June 28, 2019 9:16AM

Misunderstandings on the WTO, Trade, and the Environment

These days, the Trump administration's attacks on trade liberalization, trade agreements, and the World Trade Organization are focused on issues such as trade deficits and allegations that the United States is being treated "unfairly." But before Trump and his trade team hijacked the trade debate, there had been a critique from the left that trade was bad for the environment in various ways. One example was that trade agreements supposedly got in the way of domestic environmental regulation. There had been some trade disputes over domestic environmental regulations, some of which had included provisions that discriminated against foreign products in favor of domestic ones, and environmental groups were concerned about the impact of adverse rulings by WTO "panels" (i.e., quasi-judicial courts) on their ability to adopt such regulations. 

While that debate has been overshadowed recently, it came back yesterday after a WTO panel ruling on various U.S. state measures that discriminate against foreign products in the renewable energy sector. In reaction to this ruling, Todd Tucker of the Roosevelt Institute wrote the following

The World Trade Organization (WTO) is back in the news, with a Thursday ruling against seven U.S. states’ renewable energy policies. The WTO is already unpopular with right-wing nationalists like Donald Trump. By siding with India against the U.S., the WTO is likely to make left-leaning politicians and the burgeoning global environmental movement unhappy. 

States Are Acting on Climate because the federal government won’t

The WTO is acting against state level policies intended to improve the environment, stepping into the void left by the federal government. In 2009, the U.S. Senate refused to vote on what was at that time the most ambitious climate change legislation: the Waxman-Markey Act. Concluding that federal action might never be forthcoming, U.S. states (especially those than lean Democratic) began enacting climate policy of their own.

The measures range from biodiesel incentives in Montana, through nudges for Michigan-made clean energy manufacturing, to other schemes in California, Delaware, Connecticut, Minnesota and Washington State. The common denominator of these policies is an attempt to soften the inevitable economic dislocations of moving away from the carbon economy. The Michigan policy was typical: electricity providers get a renewable credit when they generate one megawatt of green energy. However, they get another tenth of a credit when that energy uses Michigan-made equipment or Michigan laborers.

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The WTO sees “Buy Local” politics as protectionist 

When India complained about these green schemes, they did not have to show that Indian companies tried to qualify for any of them, or that they had been denied access, or that they lost any money to make a case at the WTO. Under the rules of the General Agreement on Tariff and Trade (GATT), Michigan’s energy credit was invalid, because Indian solar panel exporters in theory would have not qualified for that extra tenth of a renewable energy credit if they had tried to sell them in Michigan.

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This is a Problem for the Green New Deal

The WTO decision collides with a groundswell of progressive interest in a Green New Deal — a plan that looks a lot like the state policies that the commercial body just ruled against. The Green New Deal resolution by Rep. Alexandria Ocasio-Cortez (D-N.Y.) and Sen. Edward J. Markey (D-Mass.) outlines five goals, 14 projects and 15 requirements to help evaluate those projects. Instead of just going ahead with carbon taxes (which would likely be unpopular), it gives groups that might be expected to oppose a carbon tax — front line communities, manufacturing workers — a stake in the deal’s success. It uses Buy Local or Hire Local requirements to make its proposed climate solutions politically sellable and viable. These are the sorts of provisions that India and other countries can be expected to challenge if and when a Green New Deal ever gets through Congress.

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In reality, while there may be some actual trade and the environment conflicts that are hard to sort out, this is not one of them. The WTO ruling here is very narrow. It is not a general condemnation of subsidies for environmental causes. Rather, it simply says that governments cannot discriminate against foreign goods when adopting their environmental policies. That ruling is actually pro-environment. If governments are trying to promote the adoption of environmentally-friendly products, competition is helpful not harmful. Generally speaking, environmentalists should want more trade in these products, not less. As I jokingly put it on twitter, "The fundamental question: Do you want artisan, hand-crafted solar panels from the Eastern Shore of Maryland for a million dollars a pop, or do you want highly efficient solar panels made by a Chinese factory in Iceland that is powered by geothermal energy?" Shielding local producers from competition makes them stagnant and inefficient. That's not the way to develop good renewable energy products. If the Green New Deal does that, it is not going to be very green.

There is a group of people out there who still believe in old school industrial policy, advocating a wide range of government interventions in the economy (including protectionist measures like the ones at issue here), in order to build up domestic manufacturing. But the policies they are pushing cannot be categorized as pro-environment, and often these policies will be pretty bad for the environment. It's a shame, because this is one area where supporters of trade liberalization should be able to work together with environmentalists by pushing for lower trade barriers on these products, as my old colleague Bill Watson and I wrote about here