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Oxley: Bill Could Create a Trade War

In the same way bootleggers and Baptists found common cause in prolonging Prohibition, uncompetitive business, labor unions and environmental organizations now find common interest in lobbying to raise trade barriers. Debate around both the House and Senate climate bills has revealed a new wave of protectionism, “green— protectionism, which threatens to spark an international trade war that will end up costing American consumers more money and foreign workers their jobs.

[IMGCAP(1)]The Waxman-Markey bill, the House version of the climate legislation, provides for carbon tariffs to limit imports from countries that do not restrict greenhouse gas emissions. The most likely targets — steel, cement, paper, chemicals and aluminum — include products that are already favorite and frequent targets for businesses and labor unions seeking special trade barriers against competition.

There is something brewing in Brussels that should give U.S. lawmakers a sense of how this can unfold. Over the summer, the EU imposed the first trade barrier in the name of climate change — a directive that requires member states to limit biofuel imports as part of a larger strategy to reduce emissions from fossil fuels. Like the well-hidden self-interest driving the carbon tariffs proposed by Congress, the true intent behind this ban is to ensure biofuels from outside Europe are kept out of this lucrative market.

The EU biofuel market is expanding rapidly. Europe’s leading source of biofuel, rapeseed, is more expensive than competing sources such as America’s corn ethanol. So though policymakers used an environmental banner to justify the directive, its main focus is a financial one — discriminating against cheaper imports to artificially benefit Europe’s biofuel industry. In fact, work has begun in several capitals including Washington, D.C., to prepare challenges in the World Trade Organization when the terms of the directive are enacted by EU member states.

European industry is itself inclining toward “green— protectionism because of the pickle into which EU climate change policy has plunged it. German industry — the biggest producer of biofuel from rapeseed and likely the first target of any WTO challenges — is already struggling to compete globally because of the costs of emission-control policy, yet EU officials have committed to even steeper cuts. Accordingly, a lot of energy is being expended in Brussels on how to protect these foundering industries. 

A rise in European trade barriers is likely, so American farmers will confront once again efforts by the U.S. to block imports on environmental grounds. They have tried before, restricting product derived from genetically modified seeds and beef because of objections to hormone in the feedstock. Those measures enraged Capitol Hill and so will new ones.

And while U.S. exports have slipped this year as the gross domestic product fell, the underlying trend, evident before the financial crisis unfolded, is for a steady increase in exports of manufactures. Last year, the National Association of Manufacturers reported that first-quarter exports in 2008 were up 10 percent from first-quarter exports in 2007, reflecting a trend response to the 25 percent fall in the value of the U.S. dollar since 2002. The current slump in economic growth may slow the rate of expansion for a while, but the continuing increases in exports of manufactures is a near certainty as the dollar continues to slide.

That American companies can export manufactured goods is contrary to established wisdom, shaped by a long-running campaign by organized labor to convince Americans that the dismal condition of the industries in which they organize is a general fact. The real fact is U.S. manufacturing had not lost its edge in the global market. In fact, a McKinsey Institute study a few years ago found that U.S. manufacturing was the most competitive in the world in most industries.

Both traditional and “green— protectionists will continue to goad the Obama administration and Congress to block imports from China. The obvious tilt at the Asian powerhouse in Waxman-Markey was not lost on either Beijing or the White House. The latter is trying to manage a “controlled burn— trade dispute with China, balancing import restrictions on Chinese automotive tires, evidently a concession to labor unions, against the Chinese countermoves to initiate anti-dumping investigations in imports of U.S. auto components and chicken meat.

The administration, understandably, does not want a flare-up. So it’s little wonder it opposed the Waxman-Markey carbon tariffs.

The environmental protectionist movement exerted significant influence on the formation of Democratic trade policy in 2008 during the presidential race, and it will hinder delivery of an effective trade-negotiating authority for the administration. Going by current attitudes in the relevant Congressional committees, any authority drafted by this Congress is highly likely to bind the administration to secure protection of labor rights and the environmental standards in trade agreements. That kind of move would render its authority ineffective. Few trading partners would go along. The result will be increased tensions with important allies, such as South Korea and Colombia, whose FTAs currently are sidelined in Congress.

Organized labor and environmental activists will spin to Members of the 111th Congress that the economy is greening and environmental trade barriers will support the new wave of sustainable industries. The message from voters will be different. Jobs are what matters. And as the U.S. climbs out of the recession, jobs will grow fastest in businesses that export. Green trade barriers in foreign markets against U.S. exports, or imposed by Congress on imports, will simply hinder economic recovery.

Alan Oxley is chairman of World Growth International, a U.S.-based free-market nongovernmental organization. He formerly served as chairman of the General Agreement on Tariffs and Trade, the predecessor to the World Trade Organization.