Dangerous protectionist provision in USA’s climate change bill
Published 08th October 2009 - 1 comments - 1096 views -
The Waman-Markey bill, or the US climate change bill is one which has been hailed by Al Gore and Paul Krugman. Passing this bill through the senate is a top agenda of the US government before the COP-15 in December. One of the provisions of the bill is the imposition of a 'border adjustment' or tariff after 2020 on certain goods from countries that do not act to reduce their carbon emissions. This carbon tax has been one of the most frequently debate provisions of the bill and looks fair. But I believe this is just a new dangerous form of protectionism that will threaten to incite a trade war.
Some advocates believe this is not a protectionist measure because this tariff does not benefit any particular country but is a way to retain the former playing field before measures for climate change were put in place. Because this form of taxation in developed nations is a disadvantage to the home industries. Paul Krugman compares this to VAT, which is an accepted norm in all WTO nations. I find this argument fails to answer certain questions.
Firstly the gains of trade originate from comparative advantages of each party. The law of comparative advantage refers to the ability of a party (an individual, a firm, or a country) to produce a particular good or service at a lower marginal cost andopportunity cost than another party. Thus each party benefits from producing a good at their lowest marginal cost and then they trade. It is a country's comparative advantage if the cost of producing is not increased due to the costs of reducing emissions. We do not tax goods originating from a country with no daily wage minimums, even though producing in such a country gives a clear cost advantage.
Secondly VAT is applicable to all goods sold in a country regardless of their country of origin. But this border tax is applicable only on imports, and can be applied at the discretion of the president and the house, which would lead to ambiguous cases. This is a clear home advantage introduced by the government, which makes it protectionist.
Thirdly this argument doesn't take into view that dealing with climate change requires multilateral action under the Kyoto Protocol. Allowing each party to pursue its own policy and letting them compare steps taken by a different party with their own standards to then apply an 'adjustment', will be at the expense of their trade partners. Such a step can result in each country following its own retaliatory measures to protect their own industries and lead to the suspension of borderless economy.
Climate change is turning into just another opportunity for advocates of protectionism to hide their real motives. Pursuing such a provision is only going to be harmful to world trade. An outcome of the measure is recent reports on China considering introducing a carbon tax to fend off USA's border levy.
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