The future of trade is both green and digital. A number of trade policy tools and models for managing cooperation and competition are emerging, a trend that will likely accelerate during 2023.
Transatlantic tensions have flared over the US’s Inflation Reduction Act, signed into law by President Joe Biden in August 2022. These centre on the EU’s concerns – also shared by countries including the UK, Japan and South Korea – over US tax credits that favour North American-made electric vehicles and subsidies for renewables that the US’s trade partners see as unfair and discriminatory. While the EU has welcomed the act’s potential contribution to tackling climate change, the legislation has led to an outcry in the bloc over fears that the incentives offered could redirect investment from the EU to the US – especially at a time when lower energy prices in the US also lure European investors. The European Commission has threatened to bring the dispute to the WTO (although this is increasingly unlikely) and announced a Green Deal Industrial Plan, which includes temporarily adapting EU state aid rules in response to the US subsidies. The two sides are trying to resolve the issues via the US–EU Task Force on the Inflation Reduction Act. But while some compromises are likely that could widen the scope for EU firms to benefit from the act’s provisions, its overall thrust will not change. Avoiding a transatlantic trade war over climate is desirable for both sides in order to accelerate the low carbon transition and to reduce dependence on China-heavy supply chains for critical minerals and batteries used in electric vehicles.
Under a provisional deal reached by European co-legislators in December 2022, the EU’s Carbon Border Adjustment Mechanism (CBAM) will enter into force on 1 October 2023. Initially, the mechanism will only cover products, from a limited number of carbon-intensive sectors, that are deemed to be at higher risk of carbon leakage (such as iron and steel, cement, fertilizers, aluminium, electricity and hydrogen, as well as some precursors and a limited number of downstream products). After a three-year transition phase during which only reporting obligations apply, CBAM will start in 2026 and become fully operational by 2034, requiring EU importers to purchase certificates equivalent to the EU carbon price. While CBAM is stated to be designed in full compliance with WTO rules, the question of compatibility remains and will also come down to how the mechanism is implemented. Moreover, political sensitivities persist, including concerns about the impact on developing countries. Beyond CBAM, other parts of the EU’s Green Deal (for example its new regulation on deforestation-free supply chains) have the potential to reshape global trade.
Climate action is still not very high on Japan’s political agenda, but a focus on energy security could stand a better chance of success under its G7 presidency in 2023.
The idea of a ‘Climate Club’ gained traction in 2022, when Germany used its G7 presidency to propose the creation of an alliance of countries committed to stronger action on climate change. In December, G7 members endorsed the terms of reference and agreed ‘to support further development of the Climate Club towards a full launch in 2023, ideally by COP28’. With Japan holding the G7 presidency in 2023, however, the Climate Club is unlikely to remain a focal point for the grouping. Climate action is still not very high on Tokyo’s political agenda, but a focus on energy security could stand a better chance of success under Japan’s G7 presidency. Meanwhile, the Climate Club discussions will be shifted to an interim secretariat (to be hosted by the Organisation for Economic Co-operation and Development, in tandem with the International Energy Agency) and a Climate Club Task Force (chaired by Germany and a yet-to-be-determined Climate Club member from beyond the G7).
As already noted, the WTO is a key forum for advancing discussions at the nexus of trade and sustainability. Three separate environmental initiatives were launched in 2021 to make progress on plastics pollution, reform of fossil fuel subsidies, and environmental sustainability. Technical discussions over the course of 2023 are intended to lead to concrete outcomes by the time of the 13th WTO ministerial conference, although political will is ultimately going to be the deciding factor for how much progress can be achieved.
Semiconductors play an important role in the transition to green and digital economies. The US CHIPS and Science Act, signed into law by President Biden in August 2022, provides $52.7 billion for American semiconductor research, development, manufacturing and workforce development. Similarly, the proposed EU Chips Act (which is expected to be adopted in 2023) seeks to mobilize €43 billion in investment for the EU’s semiconductor sector by 2030. There is a risk of a subsidy race between the US and the EU, despite both sides vowing to avoid this and to instead cooperate on creating secure semiconductor supply chains. Another risk concerns friction over the Biden administration’s efforts to get European governments, among others, to fall in line with US controls on semiconductor technology exports to China.
Many of the US’s recent legislative initiatives – including the CHIPS and Science Act, the Inflation Reduction Act and the Infrastructure Investment and Jobs Act – indicate a shift away from a more market-oriented framework towards embracing industrial policy. This more interventionist approach will have a fundamental impact on trade flows as well as on the US’s relations with major trading partners, not least in the form of tensions with the EU over subsidies.
The US’s more interventionist approach will have a fundamental impact on trade flows as well as on its relations with major trading partners.
The evolving landscape of digital regulation in the EU – exemplified by the entry into force of the Digital Services Act and the Digital Markets Act in November 2022, as well as the pending proposals for the Artificial Intelligence Act – is aimed at strengthening European digital sovereignty and competitiveness. But the full effect of these rules governing the internet and the digital economy remains to be seen. 2023 will be a critical year, as the Digital Markets Act starts to apply and as progress on the Artificial Intelligence Act could bring about its adoption before the year ends.
New governance models concerning digital trade are emerging. For example, the Digital Economy Partnership Agreement (DEPA) between Singapore, New Zealand and Chile entered into effect in 2021. This has been hailed as a landmark agreement on digital trade – not only in terms of its provisions, but also in its approach to allowing parties to make continual updates and other countries to adopt DEPA modules into their own trade agreements. DEPA is designed to be open to all WTO members – and Canada, China and South Korea have already applied to join.
The UK is also at the forefront of initiatives on digital trade, as evidenced by its constructive role in the WTO and G7 as well as its approach to trade and digital economy agreements. For example, the UK-Singapore Digital Economy Agreement entered into force in June 2022, and is the first such agreement between a European and an Asian country.
Important developments on digital trade in 2023 will likely focus on promoting inclusive and sustainable growth of the digital economy, while preventing further digital policy fragmentation. Hopes remain that the negotiations on e-commerce that are currently taking place among 87 WTO members can be finalized before the end of 2023. While such progress would represent a significant accomplishment, it should also be noted that major digital economies – among them India – are not participating in the plurilateral discussions because of both substantive issues (e.g. the contested issue of free flow of data across borders) and procedural matters (e.g. general concerns that the plurilateral process erodes the integrity of the multilateral WTO framework).
The UK is also at the forefront of initiatives on digital trade, as evidenced by its constructive role in the WTO and G7 as well as its approach to trade and digital economy agreements.
In 2023–24, WTO members will once again debate whether to maintain the current practice of not imposing customs duties on electronic transmissions. The so-called e-commerce moratorium has been renewed at every ministerial conference since its adoption in 1998, and will remain in effect until the next. However, there is a high chance that it will not be renewed at the 13th ministerial conference (India’s ongoing concerns regarding tariff revenue losses being just one likely obstacle to renewal). Letting the moratorium expire would not only hurt digital trade, but would also represent a significant setback for the WTO’s relevance and credibility.
Thus, in 2023 and beyond, most progress on updating trade rules to address technological change will happen outside the traditional WTO structures. Japan’s G7 presidency in 2023 could seek to advance cooperation on ‘data free flow with trust’ – a concept that Japan proposed under its G20 presidency in 2019. But India’s G20 presidency in 2023 is not likely to give great impetus to cooperation on digital trade given the country’s stance on data regulation and cross-border data flows.