Antidote for Green Protectionism: Fair Trade

The policy mantra in leading up to the planned December, 2009 Copenhagen negotiations on a global climate agreement has been “common but differentiated responsibilities.”  This refers to the important inclusion of several critical fast-growing and large emerging markets in the agreement; unlike that of the Kyoto Protocol. Climate change analysts are looking forward to the reopening of genuine talks on establishing emission caps; nonetheless, there is some trepidation among many going into these talks about the role the current global financial crisis will play in moderating the outcomes.  There is, however, an even more subtle, but potentially contentious item that could influence the outcome.  Negotiators need to be aware of a subtle, but insidious threat lurking in the background that may sabotage any progress made in the negotiations.  This is the impact of growing formal and informal forms of trade protectionism that has infected the public policy agenda in many countries since September, 2008.

colstripIn March, 2009, the Center for Economic Policy Research (CEPR) in London issued an insightful eBook entitled ‘The collapse of global trade, murky protectionism, and the crisis: Recommendations for the G20’ edited by Richard Baldwin and Simon Evenett (2009).  There are a number of hard-hitting essays and recommendations to G20 leaders on how to avoid the protectionist tendencies that are creeping into public policies in response to the global financial crisis.  It is a serious piece of scholarship written in record time in response to the events of the 4th quarter of 2008.  Importantly, it includes an essay by Simon Evenett and John Whalley on how to resist what has come to be known as green protectionism. A working definition of green protectionism can be given as “the deliberate use of environmental policy initiatives to discriminate against foreign commercial interests, including subsidiaries of companies owned or headquartered abroad.”

A similar call to resist regulatory arbitrage was made by the World Bank in its recent report ‘Global development finance: Charting a global recovery’ (2009).   They conclude that

“The international spillovers of the crisis in the financial area presently provide a powerful incentive for harmonization, because concerns over stability temporarily outweigh the urge to seek advantages for the ‘home team’.”

Standards Harmonization

Harmonization has been, in the financial and trade arenas, the driving force behind much of the progress made in the past 20 years to open markets and further progress in increasing efficiencies in global supply chains.  This has had a significant effect on lifting millions of people throughout the world out of poverty. This is not to say that there is no inequality in incomes, or that the digital divide has not been widened. This is an issue that will be addressed in a separate essay. The issue here is how the optics of a ‘green’ agenda has given new impetus to those who seek to protect domestic markets at the expense of consumers and global trade. The progress made toward harmonization in trade and financial sectors is threatened now as more and more national governments install provisions in bailout legislation and crisis management initiatives that give preference to in-country procurement. Similarly, governments in many different regions are instituting higher tariffs and implementing other non-tariff measures to protect domestic industries.

And yet, harmonization of global emission standards and approaches to taxation of carbon inputs in production is, undoubtedly, a key objective of the Copenhagen negotiations. Indeed, harmonization of global environmental standards has been included in the General Agreement on Trade in Services (GATS), the Agreement on Technical Barriers to Trade (TBT), among others. And, the principles embodied in these multilateral agreements are seen in several regional agreements, notably, the North American Free Trade Agreement (NAFTA).  But from a trade policy perspective, the environmental agreements that are seen to be least distorting are those that are preferable for a new Copenhagen Protocol.

Nonetheless, many critics of emission caps and global negotiations on climate issues claim that measures committed to by national governments within the context of climate change amelioration will impair business development and progress.  This is a worn out argument that has been used for years in response to Kyoto Protocol pressures. But now, in the post 2008 financial crisis era, these arguments seem to have been given new impetus.  However, the linkage of downturns in global trade, and the associated impacts to economies around the world to the deleterious effects of protectionist measures has rarely been made.  It is these protectionist trends that threaten to take the planet back to a mercantilist regime as was practiced in the 1800s.  And when trade protectionism is coupled with green technologies advocacy, a dangerous condition is set forth that can lead to a vicious downward spiral in the global situation.

It has been documented by the World Bank that since September 2008, governments around the world have proposed or enacted 78 different trade measures that are protectionist in intent.  Furthermore, 17 of the G20 countries are included in the list of offenders.  Importantly, this includes the United States where the global crisis had its genesis due to the syndication of risky mortgages.  Don’t the critics of climate change talks see this more threatening form of regulatory arbitrage as a harbinger of a shrinking global system?  Wouldn’t it make sense to address this problem as part of the climate change agenda?  In this way the potentially contentious negotiations on emissions caps, technology subsidies, and/or tax offsets can be tackled from a proactive point of view within a win/win framework.

Climate Change Control and Retaliatory Actions

Carbon control techniques being discussed among climate changes specialists include a consumption tax and a production tax.  Although the consumption tax is deemed to be fairer, calculating it is complicated by the complexity of global supply chains and rules of origin (RoO) in many countries.  As a result, the fallback position is a carbon production tax. But, as Evenett and Whalley argue

“To offset this adverse effect on competitiveness some proponents, including the high-profile Lieberman-Warner bill that recently failed in the US Congress, have argued for the introduction of taxes on imports from those jurisdictions with lower carbon taxes. Ultimately, it is feared that unilateral and regional measures will induce defensive protectionist pressures that will manifest themselves in measures to limit imports to the detriment of trading partners in particular from those poorer countries, that to date have expressed less interest in reducing carbon usage” (pg. 94).

Indeed, defensive measures in the form of complaints filed with the WTO under the TBT provisions are up 9% in 2009; another form of quantitative proof that these concerns are more than conjecture.

Climate Change and Trade

Other than Evenett and Whalley, advocates of a global climate change agenda have not addressed the trade factor in the ongoing discussions leading up to Copenhagen 2009.  The trade aspects, which include the need to address WTO Doha Round agenda items, as well as progress toward the Millennium Development Goals (MDGs), must be seen systemically just as the earth’s atmosphere is being viewed.  Importantly, the fact that over 3 billion people live on less than US$2/day should be taken into account as a key factor in moving forward (Prahalad, 2006).

This is where the antidote comes in. And it is coming from a most unlikely source; the grassroots movement known as the ‘fair trade’ movement.  If the multi-dimensional human element (as defined so eloquently by Muhammad Yunas in his book ‘Creating a world without poverty: Social Business and the future of capitalism’ [2007]) is factored in, then alternative strategies can be formulated. These alternative strategies would take into account the need to foster social businesses that both meet a market efficiency goal while at the same time satisfying a social goal, that of productive employment for workers in the budding new ‘green’ manufacturing industries.  However, these jobs may not necessarily be located in the countries that are now sounding the battle cry for supporting only their domestic industries. This could be a reason for easing trade restrictions and getting back on track with financial harmonization.

Alternatively, if business models guiding the development of technologies to implement programs for carbon capture and sequestration and/or alternative energies based on renewable resources must be built on the profit motive premise, then the pyramid-to-diamond transition argued so forcefully by C.K. Prahalad in his book ‘The fortune at the bottom of the pyramid: Eradicating poverty through profits’ could guide public policy discussions (2006).  His reference to the pyramid-to-diamond transition is his way of describing how, through focus on developing suitable products for those people living at the bottom of the pyramid (BOP), while at the same time, building the infrastructure to support the productive growth of this sector, a large segment of the population can be lifted from poverty.  In the context of climate change discussions, appropriately sized technologies based on renewable resources could offset some of the carbon emissions from the millions of people that still rely on coal and firewood burning for heat and cooking.

These two approaches to reducing global poverty rely on a harmonized trade and financial services regime; much like the one that was in place before September, 2008.  And, although global trade has declined precipitously, and economies are shrinking on the order of several percentage points (as measured by gross domestic product [GDP]), free trade is not in total retreat.  There is a solid foundation upon which to build.

Climate Change and Fair Trade

This is where a fair trade approach to production in carbon control and sequestration technologies can come into play. With a systematic approach to global climate change talks that guard against green protectionism and, at the same time, seek to enhance efforts to design appropriate energy sources for the BOP segment, whole new markets for products and services can be created.  Importantly, with a premise that seeks as a primary goal to use climate change progress as a mechanism for empowering those people who will be most affected by the energy resources that will be used as substitutes for fossil fuels, the creative and entrepreneurial power of these individuals can be unleashed to help design systems for carbon capture.

This approach can help negotiators from becoming schizophrenic in the Copenhagen meetings; allowing them to avoid opposing protectionist measures to the financial crisis, while at the same time, advocating for policies that would limit imports on the basis of RoO or TBT.

How this will work is still a bit murky.  It is, right now, just a germ of an idea.  But, by voicing the potential for this nexus, it is my hope that techniques for merging climate change and trade policy with practical, implementable solutions can be formulated. Then the empowered people from all countries can become part of the global trading system, rather than sitting outside watching the sky get smoggier with each passing year.