How trade policy can deliver sustainable value chains

William Bain, Head of Trade Policy, BCC

The twin economic and supply chain shocks of the Covid-19 pandemic and the War in Ukraine have shown how central policy is to efficient supply and sourcing chains in global trade. In a multipolar trading world, businesses and policymakers have to navigate a rapidly changing climate. This includes the US having decisively shifted policy through the Inflation Reduction Act and the negotiation of new critical minerals agreements with likeminded partners, the EU adding to its trade policy toolbox by implementing the Chips Act and Carbon Border Adjustment Mechanism (CBAM) We also mustn’t forget China continuing its surge in electric vehicles and battery production, while exerting leverage through its investment in state enterprises, with global reach, and its supply chain policies. 

So how can the UK – the world’s sixth largest economy – position its trade policy to meet these emerging supply chain challenges, while also being in the vanguard of promoting sustainability and meeting climate change commitments as key components of its economic and geopolitical approaches? 

First, the UK needs the right mix of supply chain policies to be globally competitive in green technologies. Take electric vehicles as an example. Key to battery capacity are the metals and critical minerals, like lithium, essential for their manufacture. With little indigenous supply, the UK needs to diversify its sourcing to ensure continuity of provision, and avoid over-dependence on China as a driver of supply. A critical minerals agreement with the US, as anticipated in the Atlantic Declaration, is one part of this strategy, but deeper critical mineral supply chain engagement with South America, in particular Chile, should also be considered.  

Second, adopting a suite of measures to deal with the carbon leakage and the fiscal implications of diversified supply chains. The UK Government concluded a consultation in June on this, and we are awaiting its views on the responses. Elsewhere, the EU has begun the roll out of its CBAM,  involving reporting requirements in six sectors of goods for now, but eventually phasing in CBAM credits by January 2026 with a projected coverage of all goods within the EU Emissions Trading Scheme. The BCC’s position is that we favour CBAM-like measures as part of an overall supply chain and climate change policy. We believe that formal linkage of the UK ETS with that of the EU (anticipated in the Trade and Co-operation Agreement) is necessary in terms of providing stable, long-term conditions for investment in energy and green technologies, and is the prerequisite to formal linkage of our two CBAMs.  

Third, if we are to meet our initial climate change targets by 2030 and Net Zero by 2050, we need to consider decarbonisation of key commodity production, such as steel and aluminium. Getting the details right here is crucial. The US and EU are in the midst of discussions to create a Global Sustainable Steel and Aluminium Arrangement which would lower tariffs and quotas for those countries within the grouping, while addressing excess capacity from high-carbon produced steel sources. We need to see what emerges from these discussions and whether it would be right for the UK to move in this direction. 

Fourth, growing commitments for companies in terms of attesting to the sustainability of their supply chains. The EU Deforestation Regulation will come into effect in late 2024 and create reporting requirements for SMEs and larger businesses alike, while excluding products which contribute to deforestation. We await UK Government decisions on similar measures here in the UK. The principles are right, but we need to make sure businesses come on the same journey, and receive the necessary support and phase-in periods, in the transition process to reporting requirements on sustainability.  

If we make the right policy choices here in the UK, and in concert with our global partners, the move to sustainable supply chains and green technology can boost global trade. As the World Trade Organisation reported earlier this year, reducing tariffs and non-tariff barriers on green technology can help meet our climate commitments more quickly, as well as increasing global green exports by 5% by the end of this decade. That’s the opportunity, now we need bold decision-making to be in a position to make an economic virtue of green trade and more sustainable supply chains.