WTO’s Ossa: Trade is both a cause of and solution to climate change

Climate change activists have often pointed their collective finger at international trade as one of the main reasons temperatures are rising and extreme weather events proliferating across the planet. Even the World Trade Organization (WTO) noted in a 2021 information brief that the production and transport of exported and imported goods and services generate as much as 30% of global greenhouse gas emissions.

But Ralph Ossa, the WTO’s new chief economist, says trade can be “an important part of the solution” to a changing climate—with the right incentives.

“Trade has a bad reputation when it comes to climate change because people associate it with transport emissions,” Ossa said in an interview. “But transport emissions are only a small share of total emissions, and there is large variation in production emissions across countries, so that importing is, in fact, often the greener choice. Buying green is not the same as buying local.”

Putting the right incentives in place—such as an “appropriate” carbon tax—would unlock the green sourcing potential of international trade, according to Ossa, a University of Zurich economics professor who stepped into his new role as chief economist and director of the WTO’s Economic Research and Statistics Division in January. 

Buying green is not the same as buying local.

“We have recently shown that this has enormous potential by simulating the effects of a USD 100/tonne global carbon tax in a model of the world economy,” he said.

The result? “We find that more than a third of the achieved emissions reductions are due to green sourcing, or more generally, countries specializing in what they are relatively green at. Hence, there are large environmental gains from trade, which we need to leverage in the fight against climate change.”  

Decisive climate action is only feasible if it comes at a reasonable economic cost, Ossa says. 

“Economics can help us find the most efficient solutions and should therefore be an important part of the debate. A key message emerging from economic research is that we need to embrace international trade in the fight against climate change.”

The WTO said in its flagship World Trade Report 2022, released in November at the 27th United Nations Climate Change Conference, that its simulations show that lifting trade barriers on certain energy-related environmental products could boost exports by 5% and lower global emissions by 0.6%. International trade cooperation could limit global average temperature rise by below 2°C by 2050, according to the report. Further, trade is a force multiplier for countries’ adaptation and mitigation efforts, reducing costs and increasing impact.

“We know there are large economic gains from trade if countries specialize in what they are relatively good at,” said Ossa, 44. “Along the same lines, there are also large environmental gains from trade if countries specialize in what they are relatively green at.” 

Services and Subsidies 

Another WTO publication, the Services Trade Barometer released in late December, predicted that trade in services was “likely to remain soft” in the early months of 2023. But the prospects for services trade have “greatly improved” in the meantime, Ossa says, largely due to China’s decision to reopen its borders on January 8. That move is set to boost passenger transport as well as global tourism, which accounted for almost 25% of services trade before COVID-19 hit, Ossa says.

“Both sectors remained well below pre-pandemic levels in 2022. This will help compensate for lower growth this year in shipping, as global freight rates returned to normal at the end of 2022, after surging in the last couple of years.”

Still, The New York Times wrote on January 29 that while there has been a “bump” in the number of Chinese tourists to nearby destinations such as Macau, Hong Kong, Thailand, and Singapore, “farther-flung destinations are still waiting.” China sent more travellers overseas than any other country before the pandemic, with some 150 million Chinese tourists spending upwards of USD 277 billion in foreign destinations in 2018.

Despite the encouraging prognosis for services trade, recently announced plans by the United States and the European Union to subsidize their domestic industries has many worried—especially developing countries and smaller players that are trying to get a foothold in global value chains.

On the topic of the impact on developing economies of the generous subsidies offered by the United States via the Inflation Reduction Act (designed to shelter U.S. companies from the impact of rising prices and to subsidize investments in new green technologies) and the European Union—the result of revised state aid rules designed to help member states cope with the fallout from the Ukraine war—Ossa had this to say:

“Developing countries have expressed concerns about the large subsidy schemes that are being put in place in the United States and the European Union. They view themselves as likely losers from a subsidy race since they lack the fiscal capacity to counter with measures of their own. Having said this, it is also important to recognize that the economics of subsidies is not black and white. For example, one can make an economic case for green subsidies in the fight against climate change."

One can make an economic case for green subsidies in the fight against climate change.

The European Union, worried that the USD 369 billion Inflation Reduction Act would undermine the competitiveness of EU firms in North America and spark a business exodus across the Atlantic Ocean, unveiled its own Green Deal Industrial Plan on February 1 to shore up the bloc’s homegrown green industry. 

Ossa says he began his new job on a “strong foundation” thanks to the work of his predecessor, Robert Koopman, who left the WTO last July to join American University’s School of International Service in Washington, D.C. “But, of course, I also have many new ideas, which I hope will help us take the next step. One of them is that I would like to leverage my strong ties to academia to engage the academic community in research relevant to the WTO.” 

“My main goal as chief economist is to support the WTO in its mission to facilitate trade policy cooperation by providing relevant research and analysis,” said Ossa, who enjoys hiking in the Swiss mountains with his wife and two children when he takes off his economist’s hat. “I believe we need multilateral cooperation more than ever in this increasingly complex world.”