The Future of Global Trade Will Be Green or Not at All

Picture532524 - Global Banking | FinancePicture532524 - Global Banking | FinanceAylin Somersan Coqui, CEO of Allianz Trade

Climate change is already here. It has dreadful impacts on people’s daily life, and the public is growing worried about it. According to our latest survey on climate literacy, 75% of respondents across 8 countries are (very) anxious about climate change[1].

Climate change is also impacting global trade. The drought at the Panama Canal has halved capacity at a key waterway. Global trade is only getting a taste of its own medicine as around one third of global greenhouse-gas emissions stem from trade itself[2]. As a matter of fact, greening trade is not only critical to reach a sustainable future for all. It is also an existential necessity for global trade.

There can be no green trade without green shipping

Approximately 11bn tons of goods or about 85% of global trade is carried by sea every year. This figure is poised to triple by 2050. Though maritime transportation is currently responsible for only about 3% of global greenhouse-gas emissions, this share could surge to 17% by mid-century if no action is taken today. The share can be even higher in the immediate term due to the recent Red-Sea disruptions which pushed for longer routes. In fact, since 2000, global CO2 emissions from the maritime industry have increased by +42%.

As such, decarbonizing the maritime transportation will play a major role in greening global trade. And it is an urgent race against time: To achieve net-zero emissions by 2050 in the maritime shipping sector, emissions must stabilize around 2025, despite anticipated increased activity, and then decrease until 2030. In this context, greening fleets has become a top priority for the industry: 13 of the world’s 30 largest shipping companies have already set a net-zero target between 2040 and 2060. These ambitious goals naturally come with a price: we estimate that the sector will need to invest a minimum of USD23bn per year to achieve its climate targets.

Let’s aim for more trade of green goods

The transition to a low-carbon economy will only be possible if green goods and technologies – everything from septic tanks and catalytic converters for vehicles to biofuels and mercury-free batteries – are developed, deployed and diffused at an unprecedented pace. In this respect, the trend is quite positive. Green goods as a share of total global exports have grown by around +5pps between 2000 and 2022.

Europe is clearly taking the lead in green goods trade. Germany alone surpasses the US in green exports while the US has become the strongest importer of green goods and technologies besides the EU27 taken as a whole. In fact, 19 out of the 27 EU economies have maintained or even grown their comparative advantage in low-carbon economies. In 2022, green goods represented around 15% of Germany’s total exports. Between 2000 and 2022, the country has also seen the largest increase in exports of environmental goods as a share of GDP (+6.9pps), followed by South Korea and China.

By focusing on the production and export of environmental goods, Europe can tap even further into growing global markets for clean technologies. This can drive economic growth and further investments for the green transition. Removing tariffs on such goods could make a big difference. Barriers to trade in environmental products are still significant, with tariffs at a high 5.4% compared to 8.6% for all goods. Reducing the cost of importing green goods would make them more affordable and accessible to consumers and businesses alike, as well as stimulating competition among producers, driving innovation domestically and globally. We estimate that removing tariffs on green goods could boost exports volumes by over +10% per year, which amounts to about USD184bn.

Greening trade is also about greening our economies

To make trade greener, we must pull on 5 key levers: first, leading economies should re-engage in promoting and facilitating green trade to help increase the supply and lower the price of green technologies. Second, all stakeholders need to agree on what counts as a green product. Third, governments should give clear guidelines and standards for sustainable production and consumption through appropriate labelling and public price subsidies. Fourth, customs duties for green products need to be reduced further or even removed to make them more affordable for consumers. Finally, governments need to redirect excess savings towards financing companies that produce a green product, while implementing additional tax breaks for those businesses.

But we also need to ramp up our efforts toward greening all industries to reduce the carbon footprint of all manufactured goods that are traded globally. In this regard, businesses will need public support and incentives in various areas. On borrowing and reduced investment uncertainties through tools like contracts of difference; making eco-friendly investments profitable and scalable through subsidies; addressing climate-related challenges through innovative unemployment schemes; transitioning to sustainable and secure supply chains through holistic risk management and advancing a true circular economy by introducing quotas to offset cost concerns.

Greening trade is no longer an option and we must use all available technologies and policy options to do so. Over the last couple of decades global trade has been a great driver of development and poverty reduction[3]; it is our duty to support firms and push policy makers towards now making it more sustainable.

 

[1]  https://www.allianz.com/content/dam/onemarketing/azcom/Allianz_com/economic-research/publications/specials/en/2023/november/2023-11-29-climate-literacy-AZ.pdf
[2] https://www.wto.org/english/res_e/booksp_e/wtr22_e/wtr22_e.pdf
[3] https://www.worldbank.org/en/topic/trade/brief/trade-has-been-a-powerful-driver-of-economic-development-and-poverty-reduction