Patrick Thomas

BAM!

Here in Washington, Congress is still mostly focused on getting a health care bill passed. But after a narrow victory for climate change legislation in the House this summer, things are starting to move again with the introduction of the Kerry-Boxer bill in the Senate.

Climate change doesn’t feel like a trade issue, but in many ways it is. Trade can play a powerful role in the global fight to mitigate climate change through the exchange of green goods and services. But there is also a concern that climate change could be used instead as an opportunity to build new protectionist barriers to trade.

I am referring to something called a Border Adjustment Mechanism (which has a fantastic acronym). In essence, a BAM is a tariff levied at the border on goods made in countries which do not account for carbon intensity during production. BAMs are seen by some as a way to level the playing field in regards to competitiveness.

Instinctively this may sound reasonable. But BAMs are a blunt instrument to solve what is actually a fairly small problem. They would be very tough to administer and they would have to be structured very carefully to pass muster in the WTO.

From a trade angle, the UK Government worries about the protectionist signal that BAMs could send. We need free and open markets to really tackle climate change, and we don’t want to risk sending the wrong message to our global trading partners. We agree with the statement that President Obama made about BAM provisions in the House legislation that passed in June:

At a time when the economy worldwide is still deep in recession and we've seen a significant drop in global trade, I think we have to be very careful about sending any protectionist signals out there.[…] There are going to be a series of negotiations around this and I am very mindful of wanting to make sure that there's a level playing field internationally. I think there may be other ways of doing it than with a tariff approach.

Nick Bridge has been doing an excellent job covering the wider climate change debate from the Embassy. Businesses and think tanks are engaging too - Jake Colvin of the National Foreign Trade Council and Matt Yglesias have both recently written thoughtful posts on BAMs, which I encourage you to read. This will be an ongoing debate as the Senate considers climate change legislation, and BAMs, in the coming months. I hope to write more about this subject in the future.

Posted at 09:34 19 October 2009 by Patrick Thomas  |  Comments[0]

A new normal

In recent weeks, there have been some signs that the sharp recession which has plagued the global economy is slowly beginning to turn a corner. This is welcome news. A good dose of economic growth is sorely needed at the moment; but looking forward, it’s clear that fundamental challenges remain. Last week, The Economist ran a cover story titled ‘After the Storm’, which cast a sober look at what could be the ‘new normal’ for the global economy:

The prospect of a ‘new normal’ … still spans at least two distinct possibilities. One is that the world economy returns roughly to its pre-crisis rate of growth, without regaining the ground lost. That, the IMF points out, is what happens after most financial crises. The second, more depressing possibility is that growth stays at a permanently lower rate, with investment, employment and productivity growth all feebler than before.

This is hardly encouraging stuff, and it made me wonder what we can expect from international trade in the future.  Will trade and investment, the great engines of global economic growth, pick back up? Or are we looking at a ‘new normal’ of weaker commerce?

Here in the US, I have heard two very different scenarios. Earlier this week, Nobel Prize-winning trade economist Paul Krugman gave a talk to the World Business Forum. Mr. Krugman is bearish about the future of commerce. Referring to the trade collapse this year, he concluded:

When it comes to international trade, actually it’s not the Great Depression, it’s worse… World trade growth might not be as buoyant as it has been: this looks like a long siege for the world economy. When you recover from a crisis, you almost always rely on a large trade surplus. But the world as a whole can’t move into trade surplus, so this may be a really prolonged slump.

Fortunately, I have seen some more optimistic thinking as well. I attended a discussion at the World Bank a couple months ago, where Caroline Freund, Senior Economist in the Development Research Group at the World Bank, argued that the ratio between trade and global GDP has increased over time due to the increasing complexity of global supply chains. By this logic, just as trade has fallen fast, it should snap back quickly as global economic growth returns.

We don’t know which of these scenarios will come to pass, but it seems clear that things will not be the same post-crisis. For me, this is another reason to complete the Doha Round of trade negotiations as soon as possible. In the ‘new normal’, there will likely be fresh challenges for the multilateral trading system. Once we finally finish the Doha Round, which was launched back in 2001, the World Trade Organisation will be much better placed to tackle them.

Posted at 12:33 09 October 2009 by Patrick Thomas  |  Comments[1]