It May Not Be Trump That Starts the Trade War – Climate ed.

European politicians are threatening a trade war tariffs if the U.S. backtracks on its Paris Agreement commitment. As French presidential candidate Nicholas Sarkozy has said,

“I will demand that Europe put in place a carbon tax at its border, a tax of 1 to 3 percent, for all products coming from the United States, if the United States doesn’t apply environmental rules that we are imposing on our companies,” he said.

The proposal would violate WTO rules on most-favored nation rules – specifically, Article I of the General Agreement on Tariffs and Trade, or GATT.  By treating, say, goods from (Paris Agreement obeyer) Canada better than (Paris Agreement defector) US – it would be a per se violation of the equal playing field all countries extend to one another.*

Given Trump’s promises to push hard on WTO enforcement, we can expect him to challenge such a move.

For obvious reasons of history moving in a linear direction, the 2016 Paris Agreement was not included as a specific exception to GATT commitments made over 1947-1993.

Proponents of a carbon tariff, however, would try to argue that it is excused under Article XX of the GATT, which reads in part:

Subject to the requirement that such measures are not applied in a manner which would constitute a means of arbitrary or unjustifiable discrimination between countries where the same conditions prevail, or a disguised restriction on international trade, nothing in this Agreement shall be construed to prevent the adoption or enforcement by any contracting party of measures:…

(b)      necessary to protect human, animal or plant life or health;…

(g)      relating to the conservation of exhaustible natural resources if such measures are made effective in conjunction with restrictions on domestic production or consumption;

Would this work as a defense?

The argument “against” is that it’s a multi hurdle rope course.

1. The measure is “necessary” for protection of life and health. This is in itself a three-hurdle test that has been difficult to make use of, requiring a consideration of
   • (a) how much it contributes to the goal;
   • (b) the importance of the goal; and
   • (c) how trade restrictive it is in light of alternative policies that might contribute more to the goal. In the alternative could argue that it is “relating to” conservation, a lesser test.
2. The measures are not applied in a manner which would constitute a means of arbitrary…
3. or unjustifiable discrimination…
4. between countries where like conditions prevail,
5. or a disguised restriction on trade in services.

These defenses are hard to use and almost never work.

The argument “for” is essentially a political one, that the trade negotiators that deal with the WTO knows that it should be rowing in the same direction as their environmental policy colleagues back home (who, after all – are from the same government). Under this line of thinking, the WTO’s Appellate Body and lower panels would find a way to make the exception apply.

The argument in the middle of these two positions are that – governments change. As former WTO director general Pascal Lamy said back in 2008, the WTO is still waiting for a a consensus on climate. While the Paris Agreement is an example of agreement, it’s also an agreement that by design wasn’t highly enforceable, as David Victor writes. That’s checkmark 1 against a consensus around using highly enforceable trade rules to tackle backsliding. Checkmark 2 is of course the votes of an electoral college majority in the US against even these lightly enforceable rules before they take full effect in 2020. Given this lack of uniformity in opinion on the environment, WTO adjudicators might slink back to promoting trade flows – an area they know best.

NOTES

* Indeed, my former colleague Mary Bottari and I once argued that much less aggressive carbon reduction policies could pose WTO problems. See here also.