Carbon Tax Versus Free Trade

There is an inherent tension between a government that wishes to impose costs on its domestic industries and free trade. This tension is spilling over as the debate on President Obama’s proposal for a “cap-and-trade” system on carbon emission works its way through the legislative process.

Ten Democratic Senators issued a statement declaring it was essential that a bill that imposed an expense on U.S. emitters of carbon include some kind of “carbon tariff,” so that foreign producers — not subject to the U.S. tax — would not be able to undercut the pricing of U.S. producers and seize domestic market share. As the Senators put it, some such provision was essential so as “to ensure that U.S. manufacturers do not bear the brunt of our climate change policy.”

The Senators are correct. If we impose a “carbon tax” or make U.S. producers buy “carbon credits,” these policies will raise the cost of production for U.S. manufacturers and give producers in countries without such policies a competitive edge.

The Senators, though, miss the point in proposing a “Carbon Tariff.” Aside from the enormous complexity of assessing such a tariff, it would only solve half the problem. Yes, it would equalize the tariff on domestic sales, but what about for sales to third countries, where non-complying companies in countries without cap-and-trade would have a distinct advantage?

One wonders why the Senators have suddenly become concerned about this issue, as the point applies equally to all forms of taxation and regulation that raise the cost of doing business. The U.S. minimum wage puts U.S. producers at a disadvantage to jurisdictions without a minimum wage or that have a lower minimum wage or one that is simply not enforced. The same goes for environmental, health and safety standards and the requirement to pay into social insurance schemes, such as Social Security and Medicare plus myriad other expenses the government imposes on private industry.

If there is a difference between these various expenses and the one proposed in the “cap-and-trade” bill, it is only that the proposed cost is new and large right off the bat and thus obvious, whereas the cost of things such as Social Security and minimum wage standards have crept up gradually over the decades.

Even for those administrations that are recalcitrant about imposing costs on business, this issue of how any cost or regulation affects the competitiveness of U.S. producers in a world of global trade is important. To an activist, Democratic administration intent on extracting significant sums from business to serve social ends — such as carbon reduction — the tension between these social efforts and the effort to maintain international competitiveness in business, agriculture, and industry poses a direct threat to administration’s agenda.

Unfortunately, the many benefits of free trade, including the way it raises the living standards of people around the globe, are abstract and bound to take a secondary role when politicians are looking to show they can make something happen.

Thus, protectionist measures are starting to be casually inserted in bills. In the giant — almost trillion dollar — stimulus bill, a clause was inserted that restricted the projects to utilizing American-produced steel, iron and manufactured goods, a clause that outraged many, including America’s Canadian neighbors. Several Ontario towns, the heart of the Canadian steel industry, have responded by blocking American firms from bidding for municipal contracts, and the Federation of Canadian Municipalities is threatening to restrict U.S. companies from bidding on projects all across Canada.

It is imperative that the world avoids a trade war. Nothing could more surely abort any economic recovery. Yet the inherent nature of President Obama’s program is that it will disadvantage American producers who will, surely, cry for protectionism and, just as surely, those damaged when such bills pass will ask for protection from their own governments.

It is going to be a tough road ahead for international trade. The only hope is for those actually involved in international trade — those who see, first-hand, its job and wealth-creating potential — to keep reminding their representatives and governments that the answer has to be greater openness, not attempts to isolate oneself from the world. If a law or regulation will make an industry uncompetitive, that is a good reason to not pass that bill, not an excuse for building protectionist walls.  EXP