"Green Airline War" Ends (For Now) with a Whimper, Not a Bang

Even though the domestic and international backlash has been significant, today's news that the EU has suspended its airline carbon emissions tax remains pretty surprising:

The EU will suspend for one year a controversial policy of charging foreign airlines for their carbon emissions on flights to and from Europe, citing progress in negotiations towards a global regime to tackle pollution by the aviation industry.

Connie Hedegaard, the EU climate commissioner, announced the suspension on Monday of a policy that had united the US, China, Russia, Brazil, India and several other countries in their opposition to it.

The EU carbon emissions trading scheme had also drawn complaints from European airlines and Airbus, the Toulouse-based aircraft manufacturer, which feared being caught up in a global trade war....

The suspension will apply only to flights to and from the EU – not between the 27 countries that make up the bloc – and must still be approved by member states and the European parliament. 

The EU law was part of its broader policy to curb the greenhouse gas emissions linked to global warming. It requires airlines to buy permits from its carbon market to cover their emissions on all flights to or from the EU.

You may recall that when the EU's emissions scheme was first announced, I opined that the global "trade war" was possible in this sector because the majority of airline services were exempt from WTO rules.  Thus, the EU could apply the policy - and others could retaliate against European airlines - without much fear of WTO litigation (or WTO-sanctioned retaliation).  Some trade experts raised very theoretical WTO claims, but clearly no WTO Member governments were, as is typical, willing to file a WTO complaint on based on mere theories.

Instead, it appears that some ol' fashioned strong-arming by the US, China and others - forbidding their airlines from complying with the EU system or threatening retaliation - has done the trick:

Airbus, owned by EADS, called in March for a suspension of the EU scheme against airlines after claiming that it was being prevented from finalising contracts worth $14bn to supply jets to Chinese carriers....

The Association of European Airlines also welcomed Ms Hedegaard’s statement, adding that some of its member airlines had already experienced problems resulting from non-EU countries’ objections to the bloc’s carbon emissions trading scheme – such as European carriers struggling to secure traffic rights to fly into airports.

“We already had signs we were moving towards a trade war [because of the EU scheme],” said the AEA. “We welcome for that reason [the proposal] to put a moratorium on [the scheme] and wait for the outcome of the [ICAO] debate.”...

Foreign airlines, led by US carriers, complained the scheme amounted to a form of extraterritorial taxation for flights that originated outside the EU and were largely conducted in international airspace.

Airlines for America, the US airlines’ trade body that tried unsuccessfully to stop the EU scheme in the courts, said it was “cautiously optimistic” about the European Commission’s proposal....

The future of US legislation that could ban domestic airlines from complying with the EU carbon emissions scheme is unclear.

The EU, however, refuses to admit that global pressure caused the Commission to suspend the emissions scheme.  Instead, the Europeans point to global talks on airline emissions that are - allegedly - going just great:

European Commission officials insisted that they had not buckled to international pressure in proposing to defer enforcement of the scheme against flights into and out of Europe until the end of 2013. Instead, they attributed the move to positive results last week in talks at a UN aviation body about a potential international agreement after years of frustration. 

The body, called the International Civil Aviation Organisation, agreed to establish a high-level group to develop a global system to tackle airlines’ carbon emissions by the time of its next general assembly in September 2013....

“For the first time in years, a global deal on aviation should be in reach,” said Ms Hedegaard. She called the ICAO high-level group “very good news”.

However, Ms Hedegaard also warned that the EU policy would be reactivated “automatically” if the ICAO talks proved fruitless. “It is very important for our opponents to understand this,” she told journalists in Brussels.

Ms Hedegaard’s proposal marked a softening from previous declarations that she would not amend the EU law affecting airlines and their carbon emissions because of threats of a trade war.

I don't know about you, but Ms. Hedegaard's confident statements about an international agreement on airline emissions certainly raised my eyebrow, as any such agreement would require the support of the very nations who raised a giant stink about the EU program to begin with.  I could perhaps see the second-term Obama administration pushing for such a deal, but is it realistic to assume the same motivation - especially for a deal with the same level of ambition as the EU scheme - from China, Russia, Brazil, India and others?

Color me skeptical.

Instead, it seems to me that the ICAO deal has provided the European Commission with sufficient cover to shelve the poorly-thought-out emissions scheme and let it die on the vine over the next year as the ICAO talks continue behind closed doors.  The Europeans then can express support for anything that comes out of the ICAO next September (regardless of the final deal's scope and effect), and this two step will save face and the EU airlines and aircraft companies.

But, hey, maybe I'm wrong and a big, ambitious global emissions agreement it right around the corner.  I guess we'll find out in 10 months.

Europe's "Green Airline War" Provides a Glimpse Into a WTO-less World

The EU's implementation of new regulations imposing a tax on airlines based on their carbon emissions has resulted in a firestorm of litigation and international teeth-gnashing.  The EU's steadfast commitment to assess the tax also has led many to speculate that the system could set off a "trade war" among nations as they impose similar retaliatory fees on EU-based airlines that enter their airspace.  The whole thing is a giant mess that could end up costing airlines and, inevitably, consumers billions of dollars and crippling the already-struggling global airline industry, but it does have one - albeit small - silver lining: it demonstrates just how dangerous the world might be without the WTO.

As you may recall, the demise of the WTO's Doha Round of multilateral trade negotiations has led many people to speculate that the global trade body has become pointless and/or impotent.  I've long disagreed with such commentary, arguing that, while the WTO may have its struggles as a negotiating body, its existing rules and dispute settlement mechanism are vital for maintaining an open trading system and thereby preventing the collapse of the global economy.  I'm certainly not alone in such a defense, and the EU airline fiasco shows just how right we WTO-defenders are.  But before we get to all that back-slapping, first let's check in on the EU "green airline war" as per the good folks at the WSJ:

Europe's anticarbon crusade failed to extend the Kyoto Protocol this month, but the boys in Brussels don't give up easily. Now Europe may kick off a trade war with its new scheme to tax airlines on carbon emissions.

The rule, which goes into effect January 1, will apply to all airlines regardless of nationality and to all flights to or from Europe. Airlines that refuse will be subject to fines of €100 per ton of CO2 that exceeds the EU's limits, and they could be banned from operating in Europe.

The International Air Transport Association estimates the rule will cost €900 million next year and at least €2.8 billion annually by 2020. That's a lot for an industry that expects to turn a combined global profit of €3.5 billion next year. The EU admits the scheme will raise ticket prices and dampen consumer demand, which may be the point: To make carbon-spewing international travel accessible to fewer people.

In September the U.S. joined Brazil, India, China, Russia and 21 other governments in declaring that "the unilaterally imposed [European] measures were inconsistent with international legal regimes." The 1944 Chicago convention on aviation gives every signatory "complete and exclusive sovereignty over airspace above its territory."

Brussels shrugged that off, and last week the European Court of Justice rejected a challenge brought by American and Canadian airlines. The ruling included the logical gem that while all EU nations ratified the 1944 convention, the EU itself did not exist at the time and thus cannot be bound by its provisions.

The European rule does allow exemptions for airlines whose governments are taking "equivalent measures" to penalize carbon emissions, though airline sources say a patchwork of carbon-reporting and taxation schemes would be even more unpalatable than the EU's blanket measure.

Meanwhile, the EU's trading partners are threatening to retaliate. Beijing has floated a cut in Chinese airlines' Airbus orders, and Chinese carriers are launching their own lawsuit. New Delhi is mulling a payback tax, and Moscow hasn't ruled out increasing overflight fees on European carriers.

The U.S. has stated its "strong legal and policy objections" to the move, and this month Secretary of State Hillary Clinton and Transportation Secretary Ray LaHood warned that Washington "will be compelled to take appropriate action" if the EU doesn't back down. The measures could include a tax on European airlines, judging by the request the U.S. made this month to nine European carriers for information on their 2012 carbon allowances and 2010 revenues.

So how, exactly, does this mess shine any light on the WTO's value?  Well, because the airline services regulated by the EU anti-carbon tax are most likely exempt from WTO rules, that's why.  Typically, those rules would require WTO Members (with certain exceptions) to treat each others' services in a non-discriminatory manner, and these non-discrimination disciplines, when applied to goods, are one of the reasons why WTO Members like the EU and United States haven't imposed "carbon tariffs" on each others' imports - something I've discussed a lot here.  The WTO's General Agreement on Trade in Services (GATS), however, contains an "Annex on Air Transport Services" which expressly exempts “measures affecting trade in air transport services, whether scheduled or non-scheduled, and ancillary services” from GATS disciplines.  The Annex states that the GATS will not apply to (i) traffic rights or (ii) services directly related to the exercise of traffic rights, except for aircraft repair and maintenance services, with very limited exceptions.  A “traffic right” is broadly defined in the Annex and basically covers every type of remunerative air transport (passenger, cargo and mail).  Thus, because the EU carbon tax regulates airlines’ exercise of "traffic rights," it's very likely exempt from the GATS.

Moreover, the Directive is also likely exempt from the WTO Agreement on Technical Barriers to Trade (TBT) because services are expressly excluded from that Agreement (Annex I).  So, under WTO rules, it appears that the EU can basically do whatever it wants with respect to taxing and regulating airline services that occur in its airspace.  And when it does, other WTO Members can retaliate in the same or similar fashion.  This explains why (a) no WTO Members have challenged the EU directive at the WTO; (b) why US and other airline carriers were forced to go to the EU courts to challenge the directive (yeah, good luck with all that); (c) why the EU has basically ignored nations' vocal complaints; and (d) why other nations are threatening to impose their own airline taxes to spite the EU (or to maybe qualify for an exemption from the tax).

In short, it's the Wild West out there, and airline consumers (and global trade) will inevitably be the casualties of any shoot-out.

A couple years ago, I stated that, even without Doha, the WTO remained indispensable because "(i) WTO rules establish a baseline of global trade liberalization, (ii) nations pursue "WTO plus" commitments through unilateral liberalization (best route) or bilateral/regional trade agreements with other willing partners (meh route), and (iii) many large trade disputes are adjudicated through the WTO's dispute settlement body."  These disciplines help thus nations avoid tit-for-tat protectionism that can, in the rules' absence, devolve into a real global trade war.

The EU's "green airline war" shows us just how right this is, and just how nasty a WTO-less world could be.

UPDATE:  Right on cue, Chinese airlines are saying that they'll refuse to pay the new EU carbon tax.  Yeah, that should go swimmingly.  Meanwhile, "other Asia Pacific carriers, already battling a weak travel market, are likely to pass on the extra cost to passengers."  Awesome.

Guitars, Catfish and the Rise of Regulatory Protectionism in America

Ever since the advent of the WTO, and the GATT before it, governments' ability to use tariffs, quotas and other straightforward forms of trade protectionism has been limited and, in many cases, subject to retaliation by other WTO Members.  Indeed, such limitations on trade protectionism were the goal of the WTO's "channel and bind" strategy - "channel" all trade barriers into easily quantifiable tariffs, and "bind" them at agreed maximum levels.  However, as I've mentioned here before, these basic WTO disciplines also are subject to broad "exceptions" (under GATT Article XX and XXI) for things like national security, public health, safety and the environment.  Thus, regulatory measures can often (but not always) pass WTO muster, even though they restrict international trade.  These exceptions are widely recognized as necessary to protect WTO Members' sovereignty, and I think that they do serve that important purpose in most cases.  On the other hand, these exceptions also create an extremely ripe opportunity for WTO Members to use health, safety, environmental regulations as a backdoor means of protectionism.

The most high-profile example of the problems created by regulatory protectionism is probably the recent attempts by some US and EU government officials to impose carbon tariffs on imports from countries that haven't adopted sufficient economy-killing climate change mitigation measures.  Carbon tariffs, much like global warming itself, appear to be dormant right now, but that hasn't stopped the United States from pursuing other climate change-related regulatory measures and imposing many other kinds of regulatory protectionism over the last few years.

The most recent and publicized instance of this troubling trend came in last week's anger-inducing news that the federal government raided Gibson Guitars due to alleged violations of the Lacey Act, recent expansions of which prohibit trade in certain protected woods and create an extremely onerous "strict liability" (i.e., you're guilty even if you didn't intend to break the law) compliance standard:

Federal agents swooped in on Gibson Guitar Wednesday, raiding factories and offices in Memphis and Nashville, seizing several pallets of wood, electronic files and guitars. The Feds are keeping mum, but in a statement yesterday Gibson's chairman and CEO, Henry Juszkiewicz, defended his company's manufacturing policies, accusing the Justice Department of bullying the company. "The wood the government seized Wednesday is from a Forest Stewardship Council certified supplier," he said, suggesting the Feds are using the aggressive enforcement of overly broad laws to make the company cry uncle.

It isn't the first time that agents of the Fish and Wildlife Service have come knocking at the storied maker of such iconic instruments as the Les Paul electric guitar, the J-160E acoustic-electric John Lennon played, and essential jazz-boxes such as Charlie Christian's ES-150. In 2009 the Feds seized several guitars and pallets of wood from a Gibson factory, and both sides have been wrangling over the goods in a case with the delightful name "United States of America v. Ebony Wood in Various Forms."

The question in the first raid seemed to be whether Gibson had been buying illegally harvested hardwoods from protected forests, such as the Madagascar ebony that makes for such lovely fretboards. And if Gibson did knowingly import illegally harvested ebony from Madagascar, that wouldn't be a negligible offense. Peter Lowry, ebony and rosewood expert at the Missouri Botanical Garden, calls the Madagascar wood trade the "equivalent of Africa's blood diamonds." But with the new raid, the government seems to be questioning whether some wood sourced from India met every regulatory jot and tittle.

It isn't just Gibson that is sweating. Musicians who play vintage guitars and other instruments made of environmentally protected materials are worried the authorities may be coming for them next....

The tangled intersection of international laws is enforced through a thicket of paperwork. Recent revisions to 1900's Lacey Act require that anyone crossing the U.S. border declare every bit of flora or fauna being brought into the country. One is under "strict liability" to fill out the paperwork—and without any mistakes.

Conservatives and libertarians are rightly incensed by this kind of regulatory adventurism and its effects on US businesses, but what the article above leaves out is that, as noted in a recent Heritage Foundation study, the Lacey Act's legal requirements and strict liability standard are so severe that the law - intentionally or not - has crippled trade in both illegally-harvested and legally-harvested wood products.  And this protectionism has occurred mainly to the detriment of small importers and developing country exporters who simply can't afford to jump through all of these hoops (or risk even trying to do so).

Unfortunately, the Lacey Act is not alone.  For example, the WSJ reported last month that a little-known provision in the Dodd-Frank financial "reform" law, which bans trade in "conflict minerals," is causing harmful unintended consequences for poor African miners engaging in legal commercial behavior:

The world is in the midst of a commodity boom, but in a mineral-rich and desperately poor corner of Africa exports of tin, tantalum and tungsten have fallen by more than 70% since last summer. These are not the effects of war or natural disaster--although the region suffers from all of that and more--but rather of what local small-time miners are calling "Obama's embargo."

The African miners are basically right about the source of their troubles, though if they want to be more specific with the blame they might also call it the McDermott embargo, after the Democratic Congressman from Washington state. Jim McDermott is one of the architects of the Dodd

The goal of Section 1502 is to cut off money to those responsible for the fighting in the Democratic Republic of Congo, and by those lights the sales collapse shows that it's working. A spokesman for Mr. McDermott tells us that if the trend persists, they hope to see a similar drop in the rate of carnage. Over the past dozen years, more than five million people have been killed and more than 200,000 women raped in the fighting between rebel groups and government forces.

Section 1502 requires companies that use these minerals--they have applications in everything from electronic gadgets to medical devices--to disclose whether they, or anyone along their supply chains, source their minerals from Congo or any of the countries at its borders. If so, their SEC reports will have to detail the steps they're taking to not "directly or indirectly finance or benefit armed groups" in the region. If companies cannot demonstrate such steps, they will have to declare on their websites that their products may be funding African atrocities.

Behind the scenes, companies are working to soften the rules. Some industry groups are also putting in place systems that will let them continue to source from central Africa while telling the SEC their supply chains are "conflict free." But the logistics of guaranteeing this on a large-scale are daunting, and many suppliers find it easier to leave central Africa entirely. A case in point is the procurement policy of the H.C. Starck group, which affirms that it rejects all raw materials from the region, "even if we are offered material with allegedly official certifications from other state authorities."

Shifting all sourcing to places such as Canada or Australia may drive up industry and consumer costs somewhat. But as Verizon points out in a letter to the SEC, "For the foreseeable future, it is going to be much easier to demonstrate that the minerals are from somewhere other than the DRC Zone, than to prove that minerals mined in the DRC Zone are responsibly sourced."

The highest price is being paid in central Africa, where millions of people, and 16% of the Congo's population, are dependent on small-time digging. By all accounts most of the money from central African mining goes to these artisanal miners. Soldiers and rebels do pocket some of the proceeds, and that's a depressing reality.

But mineral operations also provide the local population with centers of commerce, with cash to pay for supplies and workers and easily traded goods. As money from the mines becomes increasingly scarce, Congo's warlords have moved on to targeting the banana trade. Perhaps conflict-free bananas will be the next object of activist enthusiasm.

Meanwhile, the butchery continues, with recent reports of government troops raping more than 100 women and children over a three-day spree in the Congo's South Kivu region. If all the money from minerals dries up, these killers will not shy from even more atrocious means to fund their ambitions. As for Western policy makers, Section 1502 is a useful lesson in how well-meaning attempts to "do something" in Africa unintentionally harm the innocent without touching the guilty.

So to recap: a little-know provision of a national financial reform law has caused imports of African minerals to collapse.  Meanwhile, this regulatory protectionism, and the carnage in Congo that it was intended to prevent, continues.

Your tax dollars at work, folks.  Sigh.

But wait, there's more: the Journal reported in February that the USDA is considering reclassifying Vietnamese "catfish" in order to subject it to far more onerous importation and inspection requirements.  And, gee, you'll never guess what would happen if USDA's proposed rule takes effect:

The U.S. Department of Agriculture is seeking public comment on its proposal to classify the pangasius as a "catfish." A lot rides on that name. The 2008 farm bill specifies new safety inspection on imported catfish so onerous it would amount to a ban for at least several years while foreign fishermen struggle to comply. Pangasius is the target because it has a similar taste and texture to American catfish but is cheaper—the main reason American catfish farmers have tried for years to ban the imports.

The problem is that the pangasius is an entirely different species of fish. In an earlier bout of protectionism, Congress even passed a law making it illegal to call pangasius "catfish" for marketing purposes. Since that hasn't deterred American consumers from buying pangasius, Washington is willing to call the Vietnamese fish a catfish again if that makes it easier to ban.

This would be funny if it weren't so costly and probably illegal. On health-and-safety grounds, both the 2008 law and USDA's moves to enforce it make little sense. Vietnamese pangasius, like all fish imports, already is regulated by the Food and Drug Administration. There have been no reported safety problems with the Vietnamese imports. In contrast, USDA has no experience regulating fish despite its history overseeing meat, and catfish will be the only fish species under its regulatory purview....

As for the illegality, stricter regulation is unlikely to pass muster at the World Trade Organization. Trade expert James Bacchus, in an opinion commissioned by fish importers, argues that the U.S. would likely lose if Vietnam sued precisely because FDA regulation already is effective. Trade judges would conclude the only reason to change the regulation was protectionism, and they'd be right. A former Democratic Representative from Florida, Mr. Bacchus was the chief judge of the WTO's appellate panel for eight years.

USDA has yet to announce its intentions with respect to the final rule on catfish pangasius, but it's clear that the proposed rule would amount to an effective ban on a perfectly safe, fairly-traded product that Americans really want.

And so much for Obama administration efforts to encourage healthier American eating habits, eh?

Another law to watch is the Food Safety Modernization Act.  The Act also imposes  new verification and other requirements for US importers and foreign exporters of all types of foods.  The FDA has yet to promulgate the new regulations that will implement the new trade provisions, so the law's overall impact on food imports and domestic food prices remains to be seen.  However, a recent study by Texas A&M University estimates that the programs will be extremely costly:

FDA will likely pursue a strategy of passing as much costs as they can/are allowed to the domestic private sector. Importers will have incentives to pass the costs of compliance verification on to their sources of supply. Foreign governments interested in increasing their country’s exports could end up bearing the costs of developing new export-oriented programs....

The FSML will place substantial costs on the private sector. These costs will have substantial structural impacts. They will also raise food prices. These declaratory conclusions are based on economic logic/theory backed by analyses of the impacts of the implementation of virtually identical food policies and programs by FSIS/USDA, for similar programs implemented by the LGMA, and by research indicating the impacts of food safety import regulations.

So the law will inevitably lead to higher food prices for American families and higher compliance costs for developing country farmers - a classic protectionism exacta.  (Meanwhile, the law's also raising serious concerns about domestic enforcement.)

Now, although I'm clearly not a fan of intensive regulatory adventurism (particularly in this economy), I don't mean to question the trade intentions of these particular regulations - well, not all of them, at least.  But it's undeniable that they are creating real impediments to lawful trade and needlessly harming American businesses and consumers, as well as poor foreign producers and exporters.  And, of course, these onerous regulatory trade barriers appear to have increased rapidly during President Obama's time in office, so one must necessarily ask the obvious question:

Is this all one big coincidence?

I honestly have no idea, and I also don't know whether these new regulatory measures, or any others out there, meet the requirements for one of the aforementioned WTO exceptions and thus are allowed under global trade rules.  But I'm quite sure that, as regulatory protectionism proliferates in the United States, other nations are undoubtedly going to go through the WTO dispute settlement process to find out.

Green Disputes on the WTO's Horizon

Over the last year or so , I've frequently expressed concern about the potential for increasing trade frictions over green protectionism, i.e., anti-trade measures couched in allegedly environmental terms.  ICTSD reports that the WTO will soon adjudicate two new green trade disputes which could have pretty significant ramifications (emphasis mine):

Environmental issues featured prominently in last week’s meeting of the WTO Dispute Settlement Body (DSB), as members deferred Japan’s first request for a panel on the Canadian province of Ontario’s green energy plan, while granting the Ukraine’s request for a panel to adjudicate its dispute with Moldova on discriminatory “environmental charges.”...

Ontario’s feed-in tariff (FIT) programme for renewable energy has been an area of contention between Ottawa and Tokyo since last autumn. Under the FIT programme, Ontario supports the generation of green energy by guaranteeing electricity purchase prices, grid access, and long-term contracts to renewable energy producers thus limiting their risks and supporting needed investments. Around 75 similar programmes are currently in place worldwide.

However, it was not the FIT programme itself but a local content provision within the programme that landed Canada at the WTO. To receive FIT support, renewable energy producers must ensure that a certain percentage of the goods and services used for setting up the facility comes from Ontario. This can be as high as 60 percent. Japan alleges that the measure violates the national treatment provisions of the General Agreement on Tariffs and Trade (GATT) and the Agreement on Trade-Related Investment Measures (TRIMS).

Tokyo also claims that the local content requirement makes the FIT a “prohibited subsidy,” under the terms of the WTO’s Subsidies and Countervailing Measures (SCM) Agreement....

The Japan Ministry of Economy, Trade and Industry, in a 1 June press release on the dispute, cited concern over the “possible proliferation of such protectionist measures all over the world” as their motivation for seeking the WTO’s assistance on this matter. They noted that their consultations with Canada in October did not provide them with the intended result, given that Canada “raised a local content requirement from 50 percent to 60 percent on 1 January 2011.”...

The DSB established a panel for a dispute between Moldova and Ukraine this Friday; Ukraine had issued its initial panel request on 24 May, which Moldova blocked (see Bridges Weekly, 1 June 2011).

The Ukraine case stems from a 1998 Moldovan law that allows Moldova to apply charges to imports whose use contaminates the environment, in addition to other duties or taxes. The fee ranges from 0.5 to 5 percent of the customs value of those products.

Like the Canada - Renewables case, national treatment also plays a significant role in the Moldova - Environmental Charges dispute. Ukraine alleges that Moldova’s actions are in violation of the WTO’s General Agreement on Tariffs and Trade (GATT) 1994, by not charging the same fees to like domestic products.

Ukraine also claims that Moldova charges importers an environmental fee for plastic or “tetra-pack” packages containing imported goods, without applying the same charge to like domestic goods.

The Ukraine case could provide an indication as to how a WTO panel might resolve a dispute over highly controversial "carbon tariffs," which would in theory apply to imported products based on the carbon-intensity of their production process.  As you'll recall, both the US and EU have flirted with the idea of imposing carbon tariffs as part of their broader climate change mitigation policies, while developing countries like China and India have promised to immediately challenge such measures at the WTO.

Both cases will definitely be worth watching.

Weekend Quick Hits

Apologies for the light blogging this week - it's been a brutally long one for your humble correspondent.  But here's a treasure-trove of headlines to make up for my absence:

• Alternate headline: Former USTR Portman Joins Gaggle of Protectionist Senators to Ask Current USTR Kirk to Pursue Silly Protectionist Policy that USTR Can't Actually Achieve. (Silly letter available here.)

• Must-read WSJ analysis: Blather in Washington won't affect the US-China exchange rate; Chinese inflation will.  (Yes, this should sound very familiar.)

• In case you missed it, AEI's Claud Barfield ably responds to my blog post on the United States' sordid history of "FTA bullying."  His future analysis on this issue promises to be great.

• Forbes analysis: US corporations pay a LOT of taxes, especially those dastardly oil companies!

• Shocker: "Both the European and global carbon markets could significantly increase costs for EU steelmakers, while at the same time reducing the potential for offsetting those costs, speakers at Steel Business Briefing’s Green Steel Strategies conference in Brussels argued.  European Union Allowance (EUA) prices are expected to rise to around €40/tonne by 2020, according to forecasts presented by Carine Hemery of carbon market analysts Orbeo. Moreover, the amount by which steelmakers can cut their costs by offsetting with UN carbon credits, called Certified Emissions Reductions (CERs), could fall from around €3-4/t currently to just €1-2/t in 2013-2020, she adds."  Me: Is lobbying for carbon tariffs soon to follow?

• Vladimir Putin puts on a clinic on "How Not to Improve Your Country's Chances of Getting Into the WTO Anytime Soon."

• According to a new report by sympathetic environmentalists, governments and industries are lying to us about the efficacy of wind power generation.  I'm shocked!

• Cato's Dan Griswold deflates the silly White House rhetoric that we're "on track" to double US exports in the next 5 years.

• WorldTradeLaw.net's Simon Lester has an insightful blog post about the "dangers of talking about competitiveness" in the context of international trade rules (and disputes).  I agree.

• China's commerce ministry (MOFCOM) announced preliminary anti-dumping and countervailing duty rates for sedans and SUVs from the United States.  As you'll recall, this case started back in 2009 as a not-so-subtle response by the Chinese government to the President's decision to impose safeguards duties on Chinese tires under Section 421 of US trade law.  Final rates in the China AD/CVD case will be out in a few months.

• US-China business Council released state-by-state data on US exports to China between 2000 and 2010.  The results are pretty staggering.  For example, exports to China from my home state of North Carolina - a place that's unfortunately (and irrationally) represented by many a protectionist politician - increased over 500% since 2000 and now stand at over $2.2 billion. 

• Arnold Kling discusses a new paper on trade and US employment trends that's (rightfully) getting a lot of buzz.  Tyler Cowen has more praise and discussion here.

• The 2011 Name of the Year bracket is out, and it is as awesome as ever.

• Finally, ReasonTV follows my lead but enlists the far-more-persuasive Sallie James to implode Bernie Sanders' insane war on the imported trinkets that are were sold at the Smithsonian giftshops:

Monday Quick Hits

The eastern seaboard is clearly under attack from global cooling.  Here are some interesting links to get you through these dark and cold "spring" days.

• Chevy Volt: the car from Atlas Shrugged Motors.

• Sore losers implore the US to take their ball and go home.  I like to call this the "Cartman strategy."

• New 2004 UCLA study: FDR's statist policies prolonged the Great Depression by seven(!) years.

• Sarah Palin advocates import liberalization in India, further solidifying her free trade bona fides: "[I]n the early 1990′s, due to clear, commonsense, pro free-market reforms, India’s economy took off! [It] abolished import licenses; cut import duties; removed investment caps & broke the union’s grip on industry."

• The United States has the most progressive tax system in the industrialized world.  Key graf: "[T]he top 10 percent of households in the U.S. pays 45.1 percent of all income taxes (both personal income and payroll taxes combined) in the country. Italy is the only other country in which the top 10 percent of households pays more than 40 percent of the income tax burden (42.2%). Meanwhile, the average tax burden for the top decile of households in OECD countries is 31.6 percent."

• A fascinating study (and a related WSJ op-ed) from the UK think tank Policy Exchange on the impact of global trade on the effectiveness (or, more accurately, the impotence) of the EU's climate change regulations has me wondering whether our policymakers will (i) learn the right lesson from the EU's experience - and the one advocated by Policy Exchange ("to accelerate the development of technologies that will be genuinely competitive with fossil fuels" rather than "browbeat[ing] developing countries into going green") or (ii) use the study to justify their calls for eco-protectionism.  I'm hoping the former but cynically expecting the latter.

• US steelmaking giant Nucor recently broke ground on a new iron making facility in Louisiana that would employ hundreds.  The same site is also permitted for another iron facility, and many are guessing that a steel mill will also show up down there in the next few years.  Oddly, ABC News isn't doing a week's worth of news stories on the Nucor plant(s) or any of the many other industrial expansion efforts across the country.

• Why won't Sen. Sherrod Brown (D-OH) debate GMU's Don Boudreaux on the merits of free trade?  (Yes, that's a rhetorical question.  *cluck cluck*)

• Cato's Dan Griswold points out that the easiest way to decrease American income inequality appears to be destroying the US economy.  (Obvious response: Shh, dude, don't give anyone any bright ideas.)

• So much for the silly myth of "McJobs" in the service industry.  According to this handy primer from the National Retail Federation, the import-dependent retail industry in 2009 employed 330,000 managers who earned an average annual salary of $91,650.  And there are another 300,000 or so well-paid folks in other positions.  (This isn't new, but it's worth mentioning here anyway.)

• Finally, Jonah Goldberg at AEI points us to an awesome video from Hans Rosling about the amazing improvements in global wealth and health over the last few decades.  All of it is cool and worth watching, but for our purposes, the most relevant point is around the 10:00 mark when Rosling unequivocally credits the dramatic, disproportionate (relative to other African nations) improvement of Mauritius on the country's embrace of free trade.

 Enjoy!

China and the WTO: A Marriage Doomed to Fail?

Last week the World Trade Organization, in particular China's membership in the global trade body, came under scrutiny from the anti-trade left and, surprisingly, the (mostly) pro-trade right.  The former's response was totally expected as the logical extension of anti-traders' longstanding "strategy" of seizing on some new headline as ex post justification for their opposition to trade liberalization.  Ian Fletcher (among others) acted the part perfectly as he melodramatically bemoaned the horrible decision of the WTO's Appellate Body in the US-China AD/CVD dispute (upon which I've already commented):

The World Trade Organization has a long history of anti-American actions. They've just handed us another one, and in the process handed a big freebie to Chinese state capitalism.

Fortunately, the obvious bias and error of Fletcher's "arguments" is made evident by simply citing, you know, the actual record of WTO disputes between the US and China since the latter joined the organization about a decade ago.  First, there's the small fact that the Appellate Body actually sided with the United States in two of the four claims raised in that case.  Then, there's the broader data refuting Fletcher's silly allegations. According to the WTO, the US and China have been involved in 17 formal disputes there, with the the United States the complainant in ten of those cases.  Four of those ten are still pending, and the United States has prevailed (through a formal dispute settlement ruling or a mutually agreed solution that resulted from required consultations) in - wait for it - all six cases.  For those of you who aren't math majors, that's a 100% success rate.  So much for the WTO's obvious anti-Americanism, eh?

And let's also not forget the dramatic benefits that China's WTO Membership bestowed upon American exporters (a metric that even a mercantilist like Fletcher can support).  Cafe Hayek's Don Boudreax, citing Doug Irwin's great book, summarizes those benefits quite succinctly (emphasis mine):

While it’s true that China – like nearly every other nation on earth – has in place a plethora of growth-inhibiting mercantilist policies, the overwhelming economic story in China over the past 33 years is the liberalization of its markets – a liberalization that includes dramatic reductions in trade barriers. Here’s economist Douglas Irwin: “In December 1978 China began to end its policy of economic isolation. Under the leadership of Deng Xiaopeng, the government decollectivized agriculture, allowed private entities to trade, and permitted foreign investment…. In 1992 the weighted average tariff [in China] on manufactured goods was over 45 percent. Since China joined the WTO in 2001, the country’s average tariff will eventually fall to less than 7 percent.”

Since these data pretty much annihilate Fletcher's claims, let's move on to what struck me as the more surprising China/WTO criticism - the grumbles of discontent coming from free trade supporters on the right.  AEI's Claude Barfield explains:

At this morning’s AEI conference, Reconsidering America’s China Policy: Engaging Party and People, I had an important exchange with Heritage Foundation scholar Derek Scissors. Derek is a keen and acute observer of China’s economy and trade policy. His major theme this morning revolved around a recantation: to wit, that he had originally supported China’s entry into the World Trade Organization (WTO), but now thought this was a mistake. He stated that the problem was that neither he, nor the decision makers at the time, had foreseen the about-face Chinese leaders after 2001 would make on key trade and investment policies. He argued that China’s leaders in the 1990s had been genuinely committed to a more open economy and downsizing the state sector. However, the leadership since then has reversed course and is committed to a new form of state capitalism and inward-looking development that will inevitably bring the PRC into conflict with WTO rules—in areas such as currency, indigenous innovation, climate change, and competition policy.

Barfield, to his credit, ably refutes Scissors' primary concerns but concludes on what I think is a very odd note (again, emphasis mine):

I, in turn, argued that whatever the future problems and conflicts within the WTO, on balance the world (and the United States) was better off with China inside the WTO. In 2001, China was forced to assume obligations well beyond those demanded of any other nation, developed or developing, as the price of WTO membership. By and large, it has fulfilled those obligations. Does it cut corners and attempt to weasel out of it commitments? Yes. But all nations—particularly those with highly paid trade lawyers such as the United States and EU—continually attempt to “reinterpret” loosely-worded WTO rules (check out U.S. positions on cotton subsidies and sketchy dumping cases). Though it initially reacted with fury at WTO cases against it, China over the past several years had skillfully defended itself at the WTO. Indeed it has just won a major case on anti-dumping and subsidy rules against the United States.

The bottom line is that the issues Derek worries about in general were not, and still are not, WTO obligations. When the GATT/WTO was founded in the 1940s and 1950s, state capitalism was the norm throughout much of Europe; and trade rules for the most part did not, and do not, cover many of these misguided economic policies. During the recent crisis, state intervention increased rather substantially (viz, Government Motors), even while traditional protection barely ticked up. 

In future years, backing the state out of its new role will be a major challenge for the world trading system. And here, Derek makes a point that is worth pondering. When pressed, it was clear that what really concerned him was that China was now so large, and with such outsized influence, that if it kept to the present inward turn, it would destroy the WTO, whatever the niceties of legal obligations. Here I agree, but that is a challenge for future negotiations and does not reverse the reality (in my view) that the world trading system was better off by accepting Chinese membership. Or putting it another way, that also speaks to Derek’s fears—without China as a member could we any longer call it the World Trade Organization?

Clearly the answer to Barfield's final question is a big, fat "no" - omitting the world's largest exporter and second-largest economy from an organization dedicated to liberalizing and harmonizing global trade would instantly de-legitimize the body (although one could rightly question whether China would have ever gained this impressive status without (a) the the trade and economic liberalization brought about by its WTO accession, and (b) the protections that WTO rules have provided China's exports of goods and services).  But should we really be concerned that if China continues its nettlesome trade and economic policies "it would destroy the WTO, whatever the niceties of legal obligations"?

Color me extremely skeptical.

Granted, I wasn't at this discussion, so maybe I'm misinterpreting Scissors' and Barfield's concerns.  But I see several flaws with the idea that China's relatively-isolated fits of protectionism will eventually destroy the WTO.  First, there is the question of whether China would allow this to happen.  Clearly, China sees a lot of value in WTO membership from both a PR and legal perspective.  On the former, WTO membership and China's participation as a "responsible stakeholder" gives China a lot of global street cred - distinguishing it from "rogue" economic nations like North Korea or Russia (which is just desperate to join for, inter alia, this very reason).  On the latter, China's recent "win" at the WTO's Appellate Body, and the country's increasingly frequent resort to WTO dispute settlement (or threats of bringing a WTO case) makes it clear that China is quite pleased with the global trade body's role as an arbiter of global trade rules and potential check on importing nations' protectionism.  For two examples of this reality, consider how often the Chinese government promised an immediate WTO challenge to any US legislation targeting China's currency practices or to climate change legislation that included "carbon tariffs."  So would China really be willing to let the WTO die just to maintain something like its indigenous innovation policy?  That seems really unlikely to me.

Second, and as Barfield sorta mentions, China has actually proven to be pretty good about (i) complying with adverse WTO dispute settlement rulings by revising the illegal trade measures at issue and (ii) liberalizing its trade and investment regime pursuant to its phased-in WTO accession commitments.  Sure, the Chinese haven't been perfect and often draw the ire of their trading partners, but as Barfield and Boudreaux note above, pretty much nobody has been perfect (see, e.g., US refusal to implement adverse WTO decisions on internet gambling or zeroing or cotton subsidies).  I imagine that China's (often reluctant) compliance is due to the same reasons I already mentioned - a strong desire not to implode a global organization that they highly value.  So, when push comes to shove, China begrudgingly caves on WTO matters just like everybody else, or it pays for its non-compliance through retaliatory sanctions (again, just like everybody else).  Such (totally routine) behavior hardly seems like the actions of a rogue nation destined to implode the WTO.

Third, I'm extremely skeptical that the trade issues that Scissors and Barfield raise - such as currency, indigenous innovation, climate change and competition - are really the WTO-breakers that they (apparently) assume.  Beyond that fact that, as Barfield notes, these issues are not really covered by standard WTO disciplines (and this omission is very much intentional - just ask USTR about EU competition policy sometime), are these really the mission-critical issues that are going to destroy a global trade organization that has (in some form) been around for more than six decades?  Let's look at each quickly:

• On China's currency, I've repeatedly noted that the issue is quickly resolving itself due to domestic inflationary pressures and, well, lots of nations have meddled with their currencies over the last few years.

• On indigenous innovation, China's already revising some of the policy's more troublesome aspects, and has agreed to submit a better offer to accede to the WTO's Government Procurement Agreement (which would discipline many other aspects).  This is admittedly a long slog and should certainly be a US negotiating priority, but it is making progress (albeit at at a glacial pace).

• On climate change, China's reluctance to sign an intensive multilateral climate change agreement and its opposition to carbon tariffs is hardly is isolated to China alone - it's something shared by almost all developing country nations (see, e.g., India's threats to bring a WTO dispute against any national climate change laws that include carbon tariffs).

• And on competition policy, again, see the United States and the many other (very sane) nations that aren't really down with global harmonization of competition (i.e., anti-trust) disciplines.

Finally, it just doesn't seem that other WTO Members harbor concerns that China's naughtiness is going to end up scuttling the WTO.  Of course, they'd never admit publicly that they had such troubling feelings, but they're still negotiating as if the WTO agreements are going to still be valuable in a few years, and they're still bringing new disputes against China and each other.  I don't know about you, but I wouldn't be wasting my government's finite resources on securing new dispute settlement rulings against China if I thought the body was going anywhere anytime soon, would you?

Now, look, I'm certainly not saying that the WTO is invincible, and as I've already noted, the body's utility as a vehicle for new trade liberalization could (could!) be coming to an end.  And who knows, maybe an issue will arise that will pit WTO Members against each other in such an entrenched and permanent way that it'll effectively destroy the global trade organization.  But in China or any other WTO Member, I've yet to see anything even remotely big enough to do it.

New OECD Report on Carbon Tariffs Helpfully Beats a Dead Horse

As we gleefullycautiously discussed last week, Senate leadership has dropped any and all discussion of carbon tariffs in their latest attempt at 2010 energy legislation.  Today, the OECD issued a new report further explaining why opponents of carbon tariffs (like me) were happy with the new Senate bill's big omission:

Concern that unilateral greenhouse gas emission reductions could foster carbon leakage and undermine the international competitiveness of domestic industry has led to growing calls for carbon-based border-tax adjustments (BTAs). This paper uses a global general equilibrium model to assess the economic effects of BTAs and comes to three main conclusions. First, BTAs can reduce carbon leakage if the coalition of countries taking action to reduce emissions is small, because in this case leakage (while typically small) mainly occurs through international trade competitiveness losses rather than through declines in world fossil fuel prices that trigger rising carbon intensities outside the region taking action. Second, the welfare impacts of BTAs are small, and typically slightly negative at the world level. Third, and perhaps more strikingly, BTAs do not necessarily curb the output losses incurred by the domestic energy intensive-industries (EIIs) they are intended to protect in the first place. This is in part because taken as a whole, EIIs in industrialised countries make important use of carbon-intensive intermediate inputs produced by EIIs in other geographical areas. Another, deeper explanation is that EIIs are ultimately more adversely affected by carbon pricing itself, and the associated contraction in market size, than by any international competitiveness losses. These findings are shown to be robust to key model parameters, country coverage and design features of BTAs.

Did you get all that?  No?  Ok, then please allow me to translate that into slightly-less-nerdy prose: where a country has imposed draconian climate change-mitigation policies like cap-and-trade or a carbon tax, carbon tariffs won't protect that country's energy-intensive domestic industries (e.g., steel, aluminum, chemicals, and paper) against foreign competition that isn't burdened with a similar climate change-mitigation system.  The reason: the domestic system will itself cost domestic industries far more than they would lose in business to the unburdened foreign competition.  In short, carbon tariffs can't help save American manufacturers under a cap-and-trade system because the system itself, not foreign competition, will kill those companies.

Yikes.

Now it sure would've been nice to have this study completed before carbon tariffs were pronounced dead in America's 111th Congress, but, hey, better late than never.  Indeed, as I said last week, the threat of carbon tariffs, stemming for example from the EPA's forthcoming greenhouse gas regulations, still roams the earth like a brain-thirsty zombie, so consider the OECD study to be yet another bullet in your sidearm should the nasty carbon tariffs corpse rise from the grave and start looking for fresh meat.

(I know, I know: I took the metaphor too far.  I'll stop now.)

Victory (Sorta): New Senate Energy Bill Ditches Carbon Tariffs

Senate Majority Leader Harry Reid (D-NV) released today the scaled-down version of the Democrats cap-and-trade energy green jobs "oil spill response" bill, and free traders should be pleased.  The bill summary is available here, and as you can see, there's nary a mention of carbon tariffs or any other euphemism (like "border adjustment" or "offset rebate" or "International Reserve Allowance") used to hide the nasty, trade-war-inducing measures in plain sight.  The new bill also lacks provisions on combating "carbon leakage" or "ensuring domestic competitiveness," which are really just backdoor ways of saying "attacking developing country imports."  So all in all, carbon tariffs appear dead in the United States for 2010.  Hooray.

That said - and I hate to be a party-pooper - there are still plenty of reasons for concern going forward.  Here are my top two:

First, the new Senate Bill doles out more federal subsidies for "green manufacturing."  In particular--

- Section 2004 requires the Secretary of Energy to promulgate an interim final rule establishing an infrastructure deployment program and a manufacturing development program. The Secretary of Energy is required to provide:

• Grants of up to $50,000 per unit to qualified refuelers for the installation of natural gas refueling property placed in service between 2011 and 2015; and 

• Grants in amounts determined to be appropriate by the Secretary to qualified manufacturers for research, development, and demonstration projects on engines with reduced emissions, improved performance, and lower cost.

- Section 2005 requires the Secretary of Energy to promulgate an interim final rule establishing a direct loan program to provide loans to qualified manufacturers to pay not more than 80 percent of the cost of reequipping, expanding, or establishing a facility in the United States that will be used for the purpose of producing any new qualified alternative fuel motor vehicle or any eligible component. $200 million would be

As I've discussed a few times (and fiscal insanity aside), tossing around billions of dollars in cheap loans and direct grants to domestic "green manufacturers," combined with intense administration efforts to increase exports of the subsidized green products, is a surefire way to cause trade disputes and eventual remedial tariffs on those goods.  So while the Senate Bill ends one very big source of trade friction (carbon tariffs), it still contains at least two other, admittedly smaller, ones.  Blech.

Second, and as I noted last year, the demise of any near-term legislative attempts to cap domestic carbon emissions and concurrently regulate imports of carbon-intensive products doesn't mean that the Obama administration will just stop trying to impose its green utopia on an increasingly unwilling American electorate.  Instead, the battle now turns to the EPA and its newfound powers to regulate carbon emissions under the Clean Air Act.  As I said back in December after the EPA's "endangerment" ruling was released:

The EPA's endangerment ruling does not authorize, or even contemplate, the imposition of carbon tariffs. It doesn't even establish the EPA's actual regulation of most GHG emissions or production of GHG-intensive goods (although that's certainly a viable ultimate result). Indeed, Monday's EPA ruling really does only two things: (i) deem GHGs to be harmful pollution capable of being regulated by the CAA; and (ii) lay the groundwork for the EPA's regulation of GHG emissions from new motor vehicles. So why should we be "very, very concerned" about the EPA pursuing eco-protectionism and all the nasty fallout that would result from that move?

Several things, actually.

First, EPA documents and rulings clearly indicate that the agency both looking into, and laying the groundwork for, some form of import regulation related to its new endangerment ruling. For example, in the EPA's July 2008 Advanced Notice of Proposed Rulemaking (a necessary precursor to the final endangerment rule), the EPA frequently questioned whether its GHG regulations would cause "emissions leakage" - i.e., the outsourcing of GHG-emissions-intensive industries and jobs to countries that lack GHG regulations. A primary way to combat such leakage, of course, is carbon tariffs. Indeed, in the same document, the Department of Commerce voiced strong opposition to the unilateral imposition of carbon tariffs - another clear indication that the EPA was mulling the idea. (And, of course, that was a much different DOC (and EPA) than we have today.)

The EPA's final endangerment rule includes no discussion of leakage or border measures, but has several pages (see, in particular, pages 142-151 of the document linked above) on how global GHG emissions can affect human health and safety. One of many telling quotes: "The impacts of the air over the United States cannot be assessed separately from the impacts from the global pool, as they occur together and work together to affect the climate." As with the preliminary notice, it's clear that the EPA is well-aware of, and fully contemplating, the global effects of GHG emissions and its potential regulation of their (allegedly) harmful effects in the United States.

Another EPA ruling related to the endangerment finding also is cause for concern about future eco-protectionism stemming from the EPA's GHG regulations. On October 30 of this year, the EPA announced a final rule for GHG emissions under Section 307(d) of the CAA which "require[s] reporting of greenhouse gas emissions from all sectors of the economy." The final rule doesn't regulate GHGs emissions - just reporting, and applies to fossil fuel suppliers and industrial gas suppliers, direct GHGs emitters and manufacturers of heavy-duty and off-road vehicles and engines. Such "suppliers" include importers and exporters of fossil fuels and certain downstream petrochemicals. Again, it's clear from these regulations that the EPA is very much aware of, and concerned about, the international trade implications of its GHG regulations. Moreover, this reporting system could quite easily be expanded to include other products or, more importantly, provide much-needed evidence (a "rational basis," in legalese) to justify the EPA's imposition of border measures on products/processes controlled by any new GHG regulations.

Second, if Congress refuses to act on Cap-and-Trade (quite likely considering how devastating the issue is politically these days), the EPA's endangerment ruling could be used as a surrogate means of controlling US GHG emissions. Indeed, the White House brazenly threatened as much today (so much for Democrat wailing over abuse of executive power, huh?). Well, as I've discussed repeatedly, a primary component of both the House "Waxman-Markey" bill and the Senate "Boxer-Kerry" bill is, you guessed it, carbon tariffs. Thus, if the EPA's emissions regulations are truly meant to be a surrogate of current US climate change legislation, it's certainly plausible that those regulations will contain some form of similar border measure. (It's also plausible that they won't, but that leads us to the next point.)

Third, if the EPA's endangerment ruling indeed leads to the imposition of serious GHG regulations on US businesses, domestic industry groups will very likely spend a fortune lobbying for the imposition of some form of anti-leakage measure. For example, the above-linked WSJ article cited concerns about "huge costs" imposed on US industries from, among others, the US Chamber of Commerce and the National Association of Manufacturers, US electricity providers, and oil refiners - costs likely not borne by their (lucky!) foreign competitors. Indeed, the Iron and Steel Institute said that any regulation -- whether through the EPA or Congress -- must "reduce emissions without altering the competitiveness of American steelmakers." Of course, the steelmakers - and the many lawmakers who do their bidding - have demanded carbon tariffs in the Cap-and-Trade legislation to ensure a "level playing field" for their products versus imports, so similar efforts are very, very likely for any surrogate EPA regulation.

In sum, the EPA's controversial endangerment ruling does not explicitly contemplate or authorize eco-protectionism under the CAA, nor will it definitely lead to such nastiness. On the other hand, there is plenty of reason for concern. The EPA is clearly concerned about emissions leakage and believes that emissions regulation extends beyond America's borders. Moreover, the agency has not only contemplated border measures as part of any GHG regulation regime under the CAA, but also established a framework - and potential justification - for the imposition such measures down the road. The case isn't a slam-dunk, but it's certainly something to watch for.

Replace "Boxer-Kerry" with "Kerry-Lieberman" and all of this still applies today.  Indeed, Republican efforts to block the EPA's authority to regulate greenhouse gases failed back in June, so the agency's newfound powers definitely remain alive and well.  Moreover, the next UN Climate Change Conference in Mexico City - the much-awaited follow-up to last year's debacle in Copenhagen - is only a few months away, and do you really think that the Obama administration is going to show up totally empty-handed to the world's next big climate change party?  Highly unlikely.

So rejoice for a moment, folks, but remember: this is only round one.  We've got a long, long way to go.

Wednesday Quick Hits

I'm still digging out of cardboard boxes, so here are some headlines/links to keep you occupied until I'm fully functional again:

• India still talking tough on carbon tariffs, this time at the ongoing climate talks in Bonn, Germany.

• And speaking of Bonn, things are going, ahem, not-so-smoothly. 

• EU to US: "Hey, maybe you could help the WTO's Doha Round out by, you know, actually saying what you want instead of just repeating the same empty rhetoric and doing nothing."

• Canada's international economic sanity continues to make the United States' positions look (deservedly) bad - this time on China currency and opposition to the "global bank tax."

• Canadian 1Q economic growth tops expectations, doubles-up US growth. (Gee, I wonder why?)

• Czech President Vaclav Klaus: "Let's face it, people, the Eurozone has already collapsed.  And boy were we right to avoid that boondoggle."

Ok, that's it for now.  I promise to be a better blogger soon.  But these darn boxes unfortunately don't unpack themselves.

Center for American Progress, France Blindly Push for Carbon Tariffs

The left-leaning Center for American Progress has issued a new paper calling for the implementation of a US-EU system of carbon tariffs.  The author, CAP's Jake Caldwell, summarizes his case as follows:

Carbon tariffs—which the United States and the European Union could decide to impose on greenhouse-gas-intensive products imported from countries refusing to take action on climate change—have the potential to play an important role in these [climate change] discussions moving forward. Carbon tariffs can be an effective policy tool to reduce global emissions and preventing carbon leakage, or the migration of carbon-intensive industries to countries with more lax regulations.

But we must proceed cautiously. Carbon tariffs may also present significant risks to the multilateral trading system and the Earth’s climate if they are designed and implemented poorly and do not fundamentally reduce global greenhouse gas emissions. That’s why the United States and the European Union should work together to design and implement an open and transparent approach to carbon tariffs as part of an overall effort to reduce global greenhouse gas emissions.

Caldwell goes on to explain, as pleasantly as possible, how and why carbon tariffs should be a part of the United States' and EU's future climate policy plans.  As to the latter issue, Caldwell's two primary reasons for supporting carbon tariffs are (i) to stop "carbon leakage" (i.e., the movement of emissions-intensive production to poorly regulated countries); and (ii) to ensure the competitiveness of the domestic industries being strangledregulated by new climate change schemes.  Unfortunately, Caldwell's discussion includes not a shred of evidence that carbon tariffs would actually, you know, achieve those objectives.  (Seriously, there's not a single link or footnote to anything of the sort.)  On the other hand, Caldwell could have spent two minutes on this blog and found oodles of scholarly evidence (see, e.g., here, here, here and here) showing that they would not.

As for the "how," Caldwell provides a laundry list of ideas about what his ideal system should entail: (i) apply carbon tariffs in an open and transparent manner; (ii) exempt least developed countries from tariffs; (iii) consider countries’ greenhouse gas reduction efforts; (iv) establish a joint US-EU working group to identify the relationship between trade and climate change issues; (v) invoke a joint US-EU agreement to apply a “peace clause” for an initial period of 10 years; (vi) allow national leaders to make a final decision on carbon tariffs; and (vii) consider other policy options to address carbon leakage and competitiveness.

I won't get into all of these issues, but I find (i) and (iv) to be really, really interesting (and not in a good way).  On "transparency and openness," Caldwell doesn't really explain how that would work, but I (and many scholars and developing countries) am rather skeptical that such "transparency" is possible or even helpful for developing a "fair" system.  Indeed, I wonder if he's ever seen or read a 100+-page Department of Commerce decision memorandum in a US trade remedies investigation - one that imposes supposedly "remedial" tariffs of 100% or higher on "unfairly traded" Chinese imports, and requires a Rosetta Stone to even begin to understand (hence, why I'm employed).  And that's just the public memos.  There are always hundreds more pages of proprietary calculation documents.  So knowing how our existing remedial tariffs are calculated and imposed on "unfairly-traded" imports, does Caldwell really think that similarly "remedial" tariffs on "non-green" imports would be calculated and imposed any differently or better?  Oh, and let's also keep in mind who's lobbying for, and drafting, these carbon tariff "transparency" regulations.  (Hint: it ain't developing country governments, their exporters or US consumers.)

On point (iv) (i.e., the "joint US-EU working group to identify the relationship between trade and climate change issues"), I'm just flat confused.  According to Caldwell, his working group would "consider a range of issues including the use of carbon tariffs and... guide the WTO’s approach to these issues."  Well, considering how darn controversial carbon tariffs are for developing countries and that they could literally start a trade war, shouldn't an honest and sound environmental policy first consider and determine the "relationship between trade and climate change" before strongly advocating dangerous systems that include border measures based on that relationship?  And second, does Caldwell actually think that a US-EU working group, which excludes 151 other WTO Members, would be well-received and adopted at the WTO, which relies on consensus-driven decision making?  Or does he think that the WTO's seriously independent Appellate Body would gladly be "guided" by the very developed countries whose carbon tariff measures would no doubt be challenged (by India, China or other Members) before it?  (Quick answer: Not gonna happen, dude.)

And speaking of the WTO, it's a tad, ahem, unfortunate that Caldwell glosses over the very serious legal concerns raised by India and others that carbon tariffs don't comply with WTO rules.  His only legal justification is the now-notorious joint paper by the WTO and the UNEP which, as Caldwell rather coolly admits, only "suggests border adjustment measures may be consistent with WTO rules in certain circumstances." (Waffling emphasis mine.)  Of course, all those qualifiers are totally necessary because Cato's Sallie James and the Indian Government, among others, have both provided ample legal argument that most carbon tariff schemes would not be consistent with global trade rules.

Indeed, it's James' analysis which is most interesting here because one of her paper's main points was that WTO rules necessitate that "[a]ny trade-related measures (such as tariffs on goods from noncapped countries) need to be based strictly on the goal of protecting the environment, rather than an attempt to level the playing field for domestic competitors shackled by climate change regulations. Breaking the link between the trade measure and the goal of protecting the environment is a sure invitation to WTO dispute-settlement proceedings."  Yet, as noted above, one of Caldwell's two big reasons for carbon tariffs is the need to maintain the competitiveness of US and EU manufacturers.  In other words, Caldwell in one breath brushes off WTO concerns over carbon tariffs, yet his primary reasoning for their use is precisely what will trigger a big WTO dispute.

Umm, what!? 

So to recap, Caldwell (i) provides no empirical support for, and ignores the boatloads of evidence against, his main carbon tariffs justifications; (ii) proposes a "system" that is almost certainly impractical; and (iii) ignores carbon tariffs' legal problems under WTO rules.  But other than that........

But hey, all's not lost for Caldwell, as today's other carbon tariffs news shows that he's not alone out there in his support for the controversial measures.  Euractiv reports that the French government, fresh off the collapse of its own national efforts to impose carbon tariffs, is aggressively pushing for them at the EU.  Problem is that most every other European nation (minus Italy) and the EU's Trade Commissioner Karel De Gucht (among others) oppose carbon tariffs because they'd raise prices for consumers and possibly start a trade war.

Funny how Caldwell, while mentioning France and Italy, also fails to mention that stubborn little fact, huh?

(Actually, no it's not.)

Senate Sponsors of New Climate Change Legislation Try - and Hilariously Fail - to Cover Carbon Tariffs' "Competitiveness" Tracks (UPDATED)

Tomorrow, Senators John Kerry (D-MA), Lindsay Graham (R-SC) and Joe Lieberman (I-CT) will unveil their long-awaited legislation to completely re-jigger (technical term) the American energy sector.  The Hill has done some digging and uncovered the confidential internal summaries of the legislation, and it contains pretty much everything that we've expected for a while now: emissions caps, nuclear power, handouts to domestic energy producers and, of course, carbon tariffs.

The Hill links to the bill's long summary here (PDF), and just like the House climate change legislation (aka "Waxman Markey") and the Senate's old version (aka "Boxer-Kerry"), the bill isn't so forthrightbold as to actually call the carbon tariffs, well, "carbon tariffs" (or "border measures" or "border taxes" or anything anyone's ever actually heard of or been publicly concerned about.)  No, instead the legislation follows Waxman-Markey and calls its border measures an "International Reserve Allowance Program."  In particular, the summary states:

Sections 775. International Negotiations. Finds that the purposes of this subtitle can be most effectively achieved through international agreements and states that it is the policy of the United States to work proactively under the UNFCCC and in other forums to establish binding agreements committing all major-emitting countries to contribute equitably to the reduction of global greenhouse gas emissions.

Section 776. Presidential Reports and Determinations. Requires the President to submit a report to Congress no later than January 1, 2019, and every two years thereafter, regarding the effectiveness of the distribution of emission allowance rebates under Subpart I in mitigating the risk of increased greenhouse gas emissions in foreign countries resulting from compliance costs incurred under this bill. 

Requires the President to establish an International Reserve Allowance Program if a multilateral agreement consistent with the statement of policy described in section 775 has not entered into force by January 1, 2020, unless the President determines that such program would not be in the national economic or environmental interest of the U.S.  If the President establishes an International Reserve Allowance Program, this section requires the President to make a determination as soon as possible, but no later than June 30,2023, and every two years thereafter, for each eligible industrial sector, of whether not more than 70 percent of global production with respect to that sector is produced or manufactured in countries that meet specific criteria described in this section.

Section 777.  International Reserve Allowance Program. Directs the Administrator, with the concurrence of the Commissioner of Customs, to promulgate regulations establishing an international reserve allowance program. Includes provisions in addition to the reserve allowance program to mitigate or address carbon leakage by ensuring that eligible sectors may receive additional emission allowance rebates in an amount necessary to address those impacts.

It's much less controversial when completely unintelligible, you see?  But don't be fooled: those are stealth carbon tariffs, my friends. 

However, unlike Waxman-Markey (see Sec. 768) or Boxer-Kerry, it appears that the new Senate climate change legislation has, also as expected, ditched any discussion of how the border measuresinternational reserve allowances are intended to offset any domestic competitiveness concerns, and it instead has couched the carbon tariffs provisions in wholly environmental terms.  This environment-only focus is made abundantly clear in the sections above, and, as we've discussed before, it's part of a recent trend and probably quite intentional:

[T]he Senators' rhetorical shift [from competitiveness to environmental reasoning] is - shocking, I know - a rather ham-handed attempt to keep their cherished carbon tariffs consistent with WTO rules.  As Cato's Sallie James explains:

[T]he almost convincing attempt by these senators to cloak their protectionism in green-speak about the need to ensure that climate legislation is environmentally effective. They will have to keep that up, too, if they are to stay on the right side of WTO law, which says there must be a clear link between a trade measure and an environmental purpose if the measure is to be at least prima facie legitimate.  Imposing border measures to address adverse competitiveness effects of domestic environmental regulations, in other words, probably won’t cut it.

The bill's short summary (available here) also follows this new "green" road-map (and it's also a little more obvious about the bill's inclusion of border measures):

In order to protect the environmental goals of the bill, we phase in a WTO-consistent border adjustment mechanism. In the event that no global agreement on climate change is reached, the bill requires imports from countries that have not taken action to limit emissions to pay a comparable amount at the border to avoid carbon leakage and ensure we are able to achieve our environmental objectives. (Emphasis mine.)

You couldn't shoehorn more "environmental" references into this summary if you tried.  Only one small problem: this strictly "environmental" summary falls clearly under the main heading "Expanding America's Manufacturing Base," and the long summary of Sections 775-777 above comes under the main heading "Subtitle A - Protecting American Manufacturing Jobs and Preventing Carbon Leakage."  So did the Senate drafters really just take all that time purging all of the scary "competitiveness" language from their new bill's carbon tariffs provisions, only to keep them under a legislative subtitle that expressly denotes provisions dealing with domestic industrial competitiveness?

Well, the text of the bill isn't out yet, so we don't really know for sure.  But if so, this has gotta be one of the dumber drafting moves that I've seen since, well, ObamaCare.

Although I'm sure the Indian Government is just psyched.

UPDATE: Sallie James weighs in on the Kerry-Lieberman bill and finds even more proof of  really bad drafting.  Also, the legislation has been released and the headings, etc. are the same as the summaries.  Nice.

Monday Quick Hits

A few noteworthy things on this busy Monday:

• Apparently, the United States' position in the TPP negotiations is lactose intolerant.  In a new Washington Times op-ed, Cato's Sallie James notes some rather distressing statements from USTR Ron Kirk indicating that the US could support significant restrictions on dairy imports as part of the new Trans-Pacific Partnership Agreement.  If USTR does indeed pursue such negotiated protectionism, it's further proof that free traders just shouldn't get too excited about the TPP negotiations.

• China's trade balance continues to thwart American currency hawks' simplistic talking points about the RMB's undervaluation.  In March, China reported its first trade deficit in years.  Today we find that China shifted back to a trade surplus in April, but it was a whopping 87% smaller than April 2009, and the Jan-April 2010 surplus was 79 percent smaller than January-April 2009.  As the linked Bloomberg article correctly states, these data "may ease pressure for gains in the yuan and support Premier Wen Jiabao’s argument that the currency isn’t undervalued."  Bloomberg also hits on something that AEI's Phil Levy said last week:  "The sovereign-debt crisis in Europe that today prompted a loan package of almost $1 trillion to help nations under attack from speculators may also encourage Chinese officials to delay ending the yuan’s peg to the dollar."  Somehow I doubt, however, that the currency hawks care about such facts or will be revising their statements accordingly.

• United States' new man in Geneva: "For those of you hoping for the quick completion of a Doha Round Agreement, just stop."  The new US ambassador to the WTO, Michael Punke, told reporters today that there can be no "quick fix" to end the deadlock in the World Trade Organization's long-running Doha Round talks.  Of course, we all knew that already because such resolution requires American political will that's been missing since 2008, but it's good to know that Punke's not getting any crazy ideas about, you know, actually completing an ambitious, economically-beneficial multilateral agreement anytime soon.  Whew!

• Bi-partisan Senate support for KORUS FTA is nice, but....  The AFP reports that Sens. John Kerry (D-MA) and Richard Lugar (R-IN) sent a letter to President Obama calling om him "to submit a long-delayed free trade agreement with South Korea to Congress for approval."  The letter "urged Obama to work with lawmakers to end feuds over beef and automobiles that have held up the pact.  'Submission of the agreement to Congress also would be considered a significant show of solidarity with a close and reliable ally,'  they said in a letter dated Friday, calling for action 'as soon as possible.'"  Kerry is the chair of the Senate Foreign Relations Committee and Lugar its ranking member.  Their letter is available here.  Hey, do you think that North Korea might just have something to do with the Senators' KORUS letter?  (Obvious answer: Yes.)  Do you think that it'll change KORUS' near-term outlook in Congress?  (Obvious answer: No.)

• Ways & Means GOP to Dems: "Hey, do you guys remember the bi-partisan deal we all signed way back in 2006 that was supposed to pave the way for congressional passage of pending FTAs?  No?  Well, we do."  The Ways & Means Republicans celebrated the third anniversary of the 2006 "bi-partisan trade deal" by releasing a report "showing the harm suffered by American agriculture due to a failure to move forward on pending trade agreements."  The report is available here.  No word on whether the GOP press release and report were accompanied by a sugary cake and three candles.  (But I'm guessing that they were not.)

• A nice (long) summary of European climate change and carbon tariff developments and next steps.  Feel the excitement!

That's all for tonight, folks.