House Version of US Climate Bill Strengthens Likelihood of Border Measures

26 June 2009

The US climate bill, which will go the House of Representatives for a vote today, will include strengthened language on border measures. Efforts this week by the House Ways and Means Committee - the body with jurisdiction over legislation relating to tariffs, import trade, and trade negotiations - have adjusted the bill's goals for international climate negotiations and ensure that the US is not placed at a competitive disadvantage.

The border measures contained in the legislation would authorise the US to impose import tariffs on countries that fail to take measures to curb greenhouse gas (GHG) emissions, which has been a key issue for domestic and international industries (see Bridges Trade BioRes, 20 March 2009, https://www.ictsd.org/bridges-news/biores/news/call-for-tariffs-intensifies-as-cap-and-trade-hits-us-agenda and, 17 April 2009, https://www.ictsd.org/bridges-news/biores/news/kirk-moves-to-quell-concern-over-carbon-border-tax).

Today's vote comes much sooner than anticipated after House Democrats were able to resolve difficult agricultural issues earlier this week. While the bill is likely to pass in the house, some opponents in the Senate, where the bill is expected to face greater opposition, have criticised the climate legislation citing possible WTO rule violations as a reason to delay domestic action on climate change.

Senator Charles Grassley, a critic of the bill's possible WTO violations, suggested last week that the Senate wait for an international climate agreement before taking domestic action. Grassley said this would allow the Senate to avoid negative trade effects and ensure comparable emission reduction among US trading partners. Parties will meet in Copenhagen, Denmark at the end of the year to attempt to hammer out a successor to the Kyoto Protocol, which is set to expire in 2012.

Mixed messages on the role of import tariffs in US climate policy

The adjustments made by the House Ways and Means Committee will make downplaying the role of border measures in US climate legislation much more difficult for the Obama administration. Commenting on the changes, Subcommittee Chairman, Sander Levin, indicated a strong desire to reach a "meaningful international agreement...that will reduce global carbon emissions and maintain trade neutrality in the process."

In the absence of an international agreement, Levin continued, "this legislation ensures that the United States will avoid carbon leakage in its energy intensive and trade sensitive industries." Leakage, a term referring to the movement of carbon producing industry to countries with more lax environmental standards, has been a prime concern for the Obama administration as it mulls its proposed emissions trading scheme.

The new provisions require that import tariffs be applied to carbon-intensive products in 2020 unless Congress is informed by the president that border measures are not in the "national economic interest." This would make import tariffs the rule rather than the exception, a significant shift from the previous version of the bill, where the president was allowed several options if certain loss of competitiveness factors were met.

The Ways and Means revisions also moved to adjust international negotiation objectives to "address the competitive imbalances that may be created in domestic and export markets" between countries that have and have not taken sufficient climate change measures. Additionally, provisions governing border measures would also be sought.

Experts caution against unilateral import tariffs

In the absence of broad multilateral action, Gary Hufbauer, a Senior Fellow at the Peterson Institute for International Economics in Washington, indicated before a hearing of the Subcommittee on Energy and Air Quality in March that efforts to address competitiveness concerns and emissions leakage through the use of trade measures will have limited success. In addition to concerns surrounding WTO compliance, there are also concerns with how import restrictions could affect US exports.

If the US imposes restrictions on imports in the name of climate change, these actions, Hufbauer warned, would likely elicit similar measures by other countries on US exports. In addition, the issuance of performance standards on foreign firms by the US, would stand a high chance of reciprocal actions on the US as well, he said. These examples were cited by Hufbauer as reasons for the US to "make an exceptional effort to negotiate agreed international rules before blocking imports or penalising foreign GHG control measures."

According to Hufbauer, an inability to avoid the creation of unique brands of import bans, border taxes, and comparability mechanisms could result in "drawn-out trade skirmishes and even trade wars" with global cooperation in limiting emissions possibly the first casualty of a unilateral approach that ignores the basic GATT articles.

Domestic import tariffs and the WTO

Under pressure from industry and unions to address competitiveness concerns in the bill, media sources report that Congress is carefully considering the structure of border measures to encourage a global climate change treaty and avoid violation of WTO trade rules. However, some experts have said that, in its current form, US climate legislation could violate WTO rules that do not allow tariffs to be imposed if they are in addition to those reflected in the US schedule or if they discriminate against foreign products based on production and processing methods.

Supporters of the import tariff provision contend that, even if border measures violate WTO rules, the US could qualify for an exemption under Article XX of the General Agreement on Tariffs and Trade (GATT). While the legislation may satisfy competitiveness provisions laid out in sections XX(g) and XX(b), legal experts suggest that satisfying the demanding conditions of the Article may pose a significant challenge.

Arjun Ponnambalam at the Georgetown University Law Center said this is especially true after the Brazil-Tyres decision, which expanded the discretion of the WTO Appellate Body to ensure that Article XX is not invoked in a manner that undermines the fundamental notions of international trade equity.

Given the current state of US climate legislation and continued domestic calls for strong border measures, observers say the country's ability to remain engaged on these issues at the international level will be critical to how possible trade disputes are received in the future. In recent weeks, experts from the WTO have encouraged countries to "seek good-faith international negotiations on matters related to the border measures." Experts have indicated that current efforts could determine whether future exceptions for environmental measures under the WTO are granted.

More Information

The amended legislative trade provision text can be found here: https://www.ictsd.org/sites/default/files/news/2009/06/wamc-draft.pdf

ICTSD Reporting; "Climate Change: Competitiveness Concerns and Prospects. Testimony before the Subcommittee on Energy and Air Quality, US House of Representatives, Committee on Energy and Commerce," PETERSON INSTITUTE FOR INTERNATIONAL ECONOMICS, 5 March 2008; "U.S. Climate Change Legislation and the Use of GATT Article XX to Justify a "Competitiveness Provision" in the Wake of Brazil-Tyre," INTERNATIONAL TRADE REVIEW, 2008.

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