11. International Trade Implications & WTO Rules

Overview. Border carbon adjustment (BCA) measures, including the EU CBAM, US Clean Competition Act (CCA), and UK CBAM, raise critical questions under international trade law. While they aim to prevent carbon leakage, they must also comply with WTO rules—particularly those under the General Agreement on Tariffs and Trade (GATT).

1) WTO Principles Relevant to CBAM

• Most-Favored Nation (MFN): No discrimination between trading partners. A CBAM must apply equally to all imports regardless of origin.
• National Treatment: Imported products must not be treated less favorably than domestic like products. This is why the US CCA applies equally to imports and domestic goods.
• Non-Discrimination: Measures must be applied consistently and transparently.

2) Potential WTO Challenges

• De facto discrimination: Even if neutral in law, CBAM could disproportionately affect exporters from developing countries.
• Like products issue: Steel from two countries may be physically identical, yet taxed differently due to emissions intensity—raising legal debates.
• Protectionism concern: Critics may claim CBAM is disguised protectionism favoring domestic industries.

3) Legal Justifications under GATT

Even if a CBAM violates MFN or national treatment, it may be justified under GATT Article XX exceptions:

• Article XX(b): Measures necessary to protect human, animal, or plant life or health.
• Article XX(g): Measures relating to the conservation of exhaustible natural resources (including the atmosphere).

To qualify, measures must not constitute "arbitrary or unjustifiable discrimination" or "a disguised restriction on trade."

4) Case Law Insights

• Shrimp-Turtle case: The WTO Appellate Body allowed environmental trade restrictions but emphasized transparency and non-arbitrariness.
• US–Gasoline case: Confirmed that environmental measures are permissible if applied consistently to domestic and foreign producers.

5) Impacts on Developing Countries

• Risk of market exclusion if exporters cannot provide verified emissions data.
• Concerns over carbon colonialism—where advanced economies impose costs on developing suppliers.
• Opportunities: If revenues are recycled into climate finance or technology transfer, CBAM could support low-carbon transitions.

6) Trade Diplomacy Dynamics

• EU–US coordination: Efforts to align CBAM and CCA frameworks to avoid trade disputes.
• China, India, and Brazil: Strong critics of CBAM, framing it as inconsistent with WTO and unfair to emerging economies.
• Climate clubs: Proposals for plurilateral cooperation (e.g., G7) to align carbon pricing and avoid WTO disputes.

Note: The WTO dimension will strongly influence whether CBAMs are perceived as legitimate climate tools or protectionist barriers.