The red light against green trade wars, by Simon Tay

Two failures in multilateral cooperation are developing into a third, more severe danger.

The first failure is the Doha Round of global trade talks which have stalled. The second is the Copenhagen climate change conference last December which produced no significant, binding measures beyond vague statements.

The danger arises from their confluence: Trade wars might emerge in the name of preventing climate change.

Climate change holds immense implications for trade, investment and economic development. Given current technologies, climate change is interlocked with energy and economic growth.

Some countries, like Japan, are energy efficient. But when countries industrialise, there is a corresponding surge in energy consumption. Other things being equal, the emission of greenhouse gases will rise as Asian economies rise.

To cap their emissions would make the conditions for continued growth more challenging. And where some countries do not cap their emissions, the countries that do may find themselves at a comparative disadvantage. Thus, the lack of agreement at Copenhagen raises questions not only about climate change but also about economic competitiveness. Developed nations may consider imposing carbon caps, but they are concerned others will not follow suit.

To make up for this, they are looking to impose taxes on imports. In Europe, President Nicolas Sarkozy of France has championed the idea of imposing carbon taxes on products from big emitters which fail to agree to cut their emissions.

In the United States, Congress has introduced a draft of the American Clean Energy and Security Act or Waxman-Markey Bill. If passed, it will lead to caps on emissions, and a price for carbon. But the draft law also contains a provision to give energy-intensive companies such as steelmakers, chemical plants and paper mills the right to demand carbon taxes on imports. If they can prove a loss in their competitiveness because they must pay a price for carbon, a higher import tax will offset that difference.

Neither the European nor American proposal names the countries that would be subjected to the proposed taxes. But China and India come to mind. Not only are they large carbon emitters which refuse to accept binding limits on their emissions, but their economic rise has already provoked discontent in the West.

Those who wish to protect the world from the ill effects of climate change by taxing trade may have good intentions. But they are providing a green flag to protectionists wishing to protect uncompetitive companies.

The World Trade Organisation (WTO)has rules that prohibit discrimination and protectionism, and a dispute settlement mechanism that is strong. But there are loopholes when environmental issues are at stake.

Fighting cases in the WTO take time. It would also be difficult for the institution not to care about climate change.

Some hope that the threat of such taxes would be enough to encourage countries to participate in schemes to curb carbon emissions. However, there is no guarantee that countries like China and India will not adopt tit-for-tat measures.

A trade war could begin and be deepened because of divisions over climate change. This could spell the end of the Doha Round. The resulting atmosphere of mistrust would also undermine efforts to follow up effectively on the Copenhagen summit.

Not surprisingly, China and India have strongly rejected the idea of border adjustment mechanisms. They point to the fact that the US and other developed countries are responsible for most of the greenhouse gases already in the atmosphere.

There are other reasons against carbon taxes on imports. Barriers to trade are fundamentally inefficient and costly. Calculating the exact carbon content in traded goods is difficult, if not impossible. Such measurements can be exaggerated and abused for protectionist purposes. The truth is that carbon pricing may not matter much for most companies, outside of highly energy-intensive industries such as paper, glass and steel and, of course, power generation.

The unilateral imposition of ‘green’ trade restrictions may play to the crowd, but it can also instigate retaliatory measures and accomplish little for environmental objectives. It may be timely therefore to consider more positive ways to link trade and climate change.

One initiative that has been discussed would favour climate-friendly goods and technologies. The idea is to liberalise trade in green products and services. This can help the spread of energy-efficient products and technologies from developed to developing countries.

Trade in the opposite direction can also be stimulated as developing countries come up with their own climate-friendly exports. China, for instance, is one of the world’s leaders in solar cell production. Indian companies are growing in the wind power sector.

This idea has been mooted in the WTO. But there is no agreement on the criteria for what would constitute climate-friendly goods. A regional agreement at the Asia-Pacific Economic Cooperation forum may be the best way forward.

Green trade wars have not yet begun and are not inevitable. But the possibility that they may occur is growing. Cooperating to move forward both on freer trade and on climate change post-Copenhagen will be critical in avoiding this possibility.

_The writer is chairman of the Singapore Institute of International Affairs. _

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