• National climate policies are driving new trends of trade protectionism, with the EU at the centre of many of these fights. We expect disputes between the EU and many developing nations, in particular, to intensify over the 2020s given the inability of many emerging markets to meet the EU’s environmental policy thresholds.

• Protectionist concerns in the electric vehicle (EV) industry, as well as related sectors including critical materials, also threaten significant impediments to international trade. Aggressive subsidy deployment to promote EV development will risk locking the global EV industry in a “race to the bottom” spiral of government support.

• The absence of a functioning international trade dispute settlement mechanism means that individual trade cases will be the most instructive to watch in terms of how future climate-related trade restrictive themes develop. This will include retaliation, both in terms of foreign trade and domestic industrial policy.

Climate-related themes are poised to play a larger role in the global trade landscape, as national climate ambitions drive a new wave of protectionism. Subsidy-driven industrial policies, aimed at encouraging renewable technology adoption, are raising concerns around market distortion. Domestic emissions thresholds in advanced markets are threatening to penalise shipments from developing economies disproportionately. Most critically, the absence of an effective international dispute-settlement mechanism suggests that these tensions will deepen through the remainder of this decade.

The EU at the centre

EIU has long expected the EU to emerge at the centre of many of these fights. These assumptions reflect the advancement of the bloc’s green agenda via policies like the European Green Deal and the “Fit for 55” plan, the latter of which includes a carbon border adjustment mechanism (CBAM) that will be gradually phased in over the 2020s. We have written previously about how these policies threaten to disrupt trade flows between Asia and Europe, including in regards to the EU’s economic relations with Malaysia and Indonesia, stemming from their dispute over palm oil exports.

Similar frictions also underpin the EU’s trade relations with South America, where concerns over environmental sustainability and Amazon deforestation had previously posed obstacles to ratifying the EU-Mercosur free-trade agreement (although recent pledges by Luiz Inácio Lula da Silva, the Brazilian president, have helped to assuage European concerns). Other markets affected by the EU’s climate policies range from China, the US and the UK, as well as smaller economies like Taiwan, Moldova, Mozambique and Zimbabwe.

We expect the EU’s commitment to its green agenda to drive the bloc’s industrial and trade policy, suggesting it will make only limited concessions to its international economic partners on green topics. This will fuel future allegations of EU protectionism and keep the bloc mired in a growing number of trade disputes over the 2020s, particularly with developing nations. We doubt that the EU’s climate policies will improve administrative or governance capacity in emerging markets, where environmental standards are lower.

Rather than encouraging administrative, business or legal reforms that could help these nations to meet the EU’s environmental thresholds, the EU’s climate measures are likely to prompt many developing nations to redirect their high-emissions exports to other markets. Palm oil producers in Malaysia and Indonesia, for example, are already looking to cultivate alternative market opportunities in China, India and the Middle East, where environmental barriers to trade are less burdensome. The market power of the EU, however, suggests that export diversification will only mitigate the costs tied to lost potential export opportunities in that bloc. Moreover, reticence by countries like Malaysia and Indonesia to address the climate-related concerns of their key trade partners will ultimately run the risk that they fall behind the global trend. In the medium term, however, these dynamics may also pose risks for some EU‑based producers, who will be forced to compete in the global market at a higher price point as a result of more expensive compliance burdens attached to European clean energy targets.

Keep an eye on electric vehicles

We have also long predicted that electric vehicles (EVs) would emerge as a new lightning rod for international trade disputes. The EU is, again, at the centre of many of these tensions, but it is far from the sole player: a trans‑Atlantic rift over EVs derives partially from the US’s Inflation Reduction Act, while a brewing EU‑China trade dispute over EVs can be traced to China’s aggressive state-backed cultivation of its own new-energy vehicle industry over the past decade.

Subsidy-driven industrial policies, aimed at promoting EVs and other renewable technologies, will keep this sector in the crosshairs of trade policy over our forecast period (2024‑28). As the urgency around securing EV supply chains heats up, these tensions will not be restricted to China’s disputes with the EU or the US. In some markets—particularly in developing nations in Africa and South America, where critical mineral supply chains are most prominent—these dynamics may translate into accelerated investment, as both China and its Western rivals seek to diversify their sourcing of critical raw materials. African nations, such as Eritrea, Zambia and the Democratic Republic of the Congo, will emerge as some of the most visible battlegrounds for influence. Argentina, Brazil, Bolivia and Chile will also capture increasing foreign direct investment (FDI) as a result of their attractive lithium reserves. Nevertheless, trade protectionist elements lurk in many of these regions, as well. China’s export restrictions on gallium and germanium, Indonesia’s export controls over nickel, Malaysia’s planned trade restrictions over certain rare-earth exports and signs of lithium resource nationalisation in markets like Chile, Mexico and Bolivia all point to signs of worsening international trade frictions, as green ambitions drive national strategies around domestic industrial and supply-chain development.

By contrast, more manufacturing-focused markets will be forced to deal with increased global EV competition in other ways. China’s growing global market share in automotive production now threatens the long-standing dominance of Japan and South Korea (while also carrying investment consequences for regional markets like Thailand, which has established itself as a low‑cost automotive hub for many North‑east Asian and European car manufacturers). The supply-chain reliance of these countries on sourcing automotive components from China, as well as the deep levels of FDI stock held in China by Japanese and South Korean companies, suggest that blunt trade restrictions, like tariffs, investment restrictions, import quotas or export controls, are unattractive policy options, at least in the near term. Instead, aggressive subsidy deployment in these markets is likely as well, which risks locking the global EV industry in a “race to the bottom” spiral of government support.

Where do we go from here?

The continued “greening” of global industrial policy means that concerns around fair trade will expand and intensify over the 2020s. Many of these disagreements will reflect the disjointed priorities of individual national energy transition goals. For example, fossil fuel consumption in most advanced economies is set to peak during this decade as these markets rapidly transition toward renewables. By contrast, the priority of the world’s poorest economies remains focused on getting onto the “development ladder” in the first place, including via the mining and consumption of “dirty” resources. Middle-income economies are better placed to move towards cleaner energy sources, but they will still struggle to balance this transition against the high energy usage necessary to ensure fast economic growth. Other concerns around energy security (including the weaponisation of fuel sources)—as well as risks around protectionism diverting energy towards local manufacturing, rather than relying on the efficiency of globally integrated supply chains—also highlight the issues at the intersection of trade and climate policy.

We expect that international solutions on how to prevent, reduce or diffuse climate-related trade protectionism will remain largely absent throughout our forecast period. The dissolution of the World Trade Organisation’s dispute settlement mechanism has not been replaced by an alternative, completely neutral arbiter to address the world’s trade disputes (the WTO cases that are currently ongoing, such as between Australia and China, have largely been solved by bilateral negotiations rather than that body). Consequently, we see the specific disputes currently unfolding—such as that between the EU and Indonesia and Malaysia over palm oil—as playing a more instructive role in determining how trade-and-climate protectionist themes will develop in the coming years. This will include retaliation, both in terms of foreign trade and domestic industrial policy (that is, subsidies).

Should multiple industries, particularly beyond the EV sector, ultimately fall prey to a potential “race to the bottom” scenario, then this could unleash a wave of deflationary forces globally in 2024‑28, as governments respond to price pressures by undercutting each other in the market. Higher subsidies would demand more expansive public spending, which, in turn, could reduce the available expenditure necessary elsewhere to achieve national political, social or even climate-related ambitions.

The analysis and forecasts featured in this piece can be found in EIU’s Country Analysis service. This integrated solution provides unmatched global insights covering the political and economic outlook for nearly 200 countries, enabling organisations to identify prospective opportunities and potential risks.