One Clause in Cap and Trade We can Support

by Lisa Reisman on July 22, 2009

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As we have previously opined, the cap and trade bill passed by the House of Representatives earlier this month, does not represent America’s best thinking on climate change for a whole host of reasons. But one clause in the bill actually makes good sense to us and also makes sense to the US domestic steel industry. That clause relates to the imposition of import tariffs on goods coming from countries such as China and India who do not implement similar emission reduction programs.

Let us re-phrase that last sentence. We think the imposition of an import tariff scheme makes little sense as a policy from an administrative and enforcement standpoint. But in terms of changing behavior, we find it intriguing. The clause has raised the ire of China and India. President Obama has also come out against the imposition of these tariffs for fear that it could provoke a trade war. But the trade wars have already started so what difference does this clause make?

Commerce Secretary Gary Locke recently said to the American Chamber of Commerce in Shanghai, quoting from Reuters, It’s important that those who consume the products being made all around the world to the benefit of America ” and it’s our own consumption activity that’s causing the emission of greenhouse gases, then quite frankly Americans need to pay for that. According to the Wall Street Journal blog post, the argument suggests that China is producing these goods for export and not for domestic consumption therefore, emissions costs should be borne by those who consume the goods.

China supports Commerce Secretary Locke’s statement. Of course one ramification to higher prices could be reduced demand. As we like to say around here, nothing kills high prices like high prices. Long term, the Chinese would pay dearly for having the American consumer bear the brunt of the environmental burden. But perhaps higher cost imports would limit our insatiable demand for overseas goods from countries that can’t and won’t limit their emissions in the name of industrialization.

And we can support the notion of paying more for imports as we have previously espoused as a means for reducing our trade deficit. (See this earlier post on Warren Buffet’s plan to reduce the trade deficit). Of course if the clause on imports causes the cap and trade bill to die, well, wouldn’t that be icing on the cake?

–Lisa Reisman

  • http://www.energyplanusa.com Rmoen

    America needs clean, cheap energy — not clean, expensive energy. I’m a Democrat who thinks the House overplayed its hand when it passed cap-and-trade. Support for cap-and-trade is evaporating. Daily I read editorials, comments and letters-to-the-editor from all over the nation. Whereas when the House passed the bill it was maybe 2-to-1 against cap and trade, opinion now seems to be at least 6-to-1 against. The Senate will be wise to heed the overwhelming lack of public support and stop this legislation from passing into law.

    If instead of a complex and risky cap-and-trade system the United States had a national mandate to replace coal generation plants with natural gas and nuclear energy, plus if we replaced our commuter cars with battery-powered electric cars, we would drastically reduce our dependence on foreign oil and reduce CO2 emissions faster and beyond the proposed cap and trade targets.

    – Robert Moen, http://www.energyplanUSA.com

  • http://PeteMurphy.wordpress.com Pete Murphy

    Our enormous trade deficit is rightly of growing concern to Americans. Since leading the global drive toward trade liberalization by signing the Global Agreement on Tariffs and Trade in 1947, America has been transformed from the wealthiest nation on earth – its preeminent industrial power – into a skid row bum, literally begging the rest of the world for cash to keep us afloat. It’s a disgusting spectacle. Our cumulative trade deficit since 1976, financed by a sell-off of American assets, exceeds $9.2 trillion. What will happen when those assets are depleted? Today’s recession is the answer.

    Why? The American work force is the most productive on earth. Our product quality, though it may have fallen short at one time, is now on a par with the Japanese. Our workers have labored tirelessly to improve our competitiveness. Yet our deficit continues to grow. Our median wages and net worth have declined for decades. Our debt has soared.

    Clearly, there is something amiss with “free trade.” The concept of free trade is rooted in Ricardo’s principle of comparative advantage. In 1817 Ricardo hypothesized that every nation benefits when it trades what it makes best for products made best by other nations. On the surface, it seems to make sense. But is it possible that this theory is flawed in some way? Is there something that Ricardo didn’t consider?

    At this point, I should introduce myself. I am author of a book titled “Five Short Blasts: A New Economic Theory Exposes The Fatal Flaw in Globalization and Its Consequences for America.” My theory is that, as population density rises beyond some optimum level, per capita consumption begins to decline. This occurs because, as people are forced to crowd together and conserve space, it becomes ever more impractical to own many products. Falling per capita consumption, in the face of rising productivity (per capita output, which always rises), inevitably yields rising unemployment and poverty.

    This theory has huge ramifications for U.S. policy toward population management (especially immigration policy) and trade. The implications for population policy may be obvious, but why trade? It’s because these effects of an excessive population density – rising unemployment and poverty – are actually imported when we attempt to engage in free trade in manufactured goods with a nation that is much more densely populated. Our economies combine. The work of manufacturing is spread evenly across the combined labor force. But, while the more densely populated nation gets free access to a healthy market, all we get in return is access to a market emaciated by over-crowding and low per capita consumption. The result is an automatic, irreversible trade deficit and loss of jobs, tantamount to economic suicide.

    One need look no further than the U.S.’s trade data for proof of this effect. Using 2006 data, an in-depth analysis reveals that, of our top twenty per capita trade deficits in manufactured goods (the trade deficit divided by the population of the country in question), eighteen are with nations much more densely populated than our own. Even more revealing, if the nations of the world are divided equally around the median population density, the U.S. had a trade surplus in manufactured goods of $17 billion with the half of nations below the median population density. With the half above the median, we had a $480 billion deficit!

    Our trade deficit with China is getting all of the attention these days. But, when expressed in per capita terms, our deficit with China in manufactured goods is rather unremarkable – nineteenth on the list. Our per capita deficit with other nations such as Japan, Germany, Mexico, Korea and others (all much more densely populated than the U.S.) is worse. My point is not that our deficit with China isn’t a problem, but rather that it’s exactly what we should have expected when we suddenly applied a trade policy that was a proven failure around the world to a country with one fifth of the world’s population.

    Ricardo’s principle of comparative advantage is overly simplistic and flawed because it does not take into consideration this population density effect and what happens when two nations grossly disparate in population density attempt to trade freely in manufactured goods. While free trade in natural resources and free trade in manufactured goods between nations of roughly equal population density is indeed beneficial, just as Ricardo predicts, it’s a sure-fire loser when attempting to trade freely in manufactured goods with a nation with an excessive population density.

    Pete Murphy
    Author, “Five Short Blasts”

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