Trade wars shouldn’t damage climate progress
Beijing and Washington’s climate agreement announced last week, pledging to “work together” to address the crisis, is good news. But despite the happy words, the policies the nations have deployed to overhaul their energy supply have put them on a collision course. The European Union’s climate effort is also uncoordinated with those of the other big players.
This is all happening when the World Trade Organization, the international arbiter for trade disputes for the past quarter-century, has been virtually incapacitated by the budding conflict between China and the United States.
The policy miscoordination in a legal vacuum not only undermines the global climate effort. Without some new institutional framework, it also risks erupting into a broader trade war.
The United States carries much of the blame for the increasing tension. As the main architect of the liberal trading system under the auspices of the WTO, it often relied on the organization’s procedures to retaliate against other countries that were using subsidies and local content rules to help their companies compete unfairly in global markets.
When the Inflation Reduction Act — that is, 2022 climate law — included a rash of subsidies festooned with local content requirements, the world noticed that a new era had arrived, one in which the United States would disregard the international trade order it had worked so hard to build.
China, like the United States, has chosen a subsidy-heavy climate strategy, providing incentives for the development of clean-energy systems. Europe has followed a radically different path, relying mostly on a carbon price it imposes on polluting industries to encourage consumers and businesses to move away from fossil fuels.
These choices could well lead to conflict: Subsidies in the United States and China will reduce the cost of energy for businesses and consumers. In Europe, carbon taxes will raise it, putting European industry at a competitive disadvantage. The EU hopes to redress the imbalance by imposing a carbon tariff on imports from countries with no carbon tax. But there is little it can do to redress its competitive deficit in markets outside the EU.
Subsidies create inefficiencies of their own. And they lead trading partners to impose “countervailing duties” to protect their own industries. Paying for the energy transition becomes much more expensive in a world encumbered by interlocking sets of subsidies and countervailing duties than in a world with neither. The Biden administration thinks it can manage a more hostile international landscape. It placated Korean and European allies alarmed over provisions in the Inflation Reduction
Act that would have barred their electric vehicles from subsidies by carving out an exception that allowed leased Hyundai and
Mercedes EVs to benefit even if they lacked the required U.S. content. Washington is rushing to cut trade agreements with other friendly nations, to bring them into the supply chain and enjoy IRA preferences.
Still, ad hoc solutions are unlikely to work for long. U.S. interests are not pristine: Lawmakers wrote the IRA to promote straight protectionism, to “bring jobs home.” It is vulnerable to retaliation. Despite Washington’s concessions, the EU is considering revising its competition rules to deploy subsidies, too. China is objecting to Europe’s carbon tariff and U.S. subsidies. And Europe launched an anti-subsidy investigation into Chinese production of electric vehicles.
Without an agreed system to constrain these policies, the opportunities for conflict seem endless. Whether inside the WTO or not, the prospect of a hot future should compel cooler heads to design new, effective guardrails on trade to prevent conflict and promote the cooperation the climate needs.