CBAM is more than policy—it’s a shift in global trade. While APAC manufacturers enjoy a temporary edge, future competitiveness hinges on sustainable practices.
The European Union’s Carbon Border Adjustment Mechanism (CBAM) represents a pivotal shift in global climate policy. Designed to prevent carbon leakage and promote decarbonisation, CBAM imposes a carbon tax on certain imported goods to ensure they face the same carbon costs as those produced within the EU. While its initial scope is limited, the ripple effects of CBAM are already being felt across global supply chains—particularly in the Asia-Pacific (APAC) region.
Understanding CBAM
CBAM currently applies to six sectors:
- Cement
- Aluminium
- Fertilisers
- Iron & Steel
- Hydrogen
- Electricity
These sectors are among the most carbon-intensive, and the EU’s goal is to level the playing field by taxing imports based on their embedded carbon emissions. However, CBAM does not yet cover downstream products—finished goods that incorporate these raw materials. This creates a complex dynamic for global manufacturers.
Implications for APAC Manufacturers
- Competitive Advantage for APAC Producers
Consider a case of machinery manufacturer—such as one producing pressure equipment or boilers or containers or ships. Key input material for these is steel which are covered under CBAM. If the manufacturer is based in a third country (outside the EU), and exports to Europe, they currently do not face CBAM charges on the finished product. In contrast, EU-based manufacturers must absorb higher costs for raw materials due to CBAM, making their products less price-competitive.
This discrepancy gives APAC manufacturers a temporary cost advantage, potentially increasing their market share in Europe until CBAM expands to include more finished goods or until most steel producers decarbonise their operations.
- Risk of Accelerated Industrial Shift to APAC
Europe has already seen a gradual relocation of certain industries to APAC due to lower labor costs, regulatory flexibility, and proximity to emerging markets. CBAM could accelerate this trend. If EU manufacturers find themselves increasingly disadvantaged by carbon costs, they may consider outsourcing or relocating production to APAC, where CBAM does not yet apply to finished goods.
This shift could have long-term implications for European industrial competitiveness and employment, while boosting manufacturing hubs in countries like India, Vietnam, Indonesia, and China.
Challenges for APAC Exporters
While CBAM may offer short-term advantages, APAC exporters must prepare for future changes:
- Expansion of CBAM Scope: The EU is expected to broaden CBAM to include more products and sectors. APAC manufacturers relying on carbon-intensive processes may eventually face similar levies.
- Carbon Reporting Requirements: Exporters to the EU will need to provide detailed emissions data, which could be challenging for firms without robust sustainability reporting systems.
- Pressure to Decarbonise: As global climate regulations tighten, APAC firms will face increasing pressure from customers, investors, and regulators to adopt greener practices.
Strategic Considerations for APAC Industry
To stay competitive and future-proof operations, APAC manufacturers should consider:
- Investing in Low-Carbon Technologies: Transitioning to renewable energy, electrifying processes, and improving energy efficiency.
- Building Carbon Accounting Capabilities: Establishing systems to track and report emissions accurately.
- Engaging with EU Policy Developments: Monitoring CBAM updates and participating in trade dialogues to ensure fair treatment and transparency.
CBAM is a landmark policy that signals the EU’s commitment to climate leadership. While it currently offers a competitive edge to APAC manufacturers of finished goods, this advantage may be short-lived. The mechanism’s evolution will likely reshape global trade dynamics, pushing industries worldwide toward cleaner production. For APAC, the key lies in balancing short-term gains with long-term sustainability and resilience.