Investor’s Business Daily
Front Page, A1
By Sean Higgins
April 3, 2009
http://www.investors.com

Subsidies for U.S. firms, tariffs on foreign rivals could spur retaliation

Major cap and trade climate legislation unveiled this week might be better described as a cap on trade.
The House measure includes potentially far-reaching measures to subsidize domestic industry and impose tariffs on foreign goods.
The bill, sponsored by Reps. Henry Waxman, D-Calif., and Ed Markey, D-Mass., would cut U.S. carbon emissions by requiring companies to have permits that let them release greenhouse gases.
Many U.S. manufacturers fear such costs would give a big edge to foreign rivals from countries with little or no emission controls.
The bill seeks to address those concerns by giving “rebates” to companies, mostly industrial ones using lots of raw materials like metal and glass, for cap and trade costs.
If the White House decides those rebates aren’t enough, the legislation would let the president create a “border adjustment program.”
This would force foreign manufacturers and importers “to pay for and hold special allowances to ‘cover’ the carbon contained in U.S.-bound products,” according to a bill summary provided by the House Energy and Commerce Committee.

Backdoor Protectionism

In essence, experts say, the U.S. would use cap and trade as an excuse to subsidize domestic firms and slap tariffs on goods from countries deemed not to have strong emission controls.
Bill Kovacs, vice president for environmental policy for the Chamber of Commerce, said this will “invite retaliation.” Other nations are not going to stand idly by, he warns.
“Any time you get into a position where you want to block international markets, you really risk starting trade wars,” Kovacs said.
Trade experts said it pushes U.S. policy into uncharted waters.
“It is the use of a trade restriction to try to address the higher cost of U.S. regulation compared to that of other countries, a kind of costharmonization tariff,” said Steve Charnovitz, professor of trade law at George Washington University. “As far as I know there has been nothing like that before in an environmental legislation.”
He added that no effort seems to have been made to square it with World Trade Organization rules, so a challenge by other countries is all but certain.
Sallie James, a trade policy analyst at the free market Cato Institute, said the bill would let the White House decide which countries have the “right” kind of emissions policy, authority it may not have under international law.
“There is no case law, really, on climate change legislation and no jurisprudence at the WTO that would cover this,” she said.
The WTO would likely consider the rebates to be a subsidy, James said. The “border adjustment” could be deemed a tariff. The WTO has viewed such programs with suspicion, she adds.
A WTO challenge could backfire on the U.S., she notes. While countries like China and India emit more carbon than the U.S., they have far more people. Per capita, Americans emit far more.
“They (the lawmakers) are taking a gamble here and saying let’s see what works,” James said.
Peter Morici, professor of international business at the University of Maryland at College Park, agrees it’s untested international law, but asks: Why not test it? The U.S. has won similar WTO cases, he says.
“I don’t agree that it is protectionist,” he said. “The tax goes away if the other (country) imposes a similar cap and trade regime . . . It is an extension of a WTO right.”

Broader Bill Vague

House Energy Chairman Waxman has vowed to pass the overall bill out of his committee by Memorial Day. Its fate before the full House is unclear. Committee aides note the bill is just a “discussion draft” and is likely to be amended.
Parts of the bill are deliberately vague. It doesn’t specify if carbon permits would be given away to companies or auctioned off. Nor does it give a formula for what the special allowances would cost.
Republican staffers warn that the bill could be expanded, as was the last attempt to pass a cap and trade measure last year.
“Right now the language only covers energy-intensive primary products: steel, cement, aluminum, chemicals and glass,” a GOP aide said. “By the time they were done with the bill in the Senate last year it potentially covered all kinds of manufactured products.”