“Leveling the playing field” with border taxes (read “bring down the economy”)

In Washington, beware any proposal that attempts to “level the playing field.” What is usually meant is hobbling competition with restrictive rules and regulations that often raise costs for consumers. On the international playing field, such “leveling” can have broader disastrous consequences.

That’s likely to be the case with the House Ways and Means’ misguided proposals to impose carbon taxes on imports from countries that haven’t taken stringent measures to control greenhouse gas emissions.

It turns out that the huge and complex energy bill – the Waxman-Markey bill – is scheduled to be voted on Friday. It sets up a “cap and trade” system by setting a limit on carbon emissions and issuing tradable allowances. The bill got some carbon-intensive industries realizing the high costs they would have to pay under the program and then pass on to their customers. They and environmental groups eager to suppress energy use talked about “leakage,” that is, firms in countries that didn’t have strict emission standards would be able to offer lower prices, and other firms might move to those countries as well. Their solution? Hit those foreign imports with a hefty tax too, and Ways and Means is figuring out a way to do that.

China, India, and other powerhouse developing countries are the main bugbears. Yet going down that road to protect domestic industries could put our fragile economy in a tailspin. CEI and others have written about the increased costs to consumers from suppressing the use of fossil fuels that supply more than 80 percent of U.S. energy. At a time when many families are struggling with bills, adding these new costs will be a hefty burden. Assessing carbon taxes on imports from certain countries would mean that consumers would get no relief from those increased costs.

Perhaps the main threat, however, is to the whole economy of the U.S. Countries like China and India won’t sit back and take this blow to their exports. They will likely retaliate with trade measures against the U.S. possibly affecting a broader range of products. In fact, China’s top climate change official Li Gao had suggested that countries importing goods from China might themselves pay for the emissions created in their production. Those large developing countries point out that they have only recently been experiencing rapid industrialization and economic growth, in contrast to the developed world, and do not want to be penalized and have their growth curtailed, as millions of their people are still living at a subsistence level.

The U.S. border measures – and perhaps the free allowances offered under cap-and-trade –will undoubtedly face challenges in the World Trade Organization, which can go on for years and further disrupt the world trading system.

Also, the threat is real that retaliation might be initiated outside the trading system. Currently, China holds almost one-quarter of all U.S. debt held by foreign countries. Suppose China threatened to dump some of its holdings?

Let’s hope policymakers have more sense than to vote “yea” for this economically destructive bill.