Climate and Trade Discussion Needs a Reality Check

Since the narrow passage in the U.S. House last month of climate-change legislation that gave an OK to so-called border adjustments for imports from countries that have not approved similar policies, various policymakers and commentators have debated whether this is a good idea.

President Obama took a surprisingly tough stance on the House action, condemning the measure for sending “protectionist signals.” This, of course, implies exactly what free traders have come to fear most: protectionism masquerading as environmentalism.

Paul Krugman jumped into the fray (not an unexpected development given that it gave the Nobel winner a chance to engage in his two favorite activities: trade theorizing and Obama bashing.)  He provided the economic defense of using tariffs to penalize environmentally slothful states.   And he’s not wrong: a cost-effective means to halt climate change cannot succeed without the participation of other countries. He also makes the interesting point that border adjustment for climate change is little different than VAT-inspired adjustments.

But he does gloss over the problems of implementation.  For example, will all imports be subject to tariffs, leading to arguments over carbon content in the production? Or will the more feasible option of regulating only raw materials be chosen?  And, more to the point of free traders (now, apparently including the president), to what extent will these tariffs be subject to interest-group protectionist pressures?

Michael Moynihan (thanks Nick for the link) suggests that should the U.S. undertake border adjustment, it should do so only in a multilateral process.  More on that in a moment.

This discussion– I think– could use at least two reality checks.

The first is that the U.S. has no business at all posturing itself as defender of the climate against the horrible countries that obstinately refuse to get on board.  Until climate-change legislation is passed in the United States, it remains one of those countries.  Joseph Stiglitz, among others, has argued in favor of taking WTO action against the U.S. for this very reason: favoring its own domestic producers by not forcing them to pay the full price of emissions.

Add to that the fact that the Waxman-Markey bill is essentially a joke.  No time for specifics on this one now, but any lover of future generations should be horrified by the compromises it apparently takes to enact pro-environment legislation in the U.S. today.

Of course, this is isn’t much of a substantive point, just one of perspective.

My second point is quite the opposite.  As Copenhagen approaches and the Doha round trudges on, the framework for negotiating multilateral trade and environmental policies continues to be unwisely segregated.

So a multilateral approach to border adjustment is best? Great! But how will this system be devised and under what jurisdiction? The WTO is the world’s most advanced case of overcoming legal anarchy, but it could be overwhelmed by expanding its mandate to environmental issues (just as it would by labor issues.) But trade  and environmental ministers should at least be talking, rather than having debates about whether or not border adjustments are valid under WTO law.

And while they’re at it, why not address the climate-trade conundrum from a carrot point of view rather than immediately taking to the sticks?  The major countries that stand in the way of effective GHG caps (India, China) are also those that want something from the rich countries at Doha.  I’ll be back soon to talk about a possible breakthrough in Doha and its potential to set up a sort of Grand Bargain.

So is Congress guilty of sending “protectionist signals”?  It’s certainly guilty of far worse (failing to take a meaningful stand in the face of  an unprecedented crisis.) And the current uncommunicative, territorial system of global negotiating is guilty of setting the right conditions for protectionists to go for the kill.

Photo from the Media Influencer.

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