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Legacy Content / ONLINE EXCLUSIVE

Democrats Try To Walk Fine Line On Tariffs

The U.S. Faces Pressure To Give Climate Legislation Teeth Without Alienating Trade Partners

July 9, 2009

President Obama would prefer to arrive at this year's international climate change talks in Copenhagen with a new energy bill in hand. But doing so could hinge on the inclusion of controversial tariff provisions such as those in the House's recent Waxman-Markey bill -- measures that could threaten to derail the talks if left intact, according to testimony at a Senate Finance Committee hearing on Wednesday.

Sen. John Kerry, D-Mass., said at the hearing that the Finance Committee will probably change the tariff provisions, but he did not provide specifics. Obama has spoken out against the border taxes, warning that the U.S. must be "very careful about sending any protectionist signals" to a world mired in recession.

The 11th-hour provisions were pivotal in securing the votes of House lawmakers from Rust Belt and Midwestern states, where reliance on coal is higher and more people work in industries that might suffer from competition abroad. Similar protections will likely be necessary to mollify the region's senators.

 

"This bill doesn't pass if it doesn't take care of manufacturing," Sen. Sherrod Brown, D-Ohio, has said. "And I don't think you can fully take care of manufacturing without some border equalization."

The challenge, Kerry noted at the hearing, will be including enough protections for domestic industries to ensure the energy bill's passage, while crafting it in a way that won't subvert climate talks in Copenhagen. The U.S. must avoid "getting caught in a chicken-and-egg situation" where achieving one aim precludes realizing the other, he said.

"We won't get an agreement in Copenhagen, pure and simple, if the United States doesn't lead," he added.

Nearly 200 countries will attend the climate conference with the goal of replacing the 1997 Kyoto Protocol on global warming. Although some lawmakers defend tariffs as a way to arm Obama with the "stick" he needs to cajole developing nations into adopting emissions targets, free traders and other experts are dubious of the tariffs' legality and worry they will incite retaliation from U.S. trading partners -- China and India in particular.

Absent an international trade agreement on carbon emissions, the provisions would oblige the president in 2020 to start slapping tariffs on energy-intensive products such as steel, iron and cement from countries without similar emissions targets.

Eileen Clausen, president of the Pew Center on Global Climate Change, said she finds the rules' rigidity concerning. "There is no presidential discretion in how they are applied," she said. The rules would become "almost automatic" for developing countries that may not be ready to adopt measures similar to U.S.

Already, the provisions have drawn the ire of two major players at the conference.

"India will not accept any emissions targets -- period. It is the bottom line; a non-negotiable stand," India's newly installed environmental minister, Jairam Ramesh, has said. China's Ministry of Commerce has also sounded off, complaining in a statement that carbon tariffs would "seriously hurt the interests of developing countries" and "disrupt the order of international trade."

At the Group of 8 summit in Italy on Wednesday, developing nations including China and India refused to be drawn into long-term commitments to reduce carbon emissions. Under the current United Nations Environment Programme, developing countries are not currently required to set carbon emissions targets, but rather to work toward reducing their "energy intensity."

"In their minds, they're doing everything they can to reduce their emissions without harming their economic growth, and in countries with huge populations like India and China, not harming their economic growth is a social stability issue," said Sarah Ladislaw, an expert on regional analysis and climate change at the Center for Strategic and International Studies. "The idea that there would be these protectionist trade provisions that would encourage them, or be a stick to get them to act more aggressively isn't particularly helpful for the negotiations."

Proponents of the tariffs stress that without them, domestic industries will be exposed to foreign firms unrestricted by climate regulations and subsequently placed at a competitive disadvantage. "The obligations of the U.S. and the obligations of the rest of the world have to be contemporaneous," said Larry Kavanagh, vice president of environment and technology at the American Iron and Steel Institute. "The best program is a program that obligates everyone, and obligates everyone in the same way."

Over the years, the World Trade Organization has protected member states' rights to set environmental policies based on their respective levels of development. But a recent report jointly written by the WTO and the U.N. program suggests that border adjustment taxes, levied under the auspices of cap-and-trade climate change regulations, may actually be WTO-legal.

"Rules permit, under certain conditions, the use of [border tax adjustments] on imported and exported products," the report reads. It was released on the same day the House passed its climate change legislation.

Supporters of the provisions in Congress have seized upon the report, as have critics. "It concerns me that [the WTO] is flashing a green light rather than a yellow caution signal," said Gary Clyde Hufbauer, an expert on trade policy at the Peterson Institute for International Economics. "What I take from the WTO/U.N. press release is that the director general of the WTO is trying to advertise that the WTO is not a hidebound opponent of all carbon border measures. That's a correct sentiment, but not a slam-dunk pass for Waxman-Markey."

Regardless of the proposed border tax adjustments' legality, the U.S. needs to ask itself from a practical perspective whether it wants other countries imposing similar measures in retaliation, said Gary Horlick, an international trade lawyer well-versed in WTO case law who also spoke at the hearing. Jagdish Bhagwati, a prominent free trade advocate and economics professor at Columbia University, agreed, saying such tariffs "will lead to massive, justified, WTO-legal retaliation by India and China."

Despite the many concerns being voiced about the border taxes' implications for negotiations in Copenhagen, and ultimately U.S. leadership on climate change, Obama will likely see some version of them in any bill that eventually makes it to his desk.

"We're going to adhere pretty closely to a lot of what they did in the House because a lot of coal states' interests were taken into account... a lot of manufacturing interests were taken into account," Kerry said. House lawmakers' negotiation with environmentalists and interest groups was prolonged and delicate. "That's not something we want to do" again, Kerry said.

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