A Trade Policy for the 20s, Climate

At the end of last year and the beginning of this one, I devoted two columns to discussing a trade policy for the 20s, both in general and specifically with respect to labor issues. I had intended to continue that but instead spent a week commenting on what happened at the U.S. Capitol on January 6 and another one on Europe in the wake of the CSIS event on January 15 featuring European Commission director-general for trade Sabine Weyand. I have now run out of excuses and am returning to the trade policy discussion, this time looking at climate.

Climate as a trade as well as a domestic policy issue was essentially ignored during the Trump administration, but it has emerged as a top priority for the Biden-Harris administration, driven by the enormous body of evidence establishing global warming as a serious threat to our collective way of life. So far, and as predicted, the president’s emphasis has been on domestic policy—none of the executive orders issued in the first days of his term dealt directly with trade issues. He has rejoined the Paris Agreement and has assigned former senator and secretary of state John Kerry the task of rebuilding our international climate profile and restoring U.S. leadership. That will, among other things, mean reaffirming or possibly enhancing the United States’ commitments in the agreement and then taking the domestic steps necessary to meet them. While some of that will involve simply unraveling steps Trump took, it will likely require further legislation as well, some of which will have international implications.

At this point, I can see two areas where that might happen. The first is not new—ensuring trade agreements, both current and future, require U.S. trading partners to take on strong environmental commitments as part of the agreement and provide a strong enforcement mechanism in case they do not meet them. U.S. trade agreements generally require the parties to subscribe to a list of international environmental agreements, but the lists do not include all of the possibilities. Indeed, a group of members of Congress recently wrote the administration calling for the addition of the Paris Agreement to the list in the United States-Mexico-Canada Agreement, since Ambassador Lighthizer unsurprisingly left it off when the deal was negotiated. Expanding the lists in current and future agreements and making sure the obligations are fully enforceable are obvious steps for the Biden administration to take.

Second is the issue of border adjustment measures. The problem actually predates the climate debate. Industries whose manufacturing processes produce substantial harmful emissions have long pointed out that being forced to reduce their emissions puts them at a competitive disadvantage against countries whose competing industries do not have the same requirements. Our companies’ compliance costs go up, and their competitors’ do not. The steel industry, for example, has made this argument for years.

The current argument is similar. Companies forced to change their production processes and reduce their carbon content so the United States can comply with its climate mitigation commitments are concerned they will be at a disadvantage competing with companies from countries that have not made similar commitments, or, more likely, are much slower in meeting them.

The proposed solution is conceptually simple but complicated to implement. Countries would assess a border adjustment charge designed to offset the advantage foreign companies get from using cheaper, dirtier energy due to lower climate commitments or non-compliance. Calculating and collecting such a charge, however, is complicated. Assessing the carbon content of a product requires detailed knowledge of the process that made it, information that is often proprietary and not available. To prevent unending disputes, countries will need to come to a common understanding on how to measure the carbon embodied in products.

Another problem is compliance with World Trade Organization (WTO) rules. The applicable principle is national treatment—WTO members are required to treat foreign products in a way equal to how they treat their own. Countries will probably use one of the exemptions permitted by the WTO, but even in those situations, they are obligated to honor the national treatment principle, meaning they need to impose similar restrictions on their own industries.

Since this is a global commons problem, the ideal solution would be a global agreement on rules for subsidies and other support for green technologies, and also rules for border measures. That is not likely in the short term, if at all, which has led to suggestions instead for a “climate waiver” that would temporarily allow countries to provide incentives or impose restrictions without regard for WTO rules. There are many unanswered questions about that approach, which researchers are busy working on, including at CSIS. So far, what has been revealed is a gap between the trade wonks, for whom trade rules are sacrosanct, and environmentalists, for whom reducing carbon is paramount. The Biden administration is in a good position to narrow that gap, but that will require a trade policy and global leadership at the same time they are dealing with Covid-19 and the domestic economy. These goals are not in conflict, but it remains to be seen how they prioritize them.

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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