Trade War Looms as China Objects to European Union Carbon Fees

Differences in climate change policies have the potential to undermine the economic gains to be had from international trade.

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Robert Hahn is director of economics at Oxford's Smith School, chief economist at the Legatum Institute, and a senior fellow at the Georgetown Center for Business and Public Policy. Peter Passell is a senior fellow at the Milken Institute in Santa Monica and the editor of its quarterly economic policy journal, The Milken Institute Review. They co-founded Regulation2point0.org, a web portal on economic regulation.

China’s opposition to European Union rules that will require commercial jets flying European routes to pay carbon emission fees is (in the diplomatic language reserved for such matters) unfortunate. Expressing its opposition by threatening to boycott Airbus, the giant European aircraft manufacturer, is much worse—an early sign of the almost inevitable spillover from climate policy discord to international trade battles that will pit the European Union against its fastest growing customers.

Back up for a moment. The European Union has been leading the charge on market-friendly measures to curb emissions that affect climate change. As part of the initiative, in 2013 it will require airlines that land or take-off from European airports to pay according to how much they spew into the atmosphere. But non-European Union airlines (and their governments) are screaming foul: In February, 26 countries (including China, Brazil, and the United States) held a pep rally in Moscow to declare their opposition.

[See a collection of political cartoons on the economy.]

Threats to refuse to pay, and thus to suspend flights to the European Union, don’t seem especially credible; European routes are far too important for most international airlines to risk, especially when one considers that the rules won’t favor one carrier over another. But China has taken a more ominous tack, threatening to block some $12 billion worth of aircraft sales by Airbus to Chinese airlines. (The owners of Airbus include, among others, the governments of France and Spain as well as Daimler-Benz.)

It’s hard to know what the Chinese are actually up to. On the one hand, China’s airlines could buy substitutes from Boeing, and (in the case of smaller aircraft) from Brazilian and Canadian manufacturers. On the other, China has a big stake in Airbus’s ongoing success. The company has a major production facility in China, assembling Airbus’s bread-and-butter A320 midsized airliner. Moreover, Chinese engineers are helping to design Airbus’s next-generation 350 XWB-series aircraft—an endeavor that’s bound to transfer advanced technology to China’s own aircraft industry.

[Read: How Legacy Airlines Can Be Competitive Again.]

What is clear is that differences in climate change policies have the potential to undermine the awesome economic gains to be had from international trade in coming years. The airline issue is a high-profile flash point. But the possibility of conflict looms from a myriad of directions as the European Union ratchets down emissions.

Take the case of ocean shipping, which produces roughly 3 percent of all greenhouse emissions worldwide. A global approach would, of course, be preferable. However, the international maritime industry is deeply split on whether and how to manage emissions containment, with developing and emerging-market countries bitterly opposed to rules that would be more costly to older, less efficient vessels. And there’s a very good chance that the European Union will be forced to go it alone here, too, which would likely lead to a showdown similar to the one unfolding over air travel.

[See a collection of political cartoons on energy policy.]

Truth be told, there’s hardly an industry in the increasingly integrated global economy that won’t be affected by differences over climate change regulation. For example, should European Union steelmakers subjected to heavy emissions charges be forced to compete with Russian, Chinese, Brazilian, or Indian steelmakers whose governments aren’t inclined to follow the European Union’s lead on climate change? For that matter, should European Union automakers be forced to compete with Chinese or Brazilian automakers who buy their steel at home?

We think the European Union should be saluted for leading the world toward an efficient, market-based fix for climate change, and we see nothing wrong in principle with creating financial incentives to airlines to use carbon-sparing planes. But we worry that trade (or, more realistically, growth in trade), which is so important to rich countries and utterly vital to emerging-market economies seeking Western living standards, will end up as collateral damage in the battle over how emissions are curtailed and who pays.

The only way to assure a happy ending will be to bring climate change policies into closer alignment, or at least to agree to disagree in ways that don’t lead to trade wars. Good luck on that.

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