Commentary on Political Economy

Monday 25 March 2024

 Europe is making trade conditional on production methods

Martin Sandbu · Mar 25, 2024

Europe’s manufacturers seem to find themselves in a perfect storm. Hardly a day goes by without a complaint about excessive regulation, Chinese competition, or the EU’s inability to match the US’s Inflation Reduction Act. At the confluence of it all is European businesses’ grievance that regulators are cutting them off at the knee rather than championing them.

But corporate Europe’s disadvantage may come from policies that don’t go far enough, rather than ones that go too far.

Take the car industry. European producers worry they can’t compete against subsidised Chinese-made electric vehicles in their home market. They will soon have something else to complain about: steel and aluminium are set to become significantly dearer inside the EU than elsewhere, given that the bloc is phasing in its “carbon border adjustment mechanism” (CBAM), a tax on the carbon content of certain imported materials.

CBAM is itself a spur to innovative production. In its current form, it will secure an EU market for low-carbon steel and aluminium, cement, fertiliser, hydrogen and electricity. The efforts EU companies are making in green steel, for example, could become competitive with domestic “dirty” steel given the EU’s high domestic carbon tax, but would be undercut by carbon-intensive imports in the absence of an emissions-linked border levy.

But by creating a market for low-carbon products in these sectors, CBAM undermines the market for EU products that use those materials as inputs, such as cars. While CBAM protects the level playing field for Europe’s green steel and aluminium producers, downstream manufacturers receive no such protection from imports made with carbon-intensive raw materials or power. What a downstream industry like carmaking should push for, therefore, is to widen the scope of CBAM to cars.

This economic logic means CBAM is politically unsustainable in its current form. Once its effects are felt, politicians will face enormous and legitimate pressure to undo the competitive damage experienced by downstream manufacturers such as carmakers. At that point, expanding CBAM to more sectors will be a better policy than reversing it.

CBAM is an instance of a broader European trend of making market access conditional on production methods. In recent agreements with trading partners, the EU has sought restrictions on the environment, labour conditions and animal welfare. The bloc is passing domestic laws that in effect constrain the import of goods produced in various offending ways from human right violations to deforestation.

Cue accusations of protectionism and value imperialism. But not wanting to consume a product made by enslaved people, or through cruelty to animals, or with excessive carbon emissions, is not in itself either imperialist or protectionist — so long as these are the real motivations, not a cover for resisting foreign goods. If genuinely held, such preferences simply mean that conventional arguments for free trade may not apply in some cases.

Attention to production methods, and not just the physical characteristics of a product itself, is admittedly novel. So is the resulting regulation that upsets European businesses. But like it or not, there will only be more regulation of trade in products made by offending methods.

One reason is more concerned consumers. Those who in the past may not have cared that their clothes were made by forced labour or the diamond on their ring was extracted in a war zone, now do. Another reason is that more EU producers will adopt the attitude I recommended above: if their production methods are going to be held to high standards, so should those of their com- petitors selling into the bloc. A third is the rise in services trade and embedded data processing in goods, where “prod- ucts” and “production methods” are not clearly separable.

Europeans are not entirely alone in this newly intrusive attitude. California has successfully banned the sale of so- called unethical pork, even from other US states, on animal welfare grounds. But the EU will be leading it into stand- ard practice — if it chooses to.

That may lead to less trade — but also less trade in products whose value depended on concealing what was traded. And European exporters may find they cannot compete on price else- where; if so, that would just extend a fine European tradition of competing on quality. The EU will be accused of impe- rialism. But it will not force others to do what it does, simply insist on deciding what may be sold in its home market. A better word for that is “sovereignty”.

No comments:

Post a Comment