Why So Harsh?

At a time when the United States needs to focus on economic growth, “cap-and-trade” legislation proposed by Congressional Democrats has the potential to stifle job creation and unduly burden American businesses. A panel hosted by the Cato Institute discussed these issues at a Capitol Hill briefing on September 10, 2009.

Sallie James, a trade policy analyst at the Cato Institute and author of the paper “A Harsh Climate For Trade: How Climate Change Proposals Threaten Global Commerce,” discussed the trade provisions of the Waxman-Markey bill that was passed by the House in June 2009.

“The trade parts of these bills are going to be…harmful to the U.S. economy and the global trade system more broadly, and I think counter-productive to obtaining international agreement on climate change,” she argued.

She added that the bills would be “ineffective” against “leakage,” defined by James as “the process whereby emissions-reductions policies in say the United States result in increased production and emissions in less regulated countries.” Companies would react to such climate-change policies by outsourcing more jobs and “perhaps undermining the very reduction commitments that the United States is trying to get,” she said.

James cited a Government Accountability Office (GAO) survey from July 2009, which analyzed U.S imports of various products such as iron and steel, primary aluminum, cement, pulp products and nitrogenous fertilizers as a share of foreign output.

“What this [survey] shows is…less than one percent of China’s total Chinese output…of these products is imported or exported to the United States,” she said. “What that says [is] increasing tariffs on these goods will not necessarily harm China.”

Additionally, she argued that these trade provisions place the United States at risk of economic “retaliation” by other countries as well as the possibility of “litigation” if the United States is accused of “discriminatory trade practices.” Waxman-Markey provides for “output-based allowances,” which James argues could be considered “subsidies” by the World Trade Organization (WTO).

The European Union (EU) already uses similar restrictions on discriminatory practices. EU countries have brought successful claims against Colombia’s import tax on foreign vehicles, Brazil’s non-automatic licensing system for textile imports, and Turkey’s regulation on imported pharmaceutical products.

“Since the subsidies, as they are currently structured, would be targeted towards some firms and not others, [the subsidies] would be specific, which is the criteria for determining whether a subsidy breaks WTO rules,” she said.

Since the WTO’s formation in 1995, the United States has been a respondent for 107 cases. China, by contrast, has been a respondent for only 17 cases since becoming a member in 2001. India, a member since 1995, has been a respondent for only 20 cases.

James acknowledges that the WTO does allow some “exceptions” to encourage countries to pursue such objectives as “protecting the environment,” but she is doubtful that such exceptions will be applicable because certain conditions must be met in order to utilize those exceptions.

“I’m not convinced that the…measures being spoken of [in Waxman-Markey] comply with those conditions,” she argued.

Gary Hufbauer, Senior Fellow, Peterson Institute for International Economics, pointed out that it may be “very hard” for countries to agree on the rules which define a trade framework. Even if such an agreement were achieved, the WTO’s interpretation of these agreements would moderate any settlement dispute.

“Unlike the courts in the United States and most countries, if a case comes to the WTO…[the WTO] can’t say ‘go home.’ It’s supposed to adjudicate cases that governments bring to the WTO,” he said. “So the straightforward way of resolving all the unresolved questions now would be a case-by-case resolution of disputes which are…almost certain to come up.”

Another important question regarding the WTO is how much deference this entity would give to the opinions of organizations such as the United Nations Framework Convention on Climate Change (UNFCCC). Hufbauer noted that the WTO is “not obligated” to give deference to the UNFCCC or any other international organization, so it is unclear just how influential the opinions of such organizations may be.

It is also uncertain what role “good faith” negotiations would have in WTO decisions. Article 20 of the WTO’s General Agreement on Tariffs and Trade (GATT) requires that such negotiations not result in an “arbitrary or unjustified discrimination” between countries or a “disguised restriction on trade.”

“In the past, this has been interpreted strictly by the WTO,” he said. “Now stare decisis does not apply within the WTO in a strict sense, though in fact [the WTO is] quite respectful of prior case decisions…” he said. Stare Decisis is a legal term in that, in the original Latin, means “Let the decision stand.”

Clayton Yeutter, Senior Advisor for Hogan and Hartson, LLP, and former United States Trade Representative, questioned whether we “should have any legislation at all” in this area. When considering the prospect of other countries retaliating against the current proposed trade policies, passing such legislation is “too high a price to pay,” he said.

James argued that “Climate change, to the extent that it is an international problem…will need to be tackled internationally, through consensus. Alienating two of our bigger fastest growing economies…is not a good start for achieving international cooperation.”

Brittany Fortier is an intern at the American Journalism Center, a training program run by Accuracy in Media and Accuracy in Academia.