Trade
Realising the benefit of a global carbon tariff
Author: Vinod Thomas, AIM
Taxing the carbon content of imports, if done right, can contribute to cutting global emissions and slowing climate change. The European Union has made the first such proposal, and its potential for good or for harm can be seen in relation to how it might work in Asia — the bloc’s major trading partner and a region with very high stakes on global warming.
The proposal will enhance the wellbeing of people and the health of the planet if its implementation contributes to lowering the high carbon intensity of international trade in Asia. But it will turn into an economically costly project if it degenerates into a protectionist trade war between regions.
The starting point for worrying about international trade in the context of climate change is that calculations of country responsibility for global emissions usually leave out the roughly one-fifth of effluents that are embedded in traded goods. Accounting for these would be timely as the divergence between consumption and production-based emissions has been rising. Instead of a 3 per cent increase in production-based emissions since 1990, the United States now shows a 14 per cent rise of consumption-based emissions.
Beyond the global case for addressing the carbon content of trade, the European Union has special concern. As the region has adopted carbon pricing through a domestic emissions trading scheme, there needs to be a cost adjustment at the border that ensures a level playing field for imports and domestic production in the same categories. ‘Carbon leakage’ is said to take place when pollution control in the European Union leads its producers to relocate to Asia where the environmental standards are looser.
To protect the competitiveness of domestic industries, industrial installations with lower allowable emissions and a risk of carbon leakage would receive free allowances — which should not be necessary after the border taxes are in effect.
The European Union’s proposed ‘carbon border adjustment mechanism’ would place a tariff on highly carbon-intensive imports, a plan that has resonated among Democrats in the US Congress. The import tax would reflect pollution control costs of the European Union’s emissions trading system. Cement, iron, steel, aluminium, fertiliser and electricity would be among the most affected items, all of which are important to Asian regional trade.
For example, China, South Korea, the United States and Germany account for more than one quarter of global imports of iron and steel. Turkey, Russia and South Korea are the top exporters of iron and steel to the European Union. Australia exports AU$20 billion (US$14.6 billion) in goods to the European Union, including gold and coal, but may not be in the top 10 affected countries.
The EU proposal is for a differential approach on imported goods based on whether there is a carbon price in the exporting country. This differentiation might be acceptable vis-a-vis the World Trade Organization’s most-favoured-nation rule on environmental-protection grounds. According to the EU proposal, if exporters have paid a carbon price in their countries, they would be eligible for an equivalent credit to offset the import tax. But this is currently not an argument Australian companies can make, as the country’s carbon pricing scheme of 2014 has been removed and no equivalent alternative is in place.
Asia has arguably the largest blend of high, middle and low-income economies among the world’s regions. Differences in income levels make a case for an allowance for the low-income nations either in terms of the carbon tariff rate or the time frame for its adoption. Low-income countries have also made a consistent case for financial support for their energy transition from high-income countries.
Juxtaposed with the case for border taxes on carbon are the risks. Most importantly, the EU tariff should not be highjacked for domestic protection of industry, nor should this policy move turn into a trade war without achieving significant cuts in carbon emissions — its primary rationale.
The tariff should also not be used as a blunt instrument hitting imports from a country but rather designed to target carbon emissions of imports, motivating the exporter to switch to less-polluting ways. The desired environmental outcome calls for a shift to low-polluting fuels rather than export diversion to others, sidestepping pollution abatement.
A desirable scenario would be that Asia, together with other emitting regions, cuts carbon emissions sufficiently for the…
Trade
Self-Reliance and Openness: Core Principles of China’s Third Plenary Session
The Third Plenum communique from the CCP indicates a prioritization of stability and compromise in response to China’s economic challenges. It highlights the concept of Chinese-style modernization and establishes political guidelines for balancing regulation and market forces.
The CCP’s Third Plenum communique signals a focus on stability and compromise in the face of China’s economic challenges. It emphasises Chinese-style modernisation and sets political directions for balancing regulation and market forces. While not as groundbreaking as previous plenums, it acknowledges the importance of market mechanisms and technological self-reliance, aiming to address issues like high youth unemployment and private sector uncertainty. The communique seeks to navigate the complexities of global competition and domestic innovation, potentially reshaping global supply chains and trade dynamics. Overall, it presents a pragmatic blueprint for China’s economic future.
Source : Self-reliance and openness central pillars of China’s Third Plenum | East Asia Forum
Trade
Trade Prevails Over Political Persuasions in China-Germany Relations
China and Germany maintain a strong bilateral relationship, rooted in economic cooperation despite ideological differences. Recent visits and agreements focus on expanding trade and addressing mutual concerns, navigating challenges while nurturing ties.
Evolving Bilateral Ties
China and Germany share a strong bilateral relationship, rooted in history since 1972. This connection has seen moments of cooperation intertwined with periods of tension. German Chancellor Olaf Scholz’s April 2024 visit underscores Germany’s commitment to fostering this partnership, reflecting a mutual interest in maintaining economic ties despite ideological differences.
Economic Pragmatism
As the second and third largest global economies, China and Germany’s economic interdependence is crucial. Germany emerged as China’s primary trading partner in 2023, with trade values reaching €254.4 billion (US$280 billion). In response to global scrutiny, Germany has taken a balanced approach, emphasizing economic stability over political discord. This was evident during Scholz’s prior visit in November 2022, where his diplomatic tone contrasted with broader EU sentiments.
Facing Challenges Together
Despite increasing public skepticism in Germany regarding China’s global influence and human rights issues, both nations continue to seek common ground. Their October 2023 Joint Statement highlights intentions to pursue cooperation in areas like carbon neutrality and open markets. To navigate these complex terrains, Germany can utilize its institutional frameworks to enhance dialogue, while also considering supply chain diversification to reduce dependency on China. The intertwining nature of their economies suggests that, despite challenges, both countries will continue to prioritize their substantial trade relations.
Source : Trade trumps political persuasions in China–Germany relations
Trade
Fixing fragmentation in the settlement of international trade disputes
Fragmentation in global trade due to the lack of development in multilateral trade rules at the WTO has led to an increase in FTAs. The Appellate Body impasse has further exacerbated fragmentation, requiring a multilateral approach for reform.
Fragmentation in Global Trade
Fragmentation in global trade is not new. With the slow development of multilateral trade rules at the World Trade Organization (WTO), governments have turned to free trade agreements (FTAs). As of 2023, almost 600 bilateral and regional trade agreements have been notified to the WTO, leading to growing fragmentation in trade rules, business activities, and international relations. But until recently, trade dispute settlements have predominantly remained within the WTO.
Challenges with WTO Dispute Settlement
The demise of the Appellate Body increased fragmentation in both the interpretation and enforcement of trade law. A small number of WTO Members created the Multi-Party Interim Appeal Arbitration Arrangement (MPIA) as a temporary solution, but in its current form, it cannot properly address fragmentation. Since its creation in 2020, the MPIA has only attracted 26 parties, and its rulings have not been consistent with previous decisions made by the Appellate Body, rendering WTO case law increasingly fragmented.
The Path Forward for Global Trade
Maintaining the integrity and predictability of the global trading system while reducing fragmentation requires restoring the WTO’s authority. At the 12th WTO Ministerial Conference in 2022, governments agreed to re-establish a functional dispute settlement system by 2024. Reaching a consensus will be difficult, and negotiations will take time. A critical mass-based, open plurilateral approach provides a viable alternative way to reform the appellate mechanism, as WTO Members are committed to reforming the dispute settlement system.
Source : Fixing fragmentation in the settlement of international trade disputes
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