In a recent Foreign Affairs piece entitled "The Case for a Clean Energy Marshall Plan," Brian Deese -- the Director of the White House National Economic Council from 2021 to 2023 and a current economic adviser to Kamala Harris -- sets out a vision for how a Harris administration might lead international action against climate change. My overall reaction was that I'm not sure how well some of his arguments will be received in other countries, in particular in the developing world. I'm going to focus on two points in particular.
First, if I understand Deese correctly, he is trying to make the case that the U.S. should take the lead in manufacturing clean energy products and then sell these American-made products in developing countries (and provide subsidies to help people in developing countries make these purchases). Deese starts out by offering up the Marshall Plan as a blueprint:
... the clean energy transition remains the most important planetary challenge. It also presents the greatest economic opportunity: it will be the largest capital formation event in human history. And it presents the United States with a chance to lead. Thanks to its still unparalleled power and influence, Washington maintains a unique capacity—and a strategic imperative—to shape world outcomes.
In 2022, the United States recognized these opportunities when it passed the Inflation Reduction Act, the world’s largest-ever investment in clean energy technologies. This transformative industrial strategy was a crucial first step for the United States in positioning its economy for success by accelerating the clean energy transition at home. Now is the time to take this leadership to the global stage, in a way that promotes U.S. interests and supports aligned countries. But the United States need not create a new model for doing so.
Seventy-six years ago, also facing a fractured world order and an emerging superpower competitor, U.S. President Harry Truman and U.S. Secretary of State George Marshall launched an ambitious effort to rebuild European societies and economies. Although often associated with free-market neoliberalism, the 1948 Marshall Plan was hardly laissez-faire. It was, in fact, an industrial strategy that established the United States as a generous partner to European allies while promoting U.S. industries and interests. Generations later, the Marshall Plan is rightly understood as one of the great successes of the postwar era.
Although today’s challenges are undoubtedly different, the United States should draw lessons from that postwar period and launch a new Marshall Plan, this time for the global transition to clean energy. Just as the Marshall Plan assisted those countries most ravaged by World War II, the new Marshall Plan should aim to help countries most vulnerable to the effects of climate change: the United States’ partners in the developing world. Developing countries and emerging markets will need access to cheap capital and technology to transition away from fossil fuels quickly enough to halt global warming.
This idea sounds plausible in general terms, although it would be politically difficult domestically for a number of reasons. But when he gets to the details, the plan takes a turn towards economic nationalism, as he appears to suggest that U.S. products will be the only/dominant ones sold in developing countries:
The United States again has the chance to help others while helping itself. Putting its own burgeoning industries front and center in the energy transition will generate further innovation and growth. ... By creating global markets for its own clean energy industries and innovators, the United States can scale these economic gains and strengthen domestic support for an energy shift that has not always been an easy sell to voters.
The fracturing world order and the ominous climate crisis lead some observers to focus on the potential tensions between those two developments. But they also provide an opening for the United States to deploy its innovation and capital in a generous, pragmatic, and unapologetically pro-American way—by launching a Clean Energy Marshall Plan.
Like the original Marshall Plan, a Clean Energy Marshall Plan should meet other countries’ development needs while advancing U.S. interests. In this case, the goal is to speed the adoption of low-cost, zero-carbon solutions, such as the manufacture of batteries, the deployment of nuclear and geothermal energy, and the processing of critical minerals. This approach reflects the basic intuition that, as useful as it can be to make carbon pollution more expensive by putting a price on it, the most credible way to accelerate the adoption of zero-carbon technologies is to make that technology cheap and widely available.
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Implementing a Clean Energy Marshall Plan won’t be easy, but the process must begin now. As after World War II, the United States can be generous as well as pro-American in its approach. It can promote U.S. interests by scaling its industries to meet global needs while winning greater influence in this new geopolitical landscape. And it can meet developing countries where they are—supplying them with the energy they need to expand their economies and the innovation they need to decarbonize efficiently.
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The United States should begin with a focused investment and commercial diplomacy effort, akin to that of the Marshall Plan. The Marshall Plan had a straightforward aim: subsidize European demand for U.S. products and services needed to rebuild Europe. Today, the United States should establish a Clean Energy Finance Authority with an updated mission: subsidize foreign demand for clean energy technology and put American innovation and industry at the front of the line.
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The Clean Energy Finance Authority should be capitalized with a significant upfront commitment of money—enough to generate market momentum that tips the balance of clean energy investment toward the private sector; ultimately the private sector, not the public sector, will need to provide the majority of the financing the energy transition needs over the coming decades. If this new authority is set up and deployed properly, U.S. companies and innovators would gain more foreign demand, on favorably negotiated terms, and new market share. Foreign consumers, for their part, would gain access to new channels of cheap clean energy technology. For emerging-market countries and major emitters—such as Brazil, India, and Indonesia—the United States could act with both generosity and its own interests in mind.
He later adds: "... the [U.S.] needs to turn to foreign markets to boost demand for U.S. products."
The first problem I see here is that many developing countries -- he mentions Brazil, India, and Indonesia -- want to be producing these products themselves. They aren't going to like a plan that makes them dependent on the U.S. for these products. There are producers in the U.S. that complain about subsidized imports, and there are producers in these other countries that will do the same. As a result, I don't think the reaction to Deese's plan will be to thank the U.S. for the subsidies and happily rely on U.S.-made products. Rather, I think these countries are more likely to adopt policies that attempt to stimulate their own domestic production and to limit competition from subsidized U.S. producers.
Now, as this blog's readers know, I'm not a fan of this type of tit-for-tat protectionism/industrial policy, either from those who start it or those who respond to it. Nevertheless, as a matter of political reality, I think this is where we would likely be headed under a U.S. approach such as this one.
Another problem is that producers in Europe, South Korea, Japan and other places will have their own objections, and are likely to respond with subsidies or trade complaints of their own. Subsidy races of this kind end up being contentious, and trade wars are not a very efficient way to expand these industries.
In addition, this kind of subsidized production designed to supply the rest of the world appears to be similar to the overcapacity the U.S. has been complaining about in relation to China. The U.S. government has been struggling for years to come up with an effective response to Chinese non-market practices, and this plan might make the issue even more difficult: Why would China change if the U.S. is now doing something very similar?
Having said all this, I do think there is room for international cooperation on reducing carbon emissions. However, if the goal is to get developing countries on board with U.S. efforts, I think there's going to have to be acceptance of the idea that developing countries can make these products as well. It's worth noting that more competition has the benefit of bringing prices down and helping adoption by consumers happen more quickly.
Second, Deese wants to use tariffs as a tool to promote the fight against climate change:
As part of the Clean Energy Marshall Plan, Washington must level the global playing field through the active yet measured use of trade tools such as tariffs. Doing nothing and being resigned to China’s statist approach is neither economically nor politically sustainable. And using blunt tools to effectuate what amounts to a unilateral retreat is dangerous. Former U.S. President Donald Trump's call to essentially end all imports from China within four years is a cynical fantasy playing on populist fears. In 2022, U.S. goods and services trade with China amounted to over $750 billion. It is not practicable to decouple from any major economy, let alone the United States’ third-largest trading partner. Global trade delivers important benefits, whereas unilateral, asymmetric escalation would leave the United States isolated and vulnerable.
The right approach is to harmonize more active trade policies with like-minded countries. Indeed, Brazil, Chile, India, South Africa, Thailand, Turkey, and Vietnam, among others, are all investigating or imposing tariffs on Chinese dumping practices. China is now the object of twice as many retaliatory measures as it was four years ago. This growing pushback represents a chance for the United States to address the Chinese-driven global trade imbalance by crafting a global coalition to galvanize a coordinated response while creating more global trade in clean energy goods and services.
To accomplish this, the United States must use expanded, stronger, and smarter trade authorities. For example, Washington should build into its tariffs on imported goods an assessment of how much carbon was used to produce them. Tariffs should be determined by the emission intensity of the trading partner’s entire industry, rather than company by company, to avoid “resource reshuffling,” whereby countries try to dodge penalties by limiting their exports to only products manufactured with clean energy instead of reducing their emissions overall. These tariffs should be aimed at all countries, but given its current production practices, China would be hit the hardest.
This form of tariff regime could be coordinated with what other countries are doing on the same front. The effort should begin with the steel sector. Chinese-made steel is two to five times as carbon-intensive as U.S.-made steel and is being dumped in markets around the world. The United States has been working on an arrangement with the European Union to harmonize tariffs on steel and aluminum. But the EU need not be the United States’ first or only partner in this initiative. There is a global appetite to enact a common external tariff regime on China to respond to its overproduction and carbon-intensive practices. Washington should work to pull this group together through the G-7 and G-20.
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A carbon-based tariff, or a carbon border adjustment, should further motivate climate action by exempting countries that are hitting their nationally determined goals under the 2016 Paris climate agreement or those that fall below certain income and emission thresholds. To complement the Clean Energy Finance Authority, the tariff could be lowered in exchange for foreign procurement of clean energy technologies or of clean products made in the United States. For many developing countries, the tariff would act as a powerful accelerant to their energy development plans.
This approach would allow the United States to transition from its current indiscriminate, broad-based tariff regime to a more comprehensive carbon-based system that more accurately targets Chinese overcapacity and trade imbalance concerns. And the United States should leave the door open to cooperating with China in this context, as well.
Policymakers will have to reimagine existing trade rules—and be willing to lead the World Trade Organization and other international institutions in thinking about how trade can accelerate the clean energy transition. The WTO’s objective was never just to promote free trade for free trade’s sake; its founding document includes a vision for sustainable development. The WTO must reform if it is to deliver on that vision, but in the meantime, the United States shouldn’t cling to old trade conventions when more targeted and effective approaches exist.
I'm skeptical that tariffs on products associated with high carbon emissions will have the impact Deese thinks. The main reaction I would expect from the developing world is annoyance and resentment. From their perspective, the U.S. is much more of a problem in terms of carbon emissions, so why should the U.S. be trying to punish them through tariffs on their exports? Some people in the U.S. like to focus on carbon emissions related to manufacturing, but for people elsewhere that just feels like cherry-picking to make the U.S. look better. And with regard to whether this tariff and a possible exemption would motivate countries to take action on climate, it's worth noting here that even if they could avoid this particular tariff, U.S. trade remedy tariffs are likely to be used against them if their exports reached a significant level.
In addition, the reports of an increase in trade remedy actions by other countries against China are a bit misleading. As Huan Zhu and I explain on China Trade Monitor, there has been a pretty steady use of these measures dating all the way back to China's WTO accession. It may turn out that there is a slight increase in trade remedy measures against China in 2024, but this isn't really a big new development. Rather, it's just a core feature of the trading system since I've been involved in it (and a lucrative feature for trade lawyers!). Can these measures be ratcheted up and coordinated? Maybe. But past usage was already pretty strong.
What I might suggest, instead of an emphasis on punishing others with tariffs, is a more positive approach, perhaps along the lines of the new Agreement on Climate Change, Trade and Sustainability (ACCTS). Deese talks about reimagining trade rules so as to promote the clean energy transition. That, I would say, is what the ACCTS negotiators have done, and it would be interesting to see Harris's reaction to some of the ideas in there.
For the investment law enthusiasts among you, you may recognize Doe Run as a sister company and co-complainant of Renco, a corporation that has pursued relief against Peru in two separatearbitrations. An ICSID arbitration concluded in 2016 (the tribunal dismissed on jurisdictional grounds) and another is ongoing at the Permanent Court of Arbitration. Both arbitrations were brought under the investment chapter of the U.S.-Peru TPA.
Like the two investment disputes, the case before the Eighth Circuit concerns environmental harm caused by smelting and refining locally mined minerals at a complex in Peru. The plaintiffs are representatives of Peruvian children living near the complex who were harmed by exposure to toxic substances resulting from the industrial activities there. They brought several cases in Missouri state court making claims under Missouri state law. (Doe Run and other defendants operating the Peru complex are based in Missouri.) The defendants removed the cases to federal court, where they were consolidated, and then asked that court to dismiss them based on international comity, among other grounds. For a detailed description of the U.S. legal procedures and other U.S. legal doctrines raised in this complicated case, Maggie Gardner has a very helpful overview on the Transnational Litigation Blog.
The U.S.-Peru TPA
The defendants’ primary argument at this stage of the litigation is that the environment chapter of the U.S.-Peru TPA demands dismissal of the case as a matter of international comity – an argument that the trial court rejected. They maintain that “adjudicating this case in the United States is fundamentally at odds with the sovereign commitments in the TPA” and that having the case proceed in the United States “is an affront to Peruvian sovereignty in derogation of the TPA.”
Most readers on this forum likely need little convincing that directing U.S. courts not to hear state tort claims involving their citizens’ actions in Peru was not a central purpose of entering into the U.S.-Peru TPA. If we took a poll of trade experts, that would not appear on their brainstormed list of reasons why the United States, or frankly any country, negotiates free trade agreements (FTAs). FTA partners are not in the business of securing litigation buy-outs. But this is the debate in the case before the Eighth Circuit tomorrow. The defendants will argue that private suits concerning a U.S. company’s environmental activities taking place on or affecting the territory of an FTA partner must be dismissed.
Trade experts know that the conventional wisdom dating at least from May 10, 2007 is that Chapter 18 of the U.S.-Peru TPA, like environment chapters in other FTAs, is intended to ensure a level playing field for U.S. companies and to improve environmental standards in Peru. That’s why the chapter is premised on making Peru (and the United States) enhance its environmental standards and enforce those standards – just like FTA labor chapters do. If Peru does not do that, then the United States can raise the matter before a dispute settlement panel. That’s the traditional trade agreement environment and labor two-step: (1) each partner adopts and maintains high-level laws; (2) each partner effectively enforces those laws. When they fail to do so, they risk state-to-state arbitration.
To craft their contention, defendants in the Missouri case have had to interpret the governmental commitments in Chapter 18 as extending to private claims. For example, they argue that “enforcement” includes “adjudication of environmental claims.” Likewise, they claim that hearing a case in Missouri “violate[s] Peru’s sovereign right to ‘establish its own levels of environmental protection.’” They strongly emphasize the chapter’s language about each party having to ensure that persons have access to remedies for violations of that party’s environmental laws, including the right to sue another person. All this, they argue, shows that Peru and the United States agreed to make persons litigate environmental matters only on the territory where the activity occurred. More could be said about how the defendants misconstrue exceptions that are built in to the Agreement (like for the forestry annex) and how their additional arguments relying on the USMCA are misplaced, but these get unnecessarily far into the weeds – and I’m not sure what to do about weeds when talking about an environment chapter.
Framing the Case
More importantly, the defendants raise these readings of the U.S.-Peru TPA to support their framing of the case, which is, unsurprisingly at odds with the plaintiffs’ framing. Plaintiffs say this is a case about bad things a Missouri company did in violation of Missouri law – those bad things happened to have an impact on a facility in Peru. When viewed that way, it is easy to see that the trade agreement has nothing to say about private plaintiffs exercising their rights against other private parties no matter where they are. Defendants say plaintiffs are asking a Missouri jury to opine on the application of Peruvian environmental standards and thereby infringing Peru’s rights and obligations to set its own laws and enforce them. When viewed that way, defendants see a hook to all the language in Chapter 18 (which they mistakenly call Article 18) about each party’s right to regulate the environment on its territory. That hook and their related arguments largely reflect a misunderstanding of what trade agreements are all about.
Adding to the confusion is the defendants’ claim that Ambassador Susan Schwab, who was USTR during part of the negotiations of the U.S.-Peru TPA, “agrees that this case conflicts with the TPA.” They’re referring to an amicus brief prepared by Mayer Brown LLP, the firm with which Ambassador Schwab is affiliated, on behalf of the Associated Industries of Missouri (AIM) and the National Mining Association (NMA) which states that the TPA is clear “that each Nation’s environmental standards apply exclusively within that Nation’s borders, and any enforcement of that Nation’s standards must occur in its own courts.” Good thing for plaintiffs that this appeal is not about which environmental standards apply nor is it about Peru enforcing its standards in U.S. courts. The choice-of-law issues are not part of the appeal (the trial court decided that Missouri law governs except for one defense under Peruvian law) and obviously Peru is not a party in the Missouri case. Even if the choice of law were at stake, Chapter 18 of the TPA is of no help. Article 18.1 is plainly not a statement that Peruvian environmental law applies in a judicial dispute in the United States or elsewhere. The AIM & NMA amicus brief gets one thing right, though, where it observes that “[n]othing in the [TPA] negotiating history indicates that the Parties endorsed, or even contemplated, extraterritorial judicial enforcement of environmental standards by private parties.” That’s true, of course. The Parties did not contemplate altering private rights related to environmental harms. That’s why the trade agreement has no bearing on these sorts of claims.
The plaintiffs appropriately point to the U.S.-Peru TPA Implementation Act and to President Bush’s accompanying Statement of Administrative Action, both of which are clear that no state law or its application may be declared invalid as inconsistent with the Agreement and that only the executive branch can resolve a conflict between an application of a state law and the Agreement. So, in addition to the absence of any abstention-related language in the TPA, the law that implements the TPA into U.S. law confirms the TPA does not change U.S. law unless specifically provided for in the Act, and there is nothing close to an abstention provision in the Act – quite the opposite.
What is at stake before the Eighth Circuit is the foreign relations impact of the deal – that’s the defendants’ comity argument. The issue is whether, somehow, the U.S.-Peru TPA symbolically divided up sovereign interests related to the environment on the basis of territory and, with those interests, access to the courts on tort matters. Again, here most international trade law experts would say that’s not what the trade agreement says, nor was that what was intended. First, it is axiomatic in international law that countries have sovereign interests related to their environments with or without FTAs affirming so much. And, second, yes, the TPA makes sure that Peru has a court system that allows private environmental claims but that was because the United States was worried about competition and a race to the bottom; it was not an expression of a foreign policy preference about litigation location.
Conclusion
There are plenty of additional issues in the case, including issues related to the TPA, that are not worth elaborating here. Likewise, space does not permit us to get into the history of the foreign commerce clause and its relationship with federalism that this case indirectly underscores. States are increasingly enjoying the trade agreement spotlight and there is more to be said about that in later posts. To be sure, I have only touched upon one piece of the case in this already long discussion. There may be other comity-related grounds for dismissal (although comity experts say there are not as a matter of U.S. law). There are many further details to be examined on the merits. And, perhaps, as a policy matter, some readers may be opposed to a U.S. court hearing a case brought by foreign plaintiffs about this sort of harm, even against a U.S. defendant. But at least we can be certain that a court exercising jurisdiction over this case in Missouri under Missouri tort law does not constitute a “derogation” by the United States of the U.S.-Peru TPA. Kicking the case on the basis of some expression springing from the TPA of U.S. foreign policy on lawsuits with a connection to Peru would go far beyond the text, context, or purpose of the deal.
Senators Bill Cassidy (R-LA) and Lindsey Graham (R-SC) have introduced the Foreign Pollution Fee bill (S.3198), which would impose a fee on certain carbon-intense imports. A FAQ document for the bill explains how this would work:
The legislation imposes a fee on products imported into the U.S. that are dirtier than their American-produced counterparts. There is no domestic fee for American production. The fee increases as the difference in pollution between a foreign country and the U.S. grows.
Here's a quick and dirty look at how some key WTO rules would apply here. I'm not fleshing everything out, so feel free to add nuance (or objections) in the comments.
In terms of which WTO obligations the fees imposed under this bill would violate, if I understand it correctly, the bill involves a fee collected at the border, without a domestic equivalent. That would put it under GATT Article II (to be read with the Uruguay Round Understanding on the Interpretation of Article II:1(b)), and mostly likely classified as an "other duty or charge" (as opposed to an "ordinary customs duty"). Unless this fee was recorded in the U.S. Schedule, which it was not, imposing it would violate Article II:1(b) and II:1(a).
I assume the bill's authors would concede the Article II violation, and that their main WTO argument is that the fee falls within the Article XX(g) exception. A set of "policy details" provided for the bill states that: "The rate of the Foreign Pollution Fee is set to correlate to the environmental performance of U.S. production and U.S. imports to qualify for the WTO’s environmental policy exception." The FAQ document elaborates on this argument as follows:
Is World Trade Organization (WTO) considered in the policy design?
The FPF equalizes the environmental performance of our imports with our production. This fits into acceptable WTO practices for environmental policies. Previous WTO case law is also incorporated by providing the ability for countries to prove U.S. calculations of foreign countries’ pollution-intensities wrong.
The problem with this argument is that as part of the Article XX(g) analysis, you have to look at whether measures "relating to the conservation of exhaustible natural resources" are "made effective in conjunction with restrictions on domestic production or consumption." There doesn't seem to be a domestic restriction component here, as the bill involves "no fee on any U.S. producer", but I'm interested in hearing whether there is something they have in mind in this regard. The FAQ document states that "[t]he FPF equalizes the environmental performance of our imports with our production," but I'm not sure how that brings them within the XX(g) requirement, and I think they will have to add something to the bill -- or do it elsewhere -- that constitutes "restrictions on domestic production or consumption" if they want to satisfy XX(g). I feel like their argument may be that the "equalizing" aspect of the bill means they are acting consistently with the spirit of XX(g), but that probably will not be sufficient. Also, I don't think there is full equalization between imports and domestic products here, because if imports were less carbon intensive than the corresponding domestic products, the bill would not impose a fee on the domestic products to equalize things. As things stand now, the equalization is only going in one direction: Imports are penalized when they are dirtier, but domestic products are not penalized when they are dirtier.
And, of course, there is still the matter of the Article XX chapeau and its requirement to avoid "arbitrary or unjustifiable discrimination between countries where the same conditions prevail" and "disguised restrictions on international trade." Here, there is still the problem of equalization only going in one direction, and, in addition, assessing carbon intensity on a country-basis rather than a company-basis, as the bill seems to do, could lead to problems in terms of arbitrary discrimination.
There are also some Article I MFN/Article XXIV issues related to the treatment of FTA partners in the bill.
Finally, the FAQ document offers an assessment of international politics as it relates to WTO compliance:
What is the outlook for retaliation?
Because the FPF is WTO compliant, the U.S. is protected from retaliation. If countries like China want to see a lower fee, they need to expand purchases from cleaner suppliers—like the U.S.—to clean their supply chain. This makes China more reliant on the U.S. production and retaliation difficult.
On the politics of all this, the bill's authors are trying to portray the situation as one of unfairness between low-CO2 producing U.S. manufacturing and high-CO2 producing countries such as China ("The Foreign Pollution Fee utilizes the U.S. advantage in manufacturing and energy production with less greenhouse gas emissions than our adversaries"), but that ignores the overall CO2 emissions in the U.S. economy. China and India in particular often have strong objections to proposals under which high carbon emission places such as the U.S. or EU would impose financial penalties on countries (like them) that have lower per-capita CO2 emissions. As a result, I think it's very likely China and India (and maybe others too) would retaliate against fees being imposed on their imports on this basis. They will probably bring a WTO complaint, but given the state of WTO dispute settlement, I'm not sure they would wait for the result before retaliating.
In a new paper, law prof Tim Meyer offers a defense of combining (1) discriminatory regulations such as local content requirements with (2) subsidies to reduce carbon emissions. In the abstract of the paper, he says:
Second, like all policies, green trade policies usually pursue multiple objectives. The fact that green trade policies often have mixed motives means that assessing their effects through a Puritan lens is a fool’s errand. The quest nations are on today is not for trade policies that promote sustainability in the least trade restrictive way possible. Instead, they are looking for policies that can generate the political support to address urgent environmental crises while still promoting economic growth.
He then lays out his argument on this point as follows:
The second comparison often drawn is between a green trade barrier that contains a discriminatory or coercive component and an identical policy without the discriminatory or coercive component. The argument is that reducing discrimination or coercion will improve the measure’s ability to achieve its green objectives. Discrimination, the argument goes, is inefficient. Introducing inefficiencies into government policies designed to promote the growth of a green economy, and in particular a green industrial sector, will only slow the growth of the field, distort innovation, and artificially prolong the business life of inefficient import-competing producers.
The problem with this comparison is that it ignores politics. Discriminatory conditions like local content requirements (LCRs) or measures that contain some degree of protection for domestic producers ... make it easier to build political coalitions for green policies. Environmental policies, after all, are often public goods—pursuing them imposes concentrated costs while creating diffuse benefits. Because the benefits are diffuse, political support for the policies does not match the benefit created. As a result, the policy is undersupplied relative to the benefits it creates.
For example, decarbonizing the steel sector creates significant environmental benefits, as steel production is highly energy intensive and still involves the burning of coal—the dirtiest fossil fuel—in some places. But decarbonization also imposes costs for producers that invest in decarbonization and their consumers who may face higher prices. Consumers and producers thus may lobby the government to continue to allow the burning of coal to produce steel. These groups typically consist of companies that are well-organized, have access to government, and thus have the ability to influence policy outcomes. Citizens that benefit from cleaner air and tackling climate change, on the other hand, are likely to be poorly organized and less well-resourced in terms of obtaining political influence. Because climate change is not their business, in other words, it does not incentivize organization and investment by those who benefit from regulating it on the same scale as businesses that oppose regulation. Nevertheless, the diffuse benefits of decarbonizing the steel sector for these citizens outweigh the costs to participants in the steel industry itself.
Scholars of political economy have long understood that the solution to this problem is to provide private benefits to those who support public goods.59 Some degree of protection for domestic production serves this function. It creates advocates for green policies by providing concrete economic benefits to those that support, for example, the consumption of biofuels or subsidies for renewable energy.60 Absent these benefits, green policies might not exist at all. In the context of the steel example above, using recycled steel and electricity drawn from renewable sources can significantly cut carbon emissions. ...
LCRs attached to subsidies, such as those in the US Inflation Reduction Act, are another common method to achieve this conversion. In the case of environmental law, LCRs provide financial benefits to industries that both reduce their environmental impact and also provide political lobbying and support for government subsidization of a green economy. Recent fights over the implementation of the local content rules in the Inflation Reduction Act, with US Senators arguing that watering down those rules is inconsistent with their support for the legislation in the first place, indicate just how important this political support was to the passage of the measure.61 Moreover, recent research into the effectiveness of LCRs in generating local economic benefits has refuted the argument—often made in the context of trade disputes—that LCRs cannot achieve their objectives. Instead, studies find that LCRs can effectively promote local economic growth when certain preconditions are satisfied.62 Put differently, the realistic counterfactual comparison is almost never between a policy with a discriminatory or coercive condition and the identical policy without such a condition. The comparison is much more often going to be between a government policy with a discriminatory or coercive condition and a watered-down policy that might even then fail to obtain sufficient political support to pass. Mixed motive policies are, in other words, hardier political policies than are pure policies that seek to achieve only a single goal.63
Of course, the reality that some degree of protection may be necessary to ensure political support for green trade policies does not mean that any trade barrier should be ok. The key is to find—either through negotiation or the development of case law—an approach that allows governments the space to engage in politics that advance ambitious and politically realistic green trade policies, while at the same time preventing protectionism from becoming the sole objective. The leadership of the US and the EU, in their different ways, have created multiple fora in which nations can attempt to develop one or more approaches to address this problem. The answer(s), though, will not be technical ones, even if they are presented as such by specialists making argument about legal texts. Rather, they will be political comprises that attract sufficient support to provide a stable balance between nations’ environmental, economic, and political objectives.
For me, a key issue with political compromise is the level of contribution you are hoping to make towards solving the problem at hand. If you compromise too much, your actions might not make much of a contribution. There has never been a question that you can make political compromises to help ensure that the government takes some action, but if that action falls far short of being a solution to the problem, it may not be worth doing.
And I think that's the issue we are dealing with in the context of reducing carbon emissions. In the case of the IRA, proponents of the measure often point to this study, which found: "Our preliminary estimate is that the IRA can cut US net greenhouse gas emissions down to 31% to 44% below 2005 levels in 2030—with a central estimate of 40% below 2005 levels—compared to 24% to 35% under current policy."
I have three reactions here: (1) these sorts of estimates tend to be a bit uncertain, so I wouldn't count on a 40% reduction in US carbon emissions from 2005 levels; (2) given the scale of the problem, the 7-9% extra from the baseline doesn't sound like that much; and (3) lots of carbon emissions are outside the US, so we need to think carefully about how to work with others on these issues, and LCRs are likely to have a negative impact here.
Having said all this, I do understand the political difficulties with taking action on reducing carbon emissions, and it's worth thinking about ways to deal with it. If compromise with protectionist interest groups is not the answer, then what is? One obvious possibility is for political leaders to make the issue more of a priority than it currently is, and to talk about the issue bluntly and honestly. What we often see instead are politicians claiming that action to address climate change will create 20 million jobs. From what I can tell, most people look at those claims pretty skeptically. It would really help to have someone who could articulate the problem and convince people to take it more seriously. (Maybe that's true for all issues, but it's particularly true here!)
Another possibility would be to offer direct subsidies to people who might be hurt by the actions that are necessary to reduce carbon emissions. I think this approach would be better for the economy than Tim's plan for combining the carbon reducing action with protectionist measures that harm the economy broadly speaking and create international conflict.
Finally, it is also worth noting that it is possible to adopt the protectionism Tim thinks is necessary to reach a political compromise, but do it within the rules. For example, instead of local content requirements that are difficult to monitor and evaluate, and which clearly violate WTO rules, governments could just use tariffs that are negotiated and incorporated into their WTO Schedules.
Jennifer Hillman and Inu Manak have a new paper out called "Rethinking International Rules on Subsidies." In a nutshell, they argue that all the new subsidies being thrown around are likely to create difficulties in international economic relations, and some revised rules might help with that. One key aspect of their paper is figuring out how to distinguish "good" and "bad" subsidies, and making clear that certain "good" subsidies are permitted under the rules. For example, subsidies that "genuinely contribute to fighting climate change," such as "subsidies for renewable energy, carbon capture and sequestration, electric vehicles, and clean cooking stoves," would be permitted.
In terms of how to carve out these subsidies from the rules, they say:
Increased transparency should begin with making the notification process as easy and understandable as possible, with clear incentives for fulsome and timely notices. The WTO secretariat has begun that process through its shift to online tools, but more needs to be done, in conjunction with the SCM Committee, to ensure that all countries understand what they are required to notify and into which boxes their subsidies fall. A further incentive to notify immediately those subsidies that a country believes fall into the green box as non-trade-distorting (i.e., funds for basic research and development or disaster relief or the like) would be an agreement that subsidies notified as within the green box cannot be challenged at all or after a certain period of time, or until concerns over such subsidies have been raised and discussed at a meeting of the SCM Committee.81 That safe harbor from challenge could be agreed upon as part of the notification process even without an agreement on overall caps on industrial subsidies.
---------------------
81. This could be structured similarly to the now expired Article 8 provisions of the SCM agreement, which were considered nonactionable.
Footnote 81 refers to Article 8 of the SCM Agreement, which carved out several kinds of subsidies, including certain environmental ones:
8.2 Notwithstanding the provisions of Parts III and V, the following subsidies shall be non-actionable:
...
(c) assistance to promote adaptation of existing facilities to new environmental requirements imposed by law and/or regulations which result in greater constraints and financial burden on firms, provided that the assistance:
(i) is a one-time non-recurring measure; and (ii) is limited to 20 per cent of the cost of adaptation; and (iii) does not cover the cost of replacing and operating the assisted investment, which must be fully borne by firms; and (iv) is directly linked to and proportionate to a firm's planned reduction of nuisances and pollution, and does not cover any manufacturing cost savings which may be achieved; and (v) is available to all firms which can adopt the new equipment and/or production processes.
If we want to apply the Article 8 approach to carbon reduction subsidies, a key aspect is how to identify the subsidies for which legal challenges are to be limited. Here's a drafting suggestion from me for a basic Article 8-style environmental provision that identifies certain subsidies as non-actionable:
"Notwithstanding the provisions of Parts III and V, the following subsidies shall be non-actionable:
Subsidies that are designed, structured, and expected to operate with a primary purpose and impact of achieving a reduction in carbon emissions, and which do not have elements that are applied so as to afford protection to domestic production."
It's difficult to get the balance right here. I think you need some degree of scrutiny of the purpose and impact of a measure, so that it is not used as the basis for disguised protectionism, but exactly how much scrutiny is needed? I took a bit of language from the case law and a bit from GATT Article III to achieve the balance in a way that I think is reasonable, but I'm open to alternatives. One alternative is to try to get more specific about some of the details of the subsidies, but I thought relying on general principles might work better.
A recent Washington Post article describes a new piece of U.S. legislation that could eventually lead to the imposition of a carbon border tax:
In a rare example of a bipartisan climate policy, momentum is growing on Capitol Hill for a plan to tax imports from China and other countries with looser environmental standards.
Sens. Christopher A. Coons (D-Del.) and Kevin Cramer (R-N.D.) on Wednesday will introduce a bill that would lay the groundwork for America’s first carbon border tax, according to legislative text shared with The Washington Post before its broader release. The senators’ goal is to impose fees on iron, steel and other imports from countries that are not significantly reducing greenhouse gas emissions.
The title and sub-title of the Post piece are as follows:
A bipartisan plan to punish global climate laggards: Tax them
New legislation in Congress would lay the groundwork for tariffs on imports from countries with looser environmental rules
But who are the "global climate laggards"? And which countries have "looser environmental rules"? In Washington, as the Post article makes clear, the view is that these terms refer to countries such as China and India:
“Using trade to advance American manufacturing — and to disadvantage dirty or high-emissions products — is ultimately the only way we’re going to put effective pressure on China, Russia and India to dramatically reduce their emissions,” Coons said in an interview on Tuesday.
The basic idea seems to be that China, India and others are the laggards, and the U.S. should use its economic power to pressure these countries to reduce their emissions. (I'm ignoring Russia here because trade with Russia was much lower in general than with China and India, and after the Ukraine war sanctions this trade has dropped even further, so they are less important in this context).
But in China and India, many people would say that cherry-picking a few industrial products where U.S. carbon emissions are lower is not an appropriate way to look at the problem of carbon emissions. Rather, they would argue, when you look at per capita emissions, the U.S., Australia, Canada and others are the real laggards. Any actions to address global emissions through carbon taxes should take that into account.
Some in the U.S. might respond that regardless of what happened over the last couple centuries through today, now the U.S. is taking carbon emissions seriously, through measures such as the Inflation Reduction Act (IRA). However, it's worth noting that one projection that I often see cited for reduced carbon emissions through the IRA is the following: "Our preliminary estimate is that the IRA can cut US net greenhouse gas emissions down to 31% to 44% below 2005 levels in 2030—with a central estimate of 40% below 2005 levels—compared to 24% to 35% under current policy." Even assuming those projections are met -- and these sorts of projections are often wrong, so the reduction in emissions could end up being less -- the U.S. may still have one of the highest per capita carbon emissions. And it's also worth noting this from Elizabeth Kolbert of the New Yorker: "Though it’s been widely reported that, by 2030, [the Inflation Reduction Act] will reduce the U.S.’s emissions by forty per cent compared with their levels in 2005, most of this projected reduction is attributable to other developments, including the fact that many power plants have already switched from coal to lower-emitting natural gas."
Taking these very different views across countries into account, what are the trade policy implications of a U.S. carbon border tax? The article points out that WTO rules are not likely to have an impact here:
Some trade experts have raised concerns that if Congress passes a carbon border tax without its domestic counterpart, it could run afoul of World Trade Organization rules.
Joseph Majkut, director of the Energy Security and Climate Change Program at the Center for Strategic and International Studies, said Democrats already shrugged off these concerns when passing the clean-energy tax credits in the Inflation Reduction Act.
“If concerns about the WTO were high on Congress’s list, that would have been revealed in the [Inflation Reduction Act],” he said.
While it's hard to judge these things without seeing the actual legislation, I'm pretty confident that a carbon border tax that is not tied to a corresponding domestic tax or equivalent measure is going to violate WTO rules and/or not be justified under the exceptions. Of course, as noted in the quote above, perhaps Congress doesn't care about this. (And without the Appellate Body functioning, maybe WTO rules won't have much impact anyway).
However, there are trade implications beyond the impact of WTO rules. WTO rules help to manage trade conflict; without the WTO you have to deal with trade conflict some other way. And there is likely to be trade conflict here. While some in Congress may be hoping that trading partners will simply give in to the pressure of the U.S. carbon border tax and reduce the emissions of their steel and other products, I don't think this is the likely result. Rather, my sense is that if the U.S. adopted a carbon border tax of the sort envisioned above, it would likely be met with retaliatory tariffs (or other forms of retaliation) from China, India and others.
Will the prospect of retaliatory tariffs deter members of Congress from adopting a carbon border tax? I'm not sure, but they should at least be aware that this is a likely result of this type of measure, and consider that as part of their deliberation.
Of course, if the U.S. imposed a carbon tax that applied to both domestic and imported goods, that would be a different story entirely. But it does not seem like that is under consideration.
At an EXIM bank event yesterday, U.S. Trade Representative Katherine Tai said the following about the proposed Global Arrangement on Sustainable Steel and Aluminum:
And the concept would be for the US and the EU to join our markets, and to use access to our markets to leverage fair trade and clean trade in these industries. Again, taking the strength of our shared values and then trying to create a new paradigm for trade that is going to incentivize raised standards, both in terms of fair trade, and also in terms of moving to a clean energy future.
Apparently there is a "Concept Paper" floating around out there in which the proposal is explained in detail, and if anyone wants to leak it to me I would be most obliged!
As the substance of the policy, as Ihavesaidbefore, the difficulty I see with this proposal is that by combining clean and fair trade together like this, I'm not sure how you end up with significant incentives for foreign steel and aluminum producers to produce more cleanly. There are two categories of issues here.
First, cleanly produced steel and aluminum can still be hit with tariffs such as safeguards and anti-dumping duties even if it is traded "fairly." Yes, anti-dumping duties are marketed as targeting "unfair trade," but given the way these laws are applied in practice, they can be imposed on imported products that are not "unfairly" traded. Thus, if foreign producers find a way to make their steel and aluminum products in a squeaky clean manner, there is no guarantee they will be able to sell it in the U.S. market (or the EU market for that matter, assuming the EU goes along with this).
Second, with regard to countervailing duties, you can certainly make the case that subsidized products constitute unfair trade, and therefore it's appropriate to impose countervailing duties on these products (I would prefer an "adverse effects" complaint at the WTO, but let's put that aside for now). However, if your goal is to get foreign producers to make their products in a way that generates lower carbon emissions, a likely way for them to achieve this is with the help of government subsidies (otherwise, the costs of modifying their production methods could make their products less competitive), and if you are going to impose tariffs on their imports based on those subsidies, they will lose their incentive to change the production methods.
So, just to repeat what I've said in earlier posts, I don't see how this plan would lead any producers to reduce their emissions. While I do understand that the foreign steel and aluminum producers might avoid some higher tariffs imposed on dirty steel and aluminum through this Arrangement, how big a deal will that be given the other tariffs that are out there waiting to be applied if they have any success selling their low emissions products in the U.S./EU markets?
Now, if you separated out the "clean" from the "fair" to some extent, you could probably have a big impact on reducing carbon emissions. For example, steel and aluminum below a certain carbon emissions threshold could be exempt from anti-dumping duties and safeguards, and from countervailing duties in relation to subsidies designed to reduce carbon emissions. But for obvious reasons, it's hard to imagine many people going for that.
And finally, there is the issue of retaliation, as many countries, especially those with lower per capita carbon emissions than the U.S. and the EU, are likely to object to this approach and could retaliate with tariffs on U.S./EU products.
The Inflation Reduction Act (IRA) that was recently passed by the Senate has a complex set of assembly and content requirements for its electric vehicle (EV) tax credits. This post offers a few thoughts on domestic content requirements as a matter of policy, possible U.S. justifications under WTO law for those requirements as they are set out in the IRA EV tax credit provisions, and the practical effect of this measure given the strictness of these requirements.
The full text of the legislation is here, but since reading legislative text is often a nightmare, I'm going to rely on this overview from U.S. trade policy expert Tori Smith:
Regional Content Requirements
In addition, the bill adds production requirements for automakers to have their vehicles qualify for the tax credits. For a vehicle to qualify, it must undergo final assembly in North America. This provision is less restrictive than a previous version of the policy, which required American production and favored unionized factories to manufacture these vehicles. Because of the integrated automotive supply chains in North America, neighboring countries were very concerned with the original proposal. Canada even suggested that the previous version would violate the United States-Mexico-Canada Agreement. The Inflation Reduction Act avoids that issue, but it could still be viewed as discriminatory against other foreign automakers, namely those based in the United Kingdom, the European Union, Japan, and South Korea. Automakers have diverse global supply chains, and some may not be as present in North America.
Starting in 2024, under the Inflation Reduction Act, EVs would need to have at least 40 percent of their critical minerals sourced for batteries from countries with which the United States has a free trade agreement (FTA).[4] Critical minerals can also be made from materials recycled in North America. The required percentage of content for critical minerals would then increase over the following two years and by 2026 the regional content for critical minerals would rise to 80 percent.
The bill also specifies that no vehicle produced after 2024 can have a battery with critical minerals that were “extracted, processed, or recycled by a foreign entity of concern.” A “foreign entity of concern” is defined very broadly and could feasibly apply to China.[5] That China performs an estimated 80 percent of global mineral processing and refining makes this particular provision problematic.[6]
Under the bill, the battery of an EV would be required to have at least 50 percent North American content by 2024 and be of 100 percent North American origin by 2028. In 2020, the United States was home to 70 percent of battery cell capacity, meaning an overwhelming portion of the end process to make a battery takes place domestically. The raw materials in a lithium-ion battery, however, represent most of the total cost of the battery. The cost of cathodes and anodes, the positive and negative electrodes in a battery, alone are estimated to represent 40 percent of the total cost of a lithium-ion battery.
In terms of the consistency of the IRA provisions with WTO law, I'm going to focus on the WTO's non-discrimination obligations as applied to the assembly/content requirements, but there is also an issue with how the tax credit itself would be examined under the subsidy provisions. (And let me note that my thinking here has been informed by discussions with David Kleimann and Jesse Kreier, but of course all errors are my own).
As a general matter, domestic content requirements will violate GATT Article III:4. The law is clear on this, and in my view the policy is a good one. The WTO doesn't prohibit protectionism entirely, but it does try to steer it towards more transparent methods such as tariffs. If governments want to protect their domestic EV industry from competition, they are allowed to do so, but they have to negotiate for that ability as part of an exchange of tariff concessions. If governments undermine the carefully crafted balance of tariffs by using domestic content requirements in national and local laws and regulations, the system could quickly fall apart. If one government does it, others are likely to respond with their own content requirements, and we could get into a protectionist spiral. A core purpose of trade agreements is to prevent this sort of thing from happening.
In addition, large wealthy countries would have a general advantage in a system without rules, but also a specific advantage in a system with complex domestic content requirements, because implementation of such measures is more technical than tariffs and requires more resources.
As a result, there is broad agreement that domestic content requirements are a bad idea, and they should be, and are, prohibited by WTO and FTA rules. Obviously, there are some protectionists (and perhaps a few others) who disagree, but I'm just saying the consensus is pretty clear on this.
Of course, this consensus doesn't mean that governments never use these measures. It just means that when they do, a WTO complaint is brought in response, and there have been several WTO disputes over the past few years reaffirming all of this.
In the case of these new IRA EV tax credits, however, things get a little complicated. I'm not sure I have all the answers at this point, but I'm going to set out two key issues here and offer a few thoughts.
First, a "final assembly" requirement strikes me as different than a content requirement in ways that could be important. In theory, final assembly can take place with 100% foreign parts, and as a result, maybe it does not actually require that inputs be from any particular place. Thus, perhaps it is not the same thing as a "domestic content" requirement. Now, in practice, such a requirement might steer the assembler to use local or regional inputs, because those inputs are physically close to where the assembly has to take place. But that ends up being a de facto content requirement rather than a de jure one, and those can be difficult to prove.
Second, there is a question that comes up under all three of the aspects of the IRA EV tax credit measure (final assembly, critical minerals, batteries): Could these requirements be justified under GATT Article XXIV as measures related to a free trade area? Each of the three requirements works a little differently, but all of them are tied to the North American region (and thus perhaps to the USMCA) or to U.S. FTAs. I don't see how else the U.S. can justify these measures under WTO law, so I'm wondering if at least someone involved in the creation of this measure had in mind an Article XXIV defense (others may not have been concerned about WTO law).
It's important to think about what WTO obligations we are talking about, and the obligations that come to mind here are GATT Articles I:1 and III:4, as well as SCM Agreement Article 3.1(b). With 3.1(b), there is a question about whether Article XXIV could apply at all to a non-GATT agreement. But putting that aside, does Article XXIV even work here? How do these requirements fit under GATT Article XXIV:8(b), which states:
(b) A free-trade area shall be understood to mean a group of two or more customs territories in which the duties and other restrictive regulations of commerce (except, where necessary, those permitted under Articles XI, XII, XIII, XIV, XV and XX) are eliminated on substantially all the trade between the constituent territories in products originating in such territories.
Are these North America/FTA assembly/content requirements just part of the elimination of duties and other restrictive regulations of commerce on substantially all trade in the free trade area, and therefore justified under Article XXIV? At this point, I'm not sure, and I'm reluctant to spend too much time thinking about it until 1) the measure actually becomes law, and 2) the U.S. actually invokes Article XXIV. If the U.S. doesn't invoke Article XXIV, it's not clear to me what they will cite as a justification though. (Obviously there is GATT Article XX(g), but I don't see how these requirements could satisfy the Article XX chapeau).
One other legal point here: The “foreign entity of concern” language probably means that GATT Article XXI (security) would be invoked for that specific provision.
Finally, with regard to the effectiveness of the policy as set out in this statute, Tori raises a point about the difficulty of fulfilling the particular requirements in the IRA:
The regional requirements in the Inflation Reduction Act are likely impossible for automakers to fulfill because they severely reduce the sourcing options for inputs. For example, Argentina is responsible for roughly 10 percent of lithium production, but the United States does not have a free trade agreement with Argentina. Moreover, virtually all cathode and anode production is concentrated in China, Japan, and South Korea. South Korea is the only country with which the United States has a free trade agreement, and it represents only 15 percent of cathode production.[7]
If we want these tax credits to be helpful in encouraging people to buy electric vehicles, fewer restrictions on their use would be better. A version of the measure that did not have assembly/content requirements would lead to more electric vehicles being used, but that is not the version we have right now. It will be interesting to see whether the vehicle-makers and government officials interpreting and applying the rules will find a way to adapt so that consumers can actually make use of them.
UPDATE:
I don't know if I got the assembly requirement analysis quite right. See my discussion with Jesse Kreier in the comments.
Recently, I came across two arguments for the U.S. and EU to use tariffs as penalties designed to bring down carbon emissions:
Senator Sheldon Whitehouse suggested that "laggards and high polluting countries [will be] forced to step up and comply by virtue of the economic pressure on them to stop having their goods tariffed so heavily";
And Joseph Stiglitz, Todd Tucker, and Isabel Estevez argued for tariffs that "restrict imports of dirty steel and aluminum—that is, metals produced with a high intensity of carbon emissions—from entering their markets."
For reasons I have set out beforeon this blog, I think an approach that relies on U.S./EU tariffs to punish other governments for their carbon emissions will be ineffective. In response to the arguments set out above, I offer two additional/supplementary reasons. (I'm going to focus here on the policy as it arises in the U.S. more than the EU, because both of the arguments above come from a U.S. perspective).
The firstreason is that many people in the U.S. seem to be operating under the assumption that the U.S. is cleaner than most others in terms of carbon emissions, and as a result the U.S. government has the moral high ground to push others to reach our level. But focusing on the key metric, per capita carbon emissions, this is simply not true. Among larger economies, only Canada, Australia, and Saudi Arabia are worse than the U.S. That leaves the U.S. with low credibility to pressure others here. (Maybe the latest developments in U.S. legislation will make a big dent in these figures, but my sense is that there is a lot of uncertainty about that and the achievements will be modest at best.)
The proponents of this approach focus on manufacturing, where U.S. carbon emissions are relatively low. They want to focus on production because the U.S. is good there, but then ignore consumption, where the U.S. is bad. However, from what I can see based on the per capita figures, it is clear that the U.S. is among the worst overall, and focusing on an area where the U.S. is better can't disguise that. If the U.S. takes the approach of penalizing other countries in areas where they are worse (e.g., manufacturing), there is a good chance these other countries will retaliate in kind, e.g., imposing tariffs on the U.S. for its overall higher per capita emissions in order to induce the U.S. to "step up and comply."
Not surprisingly, the focus of these arguments is often China, as Whitehouse makes clear with this statement: "You know, you can hector and plead and wheedle with the Chinese all day long about trying to do better in terms of pollution, but what's really going to get their attention is when their exports to the US and the EU are being tariffed heavily. They will move much more rapidly to get away from that pressure than they will to try to meet the approval of the West at functions in Davos." Whenever someone brings up China these days, the discussion tends to go off the rails, so let's think about India instead. How would India react if the U.S. imposed tariffs on its steel/aluminum because it is relatively dirty in terms of its carbon emissions? Well, there have already been calls in India for action based on the level of per capita carbon emissions in a country, so no one should be too surprised if that happens. (And then going back to China, we already saw what happened when the U.S. imposed tariffs on China under Section 301: China retaliated with tariffs of its own).
The secondreason I'm skeptical about this approach is that the steel and aluminum sectors are particularly bad industries in which to carry it out because of their history with trade remedy tariffs. If the idea behind these tariffs on dirty steel/aluminum proposals is that high tariffs would be imposed on dirty steel/aluminum and low tariffs would be imposed on clean steel/aluminum, so as to give countries an incentive to produce the cleaner variety, I can see how that would work to some extent. (I don't think it's a particularly effective approach to the problem, and a revenue-neutral carbon tax would be better, but I see the logic.)
But it's important to understand that the Global Steel and Aluminum Arrangement under discussion right now will not provide those incentives, because clean steel will not be charged low tariffs. Ordinary U.S. tariffs are not very high on these products, but trade remedy tariffs often are: "As of April 19, 2017, Commerce has 152 antidumping (AD) and countervailing duty (CVD) orders in place on steel from 32 countries." (See also, World Tariff Profiles 2021: AD, p. 209; CVDs, p. 218; Safeguards, p. 225) The point here is that even if India or China could come up with a way to produce steel that, let's just say for the sake of argument, sucks carbon out of the atmosphere, it would still get hit with high U.S. tariffs. And if you are already subject to 100% AD tariffs, an extra 25% because your products are dirty won't have much impact.
So if these proposals won't accomplish their environmental goals, what might we do instead? One way to have an impact here would be to change the current system so as to charge lower tariffs for clean steel/aluminum. To this end, the U.S. could lead an effort for governments to lower tariffs on clean versions of these products in order to provide an incentive to produce this way. While U.S. ordinary tariffs are low, other countries have higher tariffs, so convincing them to charge lower tariffs on clean steel and aluminum could have an impact. Exempting these goods from anti-dumping tariffs could allow the effort have an impact in the U.S. as well.
An initiative along these lines is kind of a variation of the negotiations for the Environmental Goods Agreement. The EGA identifies goods that are considered green, and lowers tariffs for them; this initiative would lower tariffs for goods that are not inherently green but have been greened to some extent.
Another possibility is to encourage governments to provide subsidies to upgrade domestic manufacturing facilities to ones that emit less carbon, with part of this effort being a promise not to impose countervailing duties against those subsidies or to challenge them at the WTO (which could lead to authorized tariff retaliation). In effect, there would be an environmental exception applied to these particular subsidies that exempts them from tariffs that might be applied under domestic and international trade law.
To sum up, my basic point is this: If we want to provide incentives to change behavior, we have to offer something substantive in terms of opening markets to clean energy products or otherwise providing incentives to make these products. Unfortunately, under the current "tariffs as penalties" proposals, there does not seem to be much chance of progress. In contrast, a "removing tariffs as an incentive" approach could work.
This is from a CFR blog post by Jennifer Hillman and Alex Tippett on the "green steel deal":
For the proposed U.S.-EU agreement on green steel and aluminum be successful, however, it will have to avoid several potential pitfalls. First, the deal cannot devolve into a stalking horse for protectionist interests. As currently conceived, the deal appears intended to incentivize reforms abroad by promising largely unrestricted access to U.S. and European markets for countries that meet certain standards. The allure of the European and U.S. markets pushes trade partners to make domestic reforms so they can meet those standards, helping to address overcapacity and reduce carbon emissions along the way. This only works, however, if the standards are clear and genuinely achievable while stringent enough to be impactful.
The United States and the European Union will also have to disentangle improper production or export subsidies from subsidies intended to lower carbon emissions. Greening steel and aluminum production is an expensive endeavor and, in most countries, will likely only occur with state aid. That aid, however, is liable be construed as granting an unfair advantage to recipients. U.S. steel producers, for instance, are already beginning to gripe about subsidies intended to help EU steel producers reduce their carbon footprint. Without clear redlines delineating permissible forms of state action, effort to encourage decarbonization could be derailed by finger-pointing over improper subsidization. At the same time, however, overly onerous restrictions on state action could delay the transition away from carbon-intensive production methods. Developing a shared set of standards for appropriate and inappropriate subsidization should be a priority for U.S. and European negotiators.
Finally, any final deal should include some sort of framework for technology sharing, both between Europe and the United States and between the United States and Europe and those countries working to green their own steel and aluminum industries. Enabling green manufacturing techniques to flow smoothly between the United States and Europe while also demanding ever-cleaner production at home would ensure that a U.S.-EU deal also helps reduce domestic emissions. While U.S. and EU steel producers do emit less than their counterparts overseas, a significant portion of that difference is due to the prevalence of electric arc furnaces in the United States and the EU. Electric arc furnaces are cleaner and smaller than the blast furnaces common in China and elsewhere. Rather than using this quirk of the modern steel market to avoid further modernization efforts, however, the United States and Europe should strive to have even cleaner production at home—with the goal of net-zero steel and aluminum production. At the same time, ensuring these green production technologies are readily available beyond Europe and the United States is essential to ensuring a rapid and equitable transition.
When you combine their concerns with the ones I raised here and here, I'm pretty skeptical this initiative is going anywhere. It's not that something like this couldn't be done. You could definitely have some sort of coordinated international effort to reduce carbon emissions in manufacturing. (I don't think manufacturing should be the only focus, but clearly it's an important aspect). Rather, it's that due to the way the effort is being approached as described so far, there are a number of embedded problem that I don't think can be overcome.
(I should mention that the overall take on this initiative from Jennifer and Alex is more positive than mine is.)
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 evidenceshows 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.
Thanks to Tim Meyer and Todd Tucker for taking the time to respond to my questions about how the U.S.-EU Section 232 deal could lower carbon emissions. Not surprisingly, their response raises more questions for me, and I am still skeptical that this new arrangement will lead to lower emissions. I have some very specific questions and comments in this regard in reaction to what they said, and I also have some broader questions that make me wonder whether this approach is at all workable.
First, let me talk about the domestic side of the equation. In my view, the best way to approach the issue of reducing the carbon emissions that result from manufacturing is to first take domestic action to address your own carbon emissions problems, and then come up with an international component that roughly matches the domestic action. What you will end up with, ideally, is something close to a non-discriminatory set of regulatory/tax measures that apply both internally and externally. On this point, Tim and Todd suggest that the U.S. is "contemplating ... subsidies for industrial decarbonization in Build Back Better and the Bipartisan Infrastructure Bill." (Perhaps what they have in mind here is Sec. 30471 of the House Build Back Better Act (see p. 459).) I have some doubts about how much impact this will have on the carbon emissions of the U.S. steel and aluminum industry, but assuming it did, that would be a start. Opening with carbon tariffs is a bad move, in my view, and genuine efforts at domestic improvements are a better approach. So, let's see what happens with reducing U.S. steel/aluminum industry carbon emissions through the Biden administration's infrastructure plans. That could help illuminate whether a carbon tariff plan has a chance to make an impact on emissions. (I should point out that domestic producer subsidies of the sort contemplated here are often problematic, in the sense of leading to trade conflict. Subsidies to purchasers of clean steel/aluminum might be a better way to go).
Second, I'm sorry to have to point to trade remedies again, but if the Biden administration's plans involve subsidies, well then we're back to the sort of problems I raised in my original post. To the extent the U.S. industry is thinking about exporting its new and improved, squeaky clean steel and aluminum, these subsidies could subject it to countervailing duties. Of course, maybe they aren't expecting to export much, in which case it's less of a problem. But if they actually did have the cleanest steel and aluminum, I'm not sure why they wouldn't be trying to market it that way and sell it all around the world.
Third, staying on the trade remedies theme, I really think the fundamental flaw here is the linking together of dumped and dirty products. Tim and Todd say: "the arrangement will result in an ever-expanding wall against dirty, dumped steel and aluminum." But everyone needs to understand (and I think most readers of this blog do) that you can't expect companies to stop dumping. Generally speaking, it's not something they know they are doing. It's not a choice, like, "hey, let's dump our products in this foreign market," and companies won't generally know if they are dumping before some trade remedy agency tells them they are. It's not easy to run an internal calculation of whether your pricing practices will lead to a finding of dumping. (No doubt it can be done, at least to some degree of accuracy, but it would be costly). Rather, for the most part, dumping just involves a set of calculations that, if carried out in a certain way, will lead to a finding that you are dumping. Just about everyone can be found to be dumping under the right methodology. Now, if the issue is with government distortions to markets, that's something you could try to target. (I would very much like to see Tim and Todd push for action against government distortions to markets, and I was excited to see their reference to "market orientation"!) But if you are setting up this new arrangement in such a way as to target both "dumped" and "dirty" products, you may be asking too much. If a foreign producer needs to satisfy both conditions, all their efforts to clean up emissions could be for naught in terms of getting access to the U.S. market. As I said in my original post, if you could set this up in a way that clean steel and aluminum could avoid tariffs regardless of whether there was dumping, then you might be able to create some good incentives to reduce carbon emissions. But I don't think the domestic industry and unions are going to go for that. And in addition, also as mentioned in the original post, while governments could offer domestic incentives for cleaner production, avoiding the carbon tariff only to get slapped with a countervailing duty because of the subsidies would be really annoying.
Fourth, the response from Tim and Todd makes specific reference to China, and China is clearly one of the keys here. But China's imports of these products are already severely restricted by existing AD/CVDs. I'm not sure this new arrangement will give them much in the way of an incentive to decarbonize production. China's distorted steel sector is a famously difficult problem, and we should definitely think about what actions to take in this regard, but unilateral trade restrictions have been tried to death and don't hold much promise here. Maybe try going to the WTO and invoking some of the expansive WTO-plus accession protocol provisions China agreed to? Worth a shot, in my view.
Turning to the broader questions, I want to make two related points that touch on the credibility of the whole exercise. If I'm in the shoes of India, or Brazil, or South Africa, I might have a negative reaction to all of this for two reasons: 1) It doesn't seem fair to focus so much on industries where U.S. production is relatively clean; and 2) given U.S. per capita carbon emissions, the U.S. isn't really in a position to be telling other countries to clean up.
On the first one, what seems to be happening in the Section 232 deal is that the U.S. is choosing to make steel -- I'm less sure about aluminum in relation to its comparative carbon emissions -- the focus of its carbon emissions plan for industrial manufacturing. However, that's not a neutral and objective choice, picked randomly from a ping pong ball machine. Rather, it seems like a strategic decision to focus on an area where we think we won't have to do as much in terms of cleaning up. I would expect other countries to push back on this. They might say something to the effect of: "Hey, you can't just pick steel because your production does well there. Let's talk about production in a wide range of sectors, and throw in some where your production is dirty and you actually need to do some work." (This point is connected to a general complaint of mine about trade negotiations, which is that everyone wants the agenda focused on other countries' sins, not their own sins. In my view, this is a big reason why we've had so much trouble getting significant WTO deals finished.)
On the second one, when you look at comparative figures for per capita carbon emissions, the United States doesn't fare so well. That's something that developing countries who are being told to clean up their production notice. And that takes me back to a point I made above. If I were the Biden administration, I would really focus heavily at the start on reducing domestic carbon emissions. That would add some credibility to efforts to push other countries to reduce their own emissions. The Biden administration is talking a lot about reducing carbon emissions. We'll see how far that goes in practice.
Let me sum up this way. I think there is a way to get to lower carbon emissions in these and other sectors. My main objection is to using "restrict access to their markets for dirty steel and limit access to countries that dump steel in our markets" as the key principle on which the effort is based. Instead of this, I would try to identify the most carbon intense production practices and facilities in these and a number of other key sectors around the world. Then I would try to put together a funding mechanism that helps reduce emissions at the dirtiest ones in a balanced way. In contrast, I think that converting existing tariffs that trading partners thought were unjustified into a new version of the same tariff, with an ostensibly different justification, in order to induce changes in behavior among our trading partners even though it's not at all clear we are particularly virtuous, is the wrong approach and is unlikely to have much success.
I've seen some talk on Twitter and elsewhere about the "Carbon-Based Sectoral Arrangement on Steel and AluminumTrade" part of the U.S.-EU Section 232 agreement, as the White House referred to it, with people seeming to suggest that this is a big deal (a "green steel deal") and will lead to lower carbon emissions in the steel and aluminum industry. I've been puzzling over something for a couple days now, and I can't figure out an answer, so let me just put a question out there for Tim Meyer or Todd Tucker or any other supporters of this approach: How exactly will this arrangement lower carbon emissions in the U.S., the EU, or other countries?
The most obvious response is probably that by creating a club of countries who have relatively clean steel and aluminum production, with tariffs imposed on steel and aluminum imports from countries that are not part of the club, you can induce them to clean up their own production in order to get access to the club. I assume the supporters have some variation of this in mind. But if that's the argument, it raises a number of specific questions for me.
First, will there be any efforts to improve U.S. and EU carbon emissions, or is everyone just accepting that the U.S. and EU are clean enough right now and the status quo in these two places is OK and thus the focus will be on pushing others to lower their emissions? (For what it's worth, figuring out emissions by country is a challenge, and there is a lot of variation within countries, but here aresomereports on it.)
Second, in terms of the other countries, there are probably a number of countries that are similar in emissions levels to the U.S. and the EU, while other countries do worse.
For those countries that are at similar levels, my question is, are their emissions fine as is and they can just join the club right now, or will there be efforts to push them lower?
But the key issue here, of course, is the countries with dirtier steel and aluminum production. With respect to those countries, my question is, what are the tools that are going to be used to induce them to lower their emissions? In theory, you could impose a 25% tariff on these products if they are dirty, and remove the tariff when they get clean. But as just about everyone probably knows, trade in these products is already so heavily restricted by existing AD/CVD orders that the imposition and removal of a 25% tariff is not likely to have much of an impact here. Now, what you could do is remove all the tariffs on these products, including the trade remedy tariffs, after their emissions are clean, but it seems unlikely that the steel industry would ever go for that. So, in this high tariff environment, I'm not sure being able to join this new club acts as much of an incentive to clean up emissions.
It's worth noting at this point that this new arrangement is not just about carbon intensity of production, but also about traditional "unfair trade" issues, as the White House fact sheet states: "the United States and European Union will work to restrict access to their markets for dirty steel and limit access to countries that dump steel in our markets, contributing to worldwide over-supply." With the two issues intertwined like this, I'm not sure there is any scope for the arrangement to use the power of the U.S./EU markets to induce lower carbon emissions in our trading partners. As "dumping" is currently defined in domestic law, it's not easy for companies to stop dumping (unless they just stop selling to the market in question), and domestic industries and investigating authorities will use the flexibilities in the law to keep out imports of these products. So just to reiterate what I said above, as long as unfair trade laws are in place, I'm not sure the carbon tariff aspect can offer much of an incentive for changing carbon producing behavior.
With all this in mind, my broad and general question is, how does any of this lead to lower carbon emissions in the steel and aluminum industry? Which countries are going to feel pressured to make changes in their domestic production? China? India? Brazil? South Africa? China is probably out, because there is no way I can see that imports of steel and aluminum from China are going to start flowing into the U.S. and EU any time soon, even if they make their steel and aluminum solely with geothermal power and plant a million new trees. But what about the others? Could they clean up their production so that it produces less emissions and therefore gets easier access to the U.S. market? Putting aside the previous points about trade remedies, in theory they could do this. But it would take some money, and that money probably will have to come from the government, which of course brings the trade remedy issue right back in, because it means that U.S. and EU producers will bring countervailing duty cases against these subsidized imports. Thus, the 25% carbon tariff would simply be exchanged for an uncertain, and quite possibly much higher, countervailing duty.
That's as far as I've gotten with all of this at the moment, but if any of the advocates of this new arrangement who think it's going to bring down carbon emissions can explain how it will do so, I'd love to hear it!
Many of you know Mona Paulsen as the Queen of Trade Law Archival Research, but she is also a scholarly tech innovator, having convinced the stodgy folks at Cambridge University Press to do a video discussion for a World Trade Review written debate series on carbon border adjustments. In this debate, Tim Meyer and Todd Tucker have a WTR piece in which they offer their vision for a "A Pragmatic Approach to Carbon Border Measures." I provided a rejoinder here, to which Tim and Todd gave a final response. The video of us discussing all this is here.
To summarize my main points briefly:
-- Tim and Todd propose a "carbon customs union in which countries with a diverse range of high-ambition domestic climate measures would adopt a common external tariff on carbon intensive imports from countries outside the union." To me, this proposal comes across as an exclusive club that only wealthy countries can join, with financial penalties imposed on everyone else. I think that a better way for the U.S. to lead on reducing climate emissions would be to acknowledge the history (i.e., that we are the leading source of carbon emissions historically), engage in a good faith negotiation to convince everyone to take steps to reduce carbon emissions, and offer monetary and technical assistance to developing countries who are struggling with how to balance their industrialization objectives with the goal of reducing carbon emissions.
-- Tim and Todd want to use Section 232 as the mechanism to impose their carbon tariffs. In my view, however, Section 232 is not well-suited to this task, for a number of reasons: the Commerce Department is not the right institution for the task; given the recent abuse of this provision, I don't think the Biden administration will be able to convince other countries that they are using it in good faith, rather than just another excuse for protectionism as the U.S. devolves further into economic nationalism; and any action on carbon emissions has to start with domestic measures anyway, and a border tax measure could be included in whatever domestic legislation is adopted, rather than invoking Section 232.
-- I'm not sure how pragmatic what they are proposing is. For example, they suggest that the steel industry will support a plan for total decarbonization of their production, but I don't see evidence of that.
-- In my view, one key to success here is truth-telling. Ordinary people are not going to get behind action to address carbon emissions unless political leaders level with them. Todd tweeted a quote from Senator Ron Wyden recently in which Wyden said: "I will make sure as chairman of the Senate Finance Committee that no carbon policy hits working people and working families." The problem with this statement is that a carbon policy that does not have some degree of negative impact on "working people and working families" will be totally ineffective. Whether the domestic measure is a tax or a regulation, there will be costs, and some will be borne by "working people and working families." It's hard to convince people that climate is an "existential threat" when you are also telling them that it's easily solved and that the solutions will create 20 million jobs. So just be straight with people. It's the only way.
This is a guest post from trade lawyers Cándido García Molyneux & Paul Mertenskötter:
On July 14, the European Commission presented its legislative proposal for a Carbon Border Adjustment Mechanism (“CBAM”). This long-anticipated tool is intended to make importers pay for the greenhouse gas (“GHG”) emissions embedded in the covered goods that they market in the EU. A Covington webinar on the main elements of the proposal and related policy considerations is available here.
The Commission’s proposal tries to carefully define the scope of the CBAM to ensure its integrity and effective link with the EU Emissions Trading System (“ETS”). The CBAM proposal is designed to apply to specific industrial sectors for which the EU domestic industry is subject to the ETS, that are at high risk of carbon leakage, and for which it is feasible to calculate embedded GHG emissions.
However, the proposal’s current wording suggests that, once the CBAM is in force and the Commission adopts the necessary implementing legislation, it may also have an indirect coverage extending to many other products and sectors than those formally covered. This is for the following reasons.
Formally, the proposed CBAM would apply to iron and steel, aluminium, cement, and fertilizer products and to electricity. The exact types of goods that would be covered are those falling within the tariff classification lines of the EU’s Combined Nomenclature, so called CN Codes, that are listed in Annex I to the proposal. Annex I also covers several complex goods that rely on precursor production steps. For example, the following four types of complex goods would be subject to the CBAM: (i) white Portland cement [CN 2523 21 00], (ii) mineral or chemical fertilisers containing the three fertilising elements nitrogen, phosphorus, and potassium [CN 3105 20], (iii) tubes and pipes, having circular cross-sections, the external diameter of which exceeds 40.64 cm, of iron or steel [CN 7305], and (iv) aluminium foil [CN 7607]. (We provide a full table with the CN codes that determine which products are covered by the CBAM at the end of this blog post.)
In practice, however, the current wording of the proposal suggests that there is a risk that the CBAM may require including the embedded emissions of goods falling outside the industrial sectors explicitly covered (iron and steel, aluminium, cement, fertilizers ) when assessing the embedded emissions of goods that do fall within the CN Codes listed in the Annex to the proposal. This is because manufacturing the complex goods listed, such as the examples above, will require a number of input materials, some of which may be outside the scope of Annex I. For example, manufacturing aluminium foil may require the use of paper or biocides or other chemicals.
The current legal design of the CBAM Regulation appears to leave open the possibility that the CBAM would indirectly cover sectors and categories of goods not falling within the CN codes of Annex I. The Commission’s proposal does not clearly define the boundaries of the calculation of embedded emissions for complex goods and therefore fails to make clear whether emissions from products in other categories (e.g., paper and biocides) are included in calculating the emissions from a complex good falling with the CN Codes of Annex I (e.g., aluminium foil).
Instead, once the CBAM Regulation is adopted, the proposal foresees that it would be for the European Commission to set the “system boundaries” that would define the exact input materials the embedded emissions of which must be added when calculating the embedded emissions of a complex good covered by the CBAM. In short, only the Commission’s decision on the “system boundaries” would bring legal certainty with respect to the CBAM’s exact scope.
What is more, this indeterminacy of the CBAM’s scope before the Commission has set the “system boundaries” would extend the discussions on the potential impact of the CBAM years beyond the formal adoption of the CBAM Regulation. This could also be a bargaining chip of the European Commission during its international climate change negotiations with third countries.
From an EU domestic law perspective, it is unclear whether the European Parliament and Council may empower the European Commission with such seemingly wide discretion. Setting the “system boundaries” would effectively allow the Commission to determine the categories of goods that the CBAM indirectly covers. Under the Treaty on the Functioning of the European Union, this could well be considered an “essential element” of the CBAM Regulation which goes beyond the powers the Parliament and Council may grant to the Commission. It remains to be seen whether the Parliament and Council will agree with this broad grant of authority when they consider the Commission’s proposal for adoption within the next months.
The uncertainty about the CBAM’s scope goes even further. The Commission’s proposal empowers the Commission to take action in cases of circumvention, i.e., in situations where a change in the pattern of trade has insufficient due cause or economic justification other than avoiding the obligations of the CBAM. For example, if the pattern of trade to the EU from a third country would show a marked decrease in the goods covered by Annex I (such as iron pipes) and a related increase of downstream goods that use the Annex I goods covered by the CBAM as inputs (such as tables using such iron pipes for framing), the Commission may act. Such circumvention related action could, again, extend the CBAM’s scope.
In the Hindustan Times, trade lawyer RV Anuradha has an op-ed entitled "EU’s CBAM, US Carbon Tax undermine international climate and trade laws." What particularly interested me was the description of an alternative focus for climate change mitigation efforts. Whereas the EU and U.S. are emphasizing a shift away from manufacturing that involves high carbon emissions, some people in India are emphasizing reductions to per capita carbon emissions:
The EU plans to start implementation of CBAM in a phased manner from 2023. It runs the risk of derailing hard-won gains of the rules of international climate policy, as well as international trade. India and other developing countries should consider engaging in discussions that seek to address the problems with innovative solutions that have equity, accountability and effectiveness at its core.
Raghuram Rajan’s proposal for a “global carbon incentive” (GCI) is one such innovative solution that merits deeper understanding. Rajan explains that GCI is premised on the principle that every country that emits more than the global average of around five tonnes per capita of CO2, would pay annually into a global incentive fund, with the amount calculated by multiplying the excess emissions per capita by the population and GCI.
He notes for example, that if GCI started at $10 per tonne, the US would pay around $36 billion, and Saudi Arabia would pay $4.6 billion; and that countries below the global per capita average would receive a commensurate payout. For instance, he estimates that Uganda would receive around $2.1 billion. The underlying principle, Rajan explains, is that every country would face an effective loss of $10 per capita for every additional ton that it emits per capita, regardless of whether it started at a high, low, or average level.
So why are the U.S. and EU emphasizing manufacturing, while India is emphasizing per capita emissions? That's easy: They are both highlighting the areas where they are relatively better about carbon emissions. U.S. and EU manufacturing tends to emit less carbon; India has lower per capita carbon emissions.
Which aspect of carbon emissions deserves to be the focus? The answer is probably both. What would be nice is if both sides agreed with that, and went along with the proposals of the other side. What worries me, though, is that both sides will dig in their heels and assert that only the aspect that favors them should be taken up.
Paul Krugman has a new op-ed on carbon tariffs that made sense in parts but puzzled me in other parts. Here is the part that I thought made sense:
... You can think of national policies designed to limit greenhouse gas emissions as ways to induce a country’s residents to take into account the emissions resulting from the production of the goods they consume. This is obviously true if a nation imposes a carbon tax, or a cap-and-trade system, in which businesses must purchase licenses to pollute. It’s also true, although in a harder-to-measure sense, when countries impose regulations like mileage and clean-energy standards.
The point is that many climate-change policies can be seen as a form of tax on domestic consumers. And as with a VAT, both the economics and, I believe, the law (I’m not a trade lawyer, although I think I understand this issue) say that border adjustments, in this case a carbon tariff, are appropriate parts of a climate strategy. That is, if a country lacks an adequate climate policy, the price of goods imported from that country should reflect an estimate of the greenhouse gases emitted during their production.
What might make carbon tariffs slightly trickier than VAT border adjustments is the likelihood that an important part of climate policy will involve regulations rather than a straight carbon tax. In that case, while a carbon tariff remains clearly justifiable as a way to level the playing field for domestic and foreign producers, setting the appropriate level of the tariff won’t be easy — it won’t be as simple as charging the same VAT rate on imports as that imposed on domestic products. A fair bit of estimation and imputation will be involved, and there will no doubt be arguments about the numbers.
That all seems right to me.
The first thing that puzzled me is something that came earlier in the piece:
Yes, protectionism has costs, but these costs are often exaggerated, and they’re trivial compared with the risks of runaway climate change. I mean, the Pacific Northwest — the Pacific Northwest! — has been baking under triple-digit temperatures, and we’re going to worry about the interpretation of Article III of the General Agreement on Tariffs and Trade?
That last link goes to an old IELP blog post related to VATs and the interpretation of GATT Articles II and III. While I appreciate him linking to this blog, I'm not totally sure why he though that particular post was relevant to the point he was making!
The second part that puzzled me was this:
So two cheers for carbon tariffs.
Wait — why only two cheers? Because carbon tariffs affect only goods that are exported and hence are only a partial solution to the problem of countries that don’t do their part in reducing greenhouse gas emissions.
Consider the case of China, which says that it plans to reduce emissions but is still building a large number of coal-fired power plants. If advanced countries impose carbon tariffs, this will give China an incentive to reduce the carbon dioxide emitted in producing its steel exports. But it won’t impose any penalty for carbon emissions from the power plants that supply China’s cities with electricity. And those emissions, which aren’t related to international trade, are almost surely a bigger threat to the environment than emissions associated with exports.
To fully address the problem of international cooperation, then, carbon tariffs that level the playing field wouldn’t be enough. We’d have to go beyond that to the threat of sanctions against nations behaving irresponsibly.
And that would, I’m afraid, be illegal under current trade law, because it would mean intervening in policies that have traditionally been considered purely domestic. Now, given the threat of climate change, our response should be to revise or ignore trade law. But that would be a big step and won’t happen right away.
I don't want to get caught up in the specifics of China in making this point, but broadly speaking when it comes to these things, I feel like there's an instinct among some people to assume that "we" are behaving responsibly, while "they" are not and will never do so on their own. Under this view, the first step towards international cooperation is often to impose sanctions on "them" in order to provide an inducement to adopt specific measures.
As a matter of policy, I think that is often misguided. For one thing, it assumes that "we" are responsible, and I'm not sure that's the case here (certainly not in the past, and not yet in the present). For another, I don't think the opening step should be so confrontational. Others may be willing to go along with a global agreement, if the terms are reasonable. I think it's worth starting with a proposal that includes reasonable terms and seeing how that goes.
As a matter of WTO law, I would say that it's true that unilateral sanctions without evidentiary support probably would lead to a violation of WTO obligations. On the other hand, if you approach an issue such as reducing carbon emissions in a cooperative manner, try to achieve an international agreement, but fail and then decide to work with a few others to impose reasonable costs on those who did not cooperate in good faith, you might have more luck in justifying your actions under one of the GATT exceptions.
This is a guest post by trade lawyer Victor Crochet of Van Bael & Bellis
The European Commission just unveiled its proposal for a carbon border adjustment mechanism (“CBAM”) (available here).
The proposal provides for a new system where importers must purchase CBAM certificates to cover direct and indirect carbon emissions embedded in certain products imported into the European Union (“EU”) (including, steel, iron, cement, fertilisers, aluminium and electricity). Unlike allowances for carbon emissions under the EU’s Emissions Trading System (“ETS”), which are auctioned or freely allocated and subsequently traded between EU producers, CBAM certificates would be purchased from a CBAM authority at a weekly price that is set at the average of the closing prices of auctions of EU ETS allowances. In addition, CBAM certificates cannot be traded. They can only be resold to the CBAM Authority, who can purchase back up to a third of the total yearly CBAM certificates purchased by an importer, or are otherwise cancelled at the end of each year. A reduction in the number of CBAM certificates to be surrendered for imported products corresponding to the carbon price paid in relation to the imported product in the country of origin is also provided for. Importers can thus claim that the amount to be paid under the CBAM be reduced pro rata in accordance with any carbon tax or price paid under an ETS in the country where the goods were manufactured.
Taking into consideration the far-reaching implications of the European Commission’s proposal, there has been quite some discussion on how to implement a carbon border adjustment mechanism that would be WTO-compatible (see here, here or here…). Recently, the European Parliament itself stressed that any CBAM proposal should be WTO-compliant and commissioned a study on how to achieve this (see here).
One element of the current CBAM proposal seems to have escaped scrutiny in these discussions. Most of the WTO-related literature on the issue, which I refer to above, discusses the WTO-compatibility of either a carbon tax collected at the border for imported products or the extension of an ETS to imports (so that importers would have to purchase and surrender ETS allowances at the time of importation). While the idea of pegging CBAM certificate prices to the EU ETS price had been touted by the European Commission (see here), it surprisingly did not attract much scholarly attention. Yet, in my opinion, there is a fundamental flaw in adopting such a pricing mechanism as it imposes a price for carbon emissions onto imports from other countries that is inherently linked to the EU’s own carbon emission levels and decarbonisation commitments.
The CBAM proposal fails to appreciate that the price of ETS allowances under an ETS is set by the market in each country or region, whereby it essentially depends on two factors. The first factor is demand for ETS allowances which is based on how much carbon the industry emits when producing goods (carbon emission per output multiplied by total output). For example, if the industry emits more carbon to produce a ton of steel or produces a greater quantity of steel, it will need more ETS allowances, causing the prices of allowances to increase. The second factor is the supply of ETS allowances (which is set by the authorities on the basis of a country’s target emission reduction). The price of ETS allowances would thus be different in every country even if they shared the same decarbonisation goals.
By creating a hybrid system in which the price of carbon emissions for imports is tied to the EU ETS, the current CBAM proposal fails to take into account the existence of these market-specificities thus discriminating between imported and domestic products. This may stand in the way of the CBAM being justified under Article XX of the GATT as this discrimination cannot be reconciled with the CBAM’s stated policy objective, namely the avoidance of carbon leakage to countries which do not share the EU’s level of climate ambitions.
As discussed above, even between WTO Members with similar climate ambitions, the prices of ETS allowances in their systems could still differ depending on the demand for emission allowances of their industries. However, under the current CBAM proposal, imports from trading partners who share similar climate ambitions and work towards them through their own ETS will still need to pay CBAM certificates to make up for the difference between the price paid in the country of origin and the CBAM price. Hence, the EU will “gold-plate” the value of carbon emissions embedded into products that are imported in the EU as carbon emissions for these imports cannot be valued lower than the carbon emissions under the EU ETS. This seems to indicate that the objective of the measure is not avoiding carbon leakage to countries which do not share the EU’s level of climate ambitions but, rather, that foreign producers do not pay less for their carbon emissions than EU producers.
At the same time, the proposed CBAM would not prevent carbon leakage but merely put a price tag on it hinting that the hybrid pricing mechanism is aimed at levelling the playing field rather than avoiding carbon leakage to countries which do not share the EU’s level of climate ambitions. Indeed, under the current CBAM proposal, there is no cap on how much carbon embedded into products can be imported into the EU. A better option to avoid carbon leakage may have been to extend the EU ETS to imports, as initially envisaged by the European Commission. Under this option, the number of EU ETS allowances would have been increased and imports would have competed with EU products for these allowances. In this way, the total number of EU ETS allowances would have capped the total carbon consumed in the EU (instead of total carbon produced in the EU under the current EU ETS) thus taking away any benefit from moving production abroad.
Taking the above into account, if the European Parliament is true to its word and remains committed to making the CBAM WTO-compatible (see here), it would be wise to rethink the current pricing mechanism for CBAM certificates.
I've complained before about the lack of transparency in bilateral and regional trade agreements, so I appreciate the public virtual session of the Inaugural Meeting of the Environment Committee of the USMCA/CUSMA/T-MEC. And I appreciate our excellent Cato Trade Policy Center RA Alfredo Carrillo Obregon for putting together a transcript of the event, which you can find here.
In addition to prepared statements by government officials, the session also offered the opportunity for the public to ask questions, and some of them were interesting. Here's one about the possibility of bringing the Paris Agreement into the USMCA:
Q: Will the parties act to include the Paris Climate Agreement within the CUSMA, including prioritizing climate obligations over conflicting trade rules in the agreement? Is that something that is being planned at all?
Kelly Milton (USTR)
I would just note that our administration and our agency leadership in particular has really emphasized the fact that the United States is committed to considering a range of trade tools to contribute to our whole of government approach to combat climate change. With respect to this specific question about the Paris Agreement, we are certainly continuing to analyze whether adding the Paris Agreement to the list of multilateral environmental agreements in USMCA would in fact make a positive contribution to addressing the climate crisis.
Doug Forsyth (CAN)
Taking action to protect the environment and combat climate change are top priorities for the Canadian government. To this end, we recently announced a new commitment to enhance our emissions reduction target under the Paris Agreement by 40 to 45% below our 2005 levels, and to do so by 2030. Although, as rightly noted climate change isn't explicitly referenced in the CUSMA, climate change remains a priority for Canada, we will continue to advance trilateral cooperation with our close partners through the ongoing work of the Commission for Environmental Cooperation as well as throughout this chapter to work under this chapter. We also look forward to working with US and Mexico in other fora, such as the WTO, to advance collaboration on trade related climate action.
In some ways, it may seem like a no-brainer for the Biden administration to push for the inclusion of the Paris Agreement in the USMCA list of multilateral environmental agreements. They want to engage on climate change issues, and they want to show the value of the USMCA, for which U.S. Trade Representative Katherine Tai was a key player in the negotiations.
And it may be worth noting that the question was asked in somewhat of a general manner, but the USTR official brought up the specific issue of adding the Paris Agreement to the USMCA list. (See Article 24.8, paras. 4 and 5 for the relevant provisions. For more background, see this post from Risa Schwartz).
However, I can imagine the USTR folks would see a problem with an approach that only makes the Paris Agreement enforceable among three of its parties. Perhaps they would prefer to start with an effort to make the Paris agreement enforceable for all its signatories.
My own view on these sorts of issues is that the best approach is to include an enforcement mechanism in the non-trade agreement itself, rather than making it enforceable through a trade agreement. If governments want the Paris Agreement to be enforceable, they could do that directly in the Paris Agreement. Having trade agreements acts as general global governance agreements is likely to cause controversy (and has done so in the past), and it would be a mistake to go further with such efforts. There may be short term political "wins" from doing this, but in the long term it makes the trade and global governance regimes more fragile.
This is from remarks by U.S. Trade Representative Katherine Tai today on issues related to trade and the environment:
Even as investors take a greater interest in companies’ environmental risk exposure, the multilateral trading system has no rules to address the corporate incentive to participate in the race to the bottom. Rather, the environmental protection measures of WTO members are exposed to challenge.
While countries can avail themselves of what amounts to an affirmative defense, that defense has proven difficult to invoke successfully. This is part of the reason why, today, the WTO is considered by many as an institution that not only has no solutions to offer on environmental concerns, but is part of the problem.
If you are worried about affirmative defenses at the WTO being applied too strictly, I would think necessity tests would be an area of concern. In the past, when I've raised the issue of replacing necessity tests with looser "related to"-style tests, people at USTR have not seemed very receptive. Are Tai's remarks a sign that perhaps USTR is ready to revisit the issue?
Tim Meyer has a good new paper on these issues here, which I'll be blogging about soon.
This is from a Draft Ministerial Decision submitted by the U.S. under the title "Advancing Sustainability Goals through Trade Rules to Level the Playing Field":
Believing that no Member should gain a comparative advantage in trade due to insufficient or unenforced environmental laws, regulations, and standards;
...
Recognizing that the value of a subsidy is not the cost of the subsidy to the granting government but the benefit received by an industrial entity;
Realizing that industries located in certain countries benefit from weak or unenforced environmental laws and regulations by not being required to incur, and properly internalize, the costs of preventing or remediating environmental damage resulting from their production processes;
Recalling that the Agreement on Subsidies and Countervailing Measures (ASCM) permits Members to impose a countervailing duty to offset a government subsidy benefit received by an exporter to ensure that domestic producers should only have to compete with those other firms that are subject to the same competitive market conditions;
Accepting that imposing countervailing measures on subsidies that take the form of weak or unenforced environmental standards would promote stronger environmental standards and enforcement, would encourage the proper internalization of environmental costs into the calculations of production costs, and would correct policies that create transaction-specific market inefficiencies which thereby distort trade;
Decides as follows:
1. The failure of a government to adopt, maintain, implement and effectively enforce laws and regulations that ensure environmental protections at or above a threshold of fundamental standards shall constitute an actionable subsidy under the ASCM.
2. If an industry disproportionately benefits from pollution controls or other environmental measures set below a threshold of fundamental standards, a Member may impose a countervailing duty equal to the benefit received by the industry when the goods from such an industry enter the Member's customs territory.
I have some questions about all this.
First, while developing countries may be the intended target, isn't it likely that these provisions would be used against the U.S.? I don't think of the U.S. as having the highest level of environmental regulation. Wouldn't the Europeans and others make use of this to impose CVDs on U.S. products? I'm thinking of agriculture products in particular. "Environmental protection" and "environmental measures" seem like pretty broad terms, and it seems likely this could be applied to a wide range of U.S. farming practices.
Second, what specific impact would this decision have on the interpretation of the SCM Agreement? Would it override the requirement that there be a financial contribution, benefit, and specificity? That is, if you prove that the conditions in 1 and 2 exist, you can countervail?
And finally, if your goal is sustainability or environmental protection, are tariffs really the way to get there? It seems likely there are more effective approaches.
U.S. Rep. Bill Pascrell, Jr. (D-NJ-09), a member of the tax-writing House Ways and Means Committee and its Subcommittee on Trade, sent a letter to U.S. Commerce Secretary Wilbur Ross calling on him to initiate an investigation into the threat of carbon pollution. The letter was also signed by Reps. Jimmy Gomez (D-CA-34) and Judy Chu (D-CA-27), both members of the Ways and Means Committee.
“We write to request,” the members state, “an investigation into imports of carbon emissions and the threat they pose to U.S. national security. Climate change is an existential emergency that poses grave threats to our security, public health, and economic prosperity.”
The Pentagon has already concluded that climate change poses “immediate risks” to national security. Major peer-reviewed studies have predicted increasing losses to American infrastructure and property, impeding economic growth and GDP over the next century. These impacts are directly caused by carbon dioxide, mostly due to fossil fuels burned for energy. According to NOAA and the American Meteorological Society, global atmospheric carbon dioxide was 405 ppm in 2017, a new record high. Modes of trade and shipping, whether air, maritime, rail or auto transportation, cause carbon emissions that contribute to global warming.
“This threat to our national security must be taken seriously and mitigated using all tools available to us, including trade enforcement. The carbon footprint of trade and shipping of goods been studied in the past. It is conceivable that such carbon pollution could be countered through trade remedies,” the letter continues.
Rep. Pascrell’s letter invokes Section 232 of the Trade Expansion Act of 1962, which authorizes the Secretary of the Department of Commerce to conduct investigations “to determine the effects on [US] national security” of imports of an article. This law allows any “interested party” to request Commerce initiate such an investigation to ascertain the effect of specific imports on the national security of the United States.
“Clearly, carbon dioxide emissions are exacerbated by international trade and imports to the United States. This carbon pollution threatens agricultural markets and infrastructure, among other sectors of our economy, which Commerce should investigate with the urgency and gravity that this emergency warrants,” the letter concludes.
According to the law, once a Section 232 investigation is requested in writing, Commerce must “immediately initiate an appropriate investigation to determine the effects on the national security” of the subject imports. After consulting with the Secretary of Defense, other “appropriate officers of the United States,” and the public, if appropriate, Commerce has 270 days from the initiation date to prepare a report advising the President whether the targeted product is being imported “in certain quantities or under such circumstances” to impair U.S. national security, and to provide recommendations for action or inaction based on the findings.
Rep. Pascrell believes climate change is an existential threat to the world and is dedicated to mustering government attention and resources to countering the effects of climate change. He is a cosponsor of H.Res. 109, the Green New Deal, which sets forth an ambitious framework for combating climate change. The Ways and Means Committee’s Trade Subcommittee, on which Pascrell serves, has oversight of our nation’s trade laws, including the Trade Expansion Act of 1962 that governs Section 232 investigations.
But is there any real chance of success? Note that the Section 232 statute refers to "an appropriate investigation to determine the effects on the national security of imports of the article which is the subject of such request, application, or motion."
I haven't looked up the domestic or international case law, but I think of an “article” as a good or product, i.e., something physical that would be imported through normal customs procedures. Therefore, carbon emissions would not really qualify here, as they are not a physical product that is being imported. They are more like a by-product of production and international trade.
There is room for creative interpretations, but you would need a sympathetic administration to get what you wanted (and the courts would reject an interpretation that went too far). It's a little hard to imagine the Trump administration being creative in the direction of trying to lower carbon emissions.
As Susan Esserman and I pointed out in Foreign Affairs some years back, the WTO dispute settlement system is among the most advanced adjudicative mechanisms yet devised for international law. One of its innovative features is a means by which disagreements over compliance are themselves subject to resolution by the judges. The risk is that this process, stipulated in Article 21.5 of the Dispute Settlement Understanding, may be abused to undermine the finality and certainty of rulings, extending or even expanding the dispute instead of resolving it.
An egregious example of such abuse has been the way in which Mexico has chosen to attack the US dolphin-friendly voluntary labeling scheme in WTO litigation. Mexico’s bad faith conduct began with its very filing of the dispute, in flagrant violation of a choice of forum clause in the NAFTA, which specified that disputes of this nature, involving environmental or scientific facts, must be brought before the NAFTA forum not the WTO (NAFTA Article 2005.4 (a) and (b))
When the dispute finally got the WTO Appellate Body, Mexico lost on almost all fronts, except one narrow issue. The United States changed its scheme to address that one issue, concerning even-handedness of regulatory burden being calibrated to the risk to dolphins in Mexico's Eastern Tropical Pacific (ETP) fishery and other fisheries. Then Mexico decided to abuse the 21.5 process to open up many issues already decided by the AB, and indeed other issues never litigated, basically manipulating the 21.5 process to re-open and reframe the entire dispute. Incredibly, the panel bought it; and even more incredibly, although with some important pushback, the AB has rewarded or condoned such behavior. Now, a sophisticated WTO litigant that doesn’t like the outcome of the original litigation has an option to constantly re-litigate under the guise of the 21.5 process.
One of the key advantages of the WTO adjudicative system, to produce some kind of finality in controversial trade matters, can easily be eroded. Especially by WTO Members who have lots of experience in trade disputes and lots of trade lawyers. At the limit, and fortunately it was the United States on the other end of this dispute and not a capacity-limited Member, the respondent could be forced into settlement in order to obtain some certainty, regardless of the legal merits of its claim. The Appellate Body in its 21.5 ruling found the United States in continuing violation not because of its changes to the original measure, nor because it had failed to amend the original measure in the ways the AB had originally suggested were necessary, but on the basis of features of the original measure unaltered from before the original dispute and un-impugned in the original AB ruling. Almost by good fortune, the finding of violation is so obscure and imprecise that there will certainly have to be a further round of 21.5 proceedings. These should give the AB an opportunity to reconsider the system-threatening features of the decision just rendered. The decision did close some doors to the kind of abuse exemplified by Mexico’s conduct in this dispute; next time round the AB must shut the others. My sense is that the AB was divided in this case, perhaps quite sharply. It would not be difficult to reverse engineer as it were (pardon the slight misuse of that phrase) the AB 21.5 ruling into different opinions, including on the issue of the need to shut the door to abusive relitigation of the original dispute in 21.5 proceedings. (Apparently, the head of the WTO Appellate Body secretariat, Werner Zdouc has a horror of separate opinions-one that seems to outweigh the horror of incoherent unanimous reports) The outcome of the AB 21.5 ruling, a finding of violation that is rather fuzzy and based on abstract comparisons of specific wording in different clauses, without a real world grasp on the meaning for even-handedness as far as effects go, may reflect a very strenuously bargained overlapping consensus, a constructed and arguably artificial compromise.
The Original AB Ruling
Let’s start with what the AB decided in its original ruling. In its report in US-Tuna the Appellate Body 1) reversed findings of the panel that led it to the conclusion that the original measure violated TBT Articles 2.2 and 2.4); 2) reversed findings of the panel that led it to the conclusion that the original measure did not violate TBT Article 2.1; 3) completed the analysis under TBT Article 2.1 and in so doing found that the United States was in violation of Article 2.1; 4) found that the panel’s approach to judicial economy, in not considering Mexico’s GATT claims, violated Article 11 of the DSU, but did not complete the analysis under GATT, because Mexico stated in response to questioning by the division of the Appellate Body that it did not wish the Appellate Body to complete the analysis under GATT if it found a violation of TBT Article 2.1. In sum, the sole inconsistency with the covered agreements found by the Appellate Body was a violation of 2.1, upon completion of the analysis. The nature of this inconsistency was articulated by the Appellate Body in paragraphs 284ff of its Report. The Appellate Body first noted that “The aspect of the measure that causes the detrimental impact on Mexican tuna products is thus the difference in labelling conditions for tuna products containing tuna caught by setting on dolphins in the ETP, on the one hand, and for tuna products containing tuna caught by other fishing methods outside the ETP, on the other hand. The question before us is thus whether the United States has demonstrated that this difference in labelling conditions is a legitimate regulatory distinction, and hence whether the detrimental impact of the measure stems exclusively from such a distinction rather than reflecting discrimination.”(Paragraph 284) The legitimate regulatory distinction invoked by the United States was that the regulatory costs, and costs imposed on the industry, by the labelling conditions in the case of the ETP were not justified in the case of non-ETP tuna because of the considerably lower risk to dolphin mortality of tuna fishing outside the ETP. The Appellate Body found the United States had not discharged its burden of proof with respect to legitimate regulatory distinction, since it had not shown that only through the same kind of costly measures that the US used to address dolphin mortality in the ETP could it tackle the lesser risk of dolphin mortality outside the ETP. In particular, the AB raised the possibility that the US scheme could be “calibrated” to this lesser risk through certification by the ship’s captain, avoiding the expense of independent observers, etc. This notion was not vetted by the AB merely as a random hypothetical: as the AB pointed out, certification by the captain in the case of fisheries other than the ETP was an option already contemplated by the relevant US statute. It is not surprising that the AB came to the conclusion that the United States had not discharged its burden of proof, since the US authorities had not even attempted to use the means already available to them by statute (namely, captain’s certification) to address the outside the ETP risks, means that did not present the kinds of regulatory costs and burdens associated with independent observers in the case of the high-risk ETP tuna fishery.
In sum, it was evident to the Appellate Body that these high regulatory costs and burdens could not persuasively constitute a legitimate regulatory distinction, if there were clear, available alternative means for the United States to calibrate its labeling conditions based upon the relative risks to dolphin mortality posed by different fisheries. Through its 2013 Final Rule the United States adopted these alternative means.
The 21.5 Compliance Panel
The question for the 21.5 panel should have been two-fold: 1) first and foremost, whether the regulatory changes the US made to bring itself into compliance had the result of sufficiently narrowing the difference in labeling conditions between ETP and non-ETP fisheries such that this difference could be considered now to derive exclusively from a legitimate regulatory distinction; 2) whether the original measure was altered such as to give rise to some new, different violation of a provision of a covered agreement. The Appellate Body observed in Softwood Lumber VI (Article 21.5-Canada): “the scope of Article 2.15 proceedings logically must be narrower than the scope of original panel proceedings.” (Paragraph 1708) Further in Canada-Aircraft (Article 21.5-Brazil) the Appellate Body held: “Proceedings under 21.5 do not concern just any measure of a Member of the WTO; rather, Article 21.5 proceedings are limited to those ‘measures taken to comply with the recommendations and rulings of the DSB….in principle, there would be two separate measures: the original measure which gave rise to the recommendations and rulings of the DSB and the ‘measures taken to comply which are-or should be-adopted to implement those recommendations and rulings.”(Paragraphs 1720-1721;emphasis in original). In EC-Bed Linen (Article 21.5 India), the Appellate Body held: “If a claim challenges a measure which is not a ‘measure taken to comply’, that claim cannot properly be raised in Article 21.5 proceedings.” (Paragraph 78: emphasis in original).” Further, in US-Shrimp (Article 2.15 Malaysia), the Appellate Body held that a 21.5 panel may not re-visit the WTO consistency of any aspect of a new measure taken for compliance that a) remains unchanged from the original measure and b) was not found to violate a provision of a covered agreement in the original proceedings. (Paragraphs 89-106) In particular, the Appellate Body emphasized the importance of the finality of the original findings and recommendations adopted by the DSB as a binding settlement of the dispute between the parties, in accordance with Article 17.14 of the DSU. (Paragraph 97)
The 21.5 panel, however, in its report made set of comparisons de novo between situations that were not compared by the Appellate Body in its completion of the analysis under TBT Article 2.1, and made findings of violation of 2.1 based upon these comparisons. That would have been acceptable, if this set of comparisons resulted either from changes to the various categories in the original measure and/or to the requirements applicable to each category, which raised new issues of WTO compliance. The paragraphs of its report where the panel engages in this exercise of de novo comparisons are confusing and at times almost incomprehensible. (Paragraphs 7.249-7.263). Part of the reason for this murkiness could that this adventure of de novo comparisons was undertaken by the panel on its own motion not based on any prior pleadings of Mexico, and indeed was raised for the first time by the panel with the parties in its questions to them.
The AB 21.5 Report
As already noted, there are parts of the AB report that rightly push back on Mexico’s attempt to relitigate the whole dispute under the guise of 21.5 proceedings. At least some AB Members had serious concern that Mexico’s conduct might be seen as an abuse of 21.5. Thus, in paragraph 5.8 the AB underlined: “5.8. In reviewing the WTO-consistency of a measure "taken to comply", compliance panels should be mindful of the principle of prompt settlement of disputes embodied in Article 3.3 of the DSU. Accordingly, compliance proceedings cannot be used "to 're-open' issues decided in substance in the original proceedings." Further, the AB questioned whether the panel’s method of operating in finding new violations concerning the original measure was consistent with its justification that it had jurisdiction under 21.5 due to interlinkages between the original measure and the steps taken to comply: “The Panel had, in discussing its jurisdiction under Article 21.5 of the DSU, emphasized the interlinkages between elements of the amended tuna measure, it subsequently conducted a segmented analysis that isolated consideration of each element of the measure without accounting for the manner in which the elements are interrelated, and without aggregating or synthesizing its analyses or findings relating to those elements before reaching its ultimate conclusions as to the consistency or inconsistency of the amended tuna measure.”(7.2) At least, here the AB recognized that the panel wasn’t limiting itself to examining aspects of the original measure in their interaction with the steps that the US had taken to comply but rather was using this as a pretext to allow Mexico a second kick at the can, simply re-arguing the original measure. A similar recognition is reflected also in the following observations of the AB: It is also surprising that, in this part of its reasoning, the Panel made little reference to the original Appellate Body report in this dispute and did not acknowledge or discuss the concept of "calibration" advanced by the United States, and used by the Appellate Body as a means of testing the even-handedness of the original tuna measure” (Paragraph 7.101).
While saying all this, however, the AB found a way of permitting a second kick at the can, a relitigation of the original measure: aspects of the original measure could be reviewed, even if they were not challenged or decided in the original proceeding, where these aspects of the original measure constitute "an integral part of the measure taken to comply".(Paragraph 5.8) Of course, unless the original measure is completely replaced with a new measure, it is not surprising that aspects of the original measure will interact with the new measure. The real issue for preserving the proper scope of 21.5 proceedings is: does the interaction lead to the aspects of the original measure being in non-conformity with the WTO law in a manner different or more severe than before that interaction? If not then this is a second kick of the can. But here the AB was dealing with the same question of non-conformity of the original aspects of a measure that could and should have been dealt with in the original proceedings.
The AB Finding of Violation
The AB finding of violation (upon completion of the analysis) entirely centers on the issue of the circumstances in which heightened risk to dolphins can trigger the highest level of monitoring and verification in the case of non purse-seine and non-ETP tuna, including the requirement of an observer on every boat. As noted, the lack of calibration that the AB had found in the original report, the sole basis for a violation, was the between the treatment of ETP purse seine fishery tuna and all non-ETP tuna. The reasoning was that Mexico had established there is some dolphin mortality risk in the latter case and therefore one could not justify on the basis of a legitimate regulatory distinction that there would be no real monitoring of dolphin mortality as a requirement for using the dolphin-safe label in the case of non-ETP tuna generally.
In addressing the situations where non-purse seine and non-ETP tuna could trigger the highest level of monitoring and verification, because of some specific identified heightened risk to dolphins, the AB was in fact examining an aspect of the original measure unaffected by the US modification, which introduced an intermediate level of monitoring and verification (captain’s certification) in the case of non-ETP tuna generally. Thus, even if not disingenuous, the AB justification for 21.5 jurisdiction here on the basis of supposed interaction between the modification of the original measure and aspects that remain unchanged is certainly strained. Basically, the new requirement of captain certification of non-ETP generally would in no way change the operation of the provisions where, in the original measure, because of heightened risk to tuna in a specific fishery the highest level of monitoring and inspection could be required. It is not as if, for example, captain’s certification introduced a lower level of monitoring and inspection for non-ETP generally but sacrificing the possibility of the highest level where a specific fishery was shown to present a special heightened risk to dolphins. One would think that pre-existing provisions that allow the imposition of the highest level of monitoring and verification (the level applied to the ETP purse seine fishery) in other cases where comparable high risks to dolphins exist in specific fisheries would reinforce the evenhandedness of the modified measure not undermine it (there is even some language in the AB report to this effect, suggesting some considerable cleavage between AB Members in this dispute). So it is truly difficult to fathom the AB’s reasoning. But let’s try. It has something to do with two turns of phrase that are used in the original US legislative scheme to articulate situations where heightened risk to dolphins may trigger the highest level of scrutiny even in the case of non-ETP and/or non-purse seine fisheries. In the case of purse seine fishing outside the ETP, the determination of “regular and significant association between dolphins and tuna” is what triggers the requirement of independent observer certification. This is B)(i) as set out in the original measure. This provision is based on the recognition that, even though the dolphin-tuna association is already well-established and pervasive in the ETP, such an association could occur elsewhere and thus should trigger comparable intensive monitoring in order to ensure the integrity of the “dolphin-safe” label, given the well-established dangers of using purse seine nets. Now if we turn to the second “determination” provision, which concerns “other fisheries”, this is the one set out in in (D) of the original measure. Here the trigger for independent observer certification is indeed different: “regular and significant mortality or serious injury to dolphins.”
According to the AB, “The determination provision applicable to the non-ETP purse-seine fishery allows for the addition of a requirement for observer certification if there is a determination of "regular and significant association", but not for a determination of "regular and significant mortality or serious injury". In our view, this is difficult to reconcile with the fact that such an observer certification is required in the ETP large purse-seine fishery, and that such a determination, on the basis of "regular and significant mortality or serious injury", can be made pursuant to the other relevant determination provision, which is applicable to "all other fisheries." (Paragraph 7.258)
Now it will immediately observed that the conditions of competition affected by the differences in wording here, if there is any effect, would be between non-ETP purse seine tuna and other non- ETP tuna. In other words, the relative treatment at issue does not affect the treatment of Mexican purse seine ETP tuna.
Why the different language? In the case of non-ETP purse seine tuna, regular and significant association with dolphins, combined with the use of purse seine technology, raises a robust presumption that there will be significant dolphin mortality. In other words, the presence of these two risk factors together leads to a common sense judgment that regular and significant mortality in likely to occur and thus the highest level of monitoring and verification is necessary.
The AB seems to think that there could be situations in the non-ETP purse seine fishery where there could be regular and significant mortality or serious injury to dolphins other than those that result from regular and significant association. Now this is of course entirely hypothetical on the AB theory. On that theory, there would only be a violation in situations where in the case of non-ETP purse seine tuna the highest level of monitoring and verification was not imposed regardless of there being regular and significant mortality to dolphins, i.e. merely because the “association” requirement had not been met. Even if one abstracts from the error of seeing this finding as within 21.5 jurisdiction (it concerns comparisons in the original measure unaffected by the US compliance steps), and also ignores the error of regarding the difference as affecting the conditions of competition with the Mexican purse seine industry while it could only affect the conditions of competition between non-ETP purse seine and other non-ETP tuna, it would be hard to find an “as such” violation here because there is no necessity based on the provisions themselves that certification distinctions would ever result in any modification of the conditions of competition. This would only happen if the regulator, in the case of non-ETP purse seine tuna, exercised its discretion not to impose the highest level of monitoring and verification in a situation where the existence of regular and significant mortality to dolphins could nevertheless be shown—i.e. simply because the “association” requirement was not met. It is unclear empirically that purse seine tuna fishing outside the ETP would ever pose a regular and significant risk to dolphins in instances where there is a lack of tuna-dolphin association. So, in other words, it is speculative whether the difference in the provisions could ever modify conditions of competition (even assuming the misguided view of the AB as to what conditions of competition we are dealing with); this would depend on the exercise of discretion against the highest level of monitoring and verification in a situation that might never arise-where there was serious and regular dolphin mortality in a non-ETP purse seine fishery without tuna-dolphin "association" existing . In sum, there is no “as such” violation because the mere wording of the provisions would not compel or create a serious risk of discretion being exercised so as to allow laxer monitoring and enforcement in a situation where regular and significant dolphin mortality or injury actually exists.
The above is an attempt to engage with what the AB was saying. But the reasoning is so confused and twisted that one cannot be sure of what they actually had in their heads in thinking of the difference in operation of the “association” and “mortality” conditions. For example, they say at 7.260: “we do not find persuasive the United States' argument that there is no basis for imposing an observer requirement in the absence of evidence that a purse-seine fishery exists where there is regular and significant mortality without tuna-dolphin association also being present.” (emphasis added) Yet, as just noted it is precisely in the case of “other” e.g. non-purse seine non-ETP fisheries, that there is a requirement of “mortality” but without that of “association”. The AB seems to have thought, contrary to what the law says, that the highest level of monitoring and verification was being imposed in the case of non-purse seine, non-ETP tuna only where both "association" and "mortality" were established.
What Is To Be Done?
What recourse is there against a ruling that is so confused and wrong-headed, and with negative systemic implications, opening the door (seemingly narrowly but actually pretty widely when you see how loosely the AB uses the concept of interlinkage) to misuse of the 21.5 process to relitigate the original dispute? One option, invoking the ghost of Hudec, is “civil disobedience”-simply not implement the decision given its gross illegitimacy, and accept the possibility of retaliation by Mexico. This might make sense in the circumstances, as the entire premise of the WTO dispute settlement authorities’ jurisdiction was Mexico’s internationally wrongful act of violating the forum selection clause in NAFTA. In turn, the US could continue to pursue a NAFTA claim against Mexico for its violation of NAFTA. This would result in US retaliation against Mexico that would fully match WTO countermeasures by Mexico. There is a possibility, Simon Lester raised this in a recent exchange of ours, that Mexico is blocking a panel to hear that claim. If that is the case then perhaps the US would be justified in taking countermeasures against Mexico under general international law for its violation of NAFTA and lack of good faith in implementing NAFTA’s dispute settlement procedures. It will be recalled that in the Soft Drinks dispute Mexico claimed that its own countermeasures against the US for blocking a NAFTA panel could be justified under GATT Article XX (d): that claim failed. But the AB in that case never addressed whether the GATT/DSU is a lex specialis that completely displaces the operation of the ILC Articles of State Responsibility with respect to countermeasures, especially to the extent that they reflect custom. Arguably, there are no provisions of the GATT or the DSU that purport to contract out explicitly of the right to take non-forcible proportional countermeasures against an un-remedied international wrongful act. Thus, again arguably, WTO Members have reserved the right to take countermeasures in the form of trade restrictions that, but for this right under custom, would be internationally wrongful as violations of WTO rules.
But there is a less unconventional course of action, which might permit the AB to reconsider some of its misadventures in this ruling. There could be a rule-making change or indeed merely an interpretative statement, that the regulator shall not in exercising discretion in the application of the determination provisions, make any determination that would result in a situation where the monitoring and verification requirements are uncalibrated to the level of risk of dolphin mortality and injury, as objectively determined. Further it is understood that the requirement of an independent observer where there is tuna-dolphin association in the case of non-ETP purse seine fisheries is intended, in its effect, to ensure that there is an independent observer in situations of heightened risks of dolphin mortality and injury of the kind that are known to exist in the case of the ETP fishery. The discretion of the regulator shall be exercised accordingly.
This approach to implementation will remind some readers of this blog of the solution in the Section 301 dispute. There was concern that the US law on its face would lead to serious risk of the exercise of discretion in a manner that violates WTO rules. The panel accepted a statement by the US in the litigation process that the law would not be interpreted and applied so as to lead to a violation of the WTO norms at issue. This satisfied the panel that there was no “as such” violation. It will almost certainly to Mexico bringing further 21.5 proceedings, and thus to a possible self-correction by the AB of its most ill-considered ruling.
Both Professor Howse and Simon raised an important issue in the China-Rare Earths panel report, whose full ramifications, I believe, would go beyond this particular dispute. To me, the panel’s ostensibly nebulous position on GATT Article XX denotes hermeneutical birth pangs for the “Trade Constitution 2.0.” What I mean by trade constitution is a certain legal-institutional mechanism that reconciles trade and societal (such as environmental) values, as most national or regional constitutions do. (Think of the ECJ’s Dassonville/Cassis de Dijon/Keck and the U.S. Supreme Court’s Dean Milk/Taylor etc.)
Under the Trade Constitution 1.0, the GATT jurisprudence suffered from the so-called “pro-trade” bias derived structurally from the dichotomy (the textual separation of general obligations, such as GATT Article III, and exceptions, such as Article XX). Thai Cigarettes is a case in point. The WTO attempts to overcome this pro-trade bias and embrace the “(sovereign) right to regulate” in various ways, including the new teleology (“sustainable development” and “an integrated, more viable and durable multilateral trading system”), the new side agreements (such as TBT/SPS) that eliminated the GATT-style dichotomy and explicitly stipulate the right to regulate, and some innovative interpretation securing regulatory autonomy while still taking into account negative trade impacts (the chapeau test in Gasoline and Turtle). So, there emerges the Trade Constitution 2.0.
Then, the birth pangs come from the residual influences from the old relics. Even under the Trade Constitution 2.0, the WTO tribunals might not be completely free from the old interpretive habits. In fact, many old languages in the GATT and GATT panel reports were copied and pasted in the new WTO agreements, such as the SPS/TBT. Of course, the WTO tribunal may recycle the old interpretation on the same language to some extent. The problem is that some interpretive confusion tends to inevitably arise in the course of the WTO’s attempts in rationalizing recycled interpretations (from the Trade Constitution 1.) within the new context of the Trade Constitution 2.0). Hence, the interpretive birth pangs, as seen in the recent TBT jurisprudence as well as here in the China – Rare Earths panel report (as Simon aptly observed in his post.)
The Appellate Body, more than panels, should take note of the structural difference between the Trade Constitution 1.0 and the Trade Constitution 2.0. My own prediction is that the AB’s hermeneutics on the Trade Constitution 2.0 would crystalize into the “evenhandedness” test along the line of a series of recent TBT-related case law. This is the same interpretive pathway that one could observe in the similar jurisprudence in the ECJ and the U.S. Supreme Court. To that extent, we can say “convergence” of trade constitutions.
The Trade Constitution 2.0, i.e., the non-existence of dichotomy, sheds critical light on every nook and corner of the WTO system, including the TRIPS and the China Accession Protocol. As future trade disputes concern more about non-tariff barriers of all sorts, the WTO tribunal will embrace the Trade Constitution 2.0 more often. More interpretive energy will be spent on issue of “how” a measure was applied, rather than “what” the measure was all about. In other words, it would become increasingly difficult for the WTO tribunal to second-guess the legitimacy of the measure in question, as the Thai Cigarettes panel did a long time ago. Instead, the AB is likely to focus more on procedural aspects of the measure, such as consistency (evenhandedness) and due process etc.
Can GATT Article XX be invoked to justify emissions trading schemes that violate the SCM Agreement? This is from Ingrid Jegou and Luca Rubini in an ICTSD issues paper:
Four aspects should be noted regarding the SCM Agreement. First, as noted above, this instrument is directly connected to the GATT by ‘increasing and improving’ the disciplines of both Articles VI and XVI of GATT dealing with subsidies and countervailing measures. This should be set in the context of the fact that the WTO is a single undertaking and its provisions are part of an ‘integrated’ legal system. Second, there is no language in the SCM Agreement (or elsewhere) directly interfering with the application of Article XX of the GATT to subsidies. Third, as a general matter of interpretation, there is no need for an express reference to give way to the application of a provision, particularly if this has a general nature. Fourth and finally, there are no indications in the negotiating history of the SCM Agreement that Article XX of the GATT should not apply.
Up to the end of 1999 there were specific provisions (Articles 8 and 9 of the SCM Agreement) recognizing that certain subsidies, including certain environmental subsidies, were overall beneficial and hence were non-actionable as well as sheltered from countervailing duty action. The absence of an extension of these rules could be seen as a decision that exceptions should not exist under the SCM Agreement. However, one could equally argue that, with the expiry of this provisional category of subsidies, only the special discipline of exceptions of the SCM Agreement has disappeared, giving way to the applicability of the general exceptions of the GATT. The crux of this argument is that the general exceptions of the GATT should apply to rules that, as seen, find their origin within the GATT itself.
Another argument can be advanced. This counters the narrow scope of Article 8 of the SCM Agreement with respect to the environment. It could be contended that, even when Article 8 was in force, there was not really a common purpose and subject matter between the broad ‘environmental exceptions’ of Article XX and the confined remit of Article 8, with the result that Article XX could in principle have applied to subsidies not specifically permissible under the SCM Agreement. In other words, while it is clear that the SCM Agreement develops Articles VI and XVI of the GATT, it is not fully clear that Article 8 of the SCM Agreement was developing Article XX of the GATT in the context of subsidy discipline.
Whatever the merit of this argument, the expiry of Article 8 reinforces the legal and policy argument in favour of applying Article XX of the GATT to subsidies that are clearly contributing to tackling climate change. As noted above, the confirmation of the applicability of GATT Article XX to other WTO agreements via a judicial route may be politically troublesome; however, paired with the slow progression of negotiations in climate and trade, it may constitute the only alternative to tackle an undesirable lacuna in the system. The urgency of action is confirmed by recent developments in litigation.
7.551 We now turn to analyse the second step in China's argument about the long-term benefits of export restrictions on EPR products, namely that there is a strong link between higher growth and environmental benefits. China argues that "[e]conomic growth, if supported by the adequate regulatory framework, can then be translated into long-term environmental protection". China argues that this relationship is supported by the empirical evidence of the so-called "Environmental Kuznets Curve" (EKC). This is an empirical correlation between income per capita and environmental degradation whereby, while at relatively low levels of income pollution increases with income, beyond a certain income level, pollution declines. Reasons for this relationship are hypothesized to include income-driven changes in: (i) the composition of production and/or consumption that moves away from natural resources goods; (ii) the preference for environmental quality; (iii) the development of institutions introducing the proper regulatory measures to address environmental problems; and/or (iv) the arising economies of scale associated with pollution abatement technologies.
7.552 Parties agree that in general the EKC does not imply a causal relationship from economic growth to environmental quality. A higher level of wealth can strengthen public demand for a cleaner environment, but unless the government responds with policies that enhance environmental protection, the improvements are unlikely to come. China argues that, even if this is not done automatically, higher levels of income make the link between economic development and environmental protection more likely, and China contends that it has provided evidence of an EKC in China for some of the pollutants at issue in this dispute.
7.553 For the Panel, even if growth makes environmental protection statistically more likely, this does not prove that export restrictions are necessary for environmental gains. For example, to the extent that a higher income per capita generates citizens' preferences for a better quality of environment, income redistribution policies may serve the environmental objective just as well as it is claimed that export restrictions do.
Here's more on the idea of an Environmental Kuznets curve:
Pollution often appears first to worsen and later to improve as countries’ incomes grow. Because of its resemblance to the pattern of inequality and income described by Simon Kuznets, this pattern of pollution and income has been labelled an ‘environmental Kuznets curve’. While many pollutants exhibit this pattern, peak pollution levels occur at different income levels for different pollutants, countries and time periods. This link between income and pollution cannot be interpreted causally, and is consistent with either efficient or inefficient growth paths. The evidence does, however, refute the claim that environmental degradation is an inevitable consequence of economic growth.
Does economic growth eventually lead countries to promote a cleaner environment? If so, should this be considered as a factor in relation to defenses to WTO violations? What are the implications if it were considered?
Marine life has played an important role in GATT/WTO dispute settlement. Here's an argument for bringing sharks into the mix:
Oceana, the largest international advocacy group working solely to protect the world’s oceans, called on the United States government today to ban the import of shark products, including fins, cartilage and meat, from countries with insufficient shark protections. Specifically, the group is urging the U.S. to use its power under the Shark Conservation Act of 2010 to take action against countries with weaker shark conservation measures, including China, Japan and Indonesia.
In a letter to the National Marine Fisheries Service, Oceana identified 15 countries that; 1) catch sharks in international waters; 2) exported shark products to the U.S. in 2011; and 3) have weaker shark protection measures than the U.S. The list includes: Australia, Brazil, Canada, China, Chinese Taipei, Costa Rica, Hong Kong Special Administrative Region, Indonesia, Japan, South Korea, Mexico, New Zealand, Panama, Peru and Spain.
“Although shark finning is banned in the U.S., we import fins from countries with little or no protection for sharks,” said Rebecca Greenberg, marine scientist at Oceana. “By taking action against countries like these, the U.S. can help reduce the demand that leads to shark finning – encouraging improved shark conservation worldwide.”
This seems like it would be a particularly contentious trade measure, as it would be one that tries to coerce other countries to follow U.S. policies.
Parties to the United Nations Framework Convention on Climate Change (UNFCCC) have been engaged in discussions on the future of the climate change regime. While the principle of “common but differentiated responsibilities” has so far played a central role in defining rights and responsibilities of countries, there has been increasing demand from the developed countries that both developed and developing countries would need to undertake commitments to address the problem.
Pending the conclusion of a legally binding international agreement to address commitments post-2012 (when the current commitment period under the Kyoto Protocol to the UNFCCC ends), discussions in the EU and the US indicate the possibility that provisions relating to unilateral trade measures may be considered on imports from countries that do not have comparable greenhouse gas reduction norms. It is important to bear in view that the UNFCCC itself envisages the possibility of unilateral measures, though it is silent on the actual triggers that would justify implementing such measures.
Any unilateral trade action would have serious implications for the balance of rights and obligations that a multilateral agreement on climate change may hope to achieve. This could however be avoided if countries are able to achieve clarity on the conditions that need to be met prior to the exercise of any unilateral trade measures under the UNFCCC framework. This paper deals with the issue of the possible ways in which this issue may be addressed.
And here's an excerpt:
It is clear that any unilateral trade measure taken on the pretext of climate change concerns, is likely to be challenged at the WTO as violating the basic principles of the GATT, and perhaps other WTO Agreements such as the Agreement on Technical Barriers to Trade. The design and actual implementation of such measures will, to a large extent, determine the ultimate assessment of WTO consistency of such measures. Nevertheless, preliminary examination of the basic principles against which such measures are likely to be tested reveal that such a dispute will throw up a range of new conceptual issues and challenges for the WTO dispute settlement mechanism. There are arguments possible both for and against such measures, including those regarding the possible justification of such measures as an exception to principles under GATT, especially when there is a state of disagreement on the multilateral framework. Any such dispute is also likely to consider the provisions of the UNFCCC and developments under the UNFCCC
Tar sands oil production has been a big deal in the EU-Canada FTA negotiations. This AP story has me thinking that NAFTA might be dragged in to this issue:
Beneath the lush, green hills of eastern Utah's Uinta Basin, where elk, bear and bison outnumber people, the soil is saturated with a sticky tar that may soon provide a new domestic source of petroleum for the United States. It would be a first-of-its kind project in the country that some fear could be a slippery slope toward widespread wilderness destruction.
With crude prices surging beyond $100 a barrel, and politicians preaching the need to reduce America's reliance on foreign supplies, companies are now looking for more local sources. One Canadian firm says it's found it in the tar sands of Utah's Book Cliffs.
Alberta-based Earth Energy Resources Inc. aims to start with a roughly 62-acre mine here to produce bitumen, a tar-like form of petroleum, from oil-soaked sands. For decades, other Utah operators have used oil sands as a poor-man's asphalt, and Canada has been wringing oil from the ground for years, but nobody has yet tried to produce petroleum from U.S. soil on such a scale.
And it could be just the beginning. The company has over 7,800 acres of Utah state land under lease, with plans to acquire more, and estimates its current holdings contain more than 250 million barrels of recoverable oil.
"This is not just a 62-acre project that will last seven years. We are looking at a 30,000-acre project that will destroy the environment in this area over many years," said John Weisheit, a Colorado River guide and founder of the Moab, Utah-based environmental group Living Rivers.
Weisheit worries that shortsightedness and the rush to feed America's insatiable appetite for oil could trump reason at the expense of other precious natural resources.
The Bureau of Land Management says Utah has an estimated 12 to 19 billion barrels of oil buried in its tar sands, mostly in the eastern part of the state, though not all of that would be accessible.
Weisheit says if Earth Energy is allowed to mine the land, he fears others may not be far behind.
"We used hear that it's not lucrative to extract oil from tar sands unless oil prices were above $60 barrel," he said. "But now that prices have risen, we're definitely seeing companies take advantage of the situation."
Living Rivers is challenging this project's approval and contends it would dig up fragile topsoil, destroy limestone plateaus formed over thousands of years and pollute groundwater downstream that flows into the Colorado River. The group claims the Utah Division of Water Quality didn't accurately assess the potential for widespread environmental damage from the PR Springs mine. A hearing is set for May 25.
So you have a Canadian company investing in tar sands oil production in the U.S., and local environmental groups trying to prevent this. I think I can hear the NAFTA Chapter 11 briefs being written already.
From an article (subscription only) describing the Columbia panel discussion mentioned here:
China could plead environmental necessity to win a dispute over its wind industry subsidies, a case now moving through the World Trade Organization, one legal expert suggests.
Provisions under Chinese law mandating that nearly all wind power equipment be purchased from China for projects to be eligible for state financial support are facing a WTO challenge by the United States.
The domestic content requirement that helped China build a wind industry at the expense of foreign firms does, on the face of it, seem to violate WTO rules against such protectionist measures, experts say. But the WTO panel and appellate body have explicitly shown in the past that they will allow exceptions for environmental protection.
And if Beijing could convince the trade body that the domestic content requirement is necessary to help curb global climate change, the WTO board may toss out the U.S. complaint, said Robert Howse, an international law professor at New York University and an expert on international trade law.
"I think in China's case in particular, there might be a plausible argument, which is that China's demand for clean energy is so enormous that it would be irresponsible for China not to take measures to ensure it has an adequate domestic industry in this area," Howse said.
The law professor admitted that his judgment is speculative at best -- China hasn't yet publicly stated what its defense of the foreign product block is. But given the rules in the various international treaties the WTO governs that allow for exceptional state support for efforts on environmental problems, China's trade negotiators may be looking for loopholes among those provisions, he said.
...
Howse acknowledges that the facts of the case as known so far don't lend credence to this argument. "I think it's fair to say that under the subsidies agreement, there's a reasonable prima facie case that China will have violated that agreement," he said.
However, he argued the Chinese authorities may be able to keep the support for domestic manufacturers in place and continue to block imports of wind equipment from the United States and Europe if they can prove there's a compelling environmental reason for the subsidies.
It would amount to China proving that the climate change problem is so huge that it requires the country to develop a complete domestic wind industry supply chain that doesn't have to rely on foreign inputs to tackle rapidly growing greenhouse gas emissions rates.
"China has good grounds, environmental grounds, for wanting to ensure its security of a domestic supply of alternative energy technologies in the future," said Howse.
The argument seems to be that in order to achieve a particular policy goal (i.e., environmental protection), there needs to be domestic production of the product at issue (wind power equipment). Therefore, protectionist measures which encourage that domestic production are justified.
I've often wondered how this kind of argument would do. Can it ever be the case that protectionism used to develop domestic production would be considered "necessary" to protect human, animal or plant life or health under GATT Article XX(b), or "related to" the conservation of exhaustible natural resources under Article XX(g)? And if it were, would this be "arbitrary or unjustifiable" discrimination under the Article XX chapeau? Are the circumstances Rob describes (the size of the climate change problem) sufficient to satisfy Article XX?
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