About the author: Ludovic Subran is chief economist at Allianz.
In the race against time that is the global green transition, tariffs on green goods are effectively a huge speed bump.
A low-carbon economy requires everything from septic tanks and catalytic converters for vehicles to biofuels and mercury-free batteries. Those and other green goods and technologies need to be developed, deployed, and diffused at an unprecedented pace. Since Germany, Japan, and South Korea are currently the largest producers (in terms of the share of their total exports), global trade is essential to transmit these essential goods and technologies from developed countries to developing ones.
The good news is that global green trade is growing. Environmental goods as a share of total global exports have jumped from around 2.7% in 2000 to around 7.2% in 2022, while their share in global imports now stands at 7.4%, up from 5.5% in 2000. But barriers to green trade are much too high: The global simple average tariff on environmental goods is 5.4%. While that’s lower than the 8.6% applied to nongreen goods, there are strong differences between countries. The Maldives and India, for instance, apply simple average tariffs on green goods as high as 19.8% and 14.3%, respectively.
Tariffs have historically been used to protect domestic industries from foreign competition. And given the ambitious targets in place to develop domestic green industries, some governments may be tempted to impose even higher tariffs on green goods. But this would be counterproductive for combating climate change.
First of all, higher tariffs make importing green goods more expensive, pushing them out of reach of consumers and businesses alike. Affordable green goods are essential to increase adoption and advance toward climate targets. Second, tariffs stand in the way of competition between producers, limiting innovation both locally and globally. If countries collaborate and establish mutual trade agreements focused on green goods instead, they can set global standards and maximize environmental benefits. We at Allianz calculate that removing tariffs would increase trade in green goods by as much as 11%, equivalent to $184 billion. Trade in solar cells would see the biggest boost of 3%, which would make a big difference in driving the global shift toward clean energy.
But tariffs are just the tip of the iceberg. The biggest obstacle for green trade is protectionism in the form of nontariff measures, especially technical barriers to trade such as common rules or standards for product characteristics or production processes. Many of these restrictions are being applied to green products in the machinery, electrical, and chemicals sectors, especially in industrialized countries.
The character of global cooperation needs to shift in order to remove these barriers and accelerate the green transition. Multilateral cooperation produced a World Trade Organization with 164 members that share common rules, but that sort of global thinking has been losing steam for decades as countries disagree on what constitutes green goods and services. Instead, they have turned to regional cooperation to promote trade in green products. The number of regional trade agreements including an environmental provision has risen tremendously since 1970. There are 361 regional trade agreements in force this year, and 204 of them contain some sort of environmental provision. But though this is a positive development, it is not enough to establish a global consensus that would take the green transition to the next level.
To reap the benefits of green trade, the global economy needs coherent policy action. Leading economies should re-engage in promoting and facilitating green trade at the multilateral, plurilateral, and regional levels to help increase the supply of green technologies and lower their prices, which would go a long way toward bringing us closer to reaching net zero targets worldwide. The first order of business would be to agree on the definition of green products, excluding controversial items that are really more brown than green, such as specific plastics, biodiesel and petroleum oil. Then, customs duties on green products need to be reduced further or even removed completely. For this, a deep reform of the World Trade Organization’s most-favored-nation tariffs would be needed.
Of course, the flow of trade in environmental goods also relies on factors such as political stability, technological, and financial capacity and regulatory frameworks. Solving the climate crisis will take a great deal of work. Removing trade barriers is just one step, but a necessary one. By reducing costs and facilitating the spread of innovations to new markets, it can accelerate the global shift toward decarbonized production and consumption systems.
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