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Hi from Washington, where Joe Biden has this week been forced to address fears that rising inflation could undermine his $4tn spending plans. The president insisted that the Federal Reserve would take action if needed, but repeated that his top administration officials believed current inflation pressures would ease over time.
Our main piece today is on decarbonisation and how, following the EU’s unveiling of its plan to combat climate change, the US is coming up with some ideas of its own to lower emissions. We think these attempts on either side of the Atlantic will have significant implications in the trade world.
Charted waters looks at Europe’s attempts to enhance its capacity to make semiconductor chips.
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Washington plays catch-up on CBAM
President Joe Biden has talked a big game on the environment. But when it comes to carbon pricing and taxing emissions, Washington has been left very much trailing Europe.
Not only has the US, under Donald Trump at least, not been as attentive to climate change, but it has also not been as interested as Europe in developing carbon pricing strategies. Even under the Biden administration, Washington is more concerned with investing in clean technologies and developing regulation than in taxing carbon.
That is until now. Last week’s big reveal of Europe’s new climate policy proposals, Fit for 55, including its carbon border adjustment mechanism, or CBAM, did not go unnoticed in DC. Here at Trade Secrets, we’ve been observing headlines about a new and brewing transatlantic trade war over carbon and climate change. While the idea that Europe may begin penalising carbon-intensive imports from the US will raise hackles in some quarters, it also seems to have prompted some Democrats to push forward a policy response. Surprisingly, we were thrown the curveball suggestion of a “pollution import fee” by Democrats as they drew up their latest spending package.
It sounds interesting, although we have not been able to unearth any further details on what such a fee might look like. One thing to note is that the US currently does not have a carbon pricing mechanism like the EU’s. So it’s not so much an “adjustment” to bring the carbon cost of imported products in line with domestically produced products (like the CBAM), but sounds more like a straight up import tax. There are already some big question marks over whether the EU proposal will make it through litigation battles with trading partners at the World Trade Organization. Any eventual US version that ends up being structured as a tax or fee could be even less likely to fly with the WTO, according to David Kleimann of Georgetown University. “If you do not adjust for something but just imposed some sort of arbitrary polluter fee, then definitely all the alarm bells start ringing at the WTO,” said Kleimann.
One top Democratic aide said there was still a lot of discussion between the White House and Democrats on Capitol Hill over what the proposal will actually look like. Ron Wyden, the chair of the Senate’s powerful finance committee, said a “well-designed border adjustment can ensure foreign competitors pay their fair share if they fail to take responsibility for pollution”. Meanwhile, senator Chris Coons and congressman Scott Peters floated a slightly different-sounding idea in a new bill. They are calling for a tax on imports from polluting countries designed to match the regulatory costs borne by US domestic companies because of US environmental rules.
So is the US likely to sidestep carbon pricing and implement something different to the EU regime? Maybe. In a recent paper, Todd Tucker of the Roosevelt Institute and Timothy Meyer of Vanderbilt argue that the US does not need to go the same way as the EU and introduce carbon pricing, but can still work with allies to produce sectoral deals that agree on how to measure carbon intensity and impose tariffs on carbon-intensive industries. They suggest that the steel industry would be a good place to start. The US’s most recent penchant for industrial policy — the subsidisation of key industries — combined with a robust regulatory regime is a legitimate alternative path to a carbon pricing regime, they say.
There have been some suggestions that the movement from the EU could be poorly received in DC and start a new front in the transatlantic trade war. The likes of Russia have already criticised the measure. So far it seems unlikely the US will follow suit — the Biden administration and the US trade representative have said they back environmental protections and robust climate policies, and there has not been much furore on the Hill. The question is how Washington responds. While the detail is yet to be settled, there’s clearly a renewed focus and speed.
There’s a great Big Read out today on Europe’s attempts to up its game in the manufacturing of semiconductor chips. Europe, of course, is far from the only region looking at this (see Trade links for more on the US’s efforts, for instance). But with auto manufacturing one of the industries to be hardest hit by production shortages during the pandemic, it has some cause to improve capacity.
The chart below shows that the region is especially weak in lacking foundries to make and assemble the chips. The hope is that a wave of investment will rectify this. But as the Big Read highlights, many have their doubts as to whether it would actually work. Claire Jones
The Federal Maritime Commission in the US has ordered the world’s nine largest ocean carriers to undergo an audit aimed at looking into detention and demurrage practices. As Trade Secrets reported earlier this week, Joe Biden wants to clamp down on the rise in shipping costs, which have shot up during the pandemic. Biden’s team is also optimistic (Bloomberg, $) on the chips situation, saying there should be some relief for carmakers in the US shortly.
Nikkei reports ($) that North Korea’s food shortage has reached a crisis-level deficit of 860,000 tonnes, shaping up to be the worst humanitarian crisis in Asia as the reclusive country keeps its borders closed to imports.
Not ones to be left out, the UK’s Department for International Trade has published a comprehensive report on the importance of green trade. The BBC has been following the post-Brexit tensions over Gibraltar. Claire Jones
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