“NAVIGATING THE EUROPEAN GREEN DEAL: SUBSIDIES, WTO COMPLIANCE, AND IMPACT ON THE GLOBAL TRADING SYSTEM”

EU subsidies stand as external factors negatively impacting the development processes of developing and leastdeveloped countries

The European Regional Comprehensive Economic Cooperation (RCEP) ranks as the world’s third-largest integration initiative by GDP, following the regional articulation movements of the US-Mexico-Canada (USMCA). Despite a decline in soft power between the Bosnian Crisis and the Palestine War, the European Union remains a formidable force in the global economy. Furthermore, the EU is a key player in the WTO, holding considerable influence and standing as a leader or among the leaders globally in areas such as negotiation, foreign aid, foreign capital, technology transfer, and other aspects of the world economy.

Hence, the EU’s international measures are not solely economic policy practices; they encompass multidimensional geopolitical and geoeconomic implications that reverberate significantly in global diplomacy. The European Green Deal should be recognized as a highly significant global policy initiative of considerable magnitude. Alfred Kammer said in his article “Europe, and the World, Should Use Green Subsidies Cooperatively: A coordinated approach, including toward subsidies, is needed to tackle climate change successfully” on the IMF Blog site on May 11, 2023: Governments across the world are using subsidies to support the green transition. Green subsidies can be helpful when there are market failures. When carbon emissions are underpriced in relation to their true cost to society or preferable policy solutions (such as carbon pricing) are not in place, subsidies can steer businesses and consumers towards clean technologies that are less polluting while also lowering the costs of those technologies. But subsidies should be carefully targeted to correct market failures and they should not discriminate between firms, be they foreign or domestic, old or new, large or small. They must be consistent with World Trade Organization rules, too.” An IMF official, leveraging their expert insight, cautiously raises concerns about potential drawbacks of the subsidy programs planned by the EU, delivering the message in a tactful manner.

The author, an expert in IMF Finance and international monetary issues, expresses concern as they keenly perceive that the EU’s Carbon Border Adjustment Mechanism is, in fact, a secondary and marginal concern. The primary issue, as sensed by the author, revolves around the subsidy programs proposed by Brussels, which potentially contravene the principles of the WTO and the Global Trading System. The extensive global subsidy programs currently undertaken by the EU stand out as major points of contention for developing countries, triggering numerous complaints in the WTO and other forums. EU subsidies constitute external factors that adversely impact the development processes of developing and least-developed countries, particularly in the agricultural sector.

The EU exerts substantial pressure on the agricultural sectors of developing countries, particularly through subsidy programs that align with the WTO Agreement on Agriculture and the WTO Subsidies Code. The support programs under the EU Green Deal have evolved into an extensive, long-term initiative, encompassing agriculture, industry, and various other sectors. The EGD subsidy programs under consideration are deemed to inevitably undermine the fair competition environment in international trade and have an adverse impact on the competitiveness of developing countries, including Türkiye, particularly in the realm of exports. In summary, the EGD program appears to exert significant competitive pressure on sectors within the EU, particularly in the Mediterranean, North Africa, and Türkiye. Moreover, within the context of strategies aimed at boosting energy imports as part of the green transition, Russia, China, and BRICS countries as a whole, including the USA and its allies, possess characteristics that could potentially contribute to geographical and economic fragmentation. In the ultimate analysis, considering the substantial financial burdens it entails, there exists the potential for the EU’s macroeconomy to experience long-term declines in total factor productivity.

The EU, the US, and other affluent nations are poised to be short-term beneficiaries in the race for green subsidies and incentives, thanks to their substantial financial resources. Developing economies, constrained by limited financial resources, may encounter challenges in competing with developed economies in an increasingly protectionist world, primarily due to EU subsidies, loans, and grants, particularly in industrial sector investments. Nevertheless, it is likely that everyone will experience repercussions from EGD subsidies, although not reaching the same extent and severity as the Smoot-Hawley tariffs that triggered the global economic crisis in the 1930s.

The impact is anticipated due to the contraction of the global economy and the economic fallout from the Second World War, along with the subsequent Wall Street crisis. The European Green Deal (EGD) strategy positions its member economies for the most substantial economic system transformation since the Great Depression of 1929 and the establishment of the Bretton Woods System in 1944. While the EGD 2050 was initially presented based on climate targets and sustainability principles, indications suggest that the EGD strategy is evolving into a comprehensive transformation plan. This transformation aims to bolster the EU’s competitive strength in response to heightened competitive tensions between the USA-Asia, USA-Europe, and Atlantic Economies-BRICS. These tensions have intensified following the significant power shifts in the global economy around the 2009 global financial crisis. It is evident that the EU, through the EGD, is not solely pursuing an environmental or international trade strategy centred on carbon pricing and border taxation. Instead, it is gearing up for a comprehensive transformation in the commercial and economic system, facilitated by the new and upcoming supports, as well as the multi-dimensional sectoral policies it plans to enact.

The CBAM aspect of the EGD appears to concentrate specifically on the strategic implementation of carbon pricing as a targeted policy measure, primarily aimed at mitigating leakages. However, given the scale of the anticipated public expenditures and the extent of the envisioned changes in the commercial and economic system, the risks and potential opportunities arising from the EU’s strategy, Türkiye’s largest export market, are too significant to overlook. In addition to the substantial subsidy and support programs planned under the EGD, it is evident that Brussels will vigorously and systematically implement measures such as import taxes, new taxes, non-tariff barriers, and practices related to export tax refunds.

Apart from the competitive disadvantages stemming from Keynesian EU expenditures aligned with the trillions of euros under the US Roosevelt policies, the potential introduction of CBA regulation by the EU poses notable risks and uncertainties for the export of Turkish sectors with a high carbon footprint to both the EU and global markets.

Türkiye should adopt a proactive approach in terms of export market entry policies and concurrently address the defensive aspects of competition externalities concerning imports. European Commission President Ursula von der Leyen suggested that “the implementation of the Carbon Border Tax should be in full compliance with WTO rules, should start with a number of selected sectors and be gradually expanded” (von der Leyen, 2019). Nevertheless, within the WTO, where each member holds veto power, numerous countries raise concerns about how the Carbon Border Adjustment (CBA) will align with WTO rules as envisioned by the EU. These countries voice objections to Commission officials.

As the matter holds the potential to address competitive imbalances arising from international trade, it transcends being solely a sustainability concern. Positioned at the intersection of environment and competition, it becomes contentious on the WTO platform, harboring the potential to trigger political and legal conflicts and disagreements. In conclusion, the policies under the EU Green Deal remain a crucial matter that requires closer examination and dynamic monitoring. It is imperative to assess and strategically address these policies in diplomacy, considering the axis of national interests across international platforms, including the WTO. This is particularly essential due to the potential adverse impacts on the Turkish economy and trade.