After Copenhagen, The Carbon Tariff Trade Wars Begin

Posted on 05. Jan, 2010 by Ross in Asia, Europe, Government Policy, Heavy Industry, Manufacturing, Metal Stamping & Steel, North America, Oil

In the aftermath of the global economic collapse, the industrialised world looked back at the lessons of the 1930s and realised that the fastest way out of recession was to avoid protectionist trade wars and to keep international markets as open as possible, in order to try to keep trade flowing as freely as possible against the financial freeze of the credit crunch.

However, protectionist trade wars still lies at the heart of many a politician, who care far less about global economic trade than about how workers in their own constituencies are affected by the outsourcing efforts, or how multinational corporations are monopolising local resources.

Copenhagen: The Last Hope For Free Trade

In that regard, Copenhagen was far more than just a fight to reduce carbon dioxide emissions. It was an opportunity for world leaders to demonstrate their commitment to ensuring fair trade as well as free trade: that economies could reduce carbon emissions and fight climate change without being destabilised by dirtier economies which refused to rein in carbon emissions.

Copenhagen was not the agreement that was expected, let alone hoped for. The USA, India and China combining to circumvent the international diplomatic process and produce an agreement which best suited only their own interests. The rest of the world was left to cast the blame in every direction possible and barely even agree to ‘note’ the agreement, rather than formally adopt it. There is little likelihood of a better outcome from the COP16 meeting in Mexico City, either.

With a great deal of bitterness over the collapse, especially over the total lack of any carbon reduction targets at all which were so dear to the European Union, African states and the island countries, countries are now working out how to proceed next, and there is now one item on the menu which had been removed by all before Copenhagen: Carbon Tariffs.

Carbon Tariffs: The Penalty for Polluting the Planet

Carbon tariffs are seen by protectionist conservative politicians as the obvious way to safeguard domestic jobs whilst still taking action on the environment (although for many that latter point is merely convenient politically rather than an idealogical goal). However, with the collapse of international trust and negligible co-operation on carbon reductions, the idea of a carbon trade war will start to gain traction with more liberal leaders anxious to see carbon reduction global rather than just locally.

Carbon tariffs are already making their debut on a sub-national scale. Such is the division and bitterness in American politics over carbon reduction, especially between those states most dependant upon coal mining and those who aren’t, that Minnesota has now announced a carbon tariff upon energy from coal power stations in North Dakota ranging from $4-$34 dollars per tonne of carbon dioxide. Coal-rich North Dakota is trying to sue their green neighbours over the carbon tariff, but Minnesota is looking to stand firm over the decision, having already allocated half a million dollars into a legal fund to defend the carbon tariff.

Support for carbon tariffs on imported goods has always been strong in the USA, with Republicans routinely joined by rust belt and coal state Democrats to demand the inclusion of such tariffs in the ongoing climate change legislation still floundering on Capitol Hill. The main body of Democrat representatives have resisted up until now, keen to avoid penalising China and India in the hopes that both nations would bring meaningful commitments to the table at Copenhagen. With that hope now lost, US politicians are far more likely to slap strong carbon tariffs onto imports such as steel which have been made by dirtier competitors.

A USA-China Carbon Tariff Trade War?

The prime target for such action would be China, the country which has constantly dogged the thoughts of American policy-makers in the last decade. Copenhagen largely disintegrated due to the total lack of trust that the USA has in its only superpower competitor and the unwillingness of China to submit to independent monitoring of carbon emissions and to long-term global emission targets, but the possibility of a carbon trade war between the two titans of world trade now looms large on the horizon.

China’s boldness during Copenhagen was in part a result of the success of its domestic stimulus package, which helped to stabilise its economy as foreign demand for Chinese manufacturing collapsed with the economic downturn. The stimulus success has led many in China to believe that they are starting to uncouple themselves from global economics, and that domestic demand for goods will be able to sustain China more fully in the future.

However, the stimulus has served to postpone the effect of declining foreign demand rather than replace it, and China needs the developed nations to continue to soak up the extra manufacturing capacity created by its continuing growth for some time to come. The Chinese economy is far from self-sufficient right now: 20% of Chinese SMEs have been wiped out by the economic downturn, with another 20% still on the brink of bankruptcy. In 2008, SMEs contributed 60% of GDP and 80% of urban jobs.

China’s banks are still massively exposed to the collapse in commercial and industrial real estate values, hoping to weather the storm and realise stronger returns later rather than write off bad loans. Inflation is starting to become a worry, and Premier Wen Jiabao expects a ‘bumpy road’ ahead for the Chinese people.

A carbon tariff trade war with the USA would certainly hit China very hard indeed in the current economic environment.

Will Carbon Tariffs Destroy World Trade?

The big unknown is how Europe will react to any carbon tariff trade war which emerges. Whilst likely to join the USA in adding carbon tariffs to dirty imported goods, the EU’s trade relations with the USA itself might become equally frosty. Despite reserving most of the blame for the failure of Copenhagen for the Chinese, European politicians are painfully aware of the lack of progress made by America to reduce carbon emissions and of the poor level of commitment shown by American politicians to the Copenhagen process. The disappointment felt by European leaders that Barak Obama failed to bring more to the negotiating table was unavoidable.

Whilst European countries spent the last decade working towards meeting their pledges under the Kyoto Agreement through energy efficiency, renewables and nuclear power, the USA hadn’t even signed up and spent the same period polluting even more than before. American carbon tariffs on international trade would certainly smack of double standards to most European nations. The question would then become whether or not the EU started to place global carbon tariffs on certain goods, not just against specific countries. Such measures would represent a big escalation of the carbon tariff trade wars, dragging other highly polluting nations such as Russia, India, Canada, Australia and Indonesia into the fray too.

Despite the gravity of such carbon tariffs, the move would likely prove highly popular with European voters, tapping into a combination of fears about developing nation outsourcing and American arrogance, as well as adding a moral dimension of saving the planet too. However, do European politicians truly have the stomach to put the environment into the same equation as national finances?

The final question will lie at the foot of the World Trade Organisation. Will the WTO see carbon tariffs as protectionist or justified? If carbon tariffs are judged to be unfairly anti-competitive, the calls for a World Fair Trade Organisation rather than a World Trade Organisation are likely to grow.

Image by Jim McDougall @ Flickr