WITA’s Friday Focus on Trade | April 28, 2023




Assessing Different European Carbon Border Adjustment Mechanism Implementations and Their Impact on Trade Partners


On Friday, May 5, WITA will host a Zoom webinar to get a better understanding of the multiple workstreams underway on carbon border adjustment measures. Information can be found below and here.
The European Union (EU) aims to reduce net greenhouse gas emissions by at least 55% by 2030, relative to 1990. The reach of this ambitious goal relies largely on the reform and extension of the EU Emissions Trading System (ETS).
Under an ETS, a limited volume of emission permits is auctioned or freely allocated to emitters and then traded on a dedicated market. The resulting emission price penalizes carbon-intensive production and incentivizes the adoption of low-carbon technologies. However, higher costs for industries subject to an ETS may lead to a relocation of carbon-intensive industries to countries with less stringent climate policies. In order to minimize such “carbon leakage”, the EU ETS currently entails free allowances: a limited amount of emission permits allocated to sectors particularly exposed to carbon leakage (emission-intensive and trade-exposed sectors—EITE), to avoid competitiveness distortion for EU producers on both the domestic and export markets. However, free allowances are criticized for hindering the EU ETS by reducing the emission reduction ambition in EITE sectors and are incompatible with the EU target of net-zero emissions by 2050.
As part of the “Fit for 55” policy package, the EU will gradually replace the free allowances by a Carbon Border Adjustment Mechanism (CBAM). This CBAM will apply the price prevailing on emission allowances within the EU ETS to emissions released to produce commodities imported to the EU, unless a comparable emission price is already enforced in the exporting country. Export rebates are also currently discussed to refund allowance costs for products exported from the EU. While a CBAM without export rebates would level the playing field within the EU domestic market only, export rebates would ensure that the competitiveness of EU production on the world market can be maintained.
Beyond producers and consumers within the EU, such an EU CBAM will affect other economic actors along international supply chains. Numerical analyses have shown that, even though the EU CBAM could in principle motivate emissions reduction abroad, key EU trade partners could as well retaliate with trade sanctions. Understanding how the EU emission price is channeled to other countries is therefore crucial to increase acceptance of the CBAM by EU trade partners and to avoid repercussions on the global climate cooperation. Previous studies have analyzed the effect of an EU CBAM on the EU’s major trade partners, but little is known about the exposure of middle- and low-income countries as they are usually modeled at a low level of detail. Yet, research at the sub-regional level has shown that the distributional effects of an EU CBAM might exhibit a broad variation depending on local conditions.
…Our results show that the coverage of the current EU CBAM proposal is relatively modest compared to the total emissions caused by all EU imports, and that this incomplete coverage might limit the efficiency of the EU CBAM. Even with conservative implementation options, we find that some low- and middle-income countries dependent on the EU for their exports would be disproportionally affected by the EU CBAM, as a large share of their domestic emissions would be covered by the EU emission price. Finally, the implementation of an inclusive international recycling of the EU CBAM fiscal revenue might increase the acceptability of the EU CBAM globally by mitigating its impacts on the most vulnerable countries, but its implementation will require balancing the conflicting interests of the EU trade partners.
04/24/2023 | Timothé Beaufils, Hauke Ward, Michael Jakob & Leonie Wenz | Communications Earth & Environment


U.S. Carbon Border Adjustment Proposals and World Trade Organization Compliance


On December 13, 2022, the European Union (EU) announced that it had finalized plans to institute the world’s first carbon border adjustment mechanism (CBAM). This announcement comes after years of debate in the EU member states on how to transition their carbon pricing system to a CBAM, which also led to a CBAM debate in the U.S. Congress.
Last session, members of Congress put forward several proposals to create a CBAM for the United States. Legislation ranged from a simple tariff on carbon-intensive products to establishing a carbon price and a CBAM. It is very likely that Europe’s new CBAM will reignite a debate over whether the United States should create its own CBAM.
As new legislation is developed and evaluated, it is essential that these proposals are compliant with the United States’ international trade commitments, namely rules under the World Trade Organization (WTO). The specifics of how or if a carbon price is set, how taxing carbon emissions is carried out, and how issues such as carbon leakage are addressed can run afoul of WTO commitments. If Congress fails to consider WTO commitments, the United States could be subject to retaliation from trading partners.
What Is a Carbon Border Adjustment Mechanism?
A key component of policymakers’ efforts to mitigate climate change has been centered on reducing carbon emissions. It is estimated that “one-fifth of the world’s carbon emissions come from the manufacturing and production sectors.” Policymakers ostensibly see cutting carbon emissions in manufacturing sectors as an essential aspect of their carbon emission reduction objective. The Biden Administration has a goal of “50-52 percent reduction from 2005 levels in economy-wide net greenhouse gas pollution in 2030” and the EU’s goal is to “reduce greenhouse gas emissions by at least 55% by 2030 compared to 1990 levels.”
Increasingly, policymakers have sought to use trade policy to decrease carbon emissions, especially in developing countries with fewer environmental regulations than developed countries. A carbon border adjustment mechanism is one of the most prevalent examples of those efforts. A CBAM taxes carbon-intensive goods produced domestically or abroad based on an established carbon price, which is determined by the government. The border adjustment aspect of this is that the tax is based on domestic consumption of the carbon-intensive good, so products that are exported are given a rebate of the tax. A CBAM includes the rebate for exports to disincentivize moving carbon-intensive production overseas, known as carbon leakage.
02/08/2023 | Tori Smith | American Action Forum

The US-China Technology War and Its Effects on Europe


Excerpts from article about the impacts on Europe of the US-China technology confrontation.
The most important trade war in the last few years has not been the tariff war initiated by Trump. In contrast to what some might think, it has been the technology war between the US and China, which began at the end of the Obama era, gathered pace during the Trump presidency and has further escalated under the Biden Administration.
The war has two aspects: first, to stop China catching up with US technological supremacy (with all the associated economic and military implications) by blocking technology transfer; and, secondly, to maximise the technological distance between the US and China, subsidising national production. This latter aspect has major consequences for the EU, with the potential to create a dangerous lag in technology.
…. The technology war between the US and China has two interrelated causes, the first economic, the second political. The economic dimension stems from China’s desire to build its industrial capacity and work its way up the value-added ladder, an approach clearly set out in its Made in China 2025 industrial strategy and policy. Unveiled in May 2015 as part of the 13th and 14th five-year plans, the document’s vision is for China to move beyond being the ‘world’s factory’, a status the country has earned thanks to its low labour costs and the manufacture of technology-intensive goods. China’s Dual Circulation Strategy (2020) complements this idea of a more economically and technologically independent China and seeks to prioritise internal demand as a driver of growth (albeit without the country turning its back on its export strategy).
What makes this attempt at technological development concerning is that the new approach has gone hand-in-hand with a more assertive and even coercive approach to foreign policy. In a major speech delivered at the Hudson Institute on 4 October 2018, Mike Pence (Vice-President under the Trump Administration) clarified the US stance: China’s intentions (neither peaceful nor productive) make any industrial leadership even more dangerous, since ultimately this translates into military leadership.
….As on other occasions, the disputes between the US and China have caught the EU off guard. On this side of the Atlantic, the debate has been firmly centred on China’s participation in the development of 5G technology (where, for once, the EU led the US). However, it did not expect the US to embark on a major round of investment subsidies.
The EU, which makes up less than 10% of global semiconductor manufacturing, has been unable to reduce its dependence (the European Commission has acknowledged that the strategy launched in 2013 failed). Production is concentrated in Germany, France, Italy, the Netherlands, Austria, Belgium and Ireland. The EU only enjoys a position of strength in the segments of basic intellectual property blocks and manufacturing tools, lagging far behind in other value-added segments. Initiatives under the Important Projects of Common European Interest programme have largely failed to deliver results, despite some efforts in the field of microelectronics.
…. The EU faces an inevitable challenge: respond clearly to US measures, accepting that knowledge and cutting-edge technology are a European public good that is a prerequisite for future growth and competitiveness. Strategic autonomy, which does not only depend on the technology war but also on the role of other actors involved in the supply of essential raw materials, cannot be allowed to become a meaningless concept. Nor is it logical to focus on sterile debates on prioritising the disciplining of national finances before or after taking on joint projects. The debate on state aid and European financing of innovation (either through a European sovereign fund, as suggested by the President of the European Commission, or by other means) is urgent and can no longer be postponed.
Semiconductors are the cornerstone of industrial and technology policy in the 21st century (including artificial intelligence). If the EU does not wake up and accept the time has come to take risks (albeit with the necessary conditions) and simplify rules, it will be condemned to a dangerous strategic dependency over the next few decades.
02/28/2023 | Enrique Feás | Elcano Royal Institute

Does Globalization Reduce Personal Violence? The Impact of International Trade on Cross-National Homicide Rates

Globalization through increasing worldwide trade is arguably one of the most important economic developments in the past half century, but its impact on human behavior is widely disputed. It has been criticized for taking jobs from some segments of the labor market, intensifying competition between workers, and increasing within-country inequality. By contrast, globalization supporters argue that it strengthens social networks and encourages efficient labor specialization, increases worldwide prosperity and reduces country-level income inequality. While interest in globalization has continued to grow, with few exceptions researchers have rarely linked it to crime rates. However, prior theorizing about globalization suggests that it encourages changes in human behavior that could reasonably be expected to affect crime rates.
The idea that increased trade calms exchanges between individuals can be traced back to antiquity but is especially associated with the scholars of the Enlightenment. Montesquieu, Voltaire, Smith and Hume were all supporters of the “doux commerce” (i.e., gentle commerce) thesis, that the spread of trade and commerce decreases all types of violence, including homicide and other violent crime. While Enlightenment philosophers considered the social benefits of doux commerce in general, Elias (1939) argued specifically that violent crime declines along with the self-restraint imposed by increasingly complex social networks driven by trade. More recently, Hirschman (1997) revived the doux-commerce thesis and claimed that increasing trade is a powerful moralizing agent capable of bringing important nonmaterial benefits to society. While varying in terms of specific emphasis, these theoretical traditions all lead us to expect that growing trade globalization will reduce violent crime.
But not all experts share this view. For example, Marx famously claimed that commerce and trade erode traditional values and institutions and as social bonds are weakened, interpersonal violence increases. Similarly, Sassen argues that increased inequality in earnings and in profit-making abilities among firms has relegated large segments of the population of developing countries to low paying informal economies. This theme is also picked up by advocates of various conflict perspectives who argue that as globalization intensifies, rising rates of poverty, economic inequality, and unemployment increasingly separate highly industrialized core nations from developing peripheral nations, exacerbate the economic gap between the industrial “haves” and industrializing “have nots” and lead to increases in crime.
There is also support for the conclusion that trade globalization will have no connection to cross-national homicide rates. Supporters of the doux commerce perspective like Elias and Hirschman argue that all trade and commerce have a civilizing influence on human behavior and do not focus on international trade. To the extent that the effects of trade globalization are too small, or too macro-level to influence micro-level behavior like violent crime, globalization may have no significant effect on cross-national homicide rates.
…For the most part social science has ignored the possible impact of trade globalization on cross-national rates of violent crime. We see this as an important omission because both critics of globalization and its defenders point to anticipated effects of globalization that are commonly linked to crime. Moreover, while violent crime rates are only one of the possible outcomes that are potentially affected by globalization, they are nonetheless an important element to consider when developing national and international policies on trade. Throughout most of the 18th century, many western intellectuals accepted as fact the doux commerce assertion that expanding trade and commerce has beneficial effects on civilizing human behavior and reducing crime. However, most contemporary research on cross-national comparative homicide has ignored globalization as a factor in predicting crime rates and has instead concentrated on a set of economic stress and modernization variables that are widely attributed to globalization by its critics. We operationalize globalization as trade openness, analyze a large cross-national homicide database and include a robust set of control variables.
Our analysis consistently shows that trade globalization during the past half century has been associated with significant declines in national homicide rates and that these effects are especially strong for low GDP per capita-high inequality countries. Our results suggest that at least in terms of homicide, it may be beneficial to encourage further globalization while at the same time developing policies that reduce economic stress and income inequality.
11/08/2022 | Gary LaFree and Bo Jiang | Oxford Academic

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