Carbon tariffs and taxes should not be an item for the WTO

Feb 24, 2021

Carbon border tariffs would tie the World Trade Organisation in knots and detract from its core purposes. Such a tax would also discriminate against the poorest in the world. Without broad consensus they would be illegal.

There has been much discussion on the meaning and longer term viability of the so-called “rules based order”. As with any organisational system the power relativities within it determine the efficacy and utility of such rules. For example, the UN Security Council is largely impotent because the power relativities cancel out.

The expansion of the EU, now with 27 members with divergent interests, is causing complexity and over-reach in many areas of economic activity, and this is threatening its very existence.

Similarly with the World Trade Organisation. Its original purpose, the elimination of discriminatory tariffs and quantative restrictions in the trade of goods, enabled it to function in a largely consensual mode, until complexity and opportunism now threatens its existence also.

These complexities, created by the pressures of expanding trade in both goods and services, and related issues of investment, cannot withstand a piling on of extraneous issues that are beyond its remit.

Two areas of international trade present challenges to the integrity of process. One is the attempt to introduce tariffs or taxes on carbon intensive goods from countries that have not adopted a carbon price or a 2050 net-zero emissions target. Managing that in the WTO could prove insurmountable and politically toxic.

The core principle of the WTO, and one that carries over to some extent to regional FTA systems, is ‘most favoured nation’ and non-discrimination among the parties in their trade and the provision of traded services.

In determining relative parities, there are two requirements – one is exceptions in favour of least advantaged traders; the second is that the value of a tariff or a concession can be quantified. The point here is that the carbon content of goods passing across borders may in reality be ‘virtual’ – imprecise if not largely fictitious.

A carbon tax on imports could therefore be discriminatory against goods imported from developing and resource-rich countries (including Australia) whose raw materials contain a disproportionately high carbon content compared with the products of most developed countries.

As for quantifying the virtual carbon content in goods, a paper issued by the International Monetary Fund (IMF) adverted to the complexities in making this calculation:

“Our analysis extends recent work, ….by (i) constructing a country-by-country matrix of flows of carbon embodied in international trade, (ii) disaggregating carbon intensities to the sector and country level, (iii) linking the analysis of carbon flows in international trade to the literature on border tax adjustments, and (iv) estimating how large the taxes could be if virtual carbon were taxed at the border in major economies.

Ours is a partial equilibrium analysis. [Others have employed ] …a general equilibrium framework to analyze the impacts of taxing carbon, including border taxes, on exports of manufactured goods by large developing countries. (‘Trade in Virtual Carbon’, IMF/World Bank 2010).”

In the context of border difficulties being experienced by the UK in relation to Northern Ireland post-Brexit, and between the UK and the EU generally, it is difficult to see how a border carbon tax system as described might make things easier.

But if, as is likely, disputes arose in the wider trading field the WTO, currently neutered in its disputes settlement mode, would be rendered incapable. The US has refused to rectify President Trump’s crippling of the organisation.

While a carbon border tax may have merit, placing the burden on the existing depleted trade system is asking too much and could, perhaps unintentionally, be counter-productive. The WTO has been there before, in the 1990s, over controversial US moves on environment issues. Once bitten, twice shy.

Another area where loose wording in trade terms is becoming a problem is with trade in financial services. Throughout the Brexit negotiations these were put aside, but they cannot be left there much longer. Already Amsterdam has displaced the UK as the leading European bourse for share trading, though in regard to financial services and currency exchange more specifically the UK remains superior.

The central issue here, which is outside the Brexit Agreement, concerns the level playing field on which trade in services is to be conducted. The EU insists that UK regulations should be and remain ‘equivalent’ to those of the EU, whereas the UK believes the regulatory system it has operated in the past has been satisfactory to all.

Its standards are clear and specific whereas ‘equivalence’ is an imprecise notion and can be salami sliced by another party until it becomes unrecognisable, with the constant risk of arbitrary penalties along the way.

Both the UK and the EU are subject to Article VII of the General Agreement on Trade in Services concerning non-discrimination in the certification and recognition of standards and qualifications for services. The UK position is more consistent with the GATS as possibly is Australia’s.

Perfection in organisation in the international arena can be the enemy of the good. Similarly with indiscriminate overlapping of jurisdictions among distinct organisations, the outcome too may be less than good.

Encouragingly, the unanimous appointment of the new WTO Secretary General, the well regarded economist and former finance minister of Nigeria, Ngozi Okonjo-Iweala, may revive the organisation and set it firmly on course again.

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