Rethinking world trade
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Confronted with the impact of Donald Trump’s policies, Europe – like other parts of the world – has no choice but to fundamentally rethink its trade rules. To put it plainly: If Europe does not urgently give up its love of free trade, it risks an unprecedented social and industrial disaster, and the planet will also suffer.
When setting tariffs, Trump has followed a narrowly nationalist (such as focusing on the US’s bilateral trade surplus) and rather chaotic logic, often changing course on a whim. The opposite approach is needed: Tariffs should be set based on universal and predictable principles.
The first reason for implementing tariffs is that international freight generates pollution that accounts for 7% of global emissions. Economists have long underestimated this environmental cost, using a low value for the metric ton of carbon (between €100 and €200). However, the worsening of global warming has led to a reassessment. The costs stemming from emissions – natural disasters, decline in economic activity and so on – are now estimated at about €1,000 per ton, if not more, without even factoring in loss of well-being and non-economic costs. Using this value, one would need to apply average tariffs of around 15% on global trade flows to compensate for warming linked to freight, with significant variations depending on the type of goods.
The second justification for tariffs is social, fiscal and environmental dumping. Some countries apply less stringent regulations than others, allowing producers based there to undercut competitors. In practical terms, China currently accounts for 30% of global emissions, with exported emissions making up about 20% of this (or 6% of the global total). At €1,000 per ton, average tariffs of about 80% would be needed on Chinese exports to account for this environmental cost. If focusing only on net exported emissions (after subtracting imported emissions), which is about 10% of China’s emissions (3% of the global total), the necessary tariffs would be around 40%.
Now to social dumping. Wages account for 49% of gross domestic product in China, compared to 64% in Europe. This distorts competition and would require compensatory tariffs of about 15%. A similar calculation can be made for fiscal dumping, especially regarding corporate taxes and state subsidies.
As with carbon, the aim is not to penalize China per se, but to encourage it to pay better wages, at which point the compensatory tax could be lifted. China has no need to accumulate endless trade surpluses; it should first continue its plans for decarbonization (which are further along than in the US, for example) and increase its wages and domestic demand. In the long run, if the US does not change course, Europe and China will have to impose significant sanctions on it.
In any case, tariffs are not an end in themselves: They can be dispensed with if binding agreements are put in place to achieve the same objectives. They can also be replaced by targeted financial sanctions if those prove more effective. The exact amounts should be determined following thorough democratic deliberation, conducted transparently, ideally within transnational assemblies.
What is certain is that the amounts at stake are potentially very large: between 50% and 100% tariffs to account for the negative externalities associated with freight and dumping. In comparison, the modest European carbon border adjustment mechanism is projected to bring in barely €14 billion per year by 2030 – that is, 2% of Chinese imports and 0.5% of total imports from outside of Europe. Let’s be honest: This will have no tangible effect on trade flows. Claiming otherwise will lead to bitter disappointment.
Two powerful factors could prompt Europe to change course. First, the social and political pressures arising from the new wave of industrial job losses that is looming. Second, the urgent need for tax revenue to repay the 2020 European loan and finance new spending. Tariffs could help address these needs.
The main difficulty is that Europe remains deeply committed to absolute free trade. The European Union does acknowledge the importance of promoting sustainable and fair development, including in the founding articles of its treaties. But when it comes to action, it hesitates to move too far from absolute free trade, for fear of triggering an endless protectionist spiral. This Pandora’s box argument is understandable, but it is not without hypocrisy (it was used a century ago to oppose any form of progressive taxation, and fortunately has since been overcome), and above all, it is no longer suited to our current challenges.
Unilateral action will perhaps be needed to overcome these deadlocks, with certain countries adopting national measures to protect themselves from social and environmental dumping. If we use the example of the United States, it is possible that this kind of initiative comes from the right and from nationalists, which would be regrettable since the exclusionary logic of that political camp will solve none of the social challenges or the feeling of abandonment it exploits to gain power. It is time for the left, in Europe and around the world, to take up the issue of sustainable and fair trade and put forward an ambitious plan of action.
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