Moral Conflicts?

The Scholl Chair, in partnership with the CSIS Energy Security and Climate Change Program, has been undertaking research around the intersection of climate change and trade policy. There is much to study there, although I think the trade policy debate will end up being about subsidies—how to get rid of the “bad” ones, like those for fossil fuels, and how to install “good” ones for green technologies—and about carbon border adjustment measures, which allow countries taking aggressive climate mitigation measures to insulate their producers from competing imports from countries that have not taken such measures and whose production costs are therefore lower.

Both issues have lots of definitional and implementation challenges, but underlying all the details is a central dilemma that increasingly crops up in trade debates between trade wonks and climate nerds. Simply put, the wonks argue that rules are important, and climate mitigation programs should be designed to comply with them. The nerds respond that the goal of climate mitigation is so urgent and so important that we should pursue policies that work the best, and if necessary the rules should be changed to permit them. The wonky response is that changing the rules is hard, and the debate goes on.

A recent example illustrates the dilemma. LG Energy Solutions, which makes batteries for electric vehicles, filed a Section 337 complaint at the International Trade Commission (ITC), alleging that a competitor, SK Innovation, had stolen trade secrets and hired some of its staff. LG won the argument, and the ITC imposed the statutory remedy of banning the offending SK component imports from entering the country, although it provided a substantial grace period to accommodate existing relationships with two major auto producers.

This decision potentially has both environmental and job consequences. If SK cannot get the parts it needs from overseas, it will not be able to manufacture its batteries in the United States, where it has two plants planned in Georgia, with the first due to come online next year. So, jobs may be lost, and Ford and Volkswagen will have to find alternative battery sources, which may slow down their electric vehicle production. (The grace period may forestall some of these consequences.)

The dilemma is clear. From the trade perspective, SK violated U.S. intellectual property (IP) rules and should pay the price. If it does not, U.S. IP protection is called into question, and other producers may be encouraged to steal IP or infringe patents. Since IP and the resulting innovation are the United States’ key competitive strengths, we jeopardize that at our peril. But from a climate perspective, punishing SK may slow the conversion to electric vehicles, including the president’s executive order directing the federal fleet to become electric. Plus, the United States is already heading for a crunch with demand for battery components spiking and prices rising. From a jobs perspective—not a minor issue these days—Georgia could be hurt, and Michigan, where LG is located, could benefit.

The issue will be discussed in the White House, because the president has 60 days to overturn the ITC decision if he wishes. That would be rare—it has only happened once in recent memory—but you can be confident there will be a debate about it. It is only fair to note that there are other solutions, the most common one being a settlement between the combatants that usually involves the guilty party paying the one that has been harmed, and the ITC process often has the effect of forcing that result.

The same debate will likely occur on the subsidy question. Environmentalists will argue that governments should be able to subsidize green tech in order to speed up its development or increase consumer demand for green products. Trade wonks will remind them that the World Trade Organization has rules about subsidies. They are not uniformly banned, and it is possible to provide them within the rules, particularly if they are not designed to support exports.

Even so, there will be pressure to carve out a new category of explicitly permitted subsidies, just as some developing countries are currently demanding exceptions from the IP rules for Covid-19 vaccines. In that case, however, they are not necessary. There is already sufficient flexibility in the rules—and an exception does not address the larger problem, which is not production but distribution. But the demand for an exception is there, nonetheless.

There is no easy answer to this conundrum because both sides have a point. The United States has spent the past 70 years—except for the last four—designing, implementing, and defending a rules-based trading system. We have benefitted from that enormously, and we are currently seeing the consequences when other large economies ignore the rules. If we weaken them now, we will be the net loser as others rush to provide more subsidies. At the same time, the goal of addressing climate change is an important one, and it is better if trade rules are facilitators rather than obstacles in achieving it. Regardless, the debate will continue, as will the search for solutions that will let us have our cake and eat it too—successfully mitigate climate change within the rules.

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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