Protectionist threats a lot of hot air

The threat of punitive tariffs on imports from countries not acting to reduce greenhouse gas emissions has been raised by the Prime Minister as a reason why Australia should adopt his carbon pollution reduction scheme. He’s cited threats apparently made by French President Sarkozy and others. Provisions in the US emissions trading scheme bill are perceived the same way. Paul Kelly (Weekend Australian, 26-27 September) is one of the latest to retail these arguments.

This trade retaliation red herring, per se, is no reason to adopt the CPRS. It doesn’t stand up to cursory analysis. At best, it adds another layer of confusion to a confused policy. At worst, it’s rubbish.

Current World Trade Organisation (WTO) rules are clear.

First, countries generally are not allowed to discriminate between imports from different countries by imposing border taxes (e.g., tariffs) on imports differentiated by source country, unless that has been enshrined in existing agreements.

No such agreements are based on whether or not different countries have adopted policies to reduce greenhouse gas emissions. Punitive tariffs would violate existing WTO rules and constitute grounds for seeking remedies under WTO processes.

Second, countries are not allowed to discriminate in favour of locally produced goods and services by taxing them less than imports of the same products. Punitive tariffs (i.e., higher ad valorem equivalent taxes on imports than applied to locally-produced substitutes) would breach existing WTO rules and be a basis for seeking remedies under WTO processes.

In both cases, such “punitive” action is protectionist. The WTO’s role is to punish those adopting such measures.

Besides, widespread adoption of such measures by relatively wealthy developed economies would amount to “doing a Samson” on world trade, dragging global economic growth and living standards down in the process.

This is the trade policy bogeyman raised by our Prime Minister as a competitiveness threat to Australia if we don’t adopt his CPRS. (Let’s ignore the negative protection competitiveness threat embodied in the CPRS itself for now.)

Assume the threat is implemented.

Assuming substantive failure at Copenhagen (however it’s dressed up in the communiqué), it implies world trade collapses as the developed world, “led” by Europe, sets off a round of protectionist tariff increases, others retaliate, and chances of even an anaemic global economic recovery are destroyed.

Everybody loses, including the EU, which needs to seek out new, growing markets to buffer growth in living standards from its own slowing domestic markets driven by its ageing (in some cases shrinking) population.

This outcome implies the WTO is ineffective. (Given inaction against current breaches by most members the G20 - the so-called new driver of the global policy agenda - of their own pious communiqués preaching the evils of protectionism, this might be plausible.)

But let’s be more realistic.

Assume instead all countries decide stronger world growth - ASAP - takes priority over trying to force some to adopt policies they don’t want to adopt.

That is, governments decide to trade off gains in near-term employment recovery against early action reducing greenhouse gas emissions. (The national politics are obvious. Large reductions in greenhouse gas emissions wrought by the global recession are a convenient excuse.)

What will governments do on climate policy?

The easiest courses are (a) to implement “emissions watch” climate policies, or (b) do nothing. The first option has symbolic appeal, but does little or nothing to reduce global greenhouse gases. For those adopting option (a), international competitiveness is not undermined (or at least not much). There is little need to violate WTO rules by imposing “punitive” border taxes on imports.

In this case, the “punitive tariff” threat is empty, and the climate policy adopted is pusillanimous. Interested in spin rather than substance? This policy is for you.

Option (b) is just the status quo for many.

There’s another option: comply with WTO rules and put a serious price on emissions, initially unilaterally.

Do border tax adjustments (BTAs) have a place here? Absolutely.

Australian taxes differentiate between different products already.

The GST is not uniform. Some food, health and education products are GST-free. So are imports of these products. Some are input-taxed under the GST, including imports. Most products are taxed at 10 per cent, including imports.

The Luxury Car Tax (LCT) is a special higher tax on expensive cars, applied equally to locally produced cars and imports. The same applies to the Wine Equalisation Tax (WET).

The excises applied to petroleum products, alcohol and tobacco produced in Australia apply equally to imports of these products (“revenue” customs duties).

The principle’s clear. Whatever tax (as a percentage of value, or as a dollar amount per physical quantity) is applied to locally produced goods and services can be applied to imports of those products under current WTO rules.

Any country can set a tax on a given product, determined any way you like, apply it equally to local products and substitute imports, and not breach WTO rules.

Suppose any country sets such taxes based on (i) the carbon emissions price in that country, and (ii) the emissions intensity of locally produced goods and services. Suppose that process also determines the border tax adjustment (BTA) to be applied to imports of the same products, so that percentage or specific tax burdens on imports are the same as on local substitutes.

Such BTAs are WTO-compliant. They are not protectionist. They are competitiveness-neutral.

They are an integral part of a national emissions consumption approach to climate policy.

By eliminating losses of trade competitiveness otherwise incurred by “first movers”, they make an effective (as opposed to pusillanimous) global deal on climate policy more likely.

They remove an obstacle impeding consummation of a global deal in this area since 1992, and, on present trends, likely to continue impeding such a deal in December 2009 and beyond.