International Economic Law and Policy Blog

Brookings Event on Climate Change, Trade and Competitiveness

The conference is over, but the papers are up on the Brookings web site: http://www.brookings.edu/events/2008/0609_climate_trade.aspx

Here's a brief summary:

On June 9, 2008, Brookings convened more than 70 stakeholders for a conference on “Climate Change, Trade and Competitiveness.” The conference was led by Lael Brainard, Vice President and Director of Brookings Global, and focused on how climate change presents a new set of challenges for the world trading system.

Participants discussed potential conflicts that may arise as some wealthy nations begin to adopt carbon pricing regimes while others resist any policies that might limit their growth. Additionally, as the leakage of carbon emissions and the resulting shift of production across borders have attracted the attention of policymakers, participants debated potential policy solutions and their affect on economic competitiveness and the environment.

Conference papers cover a number of related issues, including: governance of climate change and trade issues, potential economic and environmental effects of border adjustments for carbon taxes, technology transfer and climate change, international trade law and options for addressing leakage/competitiveness issues.

Fine-Tuning the Discrimination Against Foreign Ethanol

From a press release related to a Senate bill to reduce ethanol tariffs:

U.S. Senator Judd Gregg (R-NH) today introduced a bipartisan measure with Senator Dianne Feinstein (D-CA) to reduce the tariff on imported ethanol. If passed, the legislation would allow U.S. refiners to purchase cheaper and more climate-friendly ethanol from foreign sources, which could then help lower gas prices.

...

The Ethanol Subsidy and Import Tariff

• The ethanol industry currently receives a 51-cent per gallon subsidy to help increase production and consumption of ethanol.
• This subsidy is applied to both domestic and foreign ethanol.
• In order to prevent foreign ethanol producers from benefiting from the subsidy, an import tariff of 54-cents per gallon was established to essentially offset the subsidy.

Ethanol Subsidies in the Farm Bill 

• The Farm Bill reduces subsidies to the ethanol industry from 51-cents per gallon to 45-cents per gallon. 
• Yet, it leaves the tariff on the importation of cleaner, greener imported sugar-based ethanol at 54-cents per gallon.
• So this tilts the playing field in favor of the heavily subsided domestic corn-based ethanol. 

What does the Feinstein-Gregg bill do?

• Mandate that the tariff on imported ethanol could not be set higher than the subsidy.
• In effect, the legislation would lower the tariff on imported sugar-based ethanol from Brazil to 45-cents per gallon – the same as the ethanol subsidy.
• This would ensure that foreign ethanol neither benefits from the ethanol subsidy, nor is penalized by a 9-cent barrier to trade.

What would this accomplish?

• This would help make it more affordable for U.S. refiners to purchase imported ethanol – and in turn help lower prices at the pump.

So if I understand this all correctly, we (the U.S., that is) had this subsidy for the use of ethanol, which helped both domestic and foreign ethanol producers by encouraging the use of ethanol.  To eliminate the benefit to foreign producers, we put a tariff on foreign ethanol in an amount that was just about that of the subsidy, with the result that the subsidy would help domestic producers at the expense of foreign ones.  But now that the latest farm bill has lowered the ethanol subsidy, the tariff exceeds the subsidy by more than it used to, and thus foreign ethanol producers are punished by the tariff to a greater degree than they had been before.  This bill seeks to eliminate that extra harm, and bring us closer to the original situation.

Basically, the bill's authors want to make sure we get the exact right amount of discrimination against foreigner ethanol producers.  Not too much, not too little.

My understanding -- and someone please correct me if I'm wrong -- is that the subsidy is paid to refiners, who blend ethanol with gasoline and are required to use a certain amount of ethanol.  I may be missing something here, but couldn't we simplify all of this by giving the subsidy directly to the domestic ethanol producers?  Then those ethanol producers could reduce their prices by the amount of the subsidy, to achieve the same effect, with only domestic producers benefitting.  Not that I'm recommending this as a matter of policy.  It just seems simpler than the subsidy/tariff combination.   The only reason I can think of for not doing it this way is that perhaps there is a fear that the refiners won't use the ethanol even with the subsidy, so those writing the laws feel they need a mandate to use ethanol combined with a subsidy directly to the refiners.

Lamy on Unilateral Trade Measures

In a recent speech to the European Parliament, WTO DG Pascal Lamy had this to say in the context of efforts to fight climate change:

Many of those advocating a “go-it-alone” approach draw on WTO jurisprudence, in particular on the Shrimp-Turtle reports from the WTO Appellate Body to argue that the WTO has finally opened the door to unilateral action. First, allow me to point out that, as important as the Shrimp-Turtle Case may be, it dealt only with shrimps and turtles. And by this, I do not mean to belittle either shrimps or turtles - do not misunderstand me! What I am simply saying is that climate change mitigation measures, of the sort that some are now advocating, would be likely to affect a whole range of different economic sectors, like the entirety of the aluminium and steel sector for instance. They would have an entirely different economic reach.

Second, the Shrimp-Turtle Case, has set several conditions which would need to be respected for unilateral measures to be green-lighted. Such as, for instance, that all efforts first be made to achieve an consensual multilateral accord. In addition, many thorny questions — both economic and legal - would have to be tackled in whatever go-it-alone legislation emerges, to make it WTO-proof. Questions such as how you calculate the greenhouse gas emissions of others, how you would compare them to your own, and how you would build “flexibility” into your system to accommodate the specificities of other trading partners would all be part of the uphill climb. So you should be under no illusions that this is somehow an easy approach.

I agree completely that such an approach will not be easy.  However, I do think that, at least in theory, it is possible to draft a law involving unilateral measures to limit greenhouse gases in a way that satisfies WTO rules.  In practice, though, whether such a measure could come out of the always messy legislative process is more difficult to say.  Finally, with regard to Shrimp-Turtle, if I were writing the legislation I'd try hard to make sure it does not violate GATT Articles III/XI, so what we might not even have to get to Article XX.

Protectionism and Wind Power

From a WSJ blog:

We’ve noted before how China’s headlong push into wind power could put pressure on the rest of the global wind industry. Chinese turbines need the same scarce components as the turbines being built and installed in Europe, India, and the U.S.

Now that pressure’s rising, China is raising tariffs on imported wind turbines and slashing tariffs on imports of turbine parts—all part of a campaign to jumpstart China’s domestic wind-turbine manufacturing industry.

Xinhua reports today that China will refund value-added tax and slash tariffs on wind-turbine components imported to feed the country’s burgeoning domestic wind-turbine-manufacturing industry. That will give Chinese turbine makers a freer hand to bid for many of the thousands of tiny components that make up turbines, even as supply-chain bottlenecks for many of those components persist around the world.

And starting May 1, the government will scrap the tax holiday for imports of most wind turbines (those under 2.5 megawatts). That will make it more expensive for big turbine makers like Vestas of Denmark and Suzlon of India to sell their wares in China.

Should tariff protection ("raising tariffs on imported wind turbines") and subsidies ("refund value-added tax ... on wind-turbine components") be used to promote clean technologies?   More competition in this industry is probably good, so as to bring down prices.  But trade disputes based on perceived violations of WTO rules might not be for the best.

Obama and McCain on Cap-and-Trade

Via Peter Gallagher, I came across the following from Obama adviser Jason Grumet:

To be unequivocally clear, Sen. Obama believes that the United States must and will act to put a mandatory limit on our domestic greenhouse-gas emissions. That is a predicate for us leading the world to enact a truly equitable and global program in which China and India and Brazil and all the major emitting countries also put legal limits on their emissions. The story of this country has not been waiting to be led by others to address global challenges.

...

Ultimately the solution to global climate change is going to be mediated through the lens of global trade. Sen. Obama has been supportive of mechanisms that have the U.S. take a first step, and if after a period of years other nations are not acting in what is deemed to be a commensurate responsible manner, look to our trade laws to try to ensure that there's no inequity or competitive disadvantage imposed on U.S. businesses. The idea that was initiated by the International Brotherhood of Electrical Workers, in which importers of energy-intensive products would be required to purchase permits for the carbon embedded in those products -- the details need to be fleshed out, but that seems to be a reasonable approach to level the playing field, if we get there.

But Sen. Obama also has faith in the intellect of others. While he believes the United States has a vital role to play in leading this discussion, he does not believe we are going to have to bludgeon other countries into appreciating their own self-interest. Climate change is a real problem. The Chinese are going to suffer the impacts of it much more harshly and immediately than we will. The Chinese and the Brazilians and the Mexican government and others read the same scientific reports as we do. They recognize that the exacerbating cycles of flood and drought will be devastating for countries trying to support billions of people on smaller amounts of arable land, who don't have the same kind of water-handling and -treatment systems. It is the wealthy nations who are in many ways the most hedged and capable of adapting early on.

Here's how I interpret Obama's views based on these statements.   As President, Obama would first take action to limit U.S. carbon emissions through a cap-and-trade program.  Then, he would try hard for an international agreement on the issue, with the goal of including the developing countries which so far have been reluctant to sign on.  But if it becomes clear that some countries cannot be brought into an international agreement, he is willing to act unilaterally to impose equivalent burdens on imports from these countries.

As for McCain, here's something from his recent speech on climate change:

If the efforts to negotiate an international solution that includes China and India do not succeed, we still have an obligation to act.

In my approach to global climate-control efforts, we will apply the principle of equal treatment. We will apply the same environmental standards to industries in China, India, and elsewhere that we apply to our own industries. And if industrializing countries seek an economic advantage by evading those standards, I would work with the European Union and other like-minded governments that plan to address the global warming problem to develop a cost equalization mechanism to apply to those countries that decline to enact a similar cap.

This wasn't quite as specific, but that's to be expected given that it was the candidate's own speech rather than a Q & A with an adviser, as with Obama.  Nonetheless, it seems that McCain's views are similar to Obama's:  International rules are preferred, but we will act unilaterally, if necessary, to impose similar burdens on countries that do not act.

Of course, within those broad principles, there is a lot of room for disagreement, both on cap-and-trade generally and the international trade component specifically.  No doubt these disagreements will get fleshed out a bit more in the coming months.

(Notice that I've created an Obama vs. McCain '08 category for this post.  I may be jumping the gun a bit here, but this matchup has begun to look inevitable.)

Biodiesel Tit-for-Tat

From the EU:

In a move which could trigger a new transatlantic trade row, the European Biodiesel Board (EBB) said it was formally requsting the EU's executive Commission to hit U.S. imports with anti-dumping and anti-subsidy duties due to unfair subsidies.

"Since 2007, as a result of these measures, there has been a dramatic surge in U.S. biodiesel exports to the EU, thus creating a severe injury to the EU biodiesel industry," the EBB said in a statement.

...

The European industry has long complained that U.S. subisidies for "B99" biodiesel, which is blended with small amounts of mineral diesel, break World Trade Organisation rules.

And right back at you from the U.S.:

"It is hypocritical for the European Biodiesel Board to cry foul while they benefit from a blatant trade barrier," said Manning Feraci, vice president of federal affairs at the National Biodiesel Board.

He said EU biodiesel fuel specifications were discriminatory and inconsistent with WTO rules.

"Our industry will be asking the U.S. Trade Representative to take action where appropriate on this and any other EU member state biofuel policy that is meant to confer special protection or treatment to European biodiesel producers," he said.

Trade in Water

From an editorial in the Toronto Star:

As aquifers and rivers in the United States run dry, there seems little doubt that the Americans will be turning their thirsty eyes north toward our seemingly plentiful water supply. Indeed, no less an authority than former Alberta premier Peter Lougheed has predicted: "The United States will be coming after our water in three to five years."

But isn't our water protected by federal-provincial agreements and legislation, such as Bill C-6, which amended the International Waters Treaty Act in 2000 to ban water exports from the Canadian side of the Great Lakes and other regional basins?

Maybe not. There is a concern that such protections would have no real force against World Trade Organization rules, which prohibit the use of export bans or limitations on any product that a trade partner has contracted to buy – especially when these WTO rules are considered in combination with the provisions of the North American Free Trade Agreement (NAFTA).

Summing up this concern in a report this week, the Polaris Institute declared: "It is not at all clear that either Ottawa or the provinces are in a position to deal with a challenge coming from Washington to turn on the taps for Canadian bulk water exports to the U.S."

Here's the Polaris Institute report mentioned in the article.

I'm not sure that there is really anything to fear from WTO rules on this.  A water export ban or limitation would clearly violate GATT Article XI:1, but I would think that it would not be too hard to justify it under Articles XX(b) or XX(g).

With regard to the NAFTA, the report seems to focus on the Chapter 11 investment provisions.  I wouldn't have thought Chapter 11 would prohibit such regulations, but maybe the report has a point here.

Some Questions about Labor/Environment Provisions in Trade Agreements

This Presidential campaign has made it very clear that there are a number of people (mostly Democrats, I would guess), including the two remaining Democratic Presidential candidates, whose support for trade agreements is conditional on having enforceable labor and environmental rules as part of these agreements.  This view raises a number of questions for me.  These are rhetorical, but people are free to offer their thoughts, of course.

1.  Would those who support putting enforceable labor/environment rules in trade agreements prefer to have these rules in free-standing mutilateral agreements on these issues, outside the context of trade agreements?  If so, why not try to make the case for that?  In other words, why aren't Obama, Clinton and others arguing for, say, an independent, binding, enforeable international agreement on labor protections?   If that approach is rejected, then go the trade agreement route, but why not start there?

2. How realistic is it to think that certain U.S. trading partners will agree to having labor and environmental rules in trade agreements?  By demanding inclusion of labor/environment rules, aren't we just ensuring that many of these agreements do not get signed?

3. The unstated assumption seems to be that the U.S. can use these provisions to ensure that our trading partners follow the rules.  But do those who support these provisions anticipate complaints being brought against the U.S. under binding labor/environment rules?  If yes, would that be a good thing?

4. By how much, if at all, do supporters of this view believe that inclusion of these rules in the NAFTA and other trade agreements will reduce the number of U.S. job losses caused by trade agreements?

5. What is the scope of the labor/environment rules that should be included?  For example, would a minimum wage be included in the labor protections?

Missouri’s Tax Break for American-Made Hybrid Cars

It is true that the United States has come late to environmentalism (and still has a ways to go). Nonetheless, even in the “heartland” we are starting to see the beginning of a Green Revolution. But, with these positive moves there is always the danger of populist protectionism rearing its head.

This week the Missouri Legislature is debating a Bill to provide incentives for the use of environmentally more friendly automotive technologies.

HOUSE BILL NO. 1326 (94TH GENERAL ASSEMBLY)

“For all tax years beginning on or after January 1, 2008, any taxpayer who purchases a qualified hybrid vehicle manufactured in the United States shall be allowed to subtract from the taxpayer's Missouri adjusted gross income to determine Missouri taxable income, for the tax year in which the taxpayer purchases the vehicle, an amount equal to two thousand dollars or ten percent of the purchase price of the vehicle, whichever is less.” (emphasis added)

(Full text at http://www.house.mo.gov/billtracking/bills081/biltxt/perf/HB1326P.HTM)

The AP, surprisingly covering the issue, noted that the “limitation was approved after Democrats criticized the bill for about an hour, saying it would use state money to encourage people to buy foreign vehicles.” One of the Democrats opposing the tax break’s application to foreign cars said that “job outsourcing has hurt the state's economy and has made it harder to find well-paying manufacturing and other blue collar jobs. . . . If a baker bakes a loaf of bread and he can't even afford to buy his own product, we've got a problem," http://biz.yahoo.com/ap/080311/mo_xgr_hybrid_tax_breaks.html?.v=1)

Needless to say this presents some interesting IEL issues! I will report back to the Blog any further developments with this Bill. (Thanks to Simon for the AP link and to one of my students for alerting me to the pending Bill.)

Is Trade In Food Products Always Bad for the Environment?

From the New Yorker:

It is a logical and widely held assumption that the ecological impacts of transporting food—particularly on airplanes over great distances—are far more significant than if that food were grown locally.

For example:

according to one recent study, factories throughout the world are burning eighteen million barrels of oil and consuming forty-one billion gallons of fresh water every day, solely to make bottled water that most people in the U.S. don’t need.

I had not previously thought about the issue much, but when I did come across it on occasion, I bought into the logic that transporting foods for consumption is bad for the environment.  However, as the article explains, the issue can often be more complicated.  Some examples:

Last year, a study of the carbon cost of the global wine trade found that it is actually more “green” for New Yorkers to drink wine from Bordeaux, which is shipped by sea, than wine from California, sent by truck.

...

The environmental burden imposed by importing apples from New Zealand to Northern Europe or New York can be lower than if the apples were raised fifty miles away. “In New Zealand, they have more sunshine than in the U.K., which helps productivity,” Williams explained. That means the yield of New Zealand apples far exceeds the yield of those grown in northern climates, so the energy required for farmers to grow the crop is correspondingly lower. It also helps that the electricity in New Zealand is mostly generated by renewable sources, none of which emit large amounts of CO₂.

...

Researchers at Lincoln University, in Christchurch, found that lamb raised in New Zealand and shipped eleven thousand miles by boat to England produced six hundred and eighty-eight kilograms of carbon-dioxide emissions per ton, about a fourth the amount produced by British lamb. In part, that is because pastures in New Zealand need far less fertilizer than most grazing land in Britain (or in many parts of the United States). Similarly, importing beans from Uganda or Kenya—where the farms are small, tractor use is limited, and the fertilizer is almost always manure—tends to be more efficient than growing beans in Europe, with its reliance on energy-dependent irrigation systems.

Williams and his colleagues recently completed a study that examined the environmental costs of buying roses shipped to England from Holland and of those exported (and sent by air) from Kenya. In each case, the team made a complete life-cycle analysis of twelve thousand rose stems for sale in February—in which all the variables, from seeds to store, were taken into consideration. They even multiplied the CO₂ emissions for the air-freighted Kenyan roses by a factor of nearly three, to account for the increased effect of burning fuel at a high altitude. Nonetheless, the carbon footprint of the roses from Holland—which are almost always grown in a heated greenhouse—was six times the footprint of those shipped from Kenya.

All of this makes clear that coming up with carbon labels for food and other products, indicating their carbon footprint, is a very difficult proposition.

How Important Are Labor/Environmental Standards in Trade Agreements?

As noted many times on this blog, Barack Obama and Hillary Clinton have been making a big deal of the absence of enforceable labor/environmental standards in certain trade agreements, such as NAFTA.  But how important would these really be?  Dan Drezner gives the following answer:

Repeat after me: attaching labor and environmental standards to trade agreements will have no appeciable effect on trade flows. Anyone who tells you differently is selling you something.

I'm sympathetic to that view, with one caveat:  Demanding that labor and environmental provisions be included could scuttle some trade deals, and that would have an impact on trade flows.

Can Unilateral Carbon Measures Be Consistent with WTO Rules?

My good friends over at the law firm Sidley Austin have done an analysis of whether certain cap-and-trade greenhouse gas legislation under consideration in the U.S. is consistent with WTO rules.  They argue that unilateral legislation can be written in a way that complies with WTO rules, and that the specific proposal they analyze is WTO-consistent.  See Appendix A of the following document for all the details:  http://www.finance.senate.gov/hearings/testimony/2008test/021408abtest.pdf

Another Argument Against Ethanol Subsidies

Putting the trade issues aside, there is an environmental argument against corn ethanol subsidies:

The widespread use of ethanol from corn could result in nearly twice the greenhouse gas emissions as the gasoline it would replace because of expected land-use changes, researchers concluded Thursday. The study challenges the rush to biofuels as a response to global warming.

Junk Mail, the Environment, and Market Access

Over at the Conglomerate, Gordon Smith complains about all the junk mail he gets and says: "... I am willing to vote for the presidential candidate who proclaims, 'I look forward to nailing the going out of business sign on the front door of the United States Postal Service.'"  Of course, there's not much chance of this actually happening.  But putting reality aside for a moment, couldn't this be a great "win-win" for trade and the environment?  Cutting out all that wasted paper from unwanted junk mail would save a lot of trees.  And getting rid of a domestic monopoly would make foreign competitors very happy with their improved market access possibilities.

Senator Calls for Unilateral Tariff Lowering

No, it's not a headline from The Onion.  It actually happened:

Sen. Charles Schumer said Sunday that rising demand for the corn-based fuel additive ethanol is contributing to a spike in milk prices and called for lifting the 54-cent-per-gallon tariff on ethanol imports.

Schumer, D-N.Y., said rising milk prices have been caused by, among other factors, a nationwide increase in demand for ethanol. The same corn used for ethanol is used in animal feed.

He called for the immediate lifting of the tariff on foreign ethanol imports to increase the supply of the federally mandated fuel additive, reduce pressure on the corn market, and bring down milk prices.

You don't see that everyday.  (Maybe he wants cheap fuel so he can drive one of these.)  No doubt there will be a good deal of resistance to the idea, though.  I wonder what the Presidential candidates will say.  Now that the Iowa caucuses are over, they might not feel the need to be quite so pro-ethanol subsidies.

Trade Versus The Environment: Biofuels PPMs

The NY Times reports:

In a sign of growing concern about the impact of supposedly “green” policies, European Union officials will propose a ban on imports of certain biofuels, according to a draft law to be unveiled next week.

If approved by European governments, the law would prohibit the importation of fuels derived from crops grown on certain kinds of land — including forests, wetlands or grasslands — into the 27-nation bloc.

...

Not only is native vegetation, including tropical rain forests, being chopped down in places to plant the crops, but fossil fuels, like diesel for tractors, are often used to farm the crops. They also demand nitrogen fertilizer made largely with natural gas and consume huge amounts of water.

Already, the draining and deforesting of peatlands in Southeast Asia — mainly to make way for palm plantations — accounts for up to 8 percent of global annual carbon dioxide emissions, said Adrian Bebb of Friends of the Earth, an environmental group.

In Indonesia, he said, more than 18 million hectares of forest, or 44 million acres, have already been cleared for palm oil developments. Environmental groups say the developments are endangering wildlife like the orangutan and the Sumatran tiger, and putting pressure on indigenous peoples who depend on the forests.

This all calls to mind the paper by Stephanie Switzer mentioned here.  There are certainly some possible trade implications, depending on the specific terms of the law.  As the Times article points out:

... in answer to a reporter’s question, an organization representing major growers of crops for biofuels in Malaysia said the E.U. should be cautious before imposing new rules. It said that farmers in the region were adopting more sustainable practices, and warned that restrictions on imports could cause trade tensions.

“The Malaysian government is very concerned about the E.U. scheme for sustainability of biofuels,” said Zainuddin Hassan, the manager in Europe for the Malaysian Palm Oil Council in Brussels. The measures “should not be a trade barrier to the palm oil industry and it should comply with the W.T.O. rules as well,” he said, referring to the World Trade Organization.

Greg Mastel on Global Warming versus Free Trade

Greg Mastel writes:

In the United States, the Senate is considering legislation authored by Sens. Joseph Lieberman, I.-Conn., and John Warner, R.-Va., to impose an ambitious cap-and-trade system designed to reduce carbon-dioxide emissions. Under the legislation, companies emitting carbon dioxide would be obliged to purchase credits for their emissions with the total number of these credits being reduced over time. After five years, foreign companies selling products in the United States would also be obliged to purchase credits, unless their home country adopted a similar system of carbon-dioxide emissions controls.

...

Efforts to "share the burden" with restrictions on imports, like those envisioned in the Lieberman-Warner bill, are a practical necessity. Unfortunately, they are at most partial or delayed responses, would be difficult to administer and could easily run afoul of global trading rules under the World Trade Organization, resulting in potential trade sanctions. The WTO has cried foul over previous U.S. environmental statutes--most notably the 1990 Clean Air Act.

The ideal response to global warming would be a truly global policy response. Unfortunately, in the real world, that may not be achievable. Environmental realities may now dictate that the United States adopt legislation like Lieberman-Warner, but America should be resolved to face serious competitive realities and related international trade disputes when embarking on this course.

I agree with him that applying a cap-and-trade system to imports "could easily run afoul" of WTO rules.  I noticed that during a recent debate, Barack Obama said he favored a cap-and-trade system.  Although he has a long way to go before being elected, he is looking good right now, which means these issues might become more than just theoretical in the near future.

The Light Bulb Ban

I was a bit surprised by the ban on incandescent light bulbs in the U.S. energy bill (probably because I hadn't been following the legislation very closely).  Usually regulation of this sort consists of higher standards, or maybe occasionally additional taxes, but here we have an outright ban (well, by 2012, anyway).  It is not sitting well in some circles, but it seems like an effective way to achieve greater energy efficiency.  I wonder why it was possible to achieve a ban here, but in other areas it's difficult even to regulate?

But getting to the trade issues, I haven't seen any mention of trade concerns resulting from this ban.  Isn't there an incandescent light bulb producing country out there who is upset by this?  I think that any WTO challenge would be rejected, but nonetheless I'm surprised I haven't seen concerns expressed.

Fuel Efficiency Standards and Trade Rules

New U.S. fuel efficiency standards were signed into law today.  Will we see a repeat of the early 1990s U.S. - Autos case?  A National Foreign Trade Council report thinks it is possible, but probably unlikely:

Unlike other bills, which continue the 1994 CAFE standards' distinction between foreign and domestic manufacturers, H.R. 1506 is structured to impose a more equal burden on domestic and foreign manufacturers. H.R. 1506 is less likely to violate the WTO's National Treatment provisions than the approach to CAFE regulations used in 1994, which used separate foreign and domestic fleet accounting. However, it is possible that this "safeguard" may still, in effect, discriminate between foreign and domestic producers, in violation of GATT Article III.

...

The CAFE regulations that affected the sale of automobiles in the U.S. based on whether they were produced domestically or imported, rather than on some intrinsic “un-likeness” between the automobiles, violated Article III Paragraph 4. In the case of the CAFE standards, the regulation could still be permissible by qualifying under GATT 1994 Article XX, Paragraph (b) or (g). However, having scrutinized the manner in which the 1994 CAFE regulations had been applied, the panel found that they did not qualify for an exception. This suggests that although they are meant to preserve clean air, CAFE standards must be applied in a non-arbitrary, non-discriminatory manner in order to be justifiable under GATT Article XX.

See pages 9-10.  The report also has analysis of how trade rules apply to other aspects of U.S. policies related to climate change.

The Economist on Carbon Border Measures

In reaction to the proposal for carbon border measures noted here the other day, the Economist's Free Exchange blog expresses skepticism:

There are good reasons to react cautiously toward this idea, however.

In the first place, developed nation carbon pricing is likely to be helpful to the fight against climate change with or without leakage. Per capita emissions in America are among the highest in the world, and given our position as one of the leading global producers of carbon, reductions at home can have a significant effect on the global path of emissions growth. Much of our economy is concentrated in non-tradables or involves trade with other developed nations (who, one guesses, would adopt similar carbon rules), and should therefore be immune to leakage pressures. Developed nation carbon regulations would also jump-start investments and innovations in efficiency technologies, which would make later adoption of carbon pricing cheaper and easier for countries like China and India.

It's difficult to imagine how import permits might be deployed in a cost effective way. The principle challenge is likely to be setting the right price. If we price carbon near the source, then that price trickles throughout the supply chain, saving us hard choices about how much to weight different aspects of the production process. Pricing a good at the final stage, however, is sure to be a nightmare. How do we weight the emissions of components produced from scattered locations across the globe? How do we price a carbon permit for an outsourced computer programmer in Bangalore? End-stage pricing is sure to be complicated, and that complexity will increase the chance of politicisation. Domestic firms, after all, will have a powerful incentive to use carbon permits as instruments of protectionism.

China is also unlikely to take such rules lying down. No stranger to trade manipulation, China could easily fiddle with the yuan or provide hidden subsidies to domestic producers to overcome the cost of the permits. Cases could also get bogged down at the WTO, and broader patterns of trade could be threatened. But most importantly, China might just turn its focus to production for domestic consumers, of which there are quite a few. As a long-term solution, import permits do not bring rapidly growing industrial powers into the regulatory scheme, and as such, they fail.

They conclude with a plug for international regulation on the issue:

The obvious best option, as Dean Baker notes, is to establish an international regulatory environment that includes developing nations. Felix Salmon says it will never happen, but I have a difficult time understanding why. We have not yet seen what kind of agreement is possible with strong American leadership pushing negotiations ahead. Our lack of seriousness in international talks means that we don't even know what concessions developing nations might require, if any. Eventually, we may need to decide that the perfect ought not be the enemy of the good, but there's no reason to do that without first giving the perfect a good-faith effort.

I confess that I have a hard time believing that meaningful international regulation in this area, in terms of carbon caps or carbon taxes, will be achieved any time soon.  Part of my skepticism comes from the fact that even the most serious proposals seem weak and ineffective to me.  Even if they were adopted as proposed, which they are unlikely to be, I'm not sure how much carbon reduction would actually be achieved.

An Argument for Carbon Restrictions on Imports

From a NY Times op-ed, here is an argument that carbon consumption should be the focus of carbon regulation, which necessarily requires carbon border measures:

A problem would arise, however, if a producer needed to buy permits to make televisions in a country with a carbon cap, while no permits were required in a country without a cap. The television from the country without the cap would be cheaper, consumers would prefer it, and there would be no economic incentive to cut emissions. Environmentalists call this the “leakage problem”: just as a balloon squeezed at one end will bulge at the other, emissions caps applied in only some economies will lead to emissions surges in others.

...

If the United States adopted a tradable permit system that treated emissions from domestic producers identically to emissions associated with imported goods, then products that are more emissions-intensive, whether domestic or imported, would require more permits and thus be more expensive. Producers in the United States and abroad would have an incentive to reduce greenhouse gases to make their goods more competitive.

While international agreement is preferable, we have to be realistic about what can be achieved:

“The best policy — both in terms of the environment and in terms of economic theory — would be to have all countries take on binding emissions caps under an international agreement,” said Nathaniel Keohane, director of economic policy and analysis at Environmental Defense, a nonprofit advocacy group. “But we have to recognize that’s not going to happen overnight.” In the meantime, he said, the United States and other developed countries “need to take the lead.” He called carbon consumption caps “a good first step.”

“FROM an environmental point of view,” Mr. Keohane said, “it would ensure that the pollution we cut here at home doesn’t simply end up coming out of a smokestack somewhere else. It levels the playing field for American companies in the global economy. And it also helps us move toward a truly international system, by providing an incentive for developing countries to take on binding caps of their own.”

At the end of the piece, the role of trade agreements is acknolwedged:

The carbon consumption provision will face scrutiny under current trade agreements, but there is sound logic for including it in any emissions legislation. Most important, it would eliminate an excuse for doing nothing.

In my view, it may be possible to set up a measure that discourages carbon consumption in a non-discriminatory manner so that it has a good chance of surviving a WTO challenge.  But, it is harder to do so with cap-and-trade than with a tax, and, furthermore, in practice it may be difficult for the legislative process to provide us with a perfectly drafted measure that can satisfy trade rules.

An even better way to do achieve these goals, though, might be to provide subsidies for consumers to be more energy efficient.  For example, a tax credit for using solar energy to power homes would be a good way to reduce carbon emissions, and would not, I don't think, conflict with trade rules.  There are other, more complicated types of emissions to deal with, of course, but this would at least be a good start.

John Edwards' Views on Carbon Border Measures

He seems to like them:

I will also require strong environmental standards so multinational companies cannot profit by exploiting weak environmental laws and enforcement in some countries. For example, after the U.S. has capped its greenhouse gas pollution as I have proposed, trade policy could be used if necessary to encourage similar commitments by other nations.

This statement is a little vague, but as I read it he is saying, once the U.S. has dealt with its own carbon issues, it could start sanctioning others who have not.  Here's my question:  If the U.S. does not deal with these issues, would he support the EU or others imposing sanctions on the U.S.?

(Hat tip to Opinio Juris for pointing out the ASIL survey that included this statement)

A Domestic SPS Dispute

If Florida and California were sovereign states, they might be at the WTO with this:

Last week, the Florida Department of Agriculture issued a new regulation requiring all citrus fruit shipped from California to Florida to be inspected, fumigated and certified free of a fungal disease known as Septoria spot.

Otherwise, no California fruit will be allowed in Florida.

"Florida doesn't have it, and frankly, we would like to keep it that way," said Liz Compton, a spokeswoman for the state agriculture department.

"We are not saying we won't take their fruit, we are saying they have to follow certain measures. We don't understand why that is so onerous."

For California's part, growers there say the state's move is all about retaliation.

The federal government is not allowing Florida growers to ship citrus to other citrus-growing states because canker is epidemic here.

"We're not shipping fruit to Florida," said Joel Nelsen, president of California Citrus Mutual. "If you start subjecting yourself to those arbitrary rules that anybody puts in place you will have arbitrary rules for each state and country."

...

California citrus interests had asked for Florida fruit to be restricted from all states except northern states east of the Mississippi.

USTR Susan Schwab's Views on Carbon Border Measures

From a speech in Indonesia:

There has been a great deal of media attention based on statements from those who propose restricting imports based on carbon intensity of production methods. This is the wrong action at wrong time. Restricting imports easily leads to covert protectionism, undermining both environment and economic objectives – and it is not a path towards sustainable development.

All countries need to act to address climate change but trade restrictions to seek to force action can backfire and lead to tit-for-tat trade restrictions that can negatively impact global economic growth while accomplishing nothing in advancing climate change objectives.

She is not a fan.

Coming Soon: The Brazil - Tyres AB Report

On December 3, the Appellate Body is scheduled to issue the Brazil - Tyres report.  There will be a lot of things said about GATT Article XX, all of which should be interesting and informative.  In addition, though, there is a slight posssiblity that the AB will clarify GATT Article XXIV a bit as it applies to free trade areas and customs unions.  Before the Panel, the EC had claimed that an exemption for Mercosur imports violated GATT Articles XIII:1 and I:1.  As a defense, Brazil argued that the exemption was justified under GATT Article XXIV.  The Panel exercised judicial economy, though, and did not address the issue.

In its appeal, the EC argues that the Panel's decision in this regard was in error, arguing that "[g]iven the
very limited basis of the Panel's finding of violation regarding the ban, a finding concerning the EC's claims under Article XIII:1 and I:1 GATT would have been necessary to ensure a complete resolution of the dispute."  However, this appeal is a "conditional" one, as the EC only asks the AB to address it if the AB does not find, as requested by the EC, that the Mercosur exemption leads to a finding that the ban is inconsistent with the chapeau of GATT Article XX.  (See paras. 370-371 of the EC appellant submission)

Environmental Dumping?

This sounds like something along the lines of what Joseph Stiglitz had in mind:

[The European Parliament invites the European Commission] to consider whether it would be appropriate to evaluate the rules on trade defence measures, such as the rules on anti-dumping or subsidies, under the WTO aegis, with a view to taking into account, in some way, the disrespect of global, social and environmental agreements or international covenants as forms of dumping or undue subsidy.