Why ASEAN should push for a trade pact with the EU

In the shadow of escalating climate change and a fragmenting global economy, the European Union’s Green Deal has emerged as both an environmental benchmark and a geopolitical flashpoint.

At its heart lies the Carbon Border Adjustment Mechanism (CBAM), an unprecedented attempt to tax carbon-intensive imports at Europe’s borders. While the policy is framed as part of the EU’s climate neutrality goal for 2050, its implications reverberate far beyond Europe, particularly in Asia, where it risks triggering trade frictions and further protectionism just as the world braces for another era of tariffs and unilateralism under the second administration of United States President Donald Trump.

Asia’s response to the EU Green Deal is far from monolithic. China, with its complex state-capitalist model and global manufacturing dominance, views the CBAM as green protectionism. ASEAN member states, from middle-income economies like Malaysia and Thailand to fast-transforming Vietnam and Indonesia, struggle to balance the imperatives of climate action with the burden of compliance.

What is clear, however, is that the absence of a finalized EU-ASEAN Free Trade Agreement (FTA) could exacerbate vulnerabilities and deepen mistrust. The time to act is now, before US President Trump further upends the global trade regime with actions that target both friend and foe.

Launched in 2019, the Green Deal is the EU’s flagship climate initiative. It envisions a carbon-neutral continent by mid-century, with sweeping reforms across energy, industry, transportation and agriculture. The CBAM, set to be fully implemented by 2026, is designed to prevent “carbon leakage”, where EU firms shift production to countries with weaker climate rules. Under the CBAM, foreign exporters in carbon-intensive sectors, such as steel, cement, aluminum and fertilizer, must purchase carbon certificates that mirror EU carbon pricing.

While intended to safeguard the EU’s internal carbon market, the CBAM has ignited international criticism. Many Asian countries see it as a form of extraterritorial regulation, enforced without meaningful consultation with major trading partners like ASEAN states (despite a transitional reporting phase that began in 2023 and ended in December 2024). This is not merely a technical dispute about emissions accounting, it is a political clash over who sets the terms of global governance.

China has taken a predictably combative stance. Framing the CBAM as a disguised tariff, Beijing argues that the policy violates World Trade Organization (WTO) norms. Behind the scenes, however, China is ramping up its national emissions trading scheme (ETS), which in 2024 covered over 40 percent of national emissions, including power, steel and cement, aiming to align with global carbon pricing trends. It has also achieved dominance in global green technologies, from electric vehicles to solar panels.

Thus, while publicly critical, China is well-positioned to benefit from global decarbonization, poised to adapt and even shape the emerging climate-trade nexus.

ASEAN’s response, however, has been more fragmented. Singapore and Vietnam have signed FTAs with the EU, while Indonesia is negotiating one with Brussels. These countries are cautiously adjusting to the new regulatory landscape.

Their motivations are clear: the EU remains one of their largest export destinations, particularly for goods like electronics, rubber and palm oil. Yet the cost of compliance is steep, especially for micro, small and medium-sized enterprises (MSMEs), which lack the financial and technological capacity to quantify or reduce their emissions.

Malaysia and Thailand, meanwhile, have expressed concern over the fairness and timing of the CBAM. They fear a new kind of non-tariff barrier dressed in the language of sustainability but applied unevenly. Without appropriate support for technology transfer, such as carbon capture, or capacity building, the CBAM risks penalizing countries that have contributed the least to global emissions yet stand to lose the most economically.

At the heart of this debate is the concept of carbon credits, a market-based mechanism designed to put a price on emissions. Carbon markets can be voluntary or compliance-based, domestic or international. While in theory polluters pay and clean actors are rewarded, the practice is fraught with asymmetry.

Critics argue that carbon markets can entrench global inequities. As EU trade policy specialists like Chad Damro have argued, the EU’s extraterritorial economic and trade policies may reinforce a “hierarchical global order”, where rich countries dictate rules while less well-off ones absorb associated adjustment costs. Such concerns are not merely theoretical. Some developing countries have faced challenges in getting carbon offsets recognized by western regulators, despite verifiable reductions.

ASEAN cannot afford to remain on the defensive. Instead, it must position itself as a normative actor pushing for fair standards, equitable financing and realistic timelines. Concluding a region-wide EU-ASEAN FTA would be a strategic step in that direction.

The EU and ASEAN represent two of the world’s most dynamic regional blocs. Together, they account for over 15 percent of global trade. Talks for an inter-regional FTA have been on and off since 2007, and stalled since 2009, with bilateral deals, like those with Vietnam and Singapore, moving faster. But a comprehensive EU-ASEAN FTA would create the regulatory clarity and institutional architecture needed to navigate climate-related trade measures like the CBAM and other initiatives under the ambitious EU Green Deal.

The agreement could promote harmonized environmental standards calibrated to development levels, technical assistance for carbon auditing and compliance and mutual recognition of emissions reporting methodologies. It should also include provisions for capacity building and green finance, plus a joint mechanism for dispute resolution on climate trade issues.

More importantly, a finalized FTA would provide a diplomatic bulwark against the uncertainties of US trade policy, given the doctrine of “tariffs first, questions later”. Trump has already targeted China with tariffs reaching 245 percent on some goods, although China downplayed these as posturing, focusing instead on retaliatory measures. He also threatened US allies, including Japan, South Korea and even ASEAN countries, with punitive trade measures for perceived imbalances or defense dependencies.

With this looming threat, the EU must recognize ASEAN as a vital partner in shaping fairer global standards, not just a passive recipient of rules. A robust EU-ASEAN FTA would shield both regions from potential US trade disruptions while fostering cooperation in key sectors like green hydrogen, clean steel and digital trade.

Such an agreement could amplify existing trade momentum, with ASEAN-EU trade projected to grow 3.5 to 5 percent annually and increase in volume by 69 percent by 2031, according to a 2023 Boston Consulting Group study.

The EU’s Green Deal is a bold vision. But without multilateral legitimacy and developmental sensitivity, it risks turning climate policy into a new geopolitical battleground. Asia, particularly China and ASEAN, is not opposed to climate action. What it seeks is a fair transition, one that balances green ambition and regulation with equity and respect.

The EU-ASEAN FTA offers a path forward. It can turn confrontation into cooperation and extraterritorial pressure into a structured partnership. In a world facing a “poly-crisis” of protectionism, regulatory nationalism and climate change, completing this agreement is not a luxury. It is a strategic necessity.

Phar Kim Beng, PhD, is professor of ASEAN studies at Islamic International University Malaysia (IIUM) and Senior Research Fellow, Asia-Europe Institute, Universiti Malaya. Yu-wai Vic Li is a lecturer in East Asian Studies at the University of Sheffield, the United Kingdom.

Article was first published in The Jakarta Post on 25 April 2025.