Friday, July 3, 2009

US-China relations strategy at crux of climate change policy debate

So the economics are right; it’s WTO-legal; and it would neutralize a major political argument against controlling greenhouse gases. Why, oh, why, would Obama say “Ni”?

The debate concerns precisely the point where the world's number one policy issue intersects with the world's most important bilateral relationship: Climate change on one hand, and US-China relations on the other.

According to the NY Times Obama recently objected to a provision of the climate change bill inserted by the House that would "to impose a 'border adjustment' — or tariff — on certain goods from countries that do not act to limit their global warming emissions." Krugman defends this provision, writing, "truth is that there’s perfectly sound economics behind border adjustments related to cap-and-trade." Krugman suspect that the Obama Administration is "relying on some slogan" (i.e. "free trade good, tariffs bad") "rather than thinking through the underlying economics."

But surely there is another possibility. Perhaps the Obama Administration may have wanted to present America's new climate change legislation not as a club, but as a model for countries of the world to emulate.

Tariffs are a stick. Why start out with a stick in hand? I'm not sure Krugman appreciates how much other countries object to having the Americans tell them what they should do. After all, the US couldn't be bothered to ratify the Kyoto accord. The rest of the world might think: What's with the sudden high-handedness, such righteousness? Nobody likes to be forced to do something.

The NY Times described the specific proposal that Krugman believes would be acceptable even under present WTO criteria, but Obama objected to:

The House bill contains a provision, inserted in the middle of the night before the vote Friday, that requires the president, starting in 2020, to impose a “border adjustment” — or tariff — on certain goods from countries that do not act to limit their global warming emissions. The president can waive the tariffs only if he receives explicit permission from Congress.
It could be argued that a policy that does not kick in for ten years hardly amounts to carrying a "stick" into the negotiating room. And it may well be necessary to retain such a provision if the bill is to make it through the US Senate.

Yet, to the extent that this provision may set the "wrong tone" for international negotiations, Obama's position makes some sense to me.

On the other hand, if you read the NY Times article closely, you have to wonder about Obama's negotiating skills. He offers consolation to Democratic congressmen who voted against his own bill ("They’ve got to run every two years, and I completely understand that”). The article also notes that "Mr. Obama predicted that similar energy legislation would face a difficult slog through the Senate and require months of tough negotiations and additional compromises."

Before the real battle has even begun, Obama is offering consolation to his opponents and negotiating against his own side. And we've see it before. A new argument emerges: how can such weak negotiator be trusted to cut a fair deal with other countries? Indeed, Congress may come to feel it has no choice but to put a stick in Obama's hand!


  1. AnonymousJuly 04, 2009

    Cap and Trade is another form of trade protectionism. It is an excuse to place trade barriers and tariffs on imports from other countries by calling their products environmentally "dirty". China and India will have no choice but to join the Cap&Trade industry because if they don’t they won’t be allowed to play in our sandbox. Even if the USA does not pass the Cap&Trade bill in the Senate, China and India will still be forced to do so because the EU has C&T and will place trade barriers on them. Eventually the USA will be forced to adopt Cap&Trade too in a few years anyway. So we either do it now under the pretext of saving the planet, or we do it later under the truth of dodging trade barriers. Either way, China, India and the USA will have Cap&Trade.

  2. Anonymous,

    I don't think cap and trade is 'inevitable.'

    If Europe was able to achieve this on its own accord, it would surely have done so by now. That's why what the United States does now matters, because everyone is looking to the US for leadership.

    Shell Chairman emphasized this point, especially the importance of getting policy right:


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