How CBAM links with other trade barriers and creates an option to stay competitive in EU

An insight into the current scenario by Climactio

Beginning of Beggar – Thy – Neighbour policy

The U.S. has announced a sweeping tariff package that will take effect in the first fortnight of April 2025. It introduces import duties on nearly all goods (with a few exempted categories like pharma, semiconductor, lumber, copper) with tariff rates largely based on the trade imbalances with each country with a baseline tariff of 10% (applicable only to a handful of countries) and supplemented by individualised much higher tariffs for other countries. Such tariffs called retaliatory tariffs (RFs) of 10% or higher depending on the country are in addition to existing product wise tariffs. Consequently, exports from the European Union are among the hardest hit, facing a flat 20% import duty, China will be subject to cumulative tariffs of up to 54% (in addition to 34% already announced). Further, many emerging and developing countries are also severely affected: Vietnam, for instance, faces 46%, Bangladesh 37%, Cambodia 49% Thailand – 36%.

Looking back in history, he has imposed tariffs exceeding even the levels of 1910. He surpassed the 1930 Smoot-Hawley tariffs that triggered the Great Depression, clearly underscoring his anti-global and protectionist policy activating a meltdown in stock markets worldwide.

This new system of RFs is far from a finely tuned model, but rather on a blunt principle: “What you do to us, we’ll do back—at half the rate (Being kind!).” While this approach may appeal domestically, in practice it marks a de facto end to multilateral tariff rules based on WTO principles. Trump justifies his measures as a means of protecting American industry. Well, well that’s a good thought but could have been dealt with more rationally!! He would stick to it and expect other countries to request him for relief as is already the case with some already (India, Vietnam, Israel) others may retaliate further (China and EU) leading to more uncertainties!! Its inflationary for US for sure and profit decretive for exporters in other countries in the near term and for others perhaps forever. Since April 2 there has been a frantic chase to stock certain goods before the tariffs come to effect and hard negotiations to offer discounts going forward to offset the incremental tariffs.

Is EU CBAM a trade barrier/akin to tariffs to US and other countries?

Even though Trump hasn’t explicitly addressed CBAM yet, the mechanism is often lumped into the same category. Like tariffs, it involves charges on imports but with a climate mitigation objective thus creating a non-tariff trade barrier but with various ways to control and reduce the impact over a period of time.

Like tariffs, it centres around a powerful regulatory actor—the EU. But the similarities end there. CBAM is not a traditional tariff. It’s often compared to VAT, which the EU applies universally—regardless of whether goods are imported or domestically produced. In fact, Trump’s economic rationale also targets the European VAT system, despite its internal logic. But there’s a fundamental difference here: VAT is a consumption tax that is fully refunded upon export—a “destination-based tax.” Tariffs, by contrast, are charges on border crossings and are not refunded. CBAM, for its part, is a climate tool. It equalizes carbon pricing and creates a level playing field with EU domestic producers who pay the price for emitting carbon beyond obligatory targets. This checks / addresses carbon leakage through offshoring manufacturing to not so climate friendly nations. Thus, importers will have an obligation if actual emissions from exporting nations are at sub benchmark levels. Both VAT and CBAM, then, differ substantially from traditional tariffs. Claims of unfair EU treatment toward U.S. businesses through CBAM are, at best, misinformed. While there is a CBAM simplification package proposal at EU which is intended at reducing the number of impacted EU importers by enhancing the threshold substantially and making it annual, mass based as against value based on a single consignment currently. This would reduce the compliance burden of importers. The other thing worth mentioning is the administrative process at EU on CBAM. It’s not arbitrary, the legislation on this levy was passed in Dec 2022 (much before Trump came to power!) and there is a detailed transitional process before the obligation kicks in for importers in 2026 with a commendable stakeholder consultation at every major step.

The Business Challenge

For internationally operating companies, the new U.S. tariff policy represents a significant additional cost burden—especially since many of these new tariffs come on top of existing sanctions and trade defense measures. Meanwhile, CBAM is also increasing import costs in Europe for emissions-intensive goods like upstream categories of goods within steel, aluminum, cement, and fertilizers and a select downstream set of products like railway infrastructure/track related products and tube piping. It depends on the CN code classification of goods that are being exported. Estimates suggest that additional CBAM-related costs could run into several billion euros annually for importers—depending on carbon certificate prices and the scope of future CBAM expansion to other product categories. Companies need to consider both tariffs and CBAM in their strategic planning. As a result, businesses are under dual pressure: they must respond to unilateral tariff measures like USA’s “tariff hammer,” while also meeting climate-driven regulatory demands from EU. This puts many importing companies in front of strategic crossroads—rethinking supply chain resilience, relocating production geographically, or accelerating decarbonization of value chains.

CBAM as a Framework for Future Levies

At the same time, it’s becoming clear that in a world where trade tools are increasingly used for geopolitical aims, mechanisms like CBAM are essential. They offer a credible, legally compliant, and climate-based controllable alternatives to arbitrary punitive tariffs largely driven by geo political factors. CBAM could even become a global benchmark—provided it remains transparent, technically robust, and open to international dialogue. The attempt to globalize carbon pricing depends on such reference systems. Global Trade Is thus being reshaped with the new U.S. tariff policy marks nothing less than a tectonic shift in the international trade order and CBAM as a potential pioneer of a “climate-driven trade order,”. In short its here to stay with some simplifications to reduce administrative burdens.

Since EU CBAM's announcement in 2022, several countries have begun developing their carbon adjustment mechanisms. The UK, for instance, plans to implement a system by 2027, and others are considering setting up carbon pricing mechanisms, such as Turkey and Brazil.

Time to effectively navigate through trade barriers using multiple options

The effective and smart way to navigate through multiple trade barriers is by having multiple possible options and focus on those that are somewhat controllable for example CBAM. Its controllable through decarbonisation efforts and adjustments through local carbon pricing (India is expected to have its own by mid-2026). If one needs to maximise EU exports and offset the market losses in US consequent to ad hoc tariffs, companies should be ready with strategies that would enable staying competitive in EU and that’s possible through a CBAM readiness if your products are applicable or would be applicable in the future. In any case it’s advisable to assess your carbon footprints and have a strategy to control and reduce the CBAM burden on the EU importers. This will also help a fast decision making while negotiating with importers. It’s also important to note that decarbonisation efforts would also lead to cost savings even though limited depending upon the products being produced

Further, as CBAM incentivises decarbonisation, lower-emission products can avoid higher certificate costs for importers, potentially reshaping trade patterns and supplier relationships. Companies should use this opportunity to rethink supplier engagement, improve data collection, and align sustainability strategies to maintain market access and competitiveness in a low-carbon economy.

Companies usually think of circumvention as a smarter way forward to navigate through differential tariffs across various countries but again too much abuse may be put under regulator lenses and there would be adequate safeguards to monitor hence this may not be a long-term solution.

Next steps

For companies, the time is now to have multiple options not just to respond to rising costs, but to fundamentally rethink their international strategies and collaborations. Companies who prepare now—regulatory, climate-wise, and geopolitically—can reduce risks and seize opportunities. They are in a much better position to take data driven decisions. At a minimum, companies should assess where they stand and strategize further. It doesn’t take much efforts to assess, benefits are huge!!

Climactio is ready to help create such options and navigate through them to maximise benefits!!!

We are just a call away!!