Energy and Climate Change Programme • Volume 2 • Number 3 • October 2008

Trade and development responses to climate adaptation challenges

by Vicente Paolo B. Yu III

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Least-developed countries (LDCs) and small and vulnerable economies (SVEs), including Small Island Developing States (SIDS), face particularly difficult climate change and trade challenges. Their economies are often underdeveloped and reliant on a few key sectors and commodities, heightening their vulnerability to the impacts of climate change. For these countries to successfully adapt to, and develop in the face of, climate change, their trade and other economic policies should be adjusted to support effective adaptation and development through measures such as economic diversification. Developed country trading partners, for their part, should support adaptation through financing and technology transfer, and by removing distortive measures such as export barriers and unfair subsidies.

Relative to developed countries, populations in developing nations are more vulnerable to and will be more adversely affected by climate change. Their development conditions and economic resource constraints often exacerbate their economic and climate change vulnerabilities and inhibit their ability to adapt to climate change in social, technological and financial terms. The impacts of climate change will have far-reaching effects on the sustainable development of developing countries, including their attainment of the Millennium Development Goals and other internationally agreed development objectives by 2015 and in decreasing the ever-widening development gap.

The global projected impacts of climate change are severe and vary by region. Africa, where the majority of least-developed countries (LDCs) are located, is projected to be hard hit by increased water-related stresses such as droughts in large parts of the continent, which will severely compromise food production and security. Projected sea level rise is likely to affect low lying coastal areas with large populations. Many parts of developing Asia will likely see decreased freshwater availability, and many low-lying coastal areas with large populations are likely to face increased flooding from sea surges or flooding rivers.

In Latin America, projections are that the Amazon river basin will start drying out by mid-century, turning from tropical forest to savannah. Agricultural productivity is projected to decrease, and water availability could also be significantly affected. Small island developing states (SIDS) are expected to be most adversely affected by sea level rise exacerbating inundation, storm surges, erosion and other coastal hazards, threatening vital infrastructure and the livelihoods of island communities. The availability of coastal resources (such as fisheries) is projected to be adversely affected due to, inter alia, beach erosion and coral bleaching. Water availability in many small islands in the Caribbean and the Pacific is also expected to become insufficient to meet demand during low-rainfall periods by mid-century.

LDCs’ Trade Profiles and Potential Climate Change Effects

Many LDCs are being left behind other countries in terms of trade growth and competitiveness, and the quality of trade growth is neither sustainable nor equitable. LDCs’ export profiles are typically characterised by high degrees of export concentration, with only a few product tariff lines, such as mineral fuels, oil and clothing being exported. These profiles render them highly vulnerable to market demand-side volatility and other shocks – such as climate shocks – in relation to their main export products.

Climate change impacts on LDCs’ trade capacity and competitiveness are likely to vary depending on the product and the country concerned. While LDC oil exporters may benefit from the current high fuel prices, possible oil price adjustments by oil importing countries as a result of climate change-related policies may lower demand for fossil fuels and thereby reduce these LDC oil exporters’ future export earnings.

Other commodity exports of LDCs that are highly dependent on climate conditions, such as fisheries and agricultural (e.g. cotton, coffee, tea, mate and spices, tobacco, vegetables, see oils, fruits, animal skins) products could also be adversely affected due to, for example, the reduction of growing seasons, drought, and ecosystem loss.

Furthermore, the development and maintenance of trade-related infrastructure, such as roads, railways, and ports, might also become more difficult as countries struggle to match increasingly scarce resources with increasing climate adaptation demands.

SVE’s Trade Profiles and Potential Climate Change Effects

Their limited physical size and constrained natural resource and labour endowments often mean that the domestic markets of SVEs cannot support the location of large-scale industries or the production of goods subject to economies of scale at competitive prices. This means that the range of products produced in SVEs is often limited or products are not priced competitively. SVEs hence often “show a very high dependence on imports and exports and, consequently, on foreign market conditions” with trade to GDP ratios “usually much larger than the average” for other developing countries and with exports generally relying “on a very narrow range of goods and services … concentrated on the markets of a few countries.” These factors create in many SVEs a high degree of trade dependence and economic instability that both affects and is affected by their vulnerability to climate change.

The services sector, especially tourism, has become a major source for economic activity in many SVEs. Some SVEs, especially among the SIDS, have sought to overcome economic instability and their associated trade-related challenges by pursuing economic diversification strategies to become knowledge and service-based economies. For other SVEs, however, agriculture remains the dominant economic activity to supply both domestic and export markets.

Adapting to Climate Change: The Role of Development-Oriented Trade Policy for LDCs and SVEs, including SIDS

Adapting to climate change entails taking the right measures to reduce the negative effects of climate change (or exploit the positive ones) by making the appropriate adjustments and changes. There are many options and opportunities to adapt, ranging from technological options to behavioural changes at the individual level, all of which would depend on the policy choices taken by individual countries whether unilaterally or in the context of their international commitments and obligations.

The concept of adaptation to climate change is closely linked to the development of adaptive capacity, which refers to changes in processes, practices, or structures to moderate or offset potential damages or to take advantage of opportunities associated with changes in climate. National-level adaptation by developing countries will require a strong component of international cooperation from developed countries for support in meeting the costs of adaptation, as provided for in the UNFCCC. Finally, effective climate adaptation by developing countries cannot take place unless other climate-adaptive changes are also effected in other areas of international policy, such as trade and intellectual property, to make these fully supportive of developing countries’ efforts to undertake sustainable development. In short, effective climate adaptation is premised on the achievement by developing countries of their first and overriding priorities of economic and social development and poverty eradication.

With respect to ensuring the appropriate adaptation of trade policy to climate change impacts and constraints that may arise in a developing country context, especially for LDCs and SVEs including SIDS, it will be necessary for policymakers to rethink their current macroeconomic development and trade policy. The trade challenges that these vulnerable countries face stem in large part from the confluence of economic and trade liberalisation policy reforms undertaken in the past three decades, which have to a great extent exacerbated these countries’ vulnerabilities to both economic volatility and climate change.

Rethinking Trade Policy Approaches in Light of the Climate Change and Development Challenges

In light of their trade-related challenges, and the impacts that climate change is having and will have on the trade competitiveness and economic development prospects of LDCs and SVEs, including SIDS, it is clear that the key towards effective climate change adaptation by these countries lies in building domestic economies that are resilient, diversified, and more productive especially in sectors that are not as vulnerable to climate change impacts.

Further trade liberalisation by LDCs and SVEs in the sense of further increasing levels of tariff openness to imports may not necessarily be the appropriate “climate-adapted” trade policy response to climate change. Rather, adjustments are needed on the trade policies and measures of their trading partners in order to adequately reflect and respond to the trade, development, and climate change challenges that LDCs and SVEs, including SIDS, face..

In short, broadly what would be required by both LDCs and SVES, including SIDS, with respect to ensuring that their trade and development policies and measures are climate-adapted are (i) domestic sustainable development policies that incorporate trade and other economic measures designed to build up domestic productive capacity and promote economic diversification to sectors and activities that are less vulnerable to climate change than current ones; and (ii) an enabling and coherent international policy environment (in both the trade and climate regimes), which includes economic and climate policy space and flexibility, new and additional financial flows to support climate adaptation and development, research and transfer of climate friendly technologies, and external support aimed at improving these countries’ trade competitiveness and long-term climate-adapted sustainable development.

With respect to trade in goods, climate-adapted trade-related policymaking that is oriented towards sustainable development could imply a rethinking of LDCs and SVEs agricultural development policy and programmes in order to take into account climate change-related impacts. This could involve promoting shifts in both crops grown and production processes used to factor in climate change-related stressors. Domestic policy shifts may need to be effected – e.g. prioritising agricultural production for food security and industrial production of manufactured goods for domestic consumption over export-oriented production and as a means to lessen vulnerabilities to external trade, economic and environmental shocks.

Attention should be paid to the ancillary agricultural and industrial policy and infrastructure shifts that may need to be made to support diversification away from the current agricultural commodities being primarily exported by LDCs and SVEs, including SIDS. Adapting to climate change impacts on infrastructure and settlements could include scientific services to assess vulnerabilities, retrofitting buildings, raising awareness, and establishing resettlement programmes.

Climate adaptation will also require that trade-related infrastructure (such as ports, roads, etc.) be built or strengthened in preparation for climate impacts. Adaptation should include, where appropriate, the development of alternative infrastructure if existing ones cannot be climate-adapted.

As with LDCs and SVEs primarily dependent on the agricultural commodities export sector, LDCs and SVEs that are dependent on their oil and other mineral commodity exports will need to ensure that income gains coming from the current high prices for oil commodities are invested into improving the diversification level of their economies. This could be achieved by their investing in other productive economic sectors and providing sufficient resources to implement a strategic industrial development policy.

For many SIDS (both LDCs and SVEs), trade in products from their coastal zones and fisheries are major components of their economic and trade profiles. Climate change impacts on these fragile ecosystems, while difficult to combat, could be better addressed through more robust domestic regimes of resource access, control and management.

Climate-adapted agricultural and industrial diversification will also require securing adequate sources of energy to fuel existing production and expansion into new economic activities while, at the same time, not contributing more than is necessary to global greenhouse gas emissions . The development of domestically-sourced, clean, renewable, sustainable energy sources and infrastructure is therefore an important component of climate-adapted agricultural and industrial diversification.

Economic diversification into the services sectors for LDCs and SVEs, including SIDS, may provide many climate-adaptation and development benefits. Services sector expansion and diversification in a manner that is climate-adapted will, however, require not only increased domestic public and private sector investment into upgrading the country’s human resources but also investments in improving and climate-proofing the associated infrastructure for specific services sub-sectors and their various modes of supply.
Climate Change Adaptation of the Trade-Related Policies of Major Trading Partners with respect to LDCs and SVEs, including SIDS

The major trading partners of LDCs and SVEs, including SIDS, should support climate-adapted agricultural and industrial sector diversification by LDCs and SVEs, including SIDS, including but not limited to the provision of financial and technology transfer assistance for such diversification in the context of adaptation consistent with developed countries’ obligations to do under the UNFCCC and immediate action to remove barriers (both tariff and non-tariff) to these countries’ exports.

Developed country subsidies that support unfair competition with the products or production capacity of LDCs and SVEs, whether in agriculture, industrial goods, or even fisheries, should be reduced or eliminated.

Support should also be provided in terms of recognising and allowing for LDCs and SVEs’ needs for flexibility with respect to policy shifts and measures within agricultural and industrial diversification programmes. Any market access opening that LDCs and SVEs, including SIDS, may wish to undertake should be voluntary and flexible to take into account possible changing economic and climatic conditions.

The trade-related actions above should cohere with and enhance the mandatory actions that need to be taken by developed countries under the UNFCCC with respect to the provision of mandatory financing and technology transfers to developing countries (see (Arts. 4.3, 4.4, 4.5, 4.8 and 4.9 of the UNFCCC). Such actions will determine the extent to which developing countries, including LDCs and SVEs, will be able to effectively implement their own UNFCCC commitments (see Art. 4.7 of the UNFCCC)

Finally, in relation to the WTO negotiations, a genuine effort to contribute on trade and climate issues would involve responding effectively to developing country proposals for an integrated and development-oriented approach in determining the negotiated outcomes of the Doha Development Agenda.

Vicente Paolo B. Yu III is Programme Coordinator – Global Governance for Development, South Centre. The statements in this paper are personal to the author and do not necessarily reflect the official views or positions of the South Centre or its Member States.