Green Industrial Policy, Tariffs, and Domestic Content Requirements

The WTO panel report in India - Solar Cells, circulated last week, triggered some thoughts about green industrial policy, by which I mean government actions to help push us towards the use of cleaner energy.

I'm skeptical of all industrial policy, and therefore I'm also skeptical of green industrial policy, although the degree of my skepticism varies based on the particular government actions involved.  If we subsidize consumption of particular products, that's not quite as bad as some other options, although I worry that we will subsidize the wrong products.  It's often hard to know which products will succeed.  (Back in 2000, I was really into fuel cell cars, but I haven't seen any on the road yet.)

But the real problem is subsidies and other advantages that are given to domestic producers.  In my view, government promotion of domestic producers, at the expense of foreign producers, will almost always lead to inefficient production, higher prices, lower quality, and lots of trade conflict.  (Even though trade litigation is good for my business, and the business of many of you reading this, the world as a whole is better off with less of it.)

But let's just assume, for the sake of argument, that green industrial policy which favors domestic producers over foreigners can be beneficial.  If so, why not just use tariffs?  Tariffs are legal under trade rules.  You just have to negotiate for them.  To me, the idea of shifting most protectionism to tariffs, which are highly transparent, is one of the greatest achievements of the GATT/WTO.  It keeps protectionism out in the open, and subject to scrutiny.

By contrast, when you use regulation to favor domestic industries, it can be difficult for other countries to monitor what is going on.  It takes a lot of time to dig through every proposed and actual law or regulation to look for disguised protectionism.  Again, it's great for lawyers, but not so great for everyone else.

Also, using regulation as a disguised means of protectionism undermines one of the core principles of the GATT/WTO, and, once detected, can lead to particularly bad feelings and accusations of cheating.

Domestic content requirements are still widely used, but the text of the WTO agreements is pretty clear on these measures, and the Appellate Body has been equally clear.  So, in the future, governments who want to favor domestic green energy producers may need to take my advice and shift over to tariffs.  (Although I wish someone would put a stop to the continued use and abuse of trade remedy tariffs in this area -- but trade remedy reform seems like a lost cause these days.)