The last three years have provided a pretty effective lesson about how tariffs impose immense economic costs and generally don’t achieve their primary policy aims, but Democrats in Congress apparently didn’t pay close enough attention.
As part of an overall $3.5 trillion federal budget framework unveiled this week, Democrats are calling for new taxes on imported goods from countries that don’t adopt stricter environmental rules. Details like what would be taxed and at what rates remain scarce for now, but The New York Times explains that the so-called polluter import fee would “require companies that want to sell steel, iron, and other goods to the United States to pay a price for every ton of carbon dioxide that is emitted during their manufacturing processes. If countries can’t or won’t do that, the United States could impose its own price.”
Officials in the European Union have already outlined plans for a similar system, called a “carbon border tax,” though no country has adopted such a system.
In theory, these import taxes would put pressure on countries that do a lot of dirty manufacturing—and, specifically, China—to adopt stricter environmental rules of their own.
In practice, however, this scheme looks like it would tax Americans in order to punish foreign manufacturers for spewing too many emissions. Dan Mitchell, an economist with the Center for Freedom and Prosperity, a free market think tank, points out that the implementation of a polluter import fee would also require a massive expansion of federal bureaucracy to measure the amount of carbon produced by every imported good, determine appropriate tariff rates, and enforce payment. In both the U.S. and the E.U., he writes, it would be “a huge recipe for cronyism and favoritism.”
Indeed, in reviewing the E.U. proposal for a carbon border tax last week, The Wall Street Journal reported that companies would have to submit reams of data for “carbon audits” carried out by European Commission regulators. Companies that refuse will be subjected to a blanket tariff based on the emissions of the 10 “dirtiest” European producers of the same goods. That’s backdoor protectionism under the guise of environmentalism, and it would likely drive up costs for consumers while driving out many smaller producers that currently sell products into the E.U. market.
There’s also a good chance it would ignite a major trade war. The Times notes that the proposal “would be difficult to carry out, and could anger trading partners and face a challenge at the World Trade Organization.” Even if things don’t get that bad, there’s still no way to guarantee that making imports more expensive will convince the countries exporting those goods to adopt different policies.
There are libertarian arguments both for and against a national carbon tax, which would attempt to convert some of the public costs of carbon emissions into actual costs for companies that do the emitting. One of the problems with carbon taxes, however, is that hiking taxes on domestic polluters only encourages the shifting of more carbon emission–heavy manufacturing to parts of the world where those policies don’t exist. In short, it risks doing damage to your own economy while not achieving any significant gains in terms of reduced emissions.
The carbon border tax or polluter import fee can therefore be understood as an attempt to solve that problem—and to universalize whatever carbon policies developed nations might impose in coming decades. But it runs up against a serious practical problem. Taxing one’s own citizens is a poor way of getting other nations to change their behavior.
Former President Donald Trump’s departure from the White House was supposed to put an end to this kind of magical thinking about tariffs. Trump and his trade advisers saw tariffs as the solution to just about every geopolitical issue. China is stealing American companies’ intellectual property? Tariffs. Turkey is threatening to invade Syria? Threaten to “swiftly destroy” their economy with some tariffs. Immigrants are coming across the southern border from Mexico? Tariffs! The prime minister of Canada was sorta mean to you? More tariffs!
But all those tariffs and tariff threats accomplished little for Trump. The minor trade pact he reached with China after more than two years of trade-warring was never very serious and has already effectively collapsed.
Perhaps that’s because tariffs—which are, once again, nothing more than taxes on your own people and domestic industries—aren’t a particularly effective tool at getting other countries to change their behavior. It’s like telling your annoying neighbor that you’ll smash your fist into your own front door if he doesn’t stop blasting his music. He might care enough to prevent you from hurting yourself, but it wasn’t the threat that did it.
The plans that Senate Democrats are drawing up do have one major advantage over the tariffs Trump futilely tried to impose. If the United States and the European Union are both going to impose these tariffs, they might have a better shot of changing global trade patterns than when the U.S. was engaged in its quixotic, solo trade wars during the Trump years.
But make no mistake: The costs of these policies will still fall squarely on Americans and Europeans.
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