Tariff makes climate heavy-duty affair

In one of his first decisions on trade policy, US President Barack Obama imposed a heavy tariff on tires imported from China.

Coming right before the Sept 24-25 G20 Summit in Pittsburgh, the decision signaled a significant shift from the policy of the George W. Bush administration, which had not taken action in similar cases.

Now, companies that import solar panels to the United States also face up to $70 million in unexpected tariffs. The bill is likely to hurt foreign solar panel-makers, as well as foreign and American distributors, while further straining trade relations between the US and China.

In the coming months, a controversial carbon tariff may create more trade friction.

The UN climate change conference in Copenhagen in December seeks to produce an international agreement to combat global warming. The new climate change treaty would succeed the Kyoto Protocol, which expires in 2012.

While the agenda of the Obama administration reflects increasing American skepticism over cross-border trade, it is moving ahead with new climate change policies.

In June, the US House of Representatives passed the Waxman-Markey American Clean Energy and Security Act. The 1,400-page bill has a hodgepodge of measures, ranging from new efficiency and renewable energy standards to a cap-and-trade provision. The problem is that it includes a carbon tariff, too.

The act contains a clause that would impose tariffs or "border measures" by 2020 on imports of certain goods from countries not seen as doing enough to reduce their emissions of carbon dioxide (CO2) and other greenhouse gases (GHG).

Obama has praised the cap-and-trade legislation but opposes the tariff. The US Chamber of Commerce has joined other major business organizations in warning the Senate that the tariff "could trigger a green trade war".

The Senate meanwhile has been working on its version of the bill.

When Secretary of State Hillary Clinton visited India in July, Environment Minister Jairam Ramesh complained that India was being pressured to reduce emissions in spite of having among the lowest per capita GHG emissions. The Indian minister was highly critical of the Waxman-Markey Act.

China's position is clear: international community should fight climate change together. Hence, it sees the carbon tariff as a violation of WTO's basic principles.

Unwilling to wait for the US Congress to act, the Obama administration announced last week that it was moving forward on new rules to regulate GHG emissions from hundreds of power plants and large industrial facilities.

By authorizing the Environmental Protection Agency (EPA) to move toward regulation, the White House is pushing lawmakers toward reaching an agreement.

Obama favors a comprehensive legislative approach for regulating GHG emissions and stemming global warming. He says he is committed to passing a climate bill this year.

The proposed rules, which could take effect as early as 2011, would place the greatest burden on 400 power plants, for they would be required to prove that they have applied the best available technology to reduce emissions. Failure to do so would incur penalties.

The prospect of EPA regulation of GHG emissions has already generated fear and deep divisions within American industry. The EPA announcement came on the same day that Democratic senators John F. Kerry and Barbara Boxer introduced global warming and energy legislation.

The new Senate energy and climate bill aims to make deep cuts in US GHG emissions, while setting a limit on the cost of carbon allowances. The bill would make it easier for businesses to compensate for their carbon pollution.

But many details have been left out. They will be hashed out later. One has the potential to make or break the bill: How the US deals with the intersection of climate change and international trade, that is, the carbon tariff.

The proposed tariff has the potential to shatter the fragile economic recovery. And a historical precedent should caution any protectionist impulse.

A few months after the stock market crash of 1929, Herbert Hoover, then US president, signed the Smoot-Hawley Tariff Act. At the time - like today - the labor markets were weakening, and the legislators hoped that the act would strengthen them.

Over 1,000 economists had opposed the law. Like Obama, Hoover, too, had opposed the bill, which he thought would undermine his pledge to international cooperation. Franklin D. Roosevelt spoke against the act while campaigning for president in 1932.

Today, the Smoot-Hawley Tariff is widely perceived as a major contributor to the Great Depression and the trade wars that, ultimately, paved the way for the devastation of World War II.

Washington's push toward multilateral trade in the post-war era was driven by a deep understanding of history. The proposed carbon tariff is driven by a deep neglect of history. To put it precisely, it is the wrong measure in the wrong time.

Despite its noble goals, the Kyoto Protocol has a controversial legacy. The advanced economies lament the decision to exclude major developing countries from the agreement. On the other hand, it was not ratified by the US and many of its signatories have failed to meet their emission cut targets.

According to a recent study, the world could reduce its GHG emissions dramatically at a cost of 1 to 3 percent of global GDP a year. But even such a modest climate goal will be very difficult to implement amid a fragile global recovery.

The good news, however, is that Copenhagen does reflect efforts at a new global approach to tackling climate change.

Obama's top domestic climate adviser, Carol Browner, has said it is "not likely" that a final US bill would be signed by the president before Copenhagen. Instead, US negotiators are now exploring whether the world's major emitters could forge a pact that encompasses nationally binding objectives, while it would be subject to some sort of international review.

However, coming after the decision to impose tariffs on tires imported from China, the Waxman-Markey tariff provisions would be seen as raising the ante in the global trading system - not for, but against cross-border trade.

A carbon tariff could further erode the credibility of the US administration and the political capital of the president. It could hurt US relations with its key trading partners, too.

Successful legislation should strongly encourage action by all major GHG emitting countries. This action must be driven by multilateral consensus however difficult it will be to achieve.

The author is research director of International Business at the India, China and America Institute, an independent think tank based in the US.

(China Daily 10/21/2009 page9)