incomes in BRICS will make it more challenging for these countries to progress on their climate goals.”

Due to growing adaptation costs to address accelerating climate change, developing countries will be hard hit, the report pointed out.

“Undoubtedly, economic diversification, technological progress, robust government finances, and reliable sources of foreign exchange are the preconditions for successful climate change adaptation and mitigation strategies in the developing world”, it argued.

Significantly, it said “the economies of the BRICS, taken together, can offer considerable leverage, on both environmental conditions and those shaping trade and finance, to the benefit of other developing countries.”

It assessed the evolution and extent of trade and financial interactions within the BRICS, and by extension within the Global South, given the pivotal role of BRICS economies in their respective regions.

The report cautions that “the scope for success of a development, growth and environmentally sustainable agenda mediated by the BRICS is limited if multilateral trade and financial arrangements, where the support of advanced economies is critical, are not altered.”

It said given the pressure exerted by the major economies, it is important that “BRICS and the Global South should strive to interact with the rest of the world from a position of strength, with sufficient policy space, as well as with a spirit of cooperation firmly anchored in the fact that the natural environment and particularly its climate are intrinsically global.”

A POSITIVE AGENDA

According to UNCTAD, “developing countries are not on the front line of a cumulative process of global environmental degradation.”

It says, “The impact of mitigation strategies of the major economies on tempering climate change is many-fold greater than what developing countries can exert.”

Little wonder that “the pace of global environmental devastation in the developing world therefore largely reflects an exogenous factor.”

Also, it appears that most developing countries are located “in more vulnerable geographical areas than the rest of the world, so climate adaptation plans are comparatively more demanding than mitigation plans and must reflect local circumstances.”

The report argues that “trade performance can play a critical role in the green transition by accelerating technical progress, raising government revenues, and providing much-needed foreign exchange to developing countries.”

Given the asymmetries in the international trade regime that seem to affect the developing countries most, it says that “greater  trade activity, especially in industrial sectors also trigger greater import demands, which are often expensive for local producers, due to well-known exogenous factors including: (i) higher international prices of high-tech products with intellectual property content, (ii) global corporate and the concentration of providers in these sectors, and (iii) disrupting exchange rate fluctuations triggered by global finance.”

According to the report, “Exports resulting from industrial activity should be sufficient to overcome the increase of import demands, but export performance is also reliant mostly on external conditions: (i) the strength of global demand; (ii) market access which can be disrupted by trade barriers; and (iii) a playing field which is often distorted by initial conditions of main players, as well as by trade rules that can impose unreachable thresholds on weaker partners.”

A positive trade and environment agenda could provide BRICS member states with a policy cooperation framework to address the above challenges, it said.

The report suggested a plan of action, as follows:

1. Diversify Intra-BRICS Trade Basket:

The composition of BRICS global trade and intra-BRICS trade highlights the importance of mineral ores, fuels, metals, and petroleum products in global and intra-BRICS trade. BRICS countries need to diversify their trade baskets through strategic interventions. In light of the product composition of exports and imports of BRICS with non-BRICS countries, there is huge potential to diversify intra-BRICS trade, especially in chemicals (HS 28-38), food products (HS 16-24), stone and glass (HS 68-71), transport (HS 86-89) and vegetables (HS 06-15) where BRICS are both exporters as well as importers from non-BRICS countries.

2. Need to Cooperate for Green Industrialization and Building Resilient Supply Chains:

BRICS members can apparently cooperate in three areas such as higher value-based segments of renewable energy, energy storage, and production of environmentally sustainable substitutes.

Integration in green value chains will require:

i. identifying entry points into value chains to exploit mutual complementarities;

ii. facilitating connections between firms operating in different countries at different parts of the chain; and

iii. easing border restrictions, harmonizing testing and certification systems, and developing trading platforms for different commodities.

3. Mobilizing Climate Finance and Facilitating Trade and Environment Fund:

To overcome the financial constraints to address climate change, intra-BRICS cooperation can play a pivotal role by creating synergies and reinforcing individual efforts.

With a combined GDP of over $20 trillion, BRICS still have huge growth potential to help meet their climate financing needs and also mobilize financial resources for other developing countries by:

i. Creating a dedicated BRICS climate financing facility under a New Development Bank to support common interests;

ii. setting up a dedicated trade-environment fund, both in national development banks and in a BRICS New Development Bank, for supporting intra-BRICS trade in green goods and green technologies.

iii. encouraging the cooperation and joint investment of public development banks of BRICS in supporting climate actions;

iv. enhancing the cooperation among central banks and regulators for sharing the policies and practices in cultivating the green bond market, building carbon emission schemes, and addressing “greenwashing” issues in financial markets; and

v. facilitating and promoting the intra-BRICS FDI flows in alignment with national climate agenda and actions.

4. Need to Collaborate on R&D Activities and Innovations for Green Transition:

BRICS countries have strong manufacturing capacities and a large industrial base which can spur technical progress.

Therefore, cooperation in science and technology can go a long way in strengthening BRICS potential to structurally transform and achieve environmentally sustainable growth by:

i. Using the New Development Bank to support national and BRICS collaborative R&D activities in green technologies.

ii. building a network among the universities, labs, and research entities of the BRICS members to strengthen the green technological capabilities.

iii. exploring the feasibility of developing an environmentally friendly intellectual property protection mechanism for green innovations, which may further strengthen intra-BRICS green technology transfer and sharing.

5. Facilitating Transfer of Affordable Green Technologies:

While BRICS countries are fast developing green technologies, they still lag behind advanced countries, which are rapidly patenting green technologies.

Due to the harmful impact of patents, UNCTAD calls on BRICS to play a leadership role in the Global South and facilitate affordable green technology transfers both amongst themselves as well as with other developing countries by:

i. Identifying a list of green technologies, similar to how countries identified a list of environmental goods;

ii. facilitating patent-free transfers of the identified green technologies amongst the BRICS countries and to the Global South;

iii. expanding TRIPS flexibilities for developing countries in the WTO, given the urgency of tackling climate change. The Doha Ministerial Declaration on the TRIPS Agreement and Public Health can provide a useful example to follow. It provided flexibilities, including the freedom to each member to establish its own intellectual property rights regime, subject to MFN and national treatment provisions; and

iv. promoting green technology transfers, including the open-sourcing of key green technologies and declaring them as public goods.

Lastly, UNCTAD called for coordination positions in international fora to preserve policy space, as “the growing trade-related unilateral environmental measures such as CBAM may slow or halt the progress made by BRICS in their climate goals by adversely impacting their export growth, incomes, and employment.”

Also, it is well documented that “the globally evolving trade and environment agenda could further restrict the policy space available to developing countries, including the BRICS, in designing their climate-related strategies.”

Therefore, the report said it is critical for BRICS to coordinate positions in various international fora and play a leadership role in preserving policy space for developing countries by:

i. upholding the need for SDT (special and differential treatment) and CBDR (common but differentiated responsibilities) in all actions undertaken internationally like the UNFCCC and the WTO;

ii. proposing a Trade and Environment Fund at the WTO on the lines of the Global Environment Fund at the UNFCCC;

iii. adopting a moratorium on trade-related environmental measures of developing countries to expand the policy space for developing countries to progress on their national climate goals;

iv. coordinating a BRICS position in all trade and environment discussions, especially at the CTE [Committee on Trade and Environment] in the WTO; and

v. jointly opposing trade-related unilateral environment measures like the CBAM, and encouraging an incentive- based approach like eliminating tariffs on plastic substitutes at the WTO.

In short, UNCTAD’s report for the BRICS provides an alternative for developing countries to rally around in the crucial discussions in opposing the EU’s trade and environmental sustainability structured discussions (TESSD) and now the CBAM at the WTO, including the WTO DG’s proposed plan to embark on carbon-pricing models. +