Illustration of NAFTA nation flags Canada, USA, and Mexico.

Summary

  • The connection between climate action and trade is becoming more apparent as the world economy and systems develop. For many countries, free trade agreements (FTAs) will become a positive way to work towards achieving their set climate action goals.
  • Economists Gene M. Grossman and Alan B. Krueger identified three “mechanisms of action” through which trade agreements could indirectly influence environmental outcomes following the North American Free Trade Agreement (NAFTA) in 1992 by Canada, the United States, and Mexico.
  • Canada currently has three complementary assessments to evaluate the nation’s trade policy initiatives’ impacts, including the Environmental Assessment (EA) of Trade Agreements. EAs in Canada closely align with the negotiation procedure and are implemented as early as possible, generally during the policy development stage.
  • With the majority of global trade already locked into trade agreements, it is vital to understand the degree to which these trade agreements support the kinds of climate-friendly policies required to tackle the world’s environmental emergency.

Introduction

The enormous efforts to tackle climate change are taking place on multiple fronts, including trade. As a globalizing world economy and system develop, climate action and trade links become more significant. Trade is a central element of contemporary globalization and has created increasing operational connections between economic activities. This is taking place globally via cross-border supply chains, production networks and other transnational economic developments.

Trade’s share of global gross domestic product (GDP) has progressively increased from 30% in the 1970s to over 40% in the 1990s. By the start of the 2020s, trade’s GDP share had risen to 60%. In the meantime, free trade agreements (FTAs) have emerged and are now the primary trade policy and diplomacy mechanism. FTAs also play a massive role in how international trade is governed, so for these reasons, including climate action measures within FTAs can have substantial potential significance—especially when energy policy is concerned.

Canada currently has 14 trade agreements in place with over 50 countries worldwide—with more in varying stages of negotiation. The FTAs in place represent over 78% of Canada’s imports and 89% of the country’s exports in 2018. With Canada’s FTAs playing such a significant role in its economy, this article explores whether it is possible for Canada to take positive climate action through FTAs or whether it holds back environmental change.

How FTAs and Climate Action Became Entwined

For many countries, FTAs have become another way they can work towards achieving climate action goals.

Illustrations of international trade being carried out with green policies.

It was in the early 1980s that climate-related conditions within FTAs first began to appear. However, it was not for another 20 years until substantive measures were introduced or a significant number of trade partners began to engage. From 2010, there were finally essential steps towards including environmental initiatives in FTAs, and in more recent years, it has continued to intensify.

For many countries, FTAs have become another way they can work towards achieving climate action goals. They also provide new opportunities for trade and energy policy to work more closely together, helping strengthen renewable energy initiatives. The influence trade agreements could have had on environmental objectives has been carefully analyzed back to the 1990s by economists Gene M. Grossman and Alan B. Krueger.

During the 1990s, trade liberalization was surging alongside an uptick in globalization due to the Soviet Union collapsing and new technological innovation reducing the cost of transport and across border communication. Following the signing of the North American Free Trade Agreement (NAFTA) in 1992 by Canada, the United States and Mexico, Grossman and Krueger  identified three “mechanisms of action” through which trade agreements could indirectly influence environmental outcomes:

  • Scale Effects:
    Liberalization typically increases trade flows by sea, air and land, encouraging more substantial economic activity. In an everyday business as usual scenario, this would increase resource depletion, pollution and emissions. Shipping alone accounts for 2% to 3% of global greenhouse gasses. The majority of other trade agreement evaluations support Grossman and Krueger’s hypothesis.
  • Composition Effects:
    Trade agreements help encourage nations to specialize corresponding to their main advantages, which can be more or less emission-intensive. For example, compared to the United States, manufacturing in Malaysia is twice as carbon-intensive, and in Vietnam, it is six times as carbon-intensive. If trade agreements move manufacturing to more polluting countries, global emissions will increase.
  • Technique Effects:
    Emissions and pollution levels can be improved if trade liberalization encourages multinational corporations to provide cleaner technologies to developing countries. However, this method can also damage the environment, such as if natural gas exports or fossil fuel extraction increase due to the diffusion of hydraulic fracturing technology or innovative oil exploration equipment.

As seen above, trade provisions can directly help or hinder environmental and climate goals. A positive impact could be seen in the solar power industry. For example, photovoltaic (PV) cells made in China are manufactured with equipment and parts from countries such as the United States, Germany and Switzerland. By removing tariffs and harmonizing standards, trade agreements could assist renewables companies in accessing more competitive suppliers and gaining access to the skills, capital and finance needed to expand. In addition, consumers would also benefit as trade agreements can reduce the price of green products—from solar panels to electric vehicles, thus increasing demand.

Trade agreements could help eliminate distortionary subsidies on fossil fuels and provide a platform to formalize efforts to stop destructive trade-related malpractices, such as illegal logging and fishing—two prominent Canadian industries.

How Canada Manages Environmental Impacts of FTAs

Canada is forward-thinking in that it understands that free and open trade, protecting the environment and acting on climate change must all work hand in hand.

Canada currently has three complementary assessments to evaluate the impacts of the nation’s trade policy initiatives. One such assessment is the Environmental Assessment (EA) of Trade Agreements, undertaken by Global Affairs Canada (GAC) to assess the impacts of prospective international trade agreements against environmental sustainability priorities.

The GAC has been performing environmental assessments of Canada’s international trade negotiations since 2001, alongside the Cabinet Directive on the Environmental Assessment of Policy, Plan and Program Proposals. This proposal provides departments and agencies with the guidelines needed to conduct strategic environmental assessments of policies, plans and program proposals. GAC continues to build on these guidelines to develop its framework for the environmental assessment of trade negotiations, taking into account any environmental repercussions of trade agreements and the international context in which they are agreed.

EAs closely align with the negotiation procedure and get underway as early as possible—generally during the policy development stage to identify potential environmental effects that are likely to arise from a trade agreement. This is a tailored approach that helps to evaluate the environmental implications of international trade negotiations efficiently. It also can identify additional ways to decrease environmental risks and improve positive environmental outcomes, mainly through specific provisions in Canadian trade agreements.

The framework for conducting EAs during trade agreements negotiations is a reference document that lists the objectives, guiding principles, analytical approach, and processes to be observed. Canada states that its aims of conducting an EA for international trade negotiations and agreements are:

  • Evaluate the environmental risks and opportunities that a potential trade agreement may produce in Canada and beyond.
  • Support Canadian negotiators to consider any environmental concerns during the negotiating process—to mitigate risks and improve benefits and relevant mainstream environmental provisions throughout the agreement.
  • Assist in the identification of possible additional domestic measures to lessen the risk further and increase benefits.
  • Communicate to Canadians on how environmental factors are considered throughout trade negotiations in the initial and final EA.
  • Utilize governance structures in the agreement to assess and monitor environmental risks identified in the EAs—leveraging cooperation activities and stakeholder engagement to support mitigation strategies identified during the negotiations.

Canada is forward-thinking in that it understands that free and open trade, protecting the environment and acting on climate change must all work hand in hand. The process for conducting EAs is flexible and can be adapted to various trade negotiations on a case-by-case basis, according to the scope and nature of the agreement under negotiation.

The Achievability of Climate Friendly Trade Deals

The majority of global trade is locked into trade agreements that have already been negotiated or are currently being agreed upon.

To date, climate agreements have made little reference to trade. For instance, international shipping and aviation clauses were withdrawn from the draft text during the COP21 Paris negotiations. Likewise, countries’ nationally determined contributions (NDCs) make only small direct references to their trade policy. For example, one study discovered that just 6% of NDCs mention reductions in trade barriers, while only 11% refer to trade regulation on climate grounds.

The majority of FTAs are still only making limited reference to climate change. As it is impossible to modify the scientific processes of climate change, some economists contend that trade agreements must be made more compatible with climate policies than the other way around. For example, a Boston University-based group claims the majority of trade models and investment treaties are largely incompatible with the world’s broader climate goals. This university group calls for a redesign to incentivize climate-friendly methods of economic activity, reduce activity that exacerbates climate change, and provide the proper policy space so that nation-states can adequately deal with the climate challenge.

The majority of global trade is locked into agreements that have already been negotiated or are currently being agreed upon. This means it is vital to understand the degree to which these trade agreements support the kinds of climate-friendly policies which are so desperately needed to tackle the world’s environmental emergency.

Closing Thoughts

Trade will have to play a central role in the climate change solution if the world is to restrict global warming to 1.5°C. It will be impossible for countries to achieve their ambitious Paris Agreement targets without coherent and robust trade and environmental policies. For starters, FTAs that are currently in the negotiation stages should be more climate-friendly. This can be achieved by building on the best practices followed in recent agreements.

It should be standard for commitments to removing non-tariff barriers on environmental goods and services and supporting broader climate policy cooperation. The current vague and non-binding language used must become more explicit and mandatory. Countries should also consider seizing more challenging opportunities to reduce fossil fuel subsidies and border adjustments on carbon taxes.

Countries supporting climate-friendly FTAs and introducing a climate waiver are essential in aligning the global trade architecture with climatic realities. It would position trade as part of the climate change solution rather than a contributing factor.

Frequently Asked Questions (FAQs)

What are free trade agreements?

A Free trade agreement(FTA) is an arrangement between two or more nations. The countries agree on specific obligations that impact trade in goods and services, protection for investors, intellectual property rights, and other matters.

 

Who do free trade agreements benefit?

Free trade can bring about many improvements, including better jobs, new markets, and increased investment in a country. In addition to encouraging ease of trading goods and services, free trade can also help spread values and principles. Since international trade depends on traders keeping their agreements, countries and companies are more accountable and, therefore, more stable.

 

Can trade agreements be used to protect the environment?

There is currently no specific agreement dealing with the environment, but members can implement trade-related measures to help protect the environment under the World Trade Organisation’s rules.

 

Does Canada have a free trade agreement?

Canada currently has 14 free trade agreements across 51 countries. The four major FTAs for Canada include:

  • Canada-United States-Mexico Agreement (CUSMA)
  • Canada-EU Comprehensive Economic and Trade Agreement (CETA)
  • Canada-UK Trade Continuity Agreement (CUKTCA)
  • Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP)

 

What country has the highest number of free trade agreements?

Following the United Kingdom’s exit from the European Union, it has 35 trade agreements to its name—the highest after the European Union countries. Iceland and Switzerland then follow with 31 agreements, Norway with 31, and Chile with 30 trade deals.

 

Westbridge Energy Corporation

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