Saturday, November 21, 2009

Bhagwati: Carbon Tariffs Are Hypocritical, Disastrous

I know that this is my second post applauding Jagdish Bhagwati in the last month, but his recent interview with Reason Magazine warrants the love. Most of the interview is typical Bhagwati - quickly and ably explaining the undeniable case for unfettered global trade and the abject stupidity of both protectionism and the politicians/interest groups that push it. He also reiterates the criticism and fears of President Obama's current trade (non)policy that I've been screaming since this blog first began.

But in my humble (ha!) opinion, Bhagwati's interview is most valuable when it gets to the issue of climate change and the US threats to unilaterally apply carbon tariffs to imports from developing countries that refuse to employ "adequate" climate change regulations:
reason: Do you think a global externality problem like global warming poses a fundamental threat to free trade?

Bhagwati: I think it depends on the way you do it. First, you’ve got to decide whether there is a problem of an externality. I have doubts about these scientists who claim to have a consensus on global warming because, you know, Freeman Dyson, a great scientific figure, says these guys are really low-level scientists and I’m told by many that they, in fact, are. And if they reach a consensus, I don’t care. I mean, that’s the consensus of incompetents.

But so long as only the scientists were talking about global warming, nobody paid the slightest attention. Remember, not a single senator voted for the Kyoto resolution back in the ’90s. Even Al Gore and Clinton had to walk away from Kyoto. But then the polar bears were threatened, the glaciers began to melt, and then that great French film about the penguins which touched all our hearts came out. So these were three whammies. Even if you live in Peoria you will understand, wrongly maybe, that global warming is a problem. I tell all my students: If they think of something like that for free trade, please let me know.

What countries like India and China are saying is that if the CO2 was accumulating and it’s going to create a disaster, then that took a lot of time to establish. So they want the West to bear primary responsibility for the damage it has caused in the past. If America applies some kind of a carbon tax and it says that if India and China don’t impose a similar tax, it’s going to use what is called border tax adjustment, then that is protectionism. And there’s no reason why Indians and Chinese have to accept this. Just as America was not willing to accept it when it didn’t sign onto Kyoto and Europe started threatening a countervailing duty on American exports. But everybody reacted to that talk and said this is a cockeyed thing to do. Peter Mandelson, who was the EU Commissioner, said it was very unwise because the United States will retaliate.

It’s ironic that we are now using exactly that kind of threat on India and China. But America’s fuel tax is so much lower than that of most other countries, except the Middle East. So India and China are going to hit us because we had a low gas tax for a long time. And all hell would break loose. India and China are big guys. They can get legal [World Trade Organization] retaliation against the U.S. Or India could take away contracts from Boeing and give them to Air France. It can have nuclear reactors go to France rather than to G.E. Caterpillar would be shut out.

So I suggest a different way. If in our own U.S. system you’re going to get your companies to clean up under the Superfund Act, that’s a tort principle which we accept. Then we ought to be willing to pay in some form to other poor countries for the past damages. The West has completely ignored this suggestion so far. It has provided maybe a few million dollars in assistance to Third World countries for this purpose. But if the West seriously starts contributing to this fund, Third World countries could get anywhere from $150 million to $1 billion to mitigate global warming.

reason: This is a political non-starter, you know.

Bhagwati: Yes. But the president actually has made some remarks about border tax adjustments not being such a good idea. He’s got to do more than that. He’s got to say this is a crazy thing to do. He’s still very cool—he needs to lose his temper once in a while. Because it’s too important. The U.S. is one of the biggest trading nations in the world. We want the rule of law. We don’t want retaliation, which would be massive. India and China are not Zaire or Zimbabwe. They’re not little countries you can push around. We don’t want to unleash that kind of trade war, because it would be very hard to control, I’m afraid.
Great stuff (especially that line about a "consensus of incompetents").  Sadly, however, I think Bhagwati is fooling himself if he honestly thinks that President Obama will ever "lose his temper" and fight for free trade.  The political will necessary to make such a stand is pretty huge.  Even though all the arguments - moral, economic and historical - would support it, standing up for free trade would require a direct confrontation with US labor unions and certain rust-belt Senators (*cough*Sherrod Brown*cough*) who dominate key swing states (Ohio, Pennsylvania, Michigan, etc.) and are essential to holding that precious 60-vote margin in the Senate.  Each is loudly in favor of carbon tariffs (and other forms of protectionism), and this White House has provided very few indications that it is willing to directly challenge these entrenched protectionists anytime soon.

So inaction and delay will rule the foreseeable future (better that, I guess, than outright hostility to trade, but it's still disappointing).

I hope I'm wrong; really, I do. But it sure doesn't look like it.

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