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Ingredients for a climate-friendly trade policy

Joseph Shapiro is Associate Professor at UC Berkeley.

UC Berkeley economist Joseph Shapiro is of the view that trade policy is “sending the wrong price signal” by bolstering trade in dirty goods in comparison to cleaner products, especially in Europe. Speaking to Borderlex’s Sarah Anne Aarup, Shapiro said that rather than raising trade barriers on dirty goods, focusing on lowering tariffs and non-tariff barriers on clean goods to make them more competitive might be a better way to go. 

The puzzle

Every ton of CO2 worldwide receives between US $ 85 (€ 72, £ 64) and US $ 120 (€ 120, £ 90) in indirect trade subsidies, according to research by UC Berkeley economist Joseph Shapiro. This is because CO2-intensive goods have consistently lower tariffs and non-tariff barriers than ‘clean’ goods, his paper reveals.

Lower tariffs on dirty goods are thus implicit subsidies. In Europe these subsidies are often much higher than in the rest of the world. “France, Germany, Norway, and the UK have among the largest such subsidies in trade policy, with subsidy values exceeding $175 per tonne (€ 147, £ 132)” the paper reads.

To take a concrete example, importing or exporting a ton of copper is much less costly on average than trading a ton of sunglasses—the example stems from Shapiro’s blog post based on his findings.

“Right now, policy is sending the wrong price signal by putting lower taxes on traded dirty goods, and that encourages production and consumption of trade in those goods,” Shapiro told Borderlex. “By encouraging production and consumption in trade in dirty goods, it is an implicit subsidy to dirtier factors of production like energy, and an implicit tax on cleaner factors of production like labour and capital.”

The reason

By now, you may be wondering why this is the case. There’s a simple answer: industry lobbying.

To expand on the previous example, ‘clean’ sunglass manufacturers need cheap ‘dirty’ inputs like copper to maximise profits on the final product—sunglasses. That’s why they will push for low copper prices.

Industry lobbying has paid off in the trade arena, where many input materials enjoy low tariffs and few NTBs. However, there is no such organised lobbying on the consumer end pushing for low prices. This is why tariffs and NTBs on finished products, which tend to be cleaner, are often higher than on intermediate goods.

The cure(s)

Now that we’ve looked at the economic problem and cause, you’re probably wondering what policymakers can do to solve the issue.

You may instinctively think that the answer to this distortion is to increase tariffs and NTBs for CO2-gluttonous products to level the playing field for all traded goods. This is the path taken by the EU and its proposed Carbon Border Adjustment Mechanism.

But Shapiro argues that a carbon tariff would in fact produce limited environmental benefits, at least to solve the industrial imbalance issue: “the magnitude of the difference in protection between clean and dirty industries […] is larger than a typical carbon tariff would achieve—US $40 ( €34, £ 30) per tonne in the paper’s analysis, or probably far lower in the carbon border adjustment the EU is currently considering.”

Shapiro also argues that “non-tariff barriers are a trade barrier which does not generally create revenue,” meaning that simply adding tariffs is not the most economically efficient way to solve the relative imbalance between dirty and clean industries.

For trade and sustainability to go hand in hand, Shapiro argues instead for lowering tariffs and NTBs on clean goods. This would make clean products more competitive when faced with dirty goods, increasing the likelihood for substitution of CO2-heavy goods with CO2-lean products.

“When I discuss this research with people, many feel like it’s hard to substitute between clean and dirty goods. It’s not like you can substitute a ton of steel for a ton of some really clean input. If you look at a factory that needs materials, the materials are clean or dirty, that’s just how it is,” Shapiro said.

This is why he added some examples of cleaner swap-outs in his paper, like aluminum for steel or wooden instead of metal shipping containers.

“I give those examples as just an intuitive way to say, ‘look, there’s a lot of potential to substitute,’” the economist told Borderlex.

But some industrial interest groups will staunchly oppose replacing dirty with clean goods. Borderlex gave the example of the European beetroot sugar lobby that would reject imports of cleaner cane sugar, which Sabine Weyand aired on 12 October during the European Parliament trade committee’s Trade Policy Day, at which Shapiro spoke.

The economist replied that “agriculture has complicated negotiation and political economy issues, but I find the same patterns just within manufacturing. I think it would be fine if policy negotiators said, ‘look, agriculture is too complex. Let’s just look at jet turbines, aluminium widgets, cans, backpacks.’”

‘All-of-the-above’ strategy to make trade sustainable

The best way to approach climate-friendly trade policy is to look at the issue from multiple perspectives and pitch in a healthy mix of policies, Shapiro told Borderlex when asked about how to move in the right direction.

“US president Barak Obama used to describe an ‘all-of-the-above’ energy policy, which would say ‘yes, we want solar and wind and nuclear and [hydrogen]. We’re not just going to put all our chips in one bag,” Shapiro said. “Trying to improve trade policy and expand the EU and have negotiations and consider a border tax adjustment and subsidise green energy and technological innovation—that seems like a sensible analogue to me.”

The EU’s carbon border tax isn’t the right policy tool for the dirty goods trade conundrum, but it may have a positive effect on other aspects key for sustainability. “For example, a border adjustment can give an incentive for other countries to implement their own climate change policies so as to avoid the border adjustment when trading with the EU,” Shapiro said.

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