April 19, 2021
This Thursday, April 22, is Earth Day and also the date of President Biden’s climate summit, so this week I will look at trade and environment issues. Fortunately, U.S. Trade Representative (USTR) Katherine Tai gave a speech last week on this subject and laid out her thinking and priorities.
One of the difficulties in discussing trade and climate is that public statements have been rich on generalities and poor on specifics, long on statements about how important it is to address climate change and short on exactly how we should do that. For a long time, hortatory statements were good enough because the main debate was with climate deniers who did not want to do anything, and the biggest task was to convince both the public and legislators that prompt action was necessary.
Fortunately, we have largely moved past that point. The deniers have either gone into the closet or have focused their objections on the economic costs of various proposals. It would have been nice if that had happened 10 years ago, but here we are, and it is time for a debate on specifics. Ambassador Tai put several forward in her speech—action on illegal logging, completion of the negotiations on fisheries subsidies, and, most important, much more aggressive enforcement of existing trade obligations, particularly in the United States-Canada-Mexico Agreement (USMCA), which she regards as flawed but still the best climate agreement around.
Her point about enforcement is well taken. USTR’s strength has been negotiating agreements, and enforcement has often been an afterthought. Reorienting the emphasis on making sure that commitments made are kept will be a useful change.
One curiosity is her failure to say anything about the Environmental Goods Agreement (EGA) negotiation at the World Trade Organization (WTO), despite pressure from members of Congress. That stalled in late 2016 due largely to China’s insistence on narrowing the list of covered items and also adding bicycles, which attracted opposition from the European Union. The Trump administration did nothing with it, but it is widely considered relatively low-hanging fruit that would be win-win. The deal would promote trade in green goods by eliminating tariffs on them and at the same time reestablish some confidence in the WTO’s ability to negotiate something.
Her failure to mention the EGA was also telling from a different perspective. The EGA is a carrot. It would provide benefits in increased green trade to participating countries. Most of her speech, in contrast, focused on sticks: the need for stronger enforcement and the need to prevent what she called a “race to the bottom” as countries compete to lower their environmental standards in order to attract jobs and investment from companies seeking to avoid their own countries’ higher standards.
Sticks can be an appropriate policy tool, but my experience representing large companies—the very ones she seems to be worried about—taught me that carrots work better. Companies are experienced in finding ways to work around restrictive rules, particularly tax rules, but carefully drafted incentives can produce the desired changes in behavior.
Also conspicuously, though not surprisingly, absent was any detailed reference to future negotiations. It’s all well and good to hold up the USMCA as a good example of an environmental agreement, but it only covers three countries. If it has good provisions, then it is worth propagating, and it would have been nice to see even an outline of a plan to do so.
Nor was there much talk about the central trade issues in a climate debate—subsidies and carbon border adjustment measures. Subsidies are domestic policies, but they have trade implications, and there is a substantial body of WTO rules and domestic laws in many countries, including the United States, dealing with them. While countries can eliminate their subsidies without WTO difficulty, creating new ones, even if for a good cause, can create problems. The debate about whether we should make green subsidies non-actionable (i.e., not permit countries to take countervailing action against them) has barely begun, and the United States has a good opportunity to exercise a leadership role there if it cares to.
Border adjustment measures will end up as the key issue as countries grapple with the trade implications of their domestic climate policies. Border measures are intended to prevent the race to the bottom Ambassador Tai discussed by stopping carbon “leakage.” They would allow a country to impose a tax on imports that had benefited from an exporting country’s lower standards—for example, steel made with a “dirtier” process—and for that reason could underprice the domestic product. The problems here will be measurement and ensuring that the actions are not protectionist, that is, that domestic products are held to the same standards as the imports. The former will require better science, and the latter will require careful construction and, ideally, international negotiation to achieve a common approach.
None of that will be easy, and no one expected Ambassador Tai to get into the details in her first speech. On the other hand, it would have been nice to see more recognition of the complexities she will be facing.
William Reinsch holds the Scholl Chair in International Business at the Center for Strategic and International Studies in Washington, D.C.
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