Reassessing Sovereignty in the age of Trade, Tech, and Climate Change

International law has for centuries based its regulating structure upon the Westphalian model of sovereignty, an idea rooted in the absolute authority of states within their territorial borders and a strict custom of non-intervention. Strikingly this age-old notion is under increasing stress in the 21st century in the face of increased economic integration. Sovereignty is no longer absolute, rather it is functionally limited and constantly negotiated within overlapping legal regimes, especially under International Economic Law (IEL). Economies are interwoven in an intricate mesh of legal and economic interdependence. Such an interdependence has not just facilitated cooperation but has also reconfigured the ambit of domestic regulatory autonomy, mainly for developing economies. In this context, this article discusses the growing friction between traditional concepts of sovereignty of the State and the demands of multi-level governance under the framework of IEL. This article argues that while IEL enables coordination, it also imposes asymmetric constraints on domestic policymaking at the same time. Thus, it further advocates for a reimagination of IEL so as to integrate equity, flexibility, and developmental considerations in the backdrop of modern world policies.

Beyond Westphalia: The Rise of Multi-level Governance

Emerging in the 17th century, the Westphalian model historically painted “sovereignty” [1] as an exclusive authority of the State over its people and territory, presupposing impermeable borders, non-intervention and sole jurisdiction over domestic matters. However, in the last few decades a clear-cut demarcation of authority across territorial boundaries has become increasingly difficult due to transnational regulatory interdependence. The regulatory space is marked by interactions between states, international organizations, and private actors, whereby states are required to share aspects of their regulatory authority with transnational bodies and to be a part of rule-making forums influencing domestic policy alternatives.

It has also been posited that sovereignty itself is being reassessed from a digital perspective as states tackle transboundary data transmission regulation and digital governance.[1] Given this scenario, in today’s world, the idea of sovereignty cannot be viewed as static, but rather must be understood as ‘dynamic’ and ‘multi-layered’ concept. This advancement has brought forth, what scholars dub, “multi-level governance”, viz. a model in which political and legal authority is spread across multiple overlapping jurisdictions rather than being monopolised by the state.

The EU can be taken as a prime example to show how member states consolidate sovereign powers in areas like trade, environmental regulation, and financial policy using supranational mechanisms. For instance, under the Treaty on the Functioning of the European Union (TFEU) specifically via European Commission (EC) directives vide TFEU Article 288,[2] member states pool their authority and it binds them to particular results allowing national implementation flexibility. [2] Adopted through ordinary legislative procedure under Article 294 TFEU,[3] these directives harmonize policies, like CBAM (Regulation (EU) 2023/956)[4] for standardised climate policies, enforced by EC infringement proceedings (Article 258 TFEU)[5] and Court of Justice of the EU adjudication, thereby causing sovereignty pooling. This idea of “shared sovereignty” within the EU explains the manner in which collective governance setups can enable policy coherence and mutual liability without entirely diminishing national control.[6]

Constraints of Global Economic Rule

In the area of in trade-, investment- and economic regulation- related matters, the principle of multi-level governance is embedded within the discipline of IEL. It governs the rights and duties of states across borders through institutions like the World Trade Organisation (WTO) agreements, bilateral investments treaties (BITs), and regional trade agreements. These impose legally binding obligations upon the autonomy of states to further public policy objectives, especially when such measures impact foreign market participants. [3] For example, under the WTO, the key principles of Most-Favoured Nation (MFN) and National Treatment (NT) restrict the power of states to discriminate between domestic and foreign goods or services in their regulatory frameworks.

These principles were initially proposed to reduce protectionism and encourage non-discriminatory trade. However, they have been largely invoked to object to legitimate national regulations regarding environmental protection, health, and industrial policy. Policies such as subsidies, localisation measures, and green transition incentives have been challenged under WTO disciplines repeatedly, mainly under the SCM Agreement and TRIMS.[7] The TRIMS bars performance requirements linking foreign investment to use of local inputs or production, conflicting with national efforts of self-reliance, green industrialization, or technology transfer. WTO’s framework which was originally formulated to curtail economic protectionism has at times also worked as a limitation to justified regulatory sovereignty.[8]

In fact, these principles can often also conflict with legitimate domestic policy choices. For instance, even if a measure can be grounded in valid policy objectives, such as to promote strategic sectors, ensure employment, or enable just transition to green technology. Yet it still risks violating the MFN or NT provisions if it distinguishes between foreign and domestic suppliers by giving preferential treatment to domestic producers or investors, unless it qualifies as limited exception under Article XX [General Exceptions] of the GATT. [4] Seeking public interest through targeted regulation can create legal tensions and is often contradictory to the non-discrimination rules of WTO.

Most of all, the WTO’s dispute settlement mechanism has exhibited a tendency of narrow interpretation of Article XX of the GATT, the general exceptions clause meant to uphold non-trade standards such as public health and the environment. Requiring strict necessity and proportionality tests,[9] it has reduced these exceptions to an anecdotal safeguard for progressive national regulation. That creates a deficit in its legality, particularly concerning developing countries which identify WTO to be a limitation of their developmental freedom.[10] While trade liberalisation obligations are enforceable, policy exceptions remain untenable creating a structural asymmetry.

Lopsided Burdens on Developing Economies

The present IEL structure, for many, constrains sovereignty not by cooperation but by disproportionate legal burdens[5] . This becomes particularly clear in its impact upon developing countries. The compliance costs associated with WTO procedures, such as subsidy notifications and dispute litigation, are considerably higher for developing nations with limited institutional faculty. Limitations placed upon policy measures like that of local content requirements and industrial subsidies restricts the tools historically employed by developed economies for industrialisation.[11] In practice, the structural inequalities within the system are potentially reinforced by the outcomes of WTO dispute settlement proceedings. The outcomes tend to favour economically stronger nations those that are often equipped with superior legal resources.[12] Thus, this ‘disproportionate burden’ arises not just from legal rules but from their uneven distributive effects in practice.

CBAM & the Trade-Climate Regime Fragmentation

These aforementioned tensions are markedly visible in climate-related trade measures like the EU’s CBAM regulation,  implemented from January, 2026. It exemplifies the complex interaction between national (or regional) regulatory autonomy and the restrictions of multilateral trade rules.[6]  CBAM was conceived as a preventive measure against “carbon leakage” by means of levying a fee on imported goods based on the carbon emissions embedded in their production. It is levied equivalent to EU’s internal carbon pricing rates through the Emissions Trading System (ETS) on sectors like steel, aluminium, and cement[13]. Although environmentally justified, the compatibility of CBAM with WTO rules, especially Articles I (MFN), III (NT), & XX (General Exceptions) has been subject to legal scrutiny. Concerns have been raised regarding the measure being interpreted as prejudiced or as a disguised restriction on international trade, unless deftly standardized[14] and designed with transparent methodologies, unbiased benchmarks, and clear provisions for equivalency. There is no clarity as to whether a WTO panel would rule CBAM as a non-arbitrary and “necessary” measure proportionate to the objectives stated, even with purported justifications of being an environmental exception.

CBAM has also received criticism from developing countries for failing to respect the Common but Differentiated Responsibilities (CBDR) principle. This raised questions on its lack of distributive equity and inherent tendency towards “green protectionism”[15]. All of this, without complementary fiscal and procedural assistance, run the risk of intensifying the asymmetries in international trade. Unilateral climate measures, even if are justified normatively, may aggravate global economic disparities.

Digital Sovereignty & Regulatory Divergence

A tech-driven market further worsens the uncertainties of the idea of sovereignty. Conventional means of regulations like tariffs and product standards are rendered insufficient as measures of protection. With the humungous increase in cross-border flow of digital data and digitally delivered services, such traditional tools are becoming increasingly ineffective. [7] States have countered by proclaiming “digital sovereignty”, utilizing data localization laws, and pushing for content regulation, local content requirement, mandatory source code disclosures, and unilateral digital service taxes.

Even so, governance in the digital domain is fragmented globally. Although progress has been seen in taxing of digital giants through OECD’s “Inclusive Framework” on the Base Erosion and Profit Shifting (BEPS),[16] it continues to be voluntary and incomplete. Similarly, e-commerce negotiations[17] in the WTO made progress, but with discrepancies between developed and developing countries’ take on matters pertaining to transparency of source code, data privacy and cross-border data flows.[18] Today, digital autonomy appears evermore like an assortment of technical standards, sector-specific agreements, and procedural irregularities.[19] This lack of a coherent multilateral structure highlights the necessity for sound, comprehensive, and practical frameworks to integrate domestic prerogatives with global synergies.

IEL Reform Beyond Policy Prescriptions

The changing circumstances of international economic governance necessitate a transformation of IEL, to embrace legal pluralism while bolstering fairness and sustainability. A balance ought to be achieved between enabling international cooperation and protecting legitimate national authority. The focus ought to be on doctrinal clarity, institutional reform, and distributive equity. WTO reform needs to prioritise the restoration of dispute settlement functionality and clarifying the scope of Article XX exceptions. Trade-climate linkages need incorporate CBDR principles to guarantee equitable burden-sharing. Treaty design has to allow for calibrated flexibility by way of differentiated commitments instead of uniform obligations. In a multipolar global economy such reconceptualizing is indispensable in order to sustain the legitimacy of IEL.

Conclusion

Sovereignty is neither absolute nor obsolete at present. Rather the concept is evolving, and is being revamped amid multiple levels of governance globally. This article posits that today, the legal framework of IEL restrains domestic policy-making autonomy, particularly in its economic aspect. Cases like the EU CBAM and fragmented digital governance exemplify the way in which national goals are being reined in by multilateral regulations. This disproportionately affect developing countries, usually without adequate protections for equity or developmental flexibility.

Nonetheless, such friction in no way warrants a withdrawal from international law. Instead, it suggests redefining sovereignty as a layered, negotiated authority functioning within a multilevel governance structure. A robust and justifiable global economic order can only be attained if IEL continues being credible, efficient, and balances global coordination with state autonomy. And therefore, in order to ensure legitimacy, foster sustainable development, and respect normative diversity, IEL must adapt. It must incorporate the notion of differentiated accountabilities, institutional flexibilities, and equitable standards into its foundational structure.

[1] Ruohonen, J. (2021). The treachery of images in the digital sovereignty debate. Minds and Machines, 31(3), 439–456. https://doi.org/10.1007/s11023-021-09566-7

[2] European Union. (2012, December 13). Treaty on the Functioning of the European Union (TFEU), Art. 288. Official Journal of the European Union, C 326, 47–390. https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:12012E/TXT

[3] Ibid., Art. 294.

[4] European Union. (2023). Regulation (EU) 2023/956 of the European Parliament and of the Council of 10 May 2023 establishing a carbon border adjustment mechanism. Official Journal of the European Union, L 130, 52–104. https://eur-lex.europa.eu/eli/reg/2023/956/oj

[5] Supra at 3, Art. 258

[6] Nicolaïdis, K. (2012). European demoicracy and its crisis. JCMS Journal of Common Market Studies, 51(2), 351–369. https://doi.org/10.1111/jcms.12006

[7] Trachtman, J. P. (2017). WTO law constraints on border tax adjustment and tax credit mechanisms to reduce the competitive effects of carbon taxes. National Tax Journal, 70(2), 469–493. https://doi.org/10.17310/ntj.2017.2.09

[8] Ibid

[9] Howse, R., & Langille, J. (2012). Permitting pluralism: The seal products dispute and why the WTO should accept trade restrictions justified by non-instrumental moral values. Yale Journal of International Law, 37(1), 367–424. https://openyls.law.yale.edu/entities/publication/3846f40f-e12e-4002-9276-0b9451fe496f

[10] Rodrik, D. (2008). One economics, many recipes. https://doi.org/10.2307/j.ctvcm4jbh

[11] Ibid

[12] Bouët, A., & Métivier, J. (2020). Is the dispute settlement system, “jewel in the WTO’s crown”, beyond reach of developing countries? Review of World Economics / Weltwirtschaftliches Archiv, 156(1), 1–39. https://www.jstor.org/stable/48734258

[13] Englisch, J., & Falcão, T. (2021). EU carbon border adjustments and WTO law, part two. Environmental Law Reporter, 51(11), 10935–10946. https://www.elr.info/sites/default/files/files-general/51.10935.pdf

[14] Tamiotti, L. (2011). The legal interface between carbon border measures and trade rules. Climate Policy, 11(5), 1202–1211. https://doi.org/10.1080/14693062.2011.592672

[15] Lim, B., Hong, K., Yoon, J., Chang, J., & Cheong, I. (2021). Pitfalls of the EU’s carbon border adjustment mechanism. Energies, 14(21), 7303. https://doi.org/10.3390/en14217303

[16] OECD. (n.d.). Base erosion and profit shifting (BEPS). https://www.oecd.org/en/topics/policy-issues/base-erosion-and-profit-shifting-beps.html

*OECD’s BEPS initiative seeks to close gaps in international taxation for companies that allegedly avoid taxation or reduce tax burden in their home country by engaging in tax inversions (moving operations) or by migrating intangibles to lower tax jurisdictions.

[17] E-commerce negotiations, particularly under the WTO’s Joint Statement Initiative, aim to establish global rules for digital trade, addressing challenges and opportunities in the rapidly evolving e-commerce landscape.

[18] E-commerce work programme focuses on bridging the digital divide. (n.d.). https://www.wto.org/english/news_e/news25_e/ecom_28jan25_e.htm

[19] Supra, at 7.