Bold Climate Action Means Seizing WTO Law’s “Policy Space”

A deal between the United States and the European Union on “green” steel and aluminum could both fuel economies and transform the politics of climate change. But these goals could be jeopardized if negotiators are preoccupied with insulating the deal from legal challenges.

US and EU negotiators have given themselves an October 2023 deadline to finalize a deal on the Global Arrangement on Sustainable Steel and Aluminum (GASSA).¹ As envisioned by US negotiators, the GASSA will combine tariffs and other trade policies to create a market for less-carbon-intensive steel and aluminum, while also combating the market-distorting subsidies that have led to global overcapacity. In so doing, it will give US and European steel producers breathing room to invest in decarbonizing their production processes without fear of being undercut by the cheap, dirty, and heavily subsidized imports that have led to massive global overcapacity in the metals sector and put pressure on the industry on both sides of the Atlantic.² If it works as planned, this deal can lead not just to lower emissions, but also—by converting steel from a climate-blocking to climate-supporting industry—to better climate policy going forward.³ Furthermore, it would provide a template for expanding transatlantic cooperation on decarbonization to other sectors in the future.

In recent years, the EU has been a leader in adopting ambitious unilateral trade-and-environment policies, such as the EU Carbon Border Adjustment Mechanism (CBAM) and the Deforestation-Free Products Regulation. Most outside observers and many other World Trade Organization (WTO) members believe that these policies are likely inconsistent with prevailing interpretations of those rules.⁴ That fear has rightfully not deterred the EU from adopting its unilateral policies, and it should not deter efforts to multilaterize similar trade-and-environment policies. After all, cooperation among the world’s leading trading powers is more likely to achieve the shared goals of decarbonization via fair trade practices than a fragmented series of unilateral trade policies.

We can put forward a good argument that the GASSA will be compliant with international trade law, and one of us has done just that.⁵ Nevertheless, the arrangement will have to rely on differential tariff treatment based on factors such as production methods and state subsidies. There is an irreducible risk that some aspect of the GASSA might eventually be found to violate one or more rules of the WTO.

Negotiators cannot afford to let this risk inhibit creative policymaking. For years, defenders of the WTO have assured skeptics that trade rules provide enough “policy space” for governments to regulate in the public interest without fear of violating trade law.⁶ This narrative is key to trade law’s legitimacy and its long-term survival. Rather than watering down their plans to minimize WTO legal risk, negotiators must focus on seizing that policy space to advance a new generation of climate policies.

One problem, though, is that many experts and policymakers are working with a cramped understanding of the space that WTO law provides. The WTO’s now-moribund Appellate Body has interpreted rules through a largely economic lens, finding that effectively any difference in treatment between competing products (such as carbon-intensive versus green steel) is discriminatory.⁷

If found to be discriminatory, regulations like the GASSA would have to be justified, if at all, by reference to the “exceptions” in WTO agreements. These exceptions are usually cited as the primary source of policy space at the WTO. They allow governments to take measures for certain listed purposes, such as measures “necessary” to protect human, animal, or plant life.⁸ The government relying on these exceptions bears the ultimate burden in WTO proceedings, and aspects of its policies can be subject to close and exacting review by an international panel of adjudicators. Environmental, health, and animal welfare policies frequently fail this review and are deemed noncompliant by WTO panels.⁹

Trying to hammer a novel policy like the GASSA into a shape that is sure to pass WTO scrutiny is a fool’s errand. Doing so would require ensuring that the arrangement is configured to comply not only with the text of WTO agreements, but also with two decades of case law that does not exactly invite the kind of green industrial policy experiment that the GASSA represents. The result is likely to be a policy that is less effective in its environmental objectives while still facing a risk of being found inconsistent with WTO rules.

Fortunately, there is a better way to think of trade law’s policy space. That is, the WTO agreements are designed to enable governments to act first, and to adjust course later, if and when their policies are found to be out of sync with trade rules.

This is the real policy space afforded by WTO law, and it derives from four basic features of the system.

First, if no country ever challenges the GASSA, then no legal consequences for joining the GASSA can arise under WTO rules. This is a very real possibility. The GASSA looks a lot like another international agreement—the Montreal Protocol on Substances that Deplete the Ozone Layer. Like the proposed structure of the GASSA, the Montreal Protocol creates two tiers of trade restrictions. First, members had to abide by certain rules or face penalties. And, second, nonmembers faced an outright prohibition on trade in ozone-depleting substances with members. This structure was wildly successful. The Montreal Protocol is the most successful environmental treaty of all time and, although many people do not know this, the most effective climate change agreement ever, because ozone-depleting substances are also greenhouse gasses. But this structure also plausibly violated WTO rules by discriminating against nonmembers. Notwithstanding arguments about the incompatibility of Montreal’s trade restrictions with international trade law, no country has ever brought a challenge, and today the agreement has almost universal membership.

Second, under WTO rules, a measure is unlawful only after the WTO (via its Dispute Settlement Body) has adopted a decision finding it to be so. And remedies under WTO rules are purely prospective. This means that, if the EU and the US agree to GASSA rules in 2023, and in 2027 the WTO’s Dispute Settlement Body adopts a decision that GASSA rules violate WTO rules, that decision only has effect from 2027 onward. Whatever one’s private opinion, under WTO rules the GASSA is lawful until found not to be.

Third, governments that lose a WTO dispute need only bring their measures “into compliance,” and they do not have to abandon their policies altogether. This may sound like a pedantic, lawyerly distinction, but it is not. Because of this principle, governments can often comply with WTO rulings by strengthening, rather than shrinking from, their regulations.¹⁰ Indeed, environmental and health regulations that failed the initial round of WTO review often emerge from this later round with relatively minor alterations. For instance, countries that have “lost” at the initial stage of WTO regulations have later brought their laws “into compliance” by eliminating exceptions and loopholes,¹¹ providing further scientific study,¹² or adjusting administrative procedures.¹³

Fourth, even if the GASSA were found to violate WTO rules in a way that could not be easily worked around, the parties could simply keep it in exchange for a fairly modest remedy. In essence, governments that objected to the GASSA would be able to adopt trade restrictions that offset any lost market access. For instance, if China successfully challenged GASSA rules as implemented by the US or EU, the result would just be that China could impose trade barriers equal in value to what they have lost in those markets. In this way, the WTO’s remedial system operates as an alternative way to negotiate import barriers. It does not, as alarmists in the US sometimes claim, force the losing party to change its policies.

These are not loopholes that somehow weaken international trade law. Rather, these aspects of the WTO are fundamental features that allow governments to experiment, adopt novel policies, negotiate with one another, and adjust course later. This is trade law’s real policy space.

This structure, moreover, helps prevent public officials from using trade law as a cover for avoiding policies that they oppose. We have seen this before. In the pre-WTO era, the Reagan administration opposed efforts to impose strong trade sanctions on South Africa partly on the grounds that doing so would violate the General Agreement on Tariffs and Trade (GATT). US officials argued to Congress that the GATT “does not contain a human rights exception,” and that the situation in South Africa could not justify trade discrimination under that agreement.¹⁴ Fortunately, the US Congress ultimately adopted the Comprehensive Anti-Apartheid Act of 1986 over President Reagan’s veto, joining a worldwide coalition against racial apartheid.

Similarly, and to its credit, in adopting a set of new environmental policies, the EU has not shied away from the risk of violating WTO rules. The EU’s Deforestation-Free Products Regulation, for instance, bans the import of goods from land deforested after 2020. That regulation will disproportionately affect developing countries that have not yet deforested, but not developed countries that deforested years ago. Indonesia and Malaysia have already challenged an earlier version of this same type of regulation as unlawfully discriminatory.¹⁵ Even more directly relevant, the EU CBAM has drawn fierce objections and talk of WTO challenges, including from India,¹⁶ once it fully comes into effect.

Trade law is designed to afford flexibility for just these kinds of experiments. There are many important details of GASSA to be hammered out, including the terms of membership in the arrangement and the opportunities for participation by Global South countries. But the risks of failing to reach agreement are too high. Steel producers and climate activists alike, on both sides of the Atlantic, have worried for years that the standard responses to unfair trade practices are insufficient to tackle the challenge posed by state-sponsored, coal-powered, global capacity. With no deal, the world will be left to hope that tools that have not worked in the past will succeed in the future. Given this risk, it makes no sense to spend the time that is left in a myopic effort to minimize WTO risk. To do so would be politically irresponsible, strategically unwise, and legally unnecessary.