Tuesday, July 4, 2017

G20 POLITICS, TRADE, AND CLIMATE.


This blog will remain quiet over the next several weeks as the author is also working on some substantial papers about low carbon issues, not to mention some summer relaxation.

Angela Merkel has indicated she will not shrink from confrontation with Trump in the forthcoming G20 talks, where free trade and climate change are both on the agenda. I suspect this is a good demonstration that trade, energy and climate will increasingly be interlinked in international affairs. Trump of course has unconventional notions of what free trade actually is, and, albeit somewhat incoherently and inconsistently, seems wedded to the view that the threat of climate change is some kind of hoax. Nations that have committed to Paris and are following through on low carbon technology and investment are not going to take kindly to unfair competition from producers who can undercut them by refusing to take climate policy seriously.  Some economists have even gone so far as to propose border adjustment taxes, a form of tariff on imports, to level the playing field. Trump’s position is in any case inexplicable even in normal rational terms of US self-interest. But this row will also put the UK’s own Brexiters somewhere between a rock and a hard place. Will they go with the rest of the world, or will they follow Trump, the DUP, and the apostles of right-wing fundamentalism – Lawson, Redwood, Rees Mogg etc, in the delusion that the clear messages from the science on climate change are simply wrong?

One of Trump’s most important bases for political support is the “rustbelt” regions of coal and steel, which have suffered dramatic economic decline in recent years. Part of the story, for coal at least, is that it is being pushed out of the energy mix in the US by the success of fracking in making the US close to self-sufficient in oil and gas. Inter alia this has also had some knock-on effects, reducing the price of coal on world markets, and increasing coal consumption in some EU countries. So trade has been at least a partial relief for a hard-pressed US coal industry.

More generally Trump’s policies seem to care little for the “left behind” in the rustbelt. One possible reconciliation, between declining coal and a rising urgency for action on climate, might have been investment in carbon capture technology, widely seen as an essential technology for a low carbon future, simultaneously protecting or even increasing domestic coal demand and providing new jobs in infrastructure, but that option has not even featured on the radar. Trump prefers to stick to the unthinking slogans of his campaign, professing support for American jobs while doing little in reality to support the “left behind”. In fact an isolationist US that ignores new low carbon technologies will most likely cost American jobs, probably in the short term and certainly in the long term.

Brexit, Free Trade and the Hard Right in the UK

But another interesting paradox is the position of British politicians now trying to take the UK out of Europe, and out of the single market and customs union, in the interests of more free trade in a global environment that will be increasingly unfriendly to countries that choose to ignore their responsibilities on carbon emissions. An important part of the “official” argument for leaving the EU was for free trade with the rest of the world, but a very large part of political establishment support for Brexit also coincided with vigorous opposition to taking any action on climate – Lawson, Redwood and Rees Mogg being just three of the more extreme polemicists in this area[1]. Outside the “establishment” UKIP and Farage have followed the same line, and I drew attention in earlier postings to the close correlations between support for Brexit and opposition to climate policies. This was evident not just among politicians, but among Leave supporting economists, including Leave’s most prominent economists Patrick Minford and Roger Bootle, who argued that exiting the EU would enable the UK to escape EU regulations on climate change.

To be fair to Minford, he was at least in some respects consistent, arguing both that trade deals, post Brexit, were an irrelevance, and that the UK should accept the further decline of its manufacturing base, concentrating instead on services. But, unsurprisingly, that has not been the Leave political line, nor would it have played well with Leave voters in the North of England. 

May’s government, faced with the appalling consequences of actually leaving the single market and the customs union, is however desperate to be able to demonstrate the prospect of a lucrative new trade deal with someone else. Step up to the plate, the UK’s largest trading partner after the EU – the USA and Mr Trump. Never mind the negative sides of such a deal for British farmers and consumers, the reality is that Mr Trump appears to believe in bilateral balances, the next best thing to barter in the modern world. Since the UK has a surplus with the USA, one of the few major economies for which this is true (it is in deficit with the EU for example), this looks like a recipe for disaster in any trade deal. Opposing Trump on climate matters is hardly going to help.

In fact May is now signalling solidarity with Merkel on climate at least, although whether we should put this down to the UK’s legal obligation under the Climate Act, or to a growing realisation that perhaps the EU does matter after all, not to mention global climate, is not clear.

Trade, Climate, and Carbon Taxes

If nothing else the prospect of conflict on both climate and trade, in the forthcoming G20, demonstrates the potential for close political connection between the two. But the inseparability of the issues has always been clear, however much that may upset the ideological position of most of the Brexiters. . A corollary of “free and fair” trade means, in a post Paris world, going along with what is now the global consensus on climate. Defaulters cannot be allowed to compete on an equal basis with countries who are taking measures that may damage their competitive position. This idea also sits behind the EU’s understandable, though not very effective or successful, attempts to establish an EU-wide arrangement for trading emissions. This at least provides a level playing field for intra-EU trade.

Two Oxford economists, Hepburn and Helm, have long proposed, most recently in a February 2017 letter to the FT, a carbon border tax.  Lakshmi Mittal made the case for a carbon border adjustment to put European steel on a level playing field with global competitors, to inhibit “leakage” of emissions to other countries. Hepburn and Helm simply extend the argument to other energy or carbon intensive sectors. It is increasingly clear that carbon taxation regimes are likely to be more effective than rather inflexible emissions quota trading. Needless to say, such a regime would have major ramifications for trade. Not least it would have demolished the cost advantages for EU generators in switching to cheap US coal dumped on world markets. Even if it has yet to gain much political traction, the idea of carbon border taxes emphasises the close interactions of trade and climate policies.

           



           





[1] The Brexit trio of Johnson, Gove and Davis also have form in this area, but are somewhat more nuanced.

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