Carbon border measures seen breaking WTO trade rules

Thu Dec 3, 2009 11:43am EST


* WTO waivers target environment, not competition

* Border controls economically unviable, think tank says



By Jonathan Lynn

GENEVA, Dec 3 (Reuters) - Border measures to protect domestic manufacturers from unfair foreign competition as part of climate change legislation could run foul of global trade rules, a Brussels think tank said on Thursday.

Such border measures could also be economically unworkable, said Fredrik Erixon, director of the ECIPE research institute.

"Many countries are going to think twice because they know they are going to unleash quite hard responses, very likely retaliation, from other countries," Erixon told a conference call about a study on trade and climate.

"It is difficult to see how they are going to be squared with basic rules," he said.

Both the United States and European Union are considering legislation to compensate domestic companies from the higher costs of carbon reduction measures if imports from other countries are not subject to similar restrictions.

China, India, Brazil and South Africa have rejected core targets for a climate deal days before talks start in Copenhagen and are demanding richer nations do more. [ID:nGEE5B12CX]

But Erixon said legislation imposing higher costs on foreign imports subject to lower or no carbon reduction measures would almost certainly run up against World Trade Organisation rules barring discrimination between domestic and foreign goods.



WTO EXEMPTION

The WTO's GATT agreement does include a general exemption to its fair-trade rules, allowing countries to restrict commerce to preserve natural resources, protect public morals, and the like.

But that exemption, known as Article XX, provides a waiver for environmental not competitive reasons, so any legislation imposing costs on imports would have to be drafted to show that it promotes environmental protection rather than helps domestic companies compete, Erixon said.

Traditional trade measures would also not work.

Anti-dumping duties imposed on unfairly priced imports are typically assessed in terms of the price in the exporting country not the price in the importing market.

Importers would find it difficult to argue that the lack of carbon reduction measures represented a subsidy and therefore apply countervailing duties, as WTO disputes against subsidies have tended to benchmark the domestic price in the exporter.

"When you can't find that particular price discrepancy between domestic sales and foreign sales the legal motivation for the imposition of countervailing duties is not there," Erixon said.

Border tax adjustments such as value-added tax or special tariffs would require the consent of other WTO members.

Subsidies for domestic biofuels could also provoke trade disputes by discriminating against foreign energy sources in an example of "green protectionism" to protect domestic producers from foreign competition under the guise of environmental policy, the ECIPE paper argues.

Border measures would have little impact on the target country, Erixon said. With the European Union taking only 8 percent of Chinese steel production, it was hard to see China raising the costs for its entire industry to meet EU demands.

Such measures also risked driving up costs for domestic users, and punishing individual producers in foreign countries that were behaving responsibly, he said. (For full ECIPE paper go to link.reuters.com/naf84g) ((jonathan.lynn@reuters.com; +41 22 733 3831; Reuters Messaging: jonathan.lynn.reuters.com@reuters.net ))

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