The US, EU, and China have major disagreements over climate and energy policy. Another major trade war is likely.

Divergent Climate Plans Will Spark the Next Trade War 

The Peterson Institute for International Economics is concerned about a Trade War Over Climate Change and wants the WTO to step in.

Two months before the next big United Nations climate conference in November, the three biggest greenhouse gas emitters—the United States, Europe, and China—are at loggerheads over how to reduce reliance on fossil fuels without excessively disadvantaging their own economies. Their confrontation is based on fears that if each country or region takes tough steps on climate change, the other two players will take unfair advantage in the arena of international trade.

The US and EU border tariffs schemes have prompted opponents to complain about the impact on international trade. US climate envoy John Kerry expressed concerns about the EU CBAM, and Australian prime minister Scott Morrison declared that carbon tariffs are "simply trade protectionism by another name." As an economy that is expected to be hit hard by the border adjustment plans, China also voiced objections, saying that CBAM violates WTO rules, will seriously undermine the principle of common but differentiated responsibilities, will erode mutual trust in the global community, and curb prospects for economic growth .

Importantly, China has not yet promised to decrease allowances over time. This is unfortunate since some power plants may relax their efforts to cut emissions and instead just rely on their historic quota of free allowances. While the market currently only covers the power sector, officials have indicated that other high-polluting industries such as steel, cement, chemical, electrolytic aluminum, and papermaking—some of them already covered in local pilot programs—could be covered in later stages.

As carbon tariffs are debated by lawmakers and move through US and EU legislative bodies, their compatibility with WTO rules will be vigorously contested. Importantly, both the US and the EU proposals grant discretionary exemptions to qualified trading partners. While seemingly benign, such exemptions could put border adjustments in violation of the WTO's non-discrimination rule. Furthermore, the General Agreement on Tariffs and Trade (GATT), signed in 1947 and reaffirmed with the creation of the WTO in 1994,mandates in Article III that taxes on imported products should not exceed those imposed on like domestic products. The EU free allowances on CBAM products (which can be seen as a subsidy) and the absence of a US domestic carbon tax both raise national treatment questions.

Difference of Opinion and Strategies

Slim Chance For WTO

Back in February, Bloomberg reported Biden Picks Up Where Trump Left Off in Hard-Line Stances at WTO.

The U.S. delegation to the WTO, in a statement Monday obtained by Bloomberg, backed the Trump administration’s decision to label Hong Kong exports as “Made in China” and said the WTO had no right to mediate the matter because the organization’s rules permit countries to take any action to protect their “essential security interests.”

The Biden administration on Monday said the U.S. has consistently argued that national-security disputes are not subject to WTO review because it would infringe on a member’s right to determine what is in its own security interests.

Recall that Trump gutted the WTO by not making appointments, leaving the body short of the required numbers of persons to even hear a case. 

That changed on August 10 when the WSJ reported Biden to Nominate María Pagán as U.S. Envoy to World Trade Organization

President Biden is expected to nominate María Luisa Pagán, a longtime government trade negotiator, as a deputy U.S. trade representative and ambassador to the World Trade Organization, a critical role for accelerating the administration’s engagement with the multilateral organization that has faced multiple challenges in recent years.

According to administration officials, Mr. Biden is also expected to name Christopher Wilson, another veteran of the Office of the U.S. Trade Representative, as the agency’s chief negotiator for innovation and intellectual property, a job tasked with solving increasingly thorny IP disputes in digital and pharmaceutical industries.

Their nominations will come as frustration builds over the slow pace of the appointments of key trade officials among business executives and trading partners who are eager to see disputes resolved and new agreements initiated. Katherine Tai, U.S. trade representative, has been working without any of her three deputy positions.

The WTO has faced various challenges in recent years, including failure to conclude negotiations in key areas such as e-commerce and environmental goods, as well as the dysfunction of the appellate body, the helm of its dispute settlement system, caused by blocking of the appointment of judges by the Obama and Trump administrations.

 

Mistrust Everywhere

Despite the appointments, there is mistrust  everywhere. And the WTO is horrendously slow to decide anything. The Boeing-Airbus dispute lasted an amazing 17 years. 

The case was not resolved by the WTO but rather by joint agreement of the US and EU to suspend tariffs for 5 years.

The US Progressive Express

Meanwhile, Biden, AOC, and Pelosi are hell bent on there mad scheme for a border adjustment tariff that is against WTO rules. 

EU Tries to Convince Trading Partners Its Carbon Tax is Not a Tax

On July 6 I noted EU Tries to Convince Trading Partners Its Carbon Tax is Not a Tax.

CBAM, the EU's carbon border adjustment mechanism looks like a tax, acts likes a tax and is indeed a tax. However, the EU says it is not a tax, but an "adjustment mechanism". 

Hope For Nothing But Expect a Mess

If anything happens in Congress that gets Biden's $3.5 trillion bill off the ground it will be a guaranteed mess. 

There is no way the WTO or anyone else will resolve it, and the bill itself is stagflationary.

The best thing that can possibly happen is nothing. Anything else is a mess.