API Geoeconomic Briefing is a series provided by the Asia Pacific Initiative, an independent think tank based in Tokyo. The series will look into geopolitical and economic trends in the post-COVID-19 world, with a particular focus on technology and innovation, global supply chains, international rule-making and climate change.
U.S. President Donald Trump, who has widely been considered unorthodox, has described himself as a “tariff man” and unilaterally applied duties on multiple occasions based on his zero-sum view on trade.
When it came to climate change, he made light of the issue and pulled the U.S. out of the Paris climate accord in the early days of his presidency.
But with Trump now in the dying days of his presidency, and President-elect Joe Biden waiting in the wings with his own set of planned policies on trade and climate change, Japan needs to think carefully and craft its possible responses.
The Biden administration will likely not raise tariffs unilaterally and will be cautious about additional tariffs based on Section 301 of the U.S. Trade Act of 1974. There is a possibility that the administration may withhold the tariffs currently being imposed and use them as a bargaining chip in negotiations with China. But there’s an expectation that tariffs that are imposed on U.S. allies for national security reasons based on Section 232 of the Trade Expansion Act of 1962 will be eliminated at an early stage.
Some analysts are predicting that duties on aluminum may be halted while those on steel may remain, or the tariffs on both commodities could be lifted in exchange for imposing an import quota, because America’s Rust Belt is politically important. This issue is drawing attention since it is likely to have a symbolic meaning regarding how serious Biden is regarding the importance of U.S. allies.
In December 2019, the Trump administration refused to appoint new members of the World Trade Organization’s Appellate Body even after outgoing members’ terms ended, gutting the body’s function and rendering it unable to accept new appeals.
It is expected, though, that the Biden administration will change course and restore the WTO’s dispute settlement function. Washington sees the WTO as problematic, becoming an ultra-vires legislative body that goes beyond legal interpretation in its dispute settlement. It’s necessary to create a situation wherein the U.S. would be able to cooperate with the resumption of the WTO’s dispute settlement function early.
Additionally, there is a problem in that several of the WTO’s frameworks don’t match with China’s reality. For example, China is an economic and trade powerhouse but still receives benefits as a developing nation.
Besides, since the interpretation of the prohibited subsidies is narrow (only subsidies provided by so-called public bodies are prohibited), the WTO is unable to effectively regulate Chinese subsidies. Japan, the U.S. and Europe are already working on plans to improve the situation, but it is important to increase the number of countries agreeing with the effort to improve WTO rules. Japan should continue with those endeavors.
When Biden was vice president under President Barack Obama, he promoted the Trans-Pacific Partnership and it was presumed that he was not opposed to the trade deal. During the presidential election campaign, though, he emphasized that a new international trade agreement would come only after the domestic structure, such as rules on investment, has improved.
With the Trade Promotion Authority, a congressional tool that allows presidents to negotiate trade agreements more efficiently, set to expire in July 2021, it’s unlikely that the U.S. will rush to join the TPP before that date considering Biden’s campaign promise prioritizing the domestic economy.
It will be difficult to obtain a Trade Promotional Authority at the same level as that currently in place from Congress considering that it is likely the Republicans will have a majority in the Senate, a result that depends on the outcome of two runoff elections in Georgia on Jan. 5.
On top of that, like the United States–Mexico–Canada Agreement, it would be expected that Washington will renegotiate the TPP in areas such as the environment and labor, before moving on to November 2022 when the midterm election is held.
For the U.S., the TPP not only has economic profits but is also lucrative geoeconomically in terms of countering China. Meanwhile, Japan needs to continue with its diplomatic efforts to make the environment favorable for the U.S. to return to the TPP.
Like the Trump administration, the Biden administration regards the Buy American policy, which prioritizes the purchase of U.S.-made goods, as important and has announced that all government procurement will use exclusively American products.
This contradicts the WTO’s government procurement rules, but the Biden team has referred to changes to the rule. If the U.S. reinforces Buy American, there could be similar movements in Europe and Japan to ensure government-procured goods are from their own countries.
Such negative spirals will not only make government procurement costly and ineffective but also reduce international business opportunities for American firms. Japan needs to work through this with the U.S.
Regarding climate policies, Biden announced that Washington would rejoin the Paris Agreement immediately after he assumed the presidency. He added that he would achieve net zero greenhouse gas emission in the electricity sector by 2035 through solar, wind and nuclear energy on top of carbon capture and storage.
While emphasizing technology neutrality, which is the freedom of individuals and organizations to choose the most appropriate and suitable technology, Biden also said the U.S. as a whole nation would go carbon neutral by 2050.
The Biden administration is promoting climate change measures through various policies despite the expectation that a $2 trillion spend to be allocated to fighting climate change over the next four years would be reduced if the Republicans control the Senate.
Meanwhile, the Democrats’ manifesto has a reference to carbon adjustment fees at the border.
If goods with a high concentration of carbon imported from countries with inadequate climate change policies increase, global emissions levels will not be reduced, even if the U.S. achieves its domestic emissions goals through measures such as carbon tax, emissions quotas and regulation. This situation also puts domestic industries in a disadvantageous position. The tariffs are aimed at avoiding such a scenario.
Similar policies are under consideration in the European Union, which aims to introduce a carbon border adjustment mechanism by 2021 as part of the European Green Deal. The Trump administration has criticized it as protectionism and threatened to impose a retaliatory tax, but the Biden administration is expected to take the opposite approach.
Indeed, it must be ensured that these border adjustment taxes will not be used as a protectionist policy in disguise. The EU’s main carbon emissions reduction policy is the EU Emissions Trading System (EU ETS) within the bloc. But it will retain the border adjustment tariff imposed on imports from other countries with insufficient measures below the EU ETS’s emissions allowance price so that the trading system won’t simply offer preferential treatment for firms within the EU.
In the U.S., a national blueprint is yet to be drafted, but academics such as Jennifer Hillman, a professor at Georgetown University, proposed in October to introduce a carbon tax in the U.S. and impose carbon adjustment tariffs not exceeding the carbon tax burden on domestic manufacturers, which would be acceptable under WTO rules.
Carbon tax repayment
Hillman’s proposal states that U.S. companies receive refunds for carbon tax if they export their products. She says that this is as long as tax returns are nondiscriminatory and suggests imposing a carbon tax as a cap that would not violate the WTO’s Agreement on Subsidies and Countervailing Measures.
In other words, since it would be difficult to judge other countries’ climate change policies, the U.S. would impose tariffs or a tax refund on exports as well as imports of goods with a high concentration of carbon from all other countries based on U.S. carbon tax.
It would mark a transition to a society in which the place of consumption shoulders the financial burden of the carbon cost rather than the place of production.
As a result, the professor explains that the proposal would induce effects to introduce both carbon tax and border adjustment tax in other countries, and thus carbon pricing would be embraced worldwide.
In Japan, Prime Minister Yoshihide Suga announced in October that the country would go net carbon neutral by 2050. Even though Suga said he will use various policy tools to achieve that goal, he appears to be putting emphasis on fiscal measures to promote innovation, including a tax credit. It’s important to support efforts effectively through those fiscal measures, considering the benefit of innovation goes beyond one company.
Yet, it will be impossible to achieve the 2050 goal by solely relying on it. It is not a good idea to overestimate the government’s ability to choose appropriate future technology. Instead, it is important to introduce a carbon pricing system, such as the introduction of technologically neutral measures like carbon tax, which is a significant expansion of current marginal global warming taxes, from the standpoint of promoting innovation, as well as finding a way to change the behavior of the public and companies.
A carbon tax is prone to unleash criticism claiming that it is a tax hike proposed by fiscal fundamentalists. But the purpose of carbon tax is to rectify a distortion, not to increase revenue.
It is possible to make neutral the system by using carbon tax revenue to slash corporate tax, or distribute it to all Japanese citizens.
If the distortion is fixed, the revenue through carbon tax would be reduced, so it will not be a permanent tax revenue.
It is worth considering border adjustment taxes — under consideration by the U.S. and Europe — to avoid domestic firms being put at a disadvantage in competition, which is the negative side of carbon tax.
In thinking of policies to protect the Earth, countries are engaged in a competition over rule-making so that they are not put at a disadvantage.
In the U.S., it is unlikely that carbon tax will easily be introduced if the Republicans control the Senate, but it is necessary to note that even among the party, there is a preference for carbon pricing over regulation, considering the former has a lower degree of government intervention.
Japan’s goal of being net carbon neutral by 2050 is not far away, but at the same time not so near that the government would be held responsible immediately, thereby allowing room for escape.
But if Japan keeps avoiding swallowing the bitter pill, it will make achieving the goal difficult and the nation will fall behind in competition over rule-making.
In September, China declared it would go net carbon neutral by 2060. This is a logical approach for China from a geopolitical perspective, in that the country will respond to requests from the European Union, highlight contrasts with the Trump administration and be welcomed once Biden is inaugurated.
Additionally, China is assuming that the goal will help boost demand for its domestic products internationally. The country is highly competitive on the global stage in photovoltaic equipment, wind power equipment, electric vehicles and nuclear power.
Japan needs foresight and strategy to actively promote rule-making and take a read-ahead position as we follow those European, American and Chinese developments and contribute to resolving environmental issues by participating in international cooperation.
Shin Oya is a senior consulting fellow at API.