Adam Triggs | Will the next trade war be green?

Businesses love tariffs. Consumers aren't so keen.

Businesses love tariffs because having to compete for your money is a bit of a drag. It's easier when your international competition has a competitive handicap thanks to a tax on imports imposed by your government.

Tariffs mean businesses don't have to worry as much about pricing competitively, investing in their products, boosting innovation or treating their customers well. Life is much easier with less competition.

Consumers aren't such big fans of tariffs, for basically the same reasons.

Consumers like their goods and services to be good quality, safe, innovative and, above all, cheap. Consumers like businesses to make the stuff they want, make the stuff they didn't know they wanted, and to be responsive to their needs.

These are all things that competition delivers, and these are the things tariffs take away.

So, are all tariffs bad? Not necessarily. One tariff which many economists are more open to - and that Chris Bowen is thinking about implementing in Australia - relates to climate change.

Consider the following scenario. Suppose Australia has an industry that, by its nature, has a pretty large carbon footprint (think: aluminum or cement) which it can't easily reduce in the short-term.

If Australia imposes a carbon tax at home, that industry suffers a competitive disadvantage if there are imported products that are not subject to a similar tax in their own countries.

This risks killing-off an industry in Australia with no benefits to the environment since the carbon-intensive production has just shifted to another country.

If you think this sounds like a bad outcome, you'd be right. And this is the whole idea of the government's proposed Carbon Border Adjustment Mechanism - or CBAM for short.

A CBAM imposes a tariff on products imported from overseas which represents the difference between the carbon price faced by the products made in Australia compared to the carbon price faced by the products from overseas. It's about ensuring a level playing-field.

Seems straightforward enough. So, what's the problem?

A CBAM is a good idea. The problem is that implementing a CBAM is much harder in practice than it is in theory. And if countries get it wrong, we risk triggering a green trade war.

To see why, suppose we are importing something from the United States. If the United States has an economy-wide carbon price, then we can (relatively) easily compare the price paid by the American manufacturer compared to the price paid by the manufacturer here in Australia.

But what if the United States doesn't have an economy-wide carbon price? What if only some jurisdictions (eg. California) have a carbon price? Tracking the specific location in which the product is made can be tricky.

And what happens if, as is the case in the United States, the government is using regulations like technology requirements to keep emissions down instead of a carbon price? How do we account for that?

Or consider the flipside of this. What if the United States has a bunch of supports or industry protections that effectively subsidise a polluting industry? How do we account for those?

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Now multiply these challenges for every single good imported into Australia from every single country in the world. The methodological challenge of this is big, and the data challenge is even bigger.

The risk is these cracks of ambiguity could invite protectionist objectives to creep in.

A domestic firm or industry that can't otherwise get any international protection might come up with some creative arguments as to why their international competitors should be hit with a larger tariff than they otherwise would - so called "green protectionism". If other countries were then to retaliate with their own green tariffs, things could get nasty.

So, how do we avoid a green trade war?

Put simply, we need to refresh - and more importantly, recommit to - the international rules and institutions that govern trade.

The global institutions responsible for trade - namely the World Trade Organisation and bodies like the G20 - have worked for years to accommodate a range of considerations in developing and enforcing global trade rules, everything from protecting human, animal and plant health through the defending against the dumping of products below cost.

These haven't worked perfectly, but they've provided the much-needed framework for setting rules and resolving disputes.

The problem is that these institutions and rules need a refresh, particularly for things relating to climate change, subsidies, data and the digital economy.

But rather than refresh these rules and institutions, the United States has either actively undermined them (Trump) or done little to fix them (Biden).

Recommitting to these international institutions and reforming the rules they implement will be our best bet for stopping green trade wars. And Australia has a key role to play.

The countries which benefit most from an effective, rules-based global trading system are small, open economies - that's Australia, and our friends in the Asia Pacific. Implementing our CBAM is an opportunity to tick two boxes at once: strengthening our relationships in our region while supporting our businesses and our economy.

The maths is simple: if we want a level-playing field for our businesses at home, we'd best start working with our friends overseas.