1. Introduction
Facing the urgent need to reduce greenhouse gas emissions and keep the temperature rise from exceeding what scientists warn is a perilous threshold, governments have deployed green industrial policies (GIPs) to develop clean and low-carbon technologies that may help decarbonizes the economy. The transition from a fossil-fuel-dominated economy to a low-carbon one would push for a drastic and complete transformation of the industrial landscape, with profound effects on consumption and production. In fact, the markets for green and low-carbon energy technologies have expanded dramatically with no sign of diminishing, attracting more than USD 1.4 trillion in global investment in 2022.Footnote 1 GIPs can be harnessed to capitalize on commercial opportunities and reap economic benefits, which can be instrumental in garnering sufficient political support for those policies.Footnote 2
Amid an era of disruption spurred by heightened geopolitical and geo-economics tensions, such as the US–China rivalry and Russia's invasion of Ukraine, the use of industrial policies in low-carbon and green sectors has experienced record-high popularity, even in the nations that have long favoured economic neoliberalism.Footnote 3 A paradigm shift is taking place as policymakers have been reassessing and re-engineering the relationship between markets and the state in advancing the low-carbon agenda. The appeal of integrating multiple purposes – economic, security, geopolitical, and environmental ones – in GIPs has been increasingly appreciated by both industrialized and emerging countries as a response to disruptions.Footnote 4 Nevertheless, the specific calibration of different factors in GIPs can differ from country to country, demonstrating their distinct policy priorities. The interweaving of increasingly diverse goals in GIPs has been particularly notable in major economies that fiercely compete for leadership in clean energy technologies and industries while also striving to strengthen the security and resilience of supply chains. The efforts to boost domestic clean energy manufacturing competitiveness are no longer exclusively or predominantly driven by the desire to maximize commercial profits but increasingly more by geo-economics and geopolitical considerations. In fact, the dominance of China in a range of green technologies has propelled advanced economies to reassess their reliance on Chinese exports with more scepticism. The emergence and growth of multi-purpose GIPs have been closely associated and will continue to be so with the evolving contextual background.
The use of multi-purpose GIPs is not without controversy. First, it raises questions regarding the compatibility with the rules-based multilateral trading system as administered by the World Trade Organization (WTO). Given the high litigiousness of GIPs within the WTO dispute settlement system,Footnote 5 it is relevant to apply international trade rules to identify potential violations. Although the dispute settlement system has been crippled by the dysfunction of the Appellate Body, WTO-proofing of green industrial policy remains essential in ensuring economic efficiency and avoiding the escalation of trade tensions. Nevertheless, a growing trend seems to be that countries have shown much less interest in using the WTO dispute settlement mechanism, when facing trade-restrictive GIPs, than in ‘taking matters into their own hand’, for instance, by adopting similar measures or seeking negotiated solutions bilaterally or minilaterally.
Second, from a broader perspective, the proliferation of multi-purpose GIPs would implicate the interface between energy, trade, and the environment. Trade-offs are likely to be made, and misalignment of different objectives might occur as the overemphasis on one single goal of GIPs could undermine efforts to achieve others. An undesirable consequence would be to marginalize or sacrifice climate targets and slow down the decarbonization process.
A vast body of scholarship has been devoted to examining the design and implementation of GIPs throughout the past decades from economic, political, public policy, and legal perspectives.Footnote 6 However, it remains under-discussed how GIPs have been reimagined or re-engineered to change the calibration of policy objectives and functions as a response to a plethora of challenges in the new era and the implications on the multilateral trading system. Active GIP-user countries, particularly those with large influences and stakes in clean energy industries and value chains, are likely to generate profound global implications that can threaten the existing international order. Therefore, this article contributes to the ongoing debate by selecting the world's three largest clean energy producers – China, the US, and the EU, each of which is also a hegemon in their respective regions – as case studies to exemplify the intertwinement of diverse considerations in their multi-purpose GIPs and how they affect the international trading system.Footnote 7
The remainder of the article is structured as follows. Section 2 reviews the existing literature on GIPs and highlights the newly emerged disruptions that have shaped and will continue to shape the composition and implementation of multi-purpose GIPs. Section 3 offers an updated account of China's, the US's, and the EU's multi-purpose GIPs, all of which demonstrate varying degrees of deviation from their past approaches to industrial policies. Section 4 delves into the implications of the multi-purpose GIPs on the multilateral trading system from three related yet distinct angles – compatibility, challenge, and opportunity. While there is a high probability that the proliferation of multi-purpose GIPs would clash with the international trade regime, a silver lining remains for the WTO to seize the chance to avoid such a clash.
2. An Overview of GIPs
As a terminology that is often interpreted differently depending on the audience, GIPs have no universal definition.Footnote 8 Scholars tend to rely on the intention and effect of GIPs in delineating the definitional boundary. For instance, Altenburg and Rodrik define GIPs as ‘any government measure aimed to accelerate the structural transformation towards a low-carbon and resource-efficient economy in ways that also enable productivity enhancements in the economy’.Footnote 9 In other words, GIPs refer to sector-targeted policies that affect the economic production structure with the goal of delivering environmental benefits.Footnote 10 GIPs are designed to address the dual challenges of transforming economic structures to create wealth and increase prosperity while, at the same time, replacing ecologically unsustainable activities with sustainable ones.Footnote 11 Compared to other environmental actions, GIPs have a distinct policy objective – to restructure and transform the economy into a green one in order to limit climate change.Footnote 12
There is no one-size-fits-all approach in the crafting and implementation of GIPs. In fact, GIPs can take a wide range of forms that go beyond single policy domains, including investments, fiscal incentives, regulatory measures, and policy supports designed to stimulate and facilitate the development and deployment of green technologies across the value chain.Footnote 13 Green industrial policymakers usually deploy a mix of different policies affecting green and low-carbon technology at different development stages, and targeting both supply and demand sides. Given that different types of green technologies tend to differ in their design complexity and the extent to which they need to be customized, it is essential that policymakers develop targeted policy mixes.Footnote 14
The rationale for supporting GIPs is primarily two-fold. The first one is to address long-existing market failures – carbon under-pricing and R&D externalities.Footnote 15 It is extremely difficult, if not entirely impossible, for the market to fix its own problems. Government support, primarily through fiscal and regulatory incentives, is much needed to create and shape the market for green technologies, at least before they can compete with fossil fuels in terms of cost. Private sector actors that are risk-averse would be highly reluctant to invest in green technologies that are far from marketable.Footnote 16 Moreover, it is noted that green technologies tend to have higher risks, uncertainties, and externalities than non-green ones.Footnote 17 The second reason is to realise a first-mover advantage in certain green technologies and industries in order to boost domestic competitiveness.Footnote 18 The potential of GIPs to generate societal and economic benefits makes it essential for policymakers to garner sufficient political support for the implementation of GIPs that extend beyond the core group of environmental advocates.Footnote 19 In light of powerful, enriched interests and political coalitions in the fossil fuel sector, efforts to address climate change are more likely to be acceptable when integrated with industrial objectives instead of market-based policies, such as carbon pricing, which may invite backlash.Footnote 20 Meanwhile, in some industrialized economies, a growing contradiction between government promises that clean energy markets will bring more jobs and the fact that manufacturing remains located abroad has pressured policymakers to recourse to GIPs.Footnote 21
Nevertheless, opponents of the use of GIPs have mainly referred to the occurrence of government failures, citing the chequered history of industrial policies in general.Footnote 22 First, real-world governments are unlikely to obtain sufficient information about market failures and therefore unlikely to make the correct decisions, which can lead to picking the losers.Footnote 23 As green technologies are rapidly changing, there is a risk of spending resources in areas that quickly lose importance. This problem can be particularly acute with technology-specific GIPs.Footnote 24 In addition, firms and industries can easily engage in rent-seeking and put pressure on governments for support that ends up only furthering private interests.Footnote 25 Therefore, creating and implementing effective GIPs require that governments know precisely when and where to intervene while also avoiding capture by interest groups.Footnote 26 This is by no means easy to pursue, nor is there a clear set of rules instructing states on how to select sectors and maintain competition.Footnote 27
Despite the debates that have, for decades, played out among academics and in politics, the question should increasingly be framed as ‘how’ to design effective GIPs to achieve the underlying objectives.Footnote 28 The recent surge in the popularity of GIPs, even in nations that have traditionally followed a more laissez faire economic approach, has further stressed the significance of addressing the ‘how’ question. What adds to the difficulty of solving the ‘how’ question is that the proliferation of GIPs has coincided with the diversification of objectives that policymakers intend to pursue. While the traditional dual objectives – industrial development and climate change mitigation – remain, the emergence of new goals shaped by security, sustainability, social justice, geoeconomics, and geopolitics-related considerations have given new dimensions and purposes to GIPs.Footnote 29 For instance, the ascendency of China as an internationally competitive actor in a range of clean energy technologies and industries has been increasingly perceived by liberal economies as a serious threat. Also, the outbreak of COVID-19 and Russia's invasion of Ukraine has further aggravated the West's concern about supply chain resilience and national security. Almost inevitably, trade, climate, supply resilience, and national security interests have been closely intertwined with each other and started to shape the making of GIPs.
Efforts to combine diverse policy objectives in GIPs immediately point to the challenge of reconciling different and competing objectives. This task becomes particularly difficult when the objectives clash, as it entails trade-offs and a possibility of missing the climate change objectives.Footnote 30 For instance, prioritizing national security interests in GIPs could push for the re-organization of globalized supply chains in green industries that have delivered economies of scale, high innovation rates, and radical declines in costs. It might be challenging for multiple policy objectives to coexist. Instead, some objectives are likely to prevail over or contradict the others. Meckling cautions that a race for green industrialization may drive global competition in clean technologies but with negligible results on decarbonization when the technological gains fail to translate into sectoral coverage.Footnote 31 In addition, the intensification of a competitive relationship could derail global cooperation and pit countries against each other.Footnote 32 In fact, several Western economies have resorted to multi-purpose GIPs as a means to counter or undercut China's dominant position in the clean energy value chains by promoting onshoring and/or allyshoring, which would cause competitive duplication and impede climate action.Footnote 33 A cause for concern is that the pervasive use of multi-purpose GIPs can lead to a vicious cycle of protectionist measures that undermines rules-based international order and fuels the rise of nationalism. In addition, the distinct logic by which industrial policy and climate policy operate may not always be easy to integrate, adding to the difficulty of leveraging the potential of multi-purpose GIPs to advance environmental targets.
3. The Making of Multi-purpose GIPs in the New Era of Disruption
As the world's largest clean energy producers, China, the US, and the EU have deployed various policy measures to advance their goals of green industrialization and decarbonization over past decades. Their experiences in designing and implementing GIPs exhibit considerable differences, owing to the divergence in their institutional and regulatory capacity and, increasingly so, to their geopolitical and geoeconomic considerations. A comparative analysis capturing the evolution of the multi-purpose GIPs in the three jurisdictions offers a fresh perspective to understanding how GIPs respond to and affect disruptions in the new era.
3.1 China
Following a socialist market economy model, or the so-called ‘state capitalism’, the Chinese government has actively pursued a mix of industrial policies in almost all its economic sectors.Footnote 34 The literature frequently cites China to showcase the effectiveness of its state-driven GIPs in fostering competitive clean energy industries in a complex global economy with important implications across the world.Footnote 35 Nevertheless, new geopolitical and geoeconomic challenges, particularly those that emerged after the US launched the trade war, have pushed China to revisit and redesign GIPs. This part discusses the paradigm shift in China's GIPs.
Dating back to the late 1970s, China's clean energy development started at a limited scale with the primary goal of providing electricity access to rural areas as a means to alleviate poverty.Footnote 36 It was not until the early 2000s when China launched the 10th Five-Year Plan, that developing clean energy and energy conservation technologies was viewed as a way to optimize the country's economic structure.Footnote 37 After that launch, enhancing Chinese domestic clean energy manufacturing capacity to reap economic and social benefits started to gain policy attention.Footnote 38 Around the same time, advanced economies in Europe and North America enacted support mechanisms to promote renewable energy deployment, contributing to a booming overseas market for Chinese manufacturers. The following years saw robust promulgation of laws and policy measures in China to enable the expansion of clean energy industries.Footnote 39 At the sub-national level, provinces and municipalities have competed fiercely with each other in rolling out generous supportive schemes, such as government grants, guaranteed loans, and low price lands to attract clean energy investors.Footnote 40
The exponential growth of China's domestic manufacturing and export capacity in the clean energy sector has been met with backlash from its trading partners, such as the EU, the US, Canada, and India.Footnote 41 Ever since the early 2010s, Chinese clean energy exports, notably in the solar PV and wind sectors, have been subject to restrictive measures in the form of trade remedies and, more recently, regulatory standards, such as labour-related standards.Footnote 42 The deterioration of China's relations with Western economies in recent years has opened the eyes of Chinese policymakers to the fact that the readiness of foreign markets to acquire Chinese clean energy final products can be easily disrupted. Against this backdrop, the Chinese government has scaled up efforts to readjust its GIPs priorities to reduce reliance on overseas markets in order to lessen its vulnerability to political pressure and restrictions employed by foreign countries.
A recently introduced development strategy – the ‘Dual Circulation’ (‘Shuang Xun Huan’) – has risen as a core component of China's new development model aimed at building a resilient economy with a robust domestic market.Footnote 43 While the new strategy by no means mandates the abandonment of China's export-growth model, it underscores the significance of achieving ‘Internal Circulation’ (‘Nei Xun Huan’) to adapt to an increasingly unstable and uncertain external environment.Footnote 44 Applying the ‘Dual Circulation’ strategy to the formulation of GIPs, the Chinese central government has increasingly emphasized the need to expand the domestic consumer market for clean energy products.Footnote 45 For instance, a series of incentive measures have been promulgated to stimulate domestic demand for new energy vehicles (NEVs), such as purchase tax rebates, preferential electricity tariffs for NEV charging, and government procurement targets.Footnote 46 For clean energy technologies that are still at an early stage with lower technological maturity,Footnote 47 China's GIPs tend to focus more on developing the value chains and advancing technological progress to reduce cost and enable commercial application, such as the designation of pilot and demonstration programmes.Footnote 48
Given China's economic decentralization, local governments have played an instrumental role in implementing the centrally crafted GIPs, although they differ in their ability and capacity to enact policy to achieve the underlying goals. It is essential that local governments adjust national policy to local conditions and institutional constraints to maintain policy alignment.Footnote 49 Achieving the objective of ‘Dual Circulation’ and domestic demand expansion would ultimately depend on an effective and coordinated policy implementation at the local level. It is noted that an increasing number of Chinese provincial governments have issued high-level policy plans to boost local demand for clean energy products.Footnote 50 The coming years are likely to witness the roll out of more consumer-oriented policy incentives at China's central and sub-national levels to create a large and stable domestic clean energy market.
Although China's GIP-making in recent years has directed much more emphasis on developing its domestic consumer market for clean and low-carbon technologies, the practices of resorting to GIPs to counteract or retaliate against foreign countries have persisted. Given China's dominance in the critical mineral sector, in particular the refining and processing segment, GIPs can take the form of restricting the exportation of critical minerals that are integral to clean energy manufacturing. A recent addition to China's export restrictions on critical minerals is the imposition of export permits for three grades of graphite based on national security concerns.Footnote 51 Not equivalent to a ban, the new export control system can still generate uncertainty for industries dependent on graphite and mandate the submission of possibly confidential commercial information.Footnote 52 Export restrictions on critical minerals can also effectively serve as subsidies for domestic manufacturers that still enjoy uninterrupted access while their foreign counterparts do not. Nevertheless, given China's WTO obligations, the legality of export licensing or other restrictions remains questionable.Footnote 53
To sum up, China's GIPs in the new era demonstrate a paradigm shift from zealously boosting its manufacturing and exportation capacity to tapping domestic market potential and building up homegrown innovation capacity to reduce dependence on Western countries and enhance self-sufficiency. Meanwhile, China appears to be even more assertive in using defensive GIPs, such as export restrictions on key inputs of clean energy products, in retaliation against foreign countries. These changes and developments in China's GIPs demonstrate an increasingly deep permeation of security-related considerations in a broad range of policymaking arenas out of the need to safeguard national security.Footnote 54
3.2 The US
The US GIPs have been traditionally implemented with a focus on the upstream (i.e. new technology R&D) and downstream (i.e. market demand) segments and less emphasis on the supply chains and manufacturing, as the former is where market failures have been assumed to exist.Footnote 55 The US government has committed various public funds to R&D to fix negative spillovers in innovation and has created fiscal incentives and regulatory policies to develop a domestic market for clean energy technologies.Footnote 56 Few industrial policies were deployed to boost the US manufacturing capability or export performance directly. The difficulty the US companies face in translating their leadership in the invention and innovation of clean energy technologies into an equally competitive position in commercial application and manufacturing becomes acute.Footnote 57 The US has developed a heavy reliance on foreign suppliers for a wide range of components and products that are essential to decarburizing the electricity and transportation sectors, such as solar PV, wind turbines, and power batteries.
The rising sentiments against losing market share to foreign competitors, particularly Chinese competitors in the clean energy sector, have compelled the US administration to resort to highly defensive GIPs – anti-dumping, and countervailing duties and safeguards – over the past decade.Footnote 58 However, the use of both country-specific and global-scale trade remedies has not effectively boosted the US domestic manufacturing capacity nor reduced its dependence on imports for several reasons.Footnote 59 First, targeted countries under anti-dumping and countervailing duties can relocate their domestic firms elsewhere to circumvent tariff increases.Footnote 60 Second, the broad structural changes in the composition of the US domestic economy over past decades has led to the shrinking of manufacturing, particularly in clean energy-related industries.Footnote 61 Third, the inadequacy of financing tools available to clean energy companies in the US has severely restricted their capacity to construct or scale up manufacturing plants, which are usually capital intensive.Footnote 62 The prevalence of offshoring and outsourcing in the US clean energy industry has triggered serious concerns that the loss of production capacity might quickly lead to the loss of the innovative edge.Footnote 63
Largely following Trump's rhetoric of bringing jobs back to the US and counteracting China's growing influence, Biden, nevertheless, reversed his predecessor's rejection of climate change efforts and integrated climate policies with economic policies.Footnote 64 In addition to maintaining the Trump-era tariffs on Chinese clean energy products, the current US administration has also crafted a new set of multi-purpose GIPs as embodied in the recently passed bills – the Infrastructure Investment and Jobs Act (IIJA), the CHIPS and Science Act, and the Inflation Reduction Act (IRA). While all of these Acts provide funding to promote clean technologies and support basic research, the IRA stands out, not just as the largest climate legislation ever passed in the US, but also for its support mechanisms that condition the eligibility on meeting explicit sourcing and domestic content requirements (DCRs).Footnote 65 For instance, the IRA provides up to USD7,500 consumer tax credits for electric vehicles, with a threshold requirement that the final assembly takes place in North America, and origin content requirements on battery components and critical minerals.Footnote 66 Besides setting a specific minimum percentage requirement on the critical minerals extracted or processed in a country with which the US has a free trade agreement, restrictions on content sourcing also apply on Foreign Entity of Concerns, which according to the proposed guidance issued by the Department of the Treasure would include even Chinese state-owned investment outside of China.Footnote 67 An additional incentive of up to USD 4,500 per vehicle is offered to support the production of battery cells, modules, and components in the US.Footnote 68 For other clean energy projects, the IRA also mandates similar DCRs as eligibility conditions for tax incentives.Footnote 69
The signing of the IRA into law represents a radical departure of the US GIPs from its traditional preference for free market fundamentals towards a much higher degree of government intervention to strengthen domestic competitiveness. The is highly problematic from the perspective of the multilateral trading system, as some of the IRA's provisions, such as the DCRs have been consistently ruled illegal by the WTO dispute settlement.Footnote 70 Unsurprisingly, many US allies and partners, notably the EU, Japan, South Korea, India, and the UK have strongly opposed the IRA despite the understanding of the need to diversify supply chains and reduce overdependence on one or a limited number of countries.Footnote 71 As reported, an increasing number of projects across different segments of clean energy value chains have been relocated or announced to relocate in the US, which was previously set to operate in the EU or other countries.Footnote 72 The concern that the IRA would create immediate economic distortions in foreign direct investment to the detriment of the US trading partners is rising. The IRA also has notable goals to undercut China's growing influences in clean energy industries and supply chains. However, the myriad rules and limitations on eligibility for tax incentives provided by the IRA demonstrate the complexity of balancing different and even competing interests in designing GIPs.Footnote 73 It remains unclear whether the US can achieve the intended goals of the IRA while minimizing the unintended effects, including fiscal burden on taxpayers to fund projects eligible for IRA incentives. Also, given that clean energy projects – particularly those in the upstream segment, such as mining and processing – can take a long time period to complete, the difficulty of achieving the IRA's industrial targets remains daunting.Footnote 74 The fragmentation of decision-making authority among a large number of agencies creates institutional barriers for the implementation of specific rules under the IRA.Footnote 75 The constant political conflicts between the Democrats and Republicans over federal support for clean energy technologies are but one reason for the IRA's uncertain future.Footnote 76
Defending national security has taken an increasingly prominent role in shaping US multi-purpose GIPs, which aim not only to secure the country's position in clean energy industries but also to undercut the influences of countries that are not politically or ideologically aligned, such as China. It is noted that the scope of the US GIPs has been expanding to cover even the very upstream segment – mineral extraction and processing, which used to attract limited attention from the US policymakers due to environmental and social concerns. The unprecedented content sourcing requirements on critical minerals clearly testify to the new security dimension of the US GIPs. While it remains too early to tell whether the newly formulated multi-purpose GIPs in the US will achieve the underlying objectives, the shockwaves sent by the White House have been acutely felt across many jurisdictions.
3.3 The EU
For decades, the EU's approach to industrial policies has been holistic, integrated, and horizontal, with a focus on promoting R&D and preserving a competitive internal market to ensure fair and undistorted competition.Footnote 77 The EU member states' autonomy in resorting to industrial policies has been limited to avoid market distortion and maintain the integrity of the single market.Footnote 78 Therefore, the EU's use of GIPs in the clean energy sectors has been oriented towards boosting domestic demand and establishing liberalized and integrated energy markets, in addition to incentivizing innovation ability.Footnote 79 For instance, the EU Renewable Energy Directive (RED) has established a regulatory framework for the promotion of the use of energy from renewable sources through setting binding national targets on the share of renewable energy in different sectors for application.Footnote 80
While the EU has achieved rapid progress in the deployment of clean energy, its domestic manufacturing companies have largely failed to transfer a booming demand into a commensurate increase in market shares or industrial competitiveness. When the EU clean energy market was drastically infiltrated with imports, most notably those produced in China, the European Commission responded with multiple rounds of investigations that led to the imposition of trade remedies, such as anti-dumping and countervailing duties.Footnote 81 The constant use of trade remedies has not effectively boosted the competitiveness of the EU's domestic clean energy industries, similar to the US case, as discussed in the preceding section. Although the EU has placed clean energy transition and decarbonization as the priority for a long time, the changing geopolitical and geoeconomic circumstances may have pushed the bloc to rethink its pathway.
Against this background, the EU has scaled up its legislative and policy-making efforts to incorporate multiple objectives in its GIPs, such as supply chain security, resilience, and industrial strength. For instance, the goal of reinforcing and protecting Europe's leadership role and competitiveness in key sectors set in the renewed EU Industrial Policy Strategy has been consistently emphasized in the subsequent policy documents.Footnote 82 Nevertheless, how to foster a highly competitive clean energy manufacturing sector in Europe remains largely unsettled as these strategy documents only generally define roadmaps without providing a workable and effective framework for GIPs.Footnote 83 Although a growing number of programmes and initiatives have been established to provide funding to incentivize R&D and innovation in cleantech sectors, they are also broad in scope and support industrial ecosystems encompassing all players across the value chain in a non-targeted fashion.Footnote 84
It was not until 2023 that two legislative proposals – the Critical Raw Materials Act (CRMA) and the Net-Zero Industry Act (NZIA) – set specific targets for domestic content sourcing in the EU as a response to the globally popular trend of enhancing national competitiveness. The CRMA, which provides a list of strategic raw materials that are considered crucial for the manufacturing of green, digital, and defence technologies, sets precise domestic targets – in terms of boosting the EU's domestic production, refining, and recycling capacity – that should be achieved by 2030.Footnote 85 The CRMA is considered to represent the EU's first comprehensive attempt to regulate critical raw materials management and shape the practices of related industry stakeholders.Footnote 86 In conjunction with the CRMA, the NZIA identifies a list of net-zero technologies that are of strategic importance, such as solar PV, solar thermal, and battery storage, and sets a target of reaching a manufacturing capacity for these technologies equivalent to at least 40% of the EU's annual deployment needs by 2030.Footnote 87 The goal of the NZIA is to enable the EU to regain its leadership for clean technologies that it lost to a few countries and create a ‘competitive, green, and job-creating’ industrial sector.Footnote 88
The announcement of specific targets in relation to domestic manufacturing capacity in critical raw materials and clean energy products has stirred considerable controversy. Some commentators argue that the policy objectives of the two proposed acts were ‘unabashedly protectionist’ and constituted ‘crude protectionism and dirigisme’.Footnote 89 It is warned that an unproductive subsidy race involving the EU would weaken its internal market and further increase existing inequalities in Europe.Footnote 90 Another concern is that the EU's industry dynamics and economic structure confer on the region an advantage in producing some clean energy technologies but not so in producing others, particularly those that require extraordinary economies of scale, such as solar PV.Footnote 91 Therefore, an across-the-board import substitution as dictated by the two acts, even for goods that are currently imported from a diversified base of trading partners with no or limited security concerns, can be counterproductive.Footnote 92 In other words, it is irrational to engage in strategic competition over almost all parts of the clean energy value chains, regardless of whether the EU realistically has a comparative advantage.
While the EU member states remain deeply divided over whether Europe needs a massive-sized stimulus package with mandatory ‘buy European’ requirements,Footnote 93 their support for setting high standards in the clean energy sector has been strong.Footnote 94 Notable examples, including the Batteries Regulation and the proposal for the Ecodesign for Sustainable Products, demonstrate the EU's efforts to lead the globe in setting regulatory standards for clean energy products and production processes.Footnote 95 These regulations, although primarily aimed at safeguarding sustainability interests, still retain a notable policy objective of strengthening the union's industrial competitiveness by levelling the playing field and, therefore, effectively becoming multi-purpose GIPs.Footnote 96 Non-EU-based manufacturers, as long as they wish to place their products on the EU market, will have to comply with the regulations. With market access as the condition, the EU regulations re-setting the standards can shift the centre of competition away from the unit cost of production to sustainability-related factors for which the European manufacturers may already have competitive advantages. GIPs in the form of regulatory standard-setting, when used by countries with an outsized domestic consumer market such as the EU, can have far-reaching implications.
The EU's multi-purpose GIP making in the new era has demonstrated the Union's efforts to navigate between different, and sometimes competing, policy objectives with the risk of dividing the member states.Footnote 97 While the energy crisis induced by Russia's invasion of Ukraine has pushed Europe's efforts to reduce fossil fuel imports to the forefront, the EU policymakers are increasingly reluctant to rely on imported equipment and components for clean energy generation. The pass of the US IRA has further aggravated the EU's fear of losing home-grown industrial capacity in the clean energy sector. However, simply duplicating the US or China's GIPs and providing generous subsidies to domestic manufactures in the EU may not be feasible, fiscally or institutionally. The EU faces inadequate funding and a high degree of policy fragmentation, among other problems, that may prevent it from using heavy subsidization.Footnote 98 Whether the EU can strike a delicate balance between ‘selective protectionism’ and openness to international trade and investment becomes vital.Footnote 99 Pursuing a long list of objectives with GIPs challenges the EU's capacity to deal with the urgent challenges while minimizing unintended consequences.Footnote 100
4. The Implications of the Multi-purpose GIPs on the WTO – An Unavoidable Clash?
Considering the high tradability of clean energy technologies and their increasingly globalized value chains, the use of multi-purpose GIPs is bound to profoundly affect international trade and create important spillover effects across jurisdictions. It is important to take stock of the implications of the proliferation of multi-purpose GIPs on the WTO before identifying solutions. This part proposes a new analytical framework to assess how the multi-purpose GIPs interact with the multilateral trading system from three interrelated yet distinct angles – WTO-compatibility, challenge, and opportunity.
4.1 The Compatibility of the Multi-purpose GIPs with the WTO Rules
As a rules-based multilateral trading system, the WTO promotes trade liberalization among its 164 members by mandating the reduction of tariff and non-tariff barriers. In addition to applying the non-discrimination obligation, including principles of national treatment and most-favored-nation (MFN), the WTO also has a set of rules governing the use of subsidies, trade remedies, and border restrictions that are potentially relevant to GIPs.Footnote 101 Among the WTO Agreements, the General Agreement on Tariffs and Trade (GATT), the Agreement on Subsidies and Countervailing Measures (ASCM), and the Agreement on Trade-Related Investment Measures (TRIMs) have been more frequently cited, while the Agreement on Safeguards and the Technical Barriers to Trade (TBT) are less cited in GIP-related disputes.Footnote 102
The compatibility of multi-purpose GIPs with the WTO rules requires a case-by-case analysis because it is determined by the specific design and implementation of a GIP. While an in-depth analysis of how the surveyed multi-purpose GIPs fare under WTO law is beyond the scope of this article, a few observations can be made. First, the existing WTO jurisprudence in relation to clean energy measures sheds important light, though sometimes blurry, on the boundary between WTO-consistent GIPs and inconsistent GIPs.Footnote 103 It is made abundantly clear that the use of blatantly discriminatory policy measures, such as DCRs, which also became the primary target in most WTO clean energy disputes, have a low chance of surviving legal scrutiny. Meanwhile, export restrictions on upstream materials that constitute critical inputs to clean energy products also face tight policy space under the WTO. Second, analysing measures that do not constitute clear-cut violations of WTO rules yet still generate restrictive implications on the trading system will be fact-intensive. For instance, the exercise of regulatory power to set product standards, as led by the EU, would be problematic if it turned out to be more restrictive than necessary or if the de facto favours domestic producers over foreign ones.Footnote 104 Third, the WTO-proofing of GIPs is not only important for preserving the authority of the multilateral trading system but also essential for ensuring the policies' economic efficiency and reconciling the interplay between industrial and climate objectives.Footnote 105 This is because trade discriminatory GIPs usually impede an optimal allocation of resources by favouring less-efficient domestic producers over foreign ones, thus driving up the cost of clean energy production, which would slow down deployment of such technologies.
4.2 The Challenges of the Multi-purpose GIPs on the WTO
The challenges that multi-purpose GIPs pose on the WTO are not, as stated earlier, limited to members' violation of the multilateral trading rules. This section cautions that an increase in the use of multi-purpose GIPs would profoundly challenge the WTO in three ways, which warrant a clear understanding in order to figure out how a clash between them could be avoided.
First, when facing multi-purpose GIPs, adversely affected countries tend to adopt similarly restrictive or discriminatory measures as a preferred ‘tit-for-tat’ response, fostering a race to the bottom competition. No trade disputes so far have been brought to challenge the legality of the recent use of multi-purpose GIPs with WTO-inconsistent aspects despite threats to do so.Footnote 106 This might signal the countries' inclination to ‘take matters into their own hands’. Examples include the EU and India's legislative responses to the US IRA by providing similarly discriminatory support to their own domestic industries, as well as the EU's consideration to impose retaliatory tariffs on US products.Footnote 107 The increasing unilateralism may also reflect countries' declining faith in the WTO dispute settlement system as a viable solution for trade frictions. The race among countries to craft and implement multi-purpose GIPs to defend or serve their own interests without deferring to the laws of the WTO can easily lead to a downward spiral, with trade tensions intensifying. As discussed earlier, the use of DCRs in GIPs has shown no signs of fading away, despite the potential breach of several trade obligations with little or no chance of being justified by WTO exceptions. The spread of trade-discriminatory measures might be hard to contain without any legally binding rulings being issued by the WTO dispute settlement system against rule-breakers. A vicious circle appears to arise and persist – the more reluctant members are to litigate against each other's WTO-inconsistent GIPs, the more likely they are to resort to equally restrictive, if not more restrictive, measures in response. It would undermine the credibility of the WTO if its dispute settlement mechanism had no role to play in regulating and scrutinizing the growing use of multi-purpose GIPs.
Second, an emerging trend among WTO members for coping with highly distorting GIPs is to deviate from multilateralism and seek bilateral solutions that are inherently politics oriented. For instance, notwithstanding the US trading partners' increasing dissatisfaction toward the IRA and their threats to file WTO disputes against the Act, several countries have already negotiated or been in the middle of a negotiation with the US to reach a deal to obtain the eligibility for tax or other fiscal benefits available under the Act.Footnote 108 The negotiated outcomes, notably bilateral agreements with the US, such as the US–Japan Critical Minerals Agreement, represent a radical deviation from one of the most important trade obligations – the MFN.Footnote 109 If the negotiation of bilateral or minilateral deals, which hardly count as free trade agreements that are pursuant to the GATT Article XXIV, becomes the new option for politically, militarily, or economically aligned countries to overcome trade-related barriers under multi-purpose GIPs, the global trading system risks fragmentation or breaking into blocs. The leverages that large economies have in dictating the terms of bilateral or minilateral deals would be disproportionately bigger than that of their counterparts. Countries that are excluded from those small-group trade deals will suffer the losses of market access, leading to trade diversion and distortion. Low-income countries with much less bargaining power to negotiate effectively bilaterally will likely be cut out or coerced into unfair deals to the detriment of global equity and justice. Therefore, it is vital for the preservation of the WTO, as an institution based on the MFN, that the tendency of countries seeking bilateral or minilateral deals with each other, in order to circumvent restrictive or discriminatory requirements entailed in GIPs, be reversed.
Third, another potential challenge that has yet to come up is that if a case is filed against WTO members at the dispute settlement system, the members rely on the GATT Article XXI national security exception to seek exemption for their multi-purpose GIPs. Although GIPs-using countries being challenged to the WTO dispute settlement system have only invoked exceptional clauses under the GATT Article XX, such as Article XX(d) and (j), there exists a possibility that defending members might seek justification from the national security exception. In light of the increasing recognition of climate change as a threat to national security,Footnote 110 multi-purpose GIPs, which directly or indirectly affect emission reduction, are likely to be connected with security-related considerations. However, the interpretation of the WTO national security exception remains highly controversial, as evidenced by the several disputes citing this clause and panel decisions made in recent years.Footnote 111 The US, in particular, has strongly asserted that claims of national security should not be justiciable or actionable as this is a matter that only a sovereign nation can decide.Footnote 112 Should any GIP-related case be filed for dispute settlement, and the national security exception be invoked, WTO adjudicators will be tested in how they tackle the highly sensitive issue with the risk of inviting backlash.
4.3 The Opportunities to Avoid the Clash between the WTO and the Multi-purpose GIPs
As the preceding section cautions, if left uncontrolled or unmitigated, the rising use of multi-purpose GIPs, as offensive and/or defensive measures with highly discriminatory or restrictive impacts on international trade, would jeopardize the openness and stability of the multilateral trading system. Discussions on disciplining multi-purpose GIPs are important for addressing trade tensions and building a stronger multilateral trading system that stays at the center of global trade governance. This section proposes a twofold solution for the WTO to mitigate negative spillovers from multi-purpose GIPs.
The first option, which is also less challenging, is to establish a WTO informal dialogue on multi-purpose GIPs to enhance the organization's deliberative function more productively. In fact, WTO members held discussions on trade and industrial policy in an informal retreat in 2023, which indicates their willingness to undertake more deliberations on this issue.Footnote 113 Meanwhile, the existing WTO Dialogue on Plastics Pollution and Environmentally Sustainable Plastics Trade (DPP) can serve as an effective template for coordinating members to engage in exchanges on salient issues.Footnote 114 The DPP has played an increasingly important role in driving information sharing and international coordination in using trade and trade rules to solve plastic pollution. The fact that the US, China, and the EU have joined the DPP as coordinators or co-sponsors also demonstrates the acceptability of the initiative's open and informal format, which presents a viable alternative to the formal negotiation of trade rules. Therefore, it is advisable for the WTO to create a similar informal dialogue on multi-purpose GIPs and to involve the US, China, and the EU as coordinators while also being open to other members. Such a platform is conducive to exchanging energy and climate-related plans and strategies ex-ante among the participating members and enabling groups directly affected by specific GIPs to be heard. Otherwise, for some GIPs that are opaque and have limited information available, members who might be adversely affected would stay uninformed or unable to outline the negative impacts on their economies. In addition, members can learn from others' policy designs and perhaps even more importantly, identify new opportunities for potential cooperation. An initiative in the form of an informal dialogue is also politically feasible for countries such as the US that harbour increasing resistance against compulsory and binding international regimes. Given that the US and China have signed the Sunnylands Agreement, indicating their willingness to ‘enhance pragmatic cooperation’ to address the climate crisis,Footnote 115 it is likely that both countries would not object to being part of a WTO dialogue on GIPs. Enhancing deliberations and mutual understanding about multi-purpose GIPs via an informal WTO forum would be an important first step for members to take.
The second option, which is more ambitious and can be built on the first one, is to reach a plurilateral agreement among major economies under the auspices of the WTO to set out new rules and commitments with regard to the use of GIPs. Article II:3 of the WTO Agreement allows a subset of the WTO membership to conclude a plurilateral agreement that lays out certain rules applying to signatories only.Footnote 116 While plurilatralism has not received much attention since the establishment of the WTO,Footnote 117 the changing context, including the growing complexity of trade policy in the twenty-first century, has rendered plurilatralism more suitable than multilaterism.Footnote 118 In the case of multi-purpose GIPs, the rationale of seeking a multilateral agreement is limited as most WTO members either do not enact such policies or their policies do not yield broad and concerning spillovers. Although plurilateral agreements have traditionally been sought after by like-minded members, countries that have high stakes or interests in certain sectors or issues, despite their disagreements, remain likely to opt for a plurilateral approach to move forward on issues of common concern. Therefore, it would be possible to include major producer countries across the clean energy value chains in the negotiation of a plurilateral agreement. The coverage of such a plurilateral agreement does not necessarily need to be extensive, but it should aim at one core objective – to put down guardrails on the use of multi-purpose GIPs. It is critical for signatory members to delineate the scope of unacceptable multi-purpose GIPs, such as blatantly discriminatory measures that are highly distorting for international trade and therefore not justifiable. Institutionally, a committee on GIPs composed of representatives from each party can be established to host meetings periodically and review the implementation of the agreement. Both options aim to foster international cooperation on GIP-related issues at the WTO, which, while challenging, have the potential to provide significant benefits. In a time of heightened geopolitical tensions and rising economic nationalism, it is easy to overlook that it is the rules-based multilateral trading system that has propelled the globalization of the clean energy value chain, which has efficiently delivered economies of scale and price reductions for clean technologies.
5. Conclusion
In an era of intensified geopolitical and geoeconomic competition among nations over the issue of leadership in low-carbon technologies and a looming climate crisis with a narrowing window of opportunity for action, the use of multi-purpose GIPs has moved into the centre of climate and economic policymaking. Efforts to interweave an increasingly complex web of policy objectives – economic, political, environmental, and national security – in GIPs have been rapidly ramping up, particularly by the world's largest economies. The adoption of multi-purpose GIPs in one jurisdiction could incentivize the adoption of similar, if not identical, policies in other countries, particularly in competitor ones.Footnote 119
While multi-purpose GIPs are today being viewed more favourably as a solution to a plethora of challenges and disruptions due to balancing between different, and sometimes conflicting, policy objectives remains intractable. When policymakers intend to pursue a diversity of policy objectives in GIPs, it is almost inevitable that some objectives will be hard to reconcile, thus necessitating trade-offs. A cause for concern is that climate-related goals, such as decarbonization might be considered to be lower priority compared to other objectives. The increasingly fierce competition for leadership in green technologies, industries, and supply chains has prompted GIPs to disrupt global clean energy value chains to undermine efficiency and market competition. Multi-purpose GIPs aimed at insulating domestic manufacturing from foreign competition or forging a small club consisting of ‘like-minded’ countries to support supply chain security may succeed in reducing unwanted dependence, but with a possibly hefty price to pay, including wasteful spending and inefficient resource allocation.Footnote 120 It is inherently perplexing to decide where the line between acceptable and unacceptable reliance on foreign products and suppliers should be drawn.Footnote 121 There is a risk that policymakers might narrowly focus on competition and turn a race in GIPs into a zero-sum game that obstructs a much-needed collective action for decarbonization.
The proliferation of multi-purpose GIPs would severely threaten the openness and stability of the rules-based multilateral trading system with countries' rising inclination for unilateralism and minilateralism and potential abuse of the national security exception. Nevertheless, the WTO still stands a chance of curbing an aggressive use of GIPs by creating an issue-specific informal dialogue and later, a plurialteral agreement as forums for members to explore opportunities for collaboration. Strengthening the WTO's role in steering countries away from direct confrontation is vital to avoiding a clash between major economies' multi-purpose GIPs and trade rules. This is also immensely important to ensure that low-income countries that cannot compete on a dollar-to-dollar basis with large economies would not be pushed to the periphery of clean energy supply chains, thus upholding fairness and equity in low carbon transition. Trade liberalization, climate change, national security, and geopolitical competition are now interacting in unprecedented ways. The WTO needs to be prepared to meet the challenge and play a pivotal role in fostering international policy cooperation and coordination in the design and implementation of multi-purpose GIPs. In doing so, the WTO can significantly contribute to the alignment between trade and non-trade values and the ultimate goal of sustainable development.
Acknowledgement
The author is grateful to the insightful comments from the anonymous reviewers and editors of the issue. All errors remain her own.
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