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A NEW ORDER OF TRADE

Down To Earth|February 16, 2023
The global superpowers are abandoning free trade to fight climate change. Armed with massive subsidies and tariffs, the US and EU are leading this charge towards protectionism. This may change the global trade system as we know it. But will developing countries and the climate gain from it? An analysis
- AVANTIKA GOSWAMI
A NEW ORDER OF TRADE

THE RACE to build a low-carbon economy is heating up. Countries have in recent months proposed or introduced policies and laws to speed up the transition from fossil fuels, promote manufacturing of clean-energy technologies at scale and decarbonise industries. On the face of it, this race appears to be part of the global effort to cut greenhouse gas emissions. But it has sparked fears of economic rivalry and neo-protectionism, as governments on the pretext of climate action try to reshore green industries and dominate the global supply chain of goods and technologies essential to avert a climate catastrophe.

Some of the new climate-focused trade measures that threaten globalisation as we know it are by the US and EU—the largest and second largest historical emitters of greenhouse gases.

Consider the Inflation Reduction Act (ira), passed by the US in August 2022. It has been billed as the most serious effort yet by the US to face up to climate change. Under ira, the government aims to unleash subsidies, about $370 billion, mainly through tax credits, over 10 years for sectors such as renewable energy, electric vehicles, energy efficient appliances and leading-edge technologies like carbon capture and storage and clean hydrogen. An analysis by McKinsey, a global management consulting firm, shows that corporations are the biggest recipient of ira funding, with an estimated $216 billion worth of tax credits. There are indirect subsidies for manufacturers too, in the form of tax credits worth $43 billion, that aim to make low-carbon purchases such as electric vehicles and rooftop solar panels more affordable.

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