The Coming Green Trade War

Be careful what you wish for. For years, much of the world has been bashing America for refusing to cooperate in the fight against climate change. Now that President Barack Obama has pledged American leadership in cutting greenhouse-gas emissions—and as a far-reaching package of green legislation begins to wind its way through the U.S. Congress—relief is giving way to worry. In recent weeks European, Indian and Chinese officials have warned that the result of America's long-awaited change of mind might not be cooperation but conflict, and possibly the world's first green trade war.

That's because as Washington debates how to regulate emissions, a powerful coalition of energy-intensive industries, labor unions and Rust Belt state legislators is clamoring for protection from imports. They argue that the new cap-and-trade system envisioned by Obama and congressional leaders, which will require major polluters to acquire permits for the right to emit CO2, will put them at a competitive disadvantage against competitors based in countries that don't have similar carbon-pricing schemes. In March Obama's energy secretary, Steven Chu, said the U.S. is prepared to use a border tax on imports as a weapon to force countries like China to limit their own emissions, triggering a warning by Su Wei, China's chief climate negotiator, that this would lead to retaliatory measures. India has since warned the West not to engage in "green protectionism."

So far, the threats have been limited to words, but that may soon change. Introduced in Congress on April 1, America's proposed scheme is loosely based on Europe's, which gives homegrown energy-intensive industries like steel, aluminum and cement generous free allowances of pollution permits, in effect grandfathering them into the new system. The president would have the authority to impose "border adjustments" only if U.S. companies were determined to be at a competitive disadvantage after a five-year trial period. But with the American debate over climate change increasingly driven by worries over jobs and competitiveness, some form of protection seems increasingly likely. In Europe, politicians have called for EU trade sanctions against both China and the U.S. if they don't agree to cut emissions.

Because they already regulate emissions, the Europeans would likely be exempt from any U.S. carbon tariffs, which appear squarely aimed at China.

The biggest victim of a confrontation, however, would be the environment that U.S. legislators are purporting to save. China is just beginning to get serious about its own environmental record, and as a member of the G20 seems finally to be taking its first baby steps toward a more involved and constructive international role. The global climate regime that the world's biggest polluters will try to hammer out at the U.N. climate conference in Copenhagen in December will not work without major developing-world emitters like China onboard. A nasty trade fight with the United States would make cooperation by Beijing even less likely, says Benjamin Görlach, emissions expert at the Ecologic Institute in Berlin.

Not only does the debate over imports threaten to obscure the original environmental-policy goals, it also obscures the facts. The greatest share of carbon-intensive imports reaches the U.S. not from China but from heavily regulated Europe. What's more, a number of studies have found the effects on industrial competitiveness to be minimal. Among other things, they found that the cost of complying with environmental regulation plays little to no role when companies decide where to locate—access to local markets is by far the most important factor, followed by labor costs. In some cases, such as Germany's €160 billion chemical industry, efficiency improvements prodded by environmental regulation have even helped make the industry more competitive, not less. Even the Chinese case is anything but clear. China itself may be polluted, but its exports tend to come from modern, efficient plants, and the country already has higher efficiency standards for vehicles and appliances than the U.S., leading a Chinese official to remark at a Brookings Institution conference in Washington last year that it may be China that should slap carbon tariffs on U.S. products, not the other way around. The trouble now is that the debate is driven less and less by environmental concerns and is turning into one defined by longstanding domestic U.S. worries that cheap Chinese goods will continue to flood the U.S., take jobs and hurt companies. So far in this downturn, the protectionists have been held in check by fears of repeating the mistakes of the 1930s, when a global tariff war plunged the world into depression. Under the cover of green, they could yet have their day.