China’s ‘green’ trade credentials: what can we learn from a deeper dive?
To quote the World Bank:
“China faces a range of environmental and climate change challenges unique in scale, complexity, and global significance.”
As the world’s biggest emitter of CO2, China’s participation in international efforts to address climate change have been universally welcomed. In September 2020, President Xi Jinping told the UN General Assembly that China aims to have a “CO2 emissions peak before 2030 and to achieve carbon neutrality before 2060”. That may be 10 years later than the apex Paris Agreement target, but as the EU HRVP Josep Borrell responded, this “could become a tipping point in the fight against climate change”.
But what does this tell us about China’s ‘green trade’ profile?
International consensus exists on the need to ‘green’ trade policies. There is less conversion on how. ‘Greening’ the economy implies more than reducing CO2 emissions, so meeting the Paris Agreement objectives is just one piece of the ‘green trade’ puzzle. EU/US 'green trade' policies are multifaceted and differ in certain respects. Neither focuses exclusively on achieving carbon neutrality. So here’s a closer look at ‘green trade’ in the world’s second largest economy.
1. Global governance: China sits at the ‘green trade table’
A Member of the UN since 1971, it took another 30 years for China to join the WTO after a 15-year accession process. It’s an active user of WTO mechanisms, both transparency and trade dispute resolution. China’s more than 60 trade disputes are mostly with its two most significant export markets, the US and the EU and encompass anti-dumping, subsidies, market access and technology transfer. IP remains a thorny issue. A proponent of WTO reform, China’s 2019 proposal focused on agriculture, fisheries subsidies, and cross-border investment. So no explicit ‘green’ among its priorities. It is also not among the 50+ WTO Members participating in the structured discussions on sustainability.
As for international finance, China has a Country Partnership Framework for 2020 to 2025 with the World Bank, of which one of the key areas of engagement is “promoting greener growth”.
2. China and Multilateral Agreements: Pick ‘n Mix
China ratified the Paris Agreement, submitted its first NDC back in 2016 and updated its targets in December 2020. China’s road to carbon neutrality may be long and uphill but it will honour its “important promise to the world” (just a bit later than hoped). At least this was the message from Minister Zhang Jianhua at the IEA-COP 26 net-zero-summit in March 2021.
China is due to host the COP15 of the UN Convention on Biological Diversity (CBD), later this year. The talks will focus on the three major goals of the CBD: protection of global biodiversity, sustainable use of biodiversity, and sharing of the benefits. The plan is to establish the post 2020 Framework. Holding the Presidency offers China a chance to steer discussions. As the CBD COP15 should end before the Paris COP26 negotiations begin, the degree of ambition settled upon could have a spill-over effect: the draft CBD Framework acknowledges the potential for nature to contribute to “at least [30%] of efforts to achieve the targets of the Paris Agreement on climate change.”
But whilst its role as President of COP15 is a new step for China, subscribing to obligations under MEAs is not. It ratified the Kyoto Protocol in 2002 and joined the Montreal Protocol on CFCs back in 1991. Nor is joining the global climate change effort a commitment to ‘greening trade’.
The Paris Agreement does not regulate trade. It does not ‘mandate’ or ‘authorise’ States to take any specific measures to reduce emissions. The principal, binding legal obligation is to prepare, communicate and maintain successive NDCs (Article 4). In other words, China has agreed to take (and communicate) progressively ambitious domestic mitigation measures, which it is free to define. Yes, China appears on track to fulfil that obligation.
China has been less enthusiastic about signing up to Human Rights Conventions. A number of core ILO Conventions including the Forced Labour Convention or its 2014 Protocol remain unratified. This ‘opt out’ from a spectrum of multilateral agreements could impede the development of other potential components of a global ‘green trade strategy’.
3. China’s Regional Trade Agreements: bucking the ‘green’ trend?
For the EU and US, including environmental provisions in RTAs is standard practice. The EU says it wants to reinforce this approach. OECD Studies show an upwards trend in environmental commitments (preambular language/ incorporation of MEA obligations/dispute resolution clauses) featuring in RTAs. China is no stranger to RTAs, but there is not much ‘green’ in the ones it has signed up to. Take two prominent examples:
China’s 2002 agreement with ASEAN is the basis of the 2010 ASEAN-China Free Trade Area. Despite being re-negotiated in 2015, it only addresses economic and regulatory cooperation. Any environmental cooperation between ASEAN and China is through initiatives outside the RTA and is not linked to trade.
More surprisingly, the Regional Comprehensive Economic Partnership (RCEP), which covers 30% of the world’s population, contains no minimum guarantees on labour or environmental standards. As the predicted effects of the liberalisation of tariffs include an increase in trade of fossil fuels, the RCEP may be a ‘mega-trade deal’ but it certainly isn’t a shining example of a ‘green’ RTA.
4. China’s bilateral trade agreements: green shoots?
Bilateral Trade Agreements are, like RTAs, a commonly used tool for increasing ‘green trade’ ambition. The EU and the US apply different approaches but both integrate environmental objectives into their bilateral trade relations. Apparently, China has 24 FTAs under construction and 16 in operation. The older FTAs make no mention of the environment or broader sustainability issues, but the more recent do include environmental provisions. Indeed, China’s FTAs with Switzerland and Korea include a whole environmental chapter.
So far, the ambition is limited to incorporating existing MEA commitments. None of China’s FTAs subject environmental provisions to any form of dispute resolution. Nevertheless, the link between trade and environmental issues is visible. When it comes to labour standards, the outlook is bleaker. China’s ‘incorporation’ approach means that unless it increases its commitments on the international plane (or faces significant negotiating pressure), obligations to ensure minimum labour standards are unlikely to be reinforced in its FTAs.
5. Investment Agreements: a gradual greening?
China is one of the world’s most prolific users of BITs (over 120 are in force) as well as multilateral/plurilateral investment treaties. Although increasingly criticised for their potential chilling effect on efforts to increase environmental regulation, BITs can also be ‘greened’. China is not alone in having made limited efforts to do so (a 2011 OECD survey found environmental concerns were addressed in just 6.5% of existing BITs). But could the tide be turning?
The investment provisions in the 2015 China-Australia FTA carves out ‘legitimate’ environmental measures from the ISDS system it establishes.
The 2020 China-EU Comprehensive Investment Agreement has a chapter on investment and sustainable development with a non-regression clause on environmental standards, a reinforcement of the Paris Agreement and a commitment to “work towards” ratification of ILO Core Conventions.
Admittedly, substantively this is not ground-breaking. Some criticise the EU CAI for not pushing China to extend its commitments. However, the EU CAI will replace the 25 older (and different) BITS between China and the Member States. Plus, if China concludes the BIT it had been negotiating with the US pre-Trump, this would offer another opportunity to ‘green’ its international investment framework.
6. ‘Green’ Supply Chain Management – a different approach?
Integrating human rights/environmental standards along global value chains is a key ‘green trade’ mechanism for the EU, is supported by the US but has low prominence in China.
The main drivers of GSCM policies are consumer demand, regulatory pressure and economic incentives. Consumer attachment to ‘green goods’ in China is relatively low. Add China’s profile as a major manufacturing nation, a baseline of low standards and vested interests, (China has been the willing recipient of end-of-life products from developed countries), and it’s not hard to see why this type of policy has low traction.
External regulatory pressure and consumer preference have had some impact. When Walmart announced in 2008 that it would not buy from Chinese firms with poor environmental standards, more domestic regulation followed. Generally measures are ‘top tier’ and the presumed ‘cascade’ effect (which most supply chain regulation relies upon) has not materialised. Contractual mechanisms to replicate commitments further down the supply chain are under-developed and enforcement is reportedly weak.
China does have an interest in reforming supply chain management but with a different focus: increasing the efficiency of its transport network. A new program, "Global 1-2-3 logistics circle" aims to ensure one-day delivery within China, two-day delivery in neighbouring countries and three-day delivery to major global cities. The high-speed transport corridor with ASEAN countries that it should create will have significant impacts on global trade and could lead to a shift of manufacturing centres to other ASEAN countries.
Linking logistics and sustainability is an acknowledged component of GSCM, just not part of the current, core ‘green supply chain’ narrative in the EU/US. Increasing efficiency could have a (different) ‘greening’ effect on supply chains. The extent is less clear: China promises to utilise technology and innovation, but has not said what shade of green its infrastructure development will be.
7. Carbon pricing and carbon borders? Maybe, maybe not
The EU and US are not fully aligned on the utility of a CBAM. So what about China?
On February 1 2021, China introduced a carbon pricing mechanism (on electricity). Provincial governments can impose pollution caps on large power producers by requiring them to purchase emissions permits. Now it has a nationalised ETS, China could theoretically introduce a carbon border mechanism of its own (it is ahead of the US in this respect). To align to the EU, it would need to expand the sectoral scope of its carbon-pricing scheme and it has not shown an appetite to do so. Officially it wants more consultation on the EU CBAM. So China is sitting on the fence for now.
8. Green Tech: Taking the lead?
China lacks no ambition on green tech. Back in 2015 it launched a 10 year state-led industrial policy, “Made in China 2025,” aiming to secure dominance in global high-tech manufacturing (including energy-saving cars and new energy cars). China is developing carbon storage, new technologies around hydrogen storage and ‘smart’ renewable technologies. Increasing renewables penetration is a primary strategy to lower coal dependency (and hence emissions). In fact, China has the highest renewable energy capacity in the world. The recently published 14th Five-Year Plan (2021-2025) confirms the focus on tech. In ‘green trade’ terms, this is an area of opportunity and competitive strength.
9. Green Manufactured Goods: does the end justify the means?
China is a major exporter of ‘green goods’. It produces approx. 70 % of the world’s solar PV or components thereof. This major export market is still growing. But at what cost? Fuelled by cheap labour, overall manufacturing chains in China remain more brown than green. China’s efforts to ‘green’ its manufacturing processes (reducing single use plastics/switching sources of energy supply/addressing pollution) are to be welcomed, but there is a long way to go.
10. Green (Trade) Finance: an opportunity to expand?
China has a substantial green finance market. Not afraid to regulate the sector, it has adopted “Green Credit Guidelines,” “Green Credit Statistics System,” and “Key Green Credit Performance Indicators.” In September 2016, the People’s Bank of China promulgated "Guidelines for Establishing the Green Financial System"—a first for a national bank. Green bonds are one of the most popular ‘green’ financial instruments, but face criticism over poor disclosure and for falling short of international standards. ‘Green insurance’ is a developing market.
Whilst green finance is not the same as ‘green trade finance’, China is well–positioned to develop a ‘green trade finance’ sector and has shown willingness to do so, notably to support its Belt & Road Initiative. As one of the barriers for Chinese industry to go green is the availability of finance (especially for the large number of SMEs), this could also have broader impacts.
Conclusion
China is talking the talk on climate change, but its buy-in to the ‘green trade’ narrative is more selective. It eschews many of the green trade tools favoured by the EU/US, its policies are closer aligned to developing countries and serve its regional interests. Still, it has its own tools to add to the global ‘green trade’ toolkit: green tech, green manufactured goods and improved efficiency of supply chains are potential contributions to a global ‘green trade’ strategy. As things stand, it looks set to follow its own path and has yet to set out what shade of ‘green’ it wants its future trading profile to be.
