response is seen as essential for economic competitiveness. China, for example, is actively seeking to maintain growth, create jobs, and increase the competitiveness of its industries by becoming a leader in technologies to conserve energy and reduce GHG emissions. Japan and many EU countries have aggressively moved in this direction as well. Active U.S. engagement in this “race to the top” will both enhance our own future economic growth and motivate other countries to continue moving ahead.
Border Tax Adjustments (BTAs) provide one strategy for inducing more action by reluctant countries and for strengthening the position of negotiators for countries with large potential markets. On the other hand, BTAs are potentially dangerous because (if applied unilaterally) they would be subject to interest-group pressures. And if such measures become protectionist, other countries could retaliate, damaging the international trading system.
A joint report from the World Trade Organization (WTO) and the UN Environment Programme (UNEP and WTO, 2009) suggests that such border adjustments could be legal under WTO rules if two conditions are met: (1) there is a close connection between the means employed and a climate change policy that is either necessary for the protection of human, plant, or animal life or health or relating to the preservation of exhaustible natural resources; and (2) the measure is applied in nondiscriminatory ways that do not serve as “a disguised restriction on international trade.” A WTO Appellate Body also insisted that administrative due process be respected: Countries that are the target of environmentally related trade measures must be consulted. Measures to address climate change would meet the first criterion and, if properly applied, could meet the second as well.
The implication is that BTAs could be a valuable part of a climate change policy portfolio, but only if they are firmly established within the WTO-centered international trade regime. Establishing nondiscriminatory BTAs could help to reassure domestic producers about competitiveness, prevent emissions leakage, and at the same time encourage more vigorous action by other countries. They could strengthen the positions of negotiators for countries seeking to take global leadership on climate change. But these policies must conform to WTO law, both substantively and in terms of due process.
As a general strategy then, the United States should strive to promote cooperative measures to limit the magnitude of climate change but should also be alert to ways in which competition can sometimes foster desirable results. A judicious combination of cooperation and competition can generate strong incentives for effective action.