Blog post

A trade strategy to support domestic decarbonization and environmental objectives

Published 4 April 2023

Advice for a potential future Labour government

There is an old adage that trade policy is domestic policy. These recommendations for a UK green trade strategy are united by that observation. The shift that needs to take place is thinking through how trade supports domestic strategic objectives, not just for FTAs but across the areas outlined below.

Recommendation 1: more green subsidies, more strategic industrial policy and diplomacy

Develop subsidy strategy, pursue talks with the US, EU and other countries

Labour has identified an objective of being a clean energy superpower. It’s important to emphasize that trade rules don’t need to be an obstacle to UK decarbonisation. Many of the most needed subsidies are more effective household incentives to install solar panels, heat pumps, insulation, and switch to electric vehicles. These types of consumer subsidies aren’t likely to be an issue with trade partners as long as we avoid conditions that materials or components have to be manufactured in the UK. The UK can introduce so-called local content requirements, but these risk trade consequences – for example, the EU initiated a WTO challenge against UK local content requirements in the Contract for Difference Scheme at the WTO and dropped the challenge when the scheme was reformed.

The superpower part of Labour’s proposal suggests that it wants to create an inviting business environment for low-carbon industries and be a player in global supply chains; in other words, it may want to enter a ‘green subsidies race’ between the US and EU. The US in particular has made it attractive for companies to invest there because of consumer tax breaks.

Here the UK must proceed with strategy and diplomacy. It doesn’t have the resources to out-incentivise the US or EU.  The industrial policy exercise is thinking strategically about where the UK has a comparative advantage – i.e. where can it participate in the supply chains. The trade diplomacy exercise is doing everything it can to be on the inside rather than outside of whatever legislation or policy is being proposed by the big players (for example, being included on the US list of countries that can assemble EVs or supply batteries).

Recommendation 2: Usher in a new era of cooperation with the EU

Link UK-EU ETS schemes

The EU and UK should work closely and well together on climate and environmental policy, and not doing so could have costs for UK industry. The most immediate example of this is the EU Carbon Border Adjustment Mechanism, which entails the EU extending domestic Emissions Trading Scheme prices to imports in trade-exposed sectors. If the UK does nothing, EU CBAM becomes another blow to manufacturing. If the UK links its ETS scheme to the EU’s it will avoid all CBAM charges and requirements. Discussion on linking ETS schemes is identified in the UK-EU TCA as an objective.

Linking will also position the UK to accompany the EU into international negotiations, such as with the US on sustainable steel and aluminium, which could also help it avoid future market access problems. This is just one example of why it makes sense to work together.

Recommendation 3: Restore and strengthen democratic oversight of trade and domestic regulation

Reform the CRAG Act; introduce primary legislation for key consumer and environmental protection legislation

Inheriting the current degree of executive power to negotiate FTAs certainly has its attractions, but this approach has weakened trade policy outcomes (as George Eustice attested in the UK-Australia negotiations). Consulting with industry provides a more granular understanding of its desired outcomes.  Having a set of objectives agreed by Parliament also gives Government political cover if a trade partner wants a concession it doesn’t want to provide. Labour’s report, Putting Workers First, makes many specific recommendations on consultation and strengthening the role of Parliament in FTA negotiations.

Beyond these recommendations, it is important to note that many UK consumer protection and environmental regulations now take the form of Statutory Instruments, which have consequences for FTA scrutiny and executive power. In an FTA context, the CRAG Act requires implementing legislation if there are changes to primary legislation pursuant to an FTA. This means that existing safeguards for legislative changes through FTAs are unlikely to apply, another reason why reform of the CRAG Act approach is necessary.

Strengthening democratic processes that affect trade goes beyond FTA ratification. Post-Brexit legislation is more vulnerable to regulatory capture, including through the influence of trade partners. That suggests a need to reintroduce primary legislation in key areas of consumer and worker protection. Strengthening the role of Parliament by introducing more primary legislation supports a more democratic version of ‘taking back control’.

Recommendation 4: Pursue opportunities for trade and climate cooperation both through existing FTAs and future plurilateral agreements

Use existing FTA Committees to discuss trade and climate cooperation; join ACCTS and GASSA

New FTAs are probably not going to be a dominant element of UK trade policy going forward, because we have already negotiated most of them. The UK has grandfathered in outdated environmental provisions from EU FTAs, though re-opening these will require the consent of trade partners, as well as significant Government capacity, and may be a lost cause.  From these FTAs, it has also inherited state-to-state and stakeholder committees on environmental issues that are fairly open-ended in nature and can be used to discuss opportunities for trade and climate cooperation.

The majority of existing FTAs, including many of those inherited by the UK, do not mention climate at all, and if they do it takes the form of high-level commitments. But as of recently, this is an area of rapid plurilateral innovation. The UK should try to join innovative negotiations where possible, notably the Agreement on Climate Change, Trade and Sustainability (ACCTS) led by New Zealand and the Global Arrangement on Sustainable Steel and Aluminium (GASSA) currently led by the US and EU.

Recommendation 5: Improve the effectiveness of enforcement of UK environmental requirements on traded goods

Increase resourcing for border checks; where possible, work with the EU on verification and compliance of shared regulation (eg hormone-treated beef requirements); introduce feasible monitoring strategies for UK-specific requirements

The UK has consistently pushed forward the introduction of the UK target operating model. In the words of the European Affairs Committee, this is leaving the UK open to the introduction of dangerous, contaminated or illegally smuggled SPS products, with evidence that exporters are taking advantage of the cracks in our system. This is clearly a threat to UK agri-food and correcting it appears to be a matter of resources and political will. 

Beyond this example, many in the agri-food sector are calling for the UK to extend some of its standards that will be difficult or impossible to monitor solely through border checks, in areas such as animal welfare standards. Assuming that the UK doesn’t have the same level of resources as the Commission, it could seek opportunities to partner with the EU on monitoring and quality assurance, where standards are the same, or there are other more interesting and innovative examples of monitoring and enforcement among smaller countries, which the UK could emulate. For example in the EFTA countries FTA with Indonesia, in order to prevent the entry of palm oil associated with deforestation, they mandate smaller shipments of palm oil and they also make voluntary sustainability standards mandatory.

This blog summarises contributions to the Labour Party National Policy Forum Consultation 2023.

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Emily Lydgate

Deputy Director

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