All these recent debates I've had with Tim Meyer and Todd Tucker on trade policy and climate change have me thinking about these issues generally, and I had a few comments on a new piece in Foreign Affairs by political science professor Jessica Green that touches on all this.
In a section entitled "Good Trade Discrimination," the piece starts with this:
WTO reform, too, can shift the momentum of multilateral climate policy. The trade body currently prevents nations from protecting their fledgling renewable industries from foreign competition.
In response, I would say a couple things. First, it's important to recognize that tariffs are permitted under WTO rules (and there are lots of them). Governments negotiate over maximum tariff levels, and make promises not to charge above a certain amount. So, if you want to charge tariffs on, say, solar panels, WTO rules do not prohibit you from doing this. You just have to negotiate for it in the context of the overall balance of commitments that everyone agrees to. (And that's before you even get to all the special trade remedy tariffs on clean energy goods. I wrote about this a few years ago, and these measures continue to proliferate.)
In addition, beyond tariffs being permitted, it overstates things a bit to say the WTO "prevents" governments from doing things. Governments can still do those things, they just may face authorized retaliation if they are found to be doing something in violation of the rules.
So, to sum up: The WTO does not prevent nations from protecting their fledgling renewable industries from foreign competition, although as discussed in the next paragraph, it does have rules about how they can carry out this protection. (And just to state the obvious, I'm not endorsing this sort of protection as matter of policy; I'm just saying it can be done.)
The piece then moves on to local content requirements:
Sustainable energy programs that require the use of local components run afoul of WTO rules. For example, Ontario established a tariff program in 2009 that sought to vastly expand renewable energy capacity in the province while providing jobs through a local procurement requirement. Along with similar programs developed elsewhere, the Ontario policy was brought before the WTO’s dispute settlement system and found to be in violation of the global trade rules. Yet evidence shows that the employment and other economic benefits of “build local” provisions can expand public support for further climate policy. Allowing countries the flexibility to make green investment decisions with these goals in mind can accelerate decarbonization—but only with the reform of the global trading system.
It is absolutely true that local content requirements of this sort violate WTO rules (e.g., GATT Article III:4 and SCM Agreement Article 3.1(b)). As a matter of policy, however, this is one of those great areas where trade liberalization and fighting climate change can support each other. Regardless of whether including "build local" provisions can expand public support for renewable energy programs, these provisions are a disaster for renewable energy and should be avoided at all costs. If every sub-national entity were trying to promote local production of these products, we would end up with thousands of small, inefficient companies, and we could never make these products in a way that is affordable for the masses. In addition, if you want to protect "fledgling renewable industries from foreign competition," you can, as noted above, do it through tariffs at the national level, which is a more transparent way to do it than burying these provisions in legislation and regulations, and is more efficient than doing it at the sub-national level.
The piece then turns to carbon tariffs:
Some have advocated carbon border tariffs as a useful, WTO-compliant tool to strengthen climate policy. Such a system would permit states that have adopted a carbon price to levy tariffs on imports from nations without an equivalent carbon price. The idea is to create a level playing field where countries are not punished for climate ambition; countries with lax domestic policies must either raise their own carbon prices to match those of their trade partners or face import tariffs.
This kind of “climate club” came a step closer to reality this summer when the European Union announced its intention to establish a carbon border tariff. Its implementation will be a mammoth regulatory undertaking. With the exception of California’s rules regarding electricity imports, an equivalent policy has never been enacted—and certainly not one on the scale the EU has proposed. A robust system will require strong sector-specific benchmarks to estimate the amount of carbon “contained” in products, as well as a large and competent bureaucratic agency to estimate tariffs and issue allowances.
In the end, the carbon tariff will be only as effective as the policies of the most determined members of this new “club.” Carbon prices must be set high enough that the tariffs they generate will drive other jurisdictions to pursue more ambitious policies. So far, however, carbon prices have remained astonishingly low, and evidence suggests they have produced limited reductions in emissions. In short, until a series of conditions is met, a carbon tariff will be little more than another procedural hurdle in the global supply chain.
I don't disagree with any of this, although if done correctly, I think of these efforts as more of a non-discriminatory carbon tax, applied to both domestic products and to imports, than as a carbon "tariff." To me, a carbon tax is the most important component of any effort to fight climate change, and taxing only domestic products wouldn't make sense. You need to tax products regardless of their origin.
And then finally, the article has praise for the recent U.S.-EU steel and aluminum sectoral arrangement:
The trade regime can also catalyze significant climate action through the removal of tariffs. On the eve of COP26, the United States and the EU announced what amounts to an international decarbonization policy targeting the steel sector—the first policy of its kind. After a trade dispute during the administration of U.S. President Donald Trump that saw both sides ratchet up import duties, the United States and the EU have each agreed to cut tariffs on the other’s steel and aluminum products, while continuing to apply tariffs to countries that produce “dirtier” steel (such as China). Two of the world’s largest economies are effectively engaging in green trade discrimination, gambling that their combined weight will allow the policy to clear any legal cases brought before the WTO. Importantly, the U.S. steel industry and its union back the measure, demonstrating that trade policy can be a politically popular means of enacting what is effectively climate policy. And there may be more opportunities to wield trade deals in this way. Reaching a similar agreement with China, the world’s largest steel producer, to reduce tariffs contingent on climate action could do even more to advance emission goals.
I talked about this arrangement at length here and here, and for the reasons set out in those posts, I am deeply skeptical that this initiative is going anywhere. I probably don't need to repeat all those arguments here, so let me now just offer a couple comments on the way the argument is articulated above.
First of all, just to state the obvious and so that people won't think I'm endorsing this statement, she writes: "[a]fter a trade dispute during the administration of U.S. President Donald Trump that saw both sides ratchet up import duties, the United States and the EU have each agreed to cut tariffs on the other’s steel and aluminum products." But that is perhaps not the best way to characterize what happened. Rather, what happened was that the Trump administration imposed tariffs on steel and aluminum products from lots of countries based on a national security justification that virtually no one bought, and then the EU and some other countries retaliated with tariffs that applied to a range of products. Through the U.S.-EU arrangement, the U.S. is converting its tariffs to TRQs (hopefully implemented in a way that they won't restrict trade too much) and the EU is removing its retaliatory tariffs. So, this isn't really a tariff "cut," but rather almost sort of, but not fully, going back to the pre-Section 232 tariff status quo.
But putting that aside, it's important to note that at this point, any agreement between the U.S. and EU to cut tariffs on each other's clean steel while imposing tariffs on dirty steel from other places is purely theoretical. We are not there yet, and for the reasons I set out in the linked pieces, I doubt any of this is going to happen. It's not impossible, of course, but the U.S. would need to radically change a number of aspects of both its domestic climate policies and its international trade policies, and that seems unlikely. (For example, it would have to step up its domestic efforts in the fight against climate change, and it would have to rethink its approach to trade remedies, which will get in the way of free trade in clean steel. I don't expect much progress on either.)
In terms of political coalitions, with regard to support from the steel sector, she says: "Importantly, the U.S. steel industry and its union back the measure, demonstrating that trade policy can be a politically popular means of enacting what is effectively climate policy." On this point, what I would say is, for those who are trying to build political coalitions this way, I recommend some very frank and direct conversations with the steel industry and the unions. I have no doubt they support tariffs. They always do, for any reason. But what do they think of decarbonization measures? That's a very different question, and I wouldn't assume they are on board with serious carbon emissions reduction measures. It's definitely worth asking them this, and not just in the abstract, but with reference to specific measures you want them to support.
Next, what she says at the end about China is true but also kind of illustrates why the U.S.-EU sectoral arrangement as it has been described so far is not going to work. She says: "Reaching a similar agreement with China, the world’s largest steel producer, to reduce tariffs contingent on climate action could do even more to advance emission goals." Yes, it could be helpful if this kind of agreement with China were to be negotiated. However, when you take into account that dumping and market-orientation are a part of this arrangement, it becomes clear that there is zero chance the Biden administration is going to reduce tariffs on Chinese steel even if somehow that steel could capture carbon like a peat bog.
Finally, it is worth noting that there is something to her statement that "[t]he trade regime can also catalyze significant climate action through the removal of tariffs." Yes, it can. For example, removing tariffs on clean energy goods through an Environmental Goods Agreement would be very helpful for climate change. But the Biden administration does not seem interested in this, and that's not what the U.S.-EU sectoral arrangement is.
