This is all happening when the World Trade Organization, the international arbiter for trade disputes for the past quarter-century, has been virtually incapacitated by the budding conflict between China and the United States.
The policy miscoordination in a legal vacuum not only undermines the global climate effort. Without some new institutional framework, it also risks erupting into a broader trade war.
The United States carries much of the blame for the increasing tension. As the main architect of the liberal trading system under the auspices of the WTO, it often relied on the organization’s procedures to retaliate against countries that were using subsidies and local content rules to help their companies compete unfairly in global markets.
When the Inflation Reduction Act — that is, the United States’ 2022 climate law — included a rash of subsidies festooned with local content requirements, the world noticed that a new era had arrived, one in which the United States would disregard the international trade order it had worked so hard to build.
China, like the United States, has chosen a subsidy-heavy climate strategy, providing incentives for the development of clean-energy systems. Europe has followed a radically different path, relying mostly on a carbon price it imposes on polluting industries to encourage consumers and businesses to move away from fossil fuels.
These choices could well lead to conflict: Subsidies in the United States and China will reduce the cost of energy for businesses and consumers. In Europe, carbon taxes will raise it, putting European industry at a competitive disadvantage. The E.U. hopes to redress the imbalance by imposing a carbon tariff on imports from countries with no carbon tax. But there is little it can do to redress its competitive deficit in markets outside the E.U.
Subsidies create inefficiencies of their own. And they lead trading partners to impose “countervailing duties” to protect their own industries. Paying for the energy transition becomes much more expensive in a world encumbered by interlocking sets of subsidies and countervailing duties than in a world with neither.
Washington’s new ambivalence about the WTO — refusing to staff key posts in its conflict resolution body — removes the necessary legal architecture to contain the likely fallout.
The United States’ turn against the WTO has some justification. Its embrace of a rules-based order under the aegis of the trade organization was predicated on the understanding that the WTO’s members, including China, would obey those rules. Beijing, however, insisted on steering its economy to serve its strategic interests. The slow, deliberate process of WTO justice ultimately proved unable to make China play on a level field.
China’s restrictions on exports of key minerals and other inputs in the clean-energy supply chain, for instance, are not only an illegal tool to ensure its dominance in critical technologies. They are also weapons deployed to punish nations from South Korea, for deploying a U.S. antimissile system, to Norway, over the Nobel Prize given to human rights activist Liu Xiaobo.
The Biden administration thinks it can manage a more hostile international landscape. It placated Korean and European allies alarmed over provisions in the Inflation Reduction Act that would have barred their electric vehicles from subsidies by carving out an exception that allowed leased Hyundai and Mercedes-Benz EVs to benefit even if they lacked the required U.S. content. Washington is rushing to cut trade agreements with other friendly nations, to bring them into the supply chain and enjoy preferences under the act.
Still, ad hoc solutions are unlikely to work for long. U.S. interests are not pristine: Lawmakers wrote the Inflation Reduction Act to promote straight protectionism, to “bring jobs home.” It is vulnerable to retaliation. Despite Washington’s concessions, the E.U. is considering revising its competition rules to deploy subsidies, too. China is objecting to Europe’s carbon tariff and U.S. subsidies. And Europe launched an anti-subsidy investigation into Chinese production of electric vehicles.
Without an agreed-upon system to constrain these policies, the opportunities for conflict seem endless. Whether inside the WTO or not, the prospect of a hot future should compel cooler heads to design new, effective guardrails on trade to prevent conflict and promote the cooperation the climate needs.
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