BEIJING – US President Donald Trump’s threats to raise tariffs on imports from Canada, China, and Mexico – which he now says may happen on February 1 – have the world bracing for major trade disruptions. While protectionism has come back into vogue, and countries like the United States are cultivating critical sectors at home to bolster their economic security, the reversal of free trade will accelerate under Trump, with far-reaching consequences – not least for the fight against climate change.
There is a straightforward path to ending our dependence on fossil fuels: nurture green industries – which would not only mitigate climate change, but also boost economic growth and job creation – and ensure that their output can be traded as widely as possible. Open trade would strengthen these industries, reduce the costs of green goods and services in most countries, and facilitate the adoption of low-carbon practices and technologies.
At a time of rising protectionism, pursuing this path requires the establishment of a special green free-trade arrangement, involving sharp reductions in tariffs and non-tariff barriers on goods and services that deliver environmental and climate benefits. Since one or two economies could scupper a truly global framework, multiple smaller arrangements could be created by “coalitions of the willing.”
Using existing regional trade agreements as a basis for green trade could hasten this process considerably. Consider the Regional Comprehensive Economic Partnership (RCEP) – the world’s largest trade bloc by both population and GDP – comprising Australia, China, Japan, New Zealand, South Korea, and the ten ASEAN countries. Operating within the RCEP’s framework may enable quicker agreement and implementation of a green free-trade arrangement involving countries that collectively account for 30% of global economic activity.
The first step toward realizing this vision would be to demonstrate clearly the economic benefits of a green trade agreement to all members of arrangements like the RCEP. A preliminary study, based on a “computable general equilibrium” model and conducted by the Institute of Finance and Sustainability (which I chair) and research partners, does just that. Our study, which we will present at a conference in Hong Kong in March, found that a green free-trade arrangement could boost members’ economies (in terms of GDP, exports, jobs, and fiscal revenue), bolster their green industries, and bring about faster decarbonization.
Next, in order to help mitigate climate change and address environmental degradation, countries must identify the goods and services that should be covered by the green free-trade arrangement. Our study suggests that this list could include a few dozen categories and a few hundred products and services, including renewable energy, electric vehicles (EVs) and their components, waste management, sustainable agriculture, nature-based solutions, and environmental professional services.
A third priority is to attract green foreign investment and technology transfers, which requires a more stable policy environment, protections for investors, and secure intellectual property rights in the regional trade blocs. A green trade arrangement that ensures these conditions would help lower-income countries, in particular, to develop their green industries and create green jobs. In the RCEP, for example, Chinese, Japanese, and South Korean firms producing, say, EVs or solar panels might license their technologies to producers in the ASEAN countries and invest in building up the region’s green supply chains.
Such arrangements must also address non-tariff barriers, which can impede trade and investment even within low-tariff or tariff-free zones. A successful green trade arrangement must start with careful analysis of all non-tariff barriers, including those arising from import and export quotas, quality-control and customs-clearance processes, product-traceability requirements, trade-finance and export-credit insurance, and the settlement of cross-border payments. Targeted measures to lower these barriers – for example, harmonizing quality and traceability standards across jurisdictions and reducing the cost of trade finance using green finance instruments – should then be implemented.
Leadership and open dialogue are essential. In the case of the RCEP, larger economies like Australia, China, Indonesia, Japan, and South Korea should take the lead in cultivating consensus, with discussions highlighting the arrangement’s wide-ranging benefits for all. This approach would support a “just transition” to a climate-neutral economy, by accelerating decarbonization in participating countries, advancing growth and job creation in green industries, and fostering the mutual trust that is essential to broader cooperation on climate and trade issues.
The case for green trade arrangements is even stronger when one compares them to the approach being embraced by advanced economies. While the carbon border adjustment mechanism (CBAM) favored by the European Union, the United Kingdom, and potentially the US can reduce carbon “leakage” from imports produced in countries with more lenient emissions rules, it harms incomes and employment in the developing economies exporting carbon-intensive goods. And it does nothing to foster cooperation; on the contrary, such unilateral measures could lead to retaliation and yet more protectionism.
As incentives go, CBAM amounts to a “stick,” which punishes developing countries for not sacrificing domestic growth and development in order to reduce emissions. A green free-trade arrangement, by contrast, amounts to a “carrot”: by aligning climate goals with development objectives, it rewards participating economies for making progress in the green transition. It is a win-win solution – just the type a just green transition demands.
Ma Jun is President of the Beijing-based Institute of Finance and Sustainability and former Co-Chair of the G20 Sustainable Finance Working Group.
Copyright: Project Syndicate, 2025.
www.project-syndicate.org
