House Tariff Vote on China a Dry Run for Border Carbon Adjustments?

Posted on September 30th, 2010 by Daniel Firger

Daniel Firger
Associate Director and Fellow

In response to persistent concerns that China intentionally undervalues its currency, the renminbi, the U.S. House of Representatives voted September 29 to give the Obama administration sweeping new authority to impose retaliatory tariffs on Chinese imports.  Senator Chuck Schumer (D-NY) indicated he would press for a Senate vote on the bill during the upcoming lame-duck session.

Notably, the policy battle over Chinese currency manipulation prefigures an even uglier fight that would pit a range of industries and interests against each other if the U.S. were to impose a cap (and price) on domestic carbon emissions. And although federal cap-and-trade legislation or anything like it is a long way off, the lessons learned in today’s currency debate may help to inform tomorrow’s difficult discussions about trade, energy, and climate change.

Citing the trade-distorting effects of artificially cheap Chinese imports, House Ways and Means Committee chairman Sander Levin (D-MI) said that “China’s persistent manipulation of its currency” had resulted in a “tilted field of competition” and the loss of over one million jobs.  While Chinese government officials argue that the problem stems not from the value of the renminbi but from high levels of U.S. government and American household debt, the consensus, at least in the House, seems to be that Chinese goods entering American ports are too cheap, and that Chinese currency policy is fundamentally to blame.

To level the playing field against cheap Chinese imports, the Currency Reform for Fair Trade Act of 2010, H.R. 2378, would amend Title VII of the Tariff Act of 1930 to “clarify that countervailing duties may be imposed to address subsidies relating to a fundamentally undervalued currency of any foreign country.” The bill would grant the Commerce Department new authority to impose duties on imports from any country: (i) whose government “engages in protracted, large-scale intervention in one or more foreign exchange markets;” (ii) whose currency is shown to be “undervalued by at least 5 percent;” (iii) whose economy “has experienced significant and persistent global current account surpluses;” and (iv) whose central bank holds excessive foreign asset reserves.

Such sweeping authority to impose tariffs across a range of imported products may run afoul under, inter alia, the WTO agreement on Subsidies and Countervailing Measures.  As the New York Times explains:

While tariffs have been placed on specific products, like steel and tires, because of evidence of unfair export subsidies, the threat of putting sizable tariffs on a country’s entire line of exports to the United States is highly unusual – and, some argue, of dubious legality under international trade law…  Traditionally, only direct subsidies to an industry, rather than the indirect help that comes from an undervalued currency, have been considered a reason for retaliatory tariffs.  Because so many countries have managed their currency rates for so long, it is unclear that the WTO would uphold any American efforts to make the manipulation of a currency a justification for action.

Similarly, in the climate change debate, some observers have argued that a border tax adjustment scheme to account for China’s lack of emissions regulations could violate WTO rules.

The analogy is apt – up to a point.

Like an artificially undervalued currency, a lack of emissions controls would make a country’s exports (like, say, China’s) cheaper vis-à-vis a given trading partner that had imposed a domestic carbon price (here, theoretically, the U.S.).  By using a tariff to “adjust” the price of imported products at the border, a country can avoid a flood of cheap, carbon-intense imports that displace domestic production, erode its terms of trade, and undo the effectiveness of its climate regulations through so-called “carbon leakage.”

Of course, as in the tariff regime imposed by H.R. 2378, a border carbon adjustment would necessarily apply to a wide swath of imported products, since a lack of GHG emissions controls across an entire economy would create an unfair cost differential in practically all categories of imports, from steel and concrete to high tech consumer goods [1].  And like detractors of currency-driven retaliation, some of those concerned about a border carbon adjustment scheme worry that such tariffs could spark an escalating trade war by disguising crass protectionism beneath a veneer of climate friendly rhetoric.

The WTO, however, has already spoken out about the potential legality of such measures.  In a joint report published with UNEP in July 2009, the WTO stated unequivocally that certain types of climate-motivated border tax adjustments could pass muster under relevant GATT rules.  Furthermore, some scholars have argued persuasively that reformatting border carbon adjustment measures so that they are origin-neutral and assessed at the point of market access would not only help avoid trade law problems but might also incentivize rapid development of new forms of international climate collaboration.  Thus, unlike retaliatory tariffs imposed in response to Chinese currency manipulation, border carbon adjustments would be GATT-legal and could, under certain circumstances, foster U.S.-China cooperation rather than conflict.

No doubt years away (at least in the U.S.) a border carbon adjustment scheme may nonetheless prove easier to pass than the sort of currency-based retaliatory tariffs envisioned by H.R. 2378.  Big differences in political optics and diplomatic relations notwithstanding, climate advocates would do well to pay attention to the high-stakes congressional debates on renminbi revaluation: we might learn a thing or two!

[1] This analysis ignores the possibility of a sectoral approach to GHG regulation in China, which is rumored to be in the works as part of the government’s next five-year plan.

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