Environmental Economics

Climate protectionism on this side of the Atlantic

From E&E news (Senators eye ‘CHIPS 2.0’ as vehicle for carbon tariff):

As senators from both parties seek a pathway for advancing a bill imposing carbon tariffs, a potentially viable vehicle has emerged: a nascent legislative package to boost U.S. competitiveness against China.

Senate Democrats announced last week they want to write a follow-up to last year’s bipartisan CHIPS and Science Act with the help of Republicans, opening the door to a rare opportunity this Congress to craft and even pass legislation that would have support from each side of the aisle.

Critically, the scope of “CHIPS and Science 2.0,” as some are calling it, would also likely lend itself to the inclusion of language to institute a carbon border adjustment mechanism, or CBAM — an emissions reduction concept that is gaining support across the political spectrum. Many advocates see the effort as key to fighting global emissions while at the same time punishing foreign adversarives like China. ...

Lawmakers would also have to resolve significant disagreement over whether putting a domestic price on carbon is necessary for achieving a CBAM that deals with international behavior surrounding emissions.

Some advocates say a domestic carbon fee is a necessary step to ensure a CBAM’s enforceability by the World Trade Organization. Others, including Coons, are currently willing to risk running afoul of the WTO by leaving that component out of their proposals to make their ideas more politically palatable.

On April 19 I wrote:

Of all the types of protectionism that are trending (e.g., here, here), this one might not be so bad.

So, why is that? Well, regular tariffs might be designed to protect domestic industry. They do that but the cost, in terms of higher prices and lost consumer surplus, outweigh the benefits. The cost of steel tariffs might be about $900,000 for each steel job protected. The same type of calculation would be at work with tariffs aimed at imports that generate more GHGs than products made domestically but there is the added benefit of reducing GHGs. If both the U.S. and Europe imposed these tariffs then it would elevate climate policy in both places and the tariff rate would effectively be zero. At least, that is the result in my simple trade model. 

Climate protectionism

From the WSJ (World’s First Carbon Import Tax Approved by EU Lawmakers): 

The European Union’s parliament approved legislation to tax imports based on the greenhouse gases emitted to make them, clearing the final hurdle before the plan becomes law and enshrines climate regulation in the rules of global trade for the first time.

Tuesday’s vote caps nearly two years of negotiations on the import tax, which aims to push economies around the world to put a price on carbon-dioxide emissions while shielding the EU’s manufacturers from countries that aren’t regulating emissions as strictly, or at all. The tax gives credit to countries that put a price on carbon, allowing importers of goods from those countries to deduct payments made for overseas emissions from the amount owed at the EU’s borders. ...

Governments and lawmakers in other countries are already under pressure to follow suit. The U.K. is debating whether to introduce a carbon border tax, while Democrats in Congress proposed legislation to create one. Bipartisan support for the idea is growing in the U.S., said Kevin Dempsey, president of the American Iron and Steel Institute, which represents companies such as Nucor Corp. and ArcelorMittal SA.

Of all the types of protectionism that are trending (e.g., here, here), this one might not be so bad.

 

Friday Beer Post: The best reason yet to oppose a trade war (and there are a lot of reasons)

This is appalling!

I'm aghast!

I need a beer.

Around this time last year, the Beer Institute (BI), a national trade association representing the American brewing industry, warned that President Donald Trump’s aluminum and steel tariffs would cost the beer industry $347 million annually and potentially lead to the loss of 20,000 jobs.

Well, as it turns out, the BI’s worst fears are coming true.

The Washington, D.C., lobbying group tapped Austin, Texas-based Harbor Aluminum — a research firm that specializes in the global aluminum industry – to study and estimate the cost of aluminum tariffs under section 232 of the Trade Expansion Act of 1962 since they were imposed on March 8, 2018.

According to the firm — which compiles, develops, and analyzes industry data and market intelligence for more than 300 companies across the aluminum supply chain — the U.S. beverage industry paid about $250 million for aluminum cansheet between March and December of last year.

During that same period, however, the United States Department of the Treasury collected just $50 million, while U.S. smelters and rolling mills pocketed the rest.

“We see beer as the crown jewel of American manufacturing,” BI president and CEO Jim McGreevy told CNBC last week. “This is really hurting us.”

Here’s the rub: The U.S. cansheet used to produce beverage cans contains 70 percent domestic scrap metal, which is exempt from tariffs. The other 30 percent comes from imported primary aluminum.

But according to the BI, domestic beverage manufacturers paid a tariff on 100 percent of the cansheet used to make beverage cans.

Harbor Aluminum estimates that U.S. rolling mills and smelters raked in $173 million and $27 million, respectively, over a 10-month period by charging end users a “tariff-paid price” on the entire aluminum cansheet used to make beverage containers.

In other words, rolling mills and smelters are effectively stealing from beverage manufacturers by overcharging for cansheet as if it was made entirely from imported primary aluminum.

“Brewers are paying a tariff price even on domestic aluminum,” McGreevy said via a press release. “I have heard from brewers large and small from across the country who are seeing their aluminum costs drastically increase, even when they are using American aluminum.”

Speaking to CNBC, McGreevy said many brewing companies have decided to absorb the increased costs of aluminum, while others have raised prices and passed it along to consumers.

“Any downstream user of aluminum is being affected by this increased tax,” he said. “Repeal, in our view, is the only way to go.”

In a conversation with Brewbound last March, Robert Budway, the president of the Can Manufacturers Institute (CMI), said President Trump’s 10 percent tariff on aluminum would add about 1 penny to the cost of every can. At that rate, a brewery making 10,000 barrels would be forced to pay an additional $20,000 annually.

Last June, MillerCoors CEO Gavin Hattersley said the tariffs would cost his company $40 million. And according to McGreevy, Minnesota’s Summit Brewing shelled out an extra $160,000 in 2018.

“This is affecting brewers of all sizes,” he told CNBC.

Approximately 60 percent of the beer produced and sold in the U.S. is packed in aluminum cans and bottles, the BI estimates.

In addition to the BI and the Brewers Association, the American Beverage Association and the CMI oppose tariffs on steel and aluminum.

Only someone poorly trained in the dark arts would have expected otherwise

From the WaPo (Trump’s washing-machine tariffs cost U.S. consumers $815,000 for every job created):

President Trump has repeatedly sought to portray his tariffs on Chinese goods as a major windfall for the U.S. treasury that has extracted “billions of dollars” from China. But the reality is that tariffs are typically absorbed by consumers in the form of higher prices.

And now a new study shows just how big that markup can be.

When economists at the University of Chicago and the Federal Reserve studied the 2018 duty on washing machines, they found the expected rise in retail prices from foreign manufacturers such as Samsung and LG. Surprisingly, though, these brands also increased dryer prices. Then domestic manufacturers followed suit, simply because they could.

All told, the research shows, U.S. consumers are spending an additional $1.5 billion a year on washers and dryers as a result of the tariffs. That’s an extra $86 for each washing machine and $92 for each dryer, the authors estimate.

And less than 10 percent of that goes to the U.S. treasury — about $82.2 million — the study showed.

The authors ran their analysis using weekly price data on appliances from the market research firm Gap Intelligence. If the tariffs cost $82 million but consumers are paying $1.5 billion, where’s the rest of that money going? Foreign manufacturers are passing some costs on to consumers, while domestic ones are simply pocketing extra profits, according to the study. ...

U.S.-based manufacturers added about 1,800 jobs in response to the tariffs, researchers found. But at a total cost to consumers of about $1.5 billion, that works out to approximately $815,000 for every new job created. That figure is roughly in line with other estimates on the per-job cost of tariffs in other industries.

This is what is taught in thousands of introductory economics courses every semester. 

Kudlow: "the beatings will continue until morale improves"

It's going to be a fun (i.e., not fun) two years for environmental economists (Kudlow calls for end to subsidies ...):

White House chief economic adviser Larry Kudlow said on Monday the Trump administration will seek to end subsidies for electric cars and renewable energy sources, according to reports.

Kudlow said he expected subsidies for electric cars would end by 2020 or 2021.

“We want to end, we will end those subsidies and others of the Obama administration,” he said, according to Bloomberg.

It’s unclear how the administration plans to cut the tax credits, since Congress enacted them and would have to act to end them. ...

The remarks were made in response to a question about what the administration would do about GM’s plans to layoff 15,000 people and shutter five plants across North America.

The company's plans have sparked outrage in Washington from both parties.

President Trump last week floated cutting GM's subsidies for electric vehicles and raising auto tariffs to punish the company if it cuts jobs in the U.S.

Didn't President Trump already "punish" GM with the steel tariffs? 

Thank you EU, I guess this means more cheap whiskey for me...oh, and there's an economic lesson in here too.

Don't take this as support for tariffs, my inner economist is strongly opposed to tariffs on economic efficiency grounds, but my inner hillbilly is slightly happy that an EU tariff on American whiskey is likely to lower U.S. whiskey prices (at least in the short run).  Life can't be all beer...

Jack Daniel’s Tennessee Whiskey prices will rise in the European Union (EU) due to the member countries’ new 25 percent tariff on imported U.S. whiskey.

Brown-Forman Corp. spokesman Phil Lynch told The Associated Press that the price of Jack Daniel’s in the EU will likely rise by about 10 percent, a change which will go into effect over the next couple of months.

For those not familiar with the economics of tariffs, when a tariff is placed on an imported good, the price of that good rises in the importing country.  So let's say for some odd reason, the President of the United States decides to place a tariff on all imported, oh, I don't know, let's say steel imported into the U.S.  (I know, that's far fetched, but go with me here).  The result of the price increase on imported steel is an increase in the price of ALL steel in the U.S.--steel we import, and steel we produce domestically.  The impact on the rest of the world is an increase in the supply of steel on the world market, causing prices for the rest of the world to fall. 

Who benefits?  Domestic steel manufacturers benefit from the tariff on imported steel, because they can now sell their U.S. produced steel at higher prices.  But that comes at an expense--U.S. consumers of steel lose because they have to pay more for steel.  But here's the kicker--the losses to U.S. consumers are GREATER than the gains to U.S. producers.

All of this of course ignores the effects on the rest of the world.  What happens there?  

The manufacturers in the tariffed country (the country producing the good being imported) will lose because they are forced to lower their prices to sell all of the stuff they used to export to the tariffing country.  So when the U.S. puts a tariff on imported steel, manufacturers of steel in the rest of the world are penalized...but consumers of steel in the rest of the world gain from lower priced steel.  But here's the second part of the kicker--the losses to steel manufacturers in the rest of the world are GREATER than the gains to consumers in the rest of the world.

That means that a 'hypothetical' tariff on an imported steel in the U.S. will benefit U.S. steel producers, and steel consumers in the rest of the world.   U.S. steel consumers and steel manufacturers in the rest of the world will take a loss.  And the total losses will ALWAYS be greater than the total gains.  

So I guess you could say that if the U.S. were to impose a tariff on imported steel, it would be a signal that the U.S. likes foreign consumers more than domestic consumers, likes domestic manufacturers more than foreign manufacturers, and likes creating economic losses.

But that's just hypothetical of course.  Let's get back to the more import issue at hand--whiskey.  

An EU tariff on imported U.S. whiskeys will raise whiskey prices to EU whiskey consumers, create an economic gain for EU whiskey producers, create an economic loss for U.S. whiskey producers (probably the whole point), and create an economic gain for U.S. whiskey consumers.

And the total losses will be GREATER than the total gains.

But who cares?

I get cheaper whiskey.

And that's all that matters.

Right?

     

"US solar company to lay off hundreds of workers after Trump tariffs"

You should beware U.S. companies making announcements about decisions and using government policy as a cover these days, but this seems to make economic sense:

American solar company SunPower will lay off about 3 percent of its workforce in March, a decision that comes after President Trump began imposing new tariffs on imported solar materials earlier this month. 

SunPower has already started the process of laying off between 150 and 250 workers, largely from its research and development and marketing positions, CEO Tom Werner told The Hill. The cuts will amount to about a 10 decrease in operational expenses.

The cuts made by the publicly traded company, which is based in San Jose, Calif., are largely an effort to stop the bleeding from the new costs associated with the 30 percent tariffs, Werner said.

via thehill.com

Quote of the Day: Both sides win from trade...sheesh

That moment you realize the Chinese administration understands economics better than the U.S. administration...

From the Steve Bannon interview story:

"In reality, China and the United States' long term cooperation has brought about real benefits for both countries' peoples, any unbiased person will clearly see this fact," [Chinese Foreign Ministry spokeswoman Hua Chunying] told a daily news briefing in Beijing.

"We have also said before, a trade war has no future. A trade war does not serve the interests of any party, as fighting a trade war will not produce a winner. We hope that relevant parties can stop viewing issues of the 21st century with a 19th- or 20th-century mentality."

 Hua's quote is in reaction to Steve Bannon's claim that the U.S. is losing the trade war with China:

"It's in all their literature. They're not shy about saying what they're doing. One of us is going to be a hegemon in 25 or 30 years and it's gonna be them if we go down this path," he was quoted as saying.

"If we continue to lose it, we're five years away, I think, 10 years at the most, of hitting an inflection point from which we'll never be able to recover."

I need a facepalm emoji.

"What You Should Know About the Professor Who Has Trump’s Ear on the Economy"

From the Chronicle of Higher Education:

Peter Navarro, a professor and author who became known during the presidential campaign as the only academic economist directly advising the Trump campaign, continues to be one of the most public voices on economic matters for President-elect Donald J. Trump as he prepares to take office next month.

Last Friday, Mr. Navarro gave the transition team’s official response to the latest federal jobs report (although unemployment continued to fall, he maintained that the level of job recovery "further demonstrates an urgent need for President-elect Trump’s America First economic plan"). And later that day, when Mr. Trump broke nearly 40 years of diplomatic protocol and spoke directly to the president of Taiwan, at least one account highlighted the likely role that Mr. Navarro’s get-tough-with-China influence may have had on the president-elect’s actions.

Mr. Navarro, who is 67, is a Harvard-trained professor of economics and public policy who has been on the faculty of the business school at the University of California at Irvine since 1989. Before that, he spent two years as an assistant professor of business and government at the University of San Diego.

His ties to Mr. Trump began years before the campaign, when Mr. Navarro produced a film in connection with his 2011 book, Death by China: Confronting the Dragon — A Global Call to Action (Pearson FT Press). He sent the film to Mr. Trump, and soon got back an endorsement from the real-estate developer that called the film "right on."

This past October, a column in the The New Yorker speculated that if Mr. Trump won, "Peter Navarro would likely become the single most powerful economic adviser in the United States." The author of the piece also said he found some of Mr. Navarro’s ideas on China and trade "so radical" that he couldn’t find another economist who fully agreed with them.

Little-known nationally, Mr. Navarro attracted wider attention this summer, thanks in part to a Bloomberg View column by Tyler Cowen, an economics professor at George Mason University, who, while praising Mr. Navarro as a "one of the most versatile and productive American economists of the last few decades," also characterized Mr. Navarro’s recent writings on China as "a series of emotional diatribes against the Chinese government." He also wrote, "If you want to read one thinker to understand Trump on China, it is Navarro."

In an interview with The Chronicle this week, Mr. Cowen said Mr. Navarro’s broad protectionist ideas — like Mr. Trump, he urges slapping huge tariffs on Chinese goods to reduce the trade deficit — are out of step with generally accepted economic theories. "There are plenty of economists who defend some form of protectionism," said Mr. Cowen, to help a growing economy or to bolster selective industries. But "close to no one," he said, agrees with Mr. Navarro’s idea that a trade deficit is bad on its face. ...

If you were in graduate school in the late 1980s, you probably know this one: Richard Carson and Peter Navarro, "A Seller's (and Buyer's) Guide to the Job Market for Beginning Academic Economists," Journal of Economic Perspectives, vol. 2, no. 2, Spring 1988 (pp. 137-148). It's the same guy (and the Richard Carson is the same one you might be familiar with too). 

I'm no macroeconomist but (but I'm not going to let that stop me) someone tell me why we shouldn't be worried about inflation? The Fed will begin to allow interest rates to rise very soon but it will take a while to get to the point where monetary policy is no longer expansionary, taxes will fall and government (infrastructure) spending will increase sometime soon. If all three shift the aggregate demand curve to the right (when the economy is not in a recession) then prices will rise. Or am I missing something?

"A Little-Noticed Fact About Trade: It’s No Longer Rising"

Off-topic but important:

The growth of trade among nations is among the most consequential and controversial economic developments of recent decades. Yet despite the noisy debates, which have reached new heights during this presidential campaign, it is a little-noticed fact that trade is no longer rising. The volume of global trade was flat in the first quarter of 2016, then fell by 0.8 percent in the second quarter, according to statisticians in the Netherlands, which happens to keep the best data.

The United States is no exception to the broader trend. The total value of American imports and exports fell by more than $200 billion last year. Through the first nine months of 2016, trade fell by an additional $470 billion.

It is the first time since World War II that trade with other nations has declined during a period of economic growth. ...

The economist Branko Milanovic published a chart in 2012 that is sometimes called the elephant chart, because there is a certain resemblance. It shows real incomes rose significantly for most of the world’s population between 1988 and 2008, but not for most residents of the United States and other developed countries.

The chart is often presented as a depiction of the consequences of globalization. The reality is more complicated, but perception is undeniable. Voters in developed nations increasingly view themselves as the victims of trade with the developing world — and a backlash is brewing.

Donald J. Trump’s presidential campaign is an obvious manifestation, as is Hillary Clinton’s backing off from her support of the Trans-Pacific Partnership trade deal. A study published in April found that voters in congressional districts hit hardest by job losses are more likely to reject moderate candidates, turning instead to candidates who take more extreme positions.

Economic stagnation is turning European voters against trade, too.

Professor [Dani] Rodrik said that proponents of free trade were guilty of overstating the benefits and understating the costs. “Because they failed to provide those distinctions and caveats, now trade gets tarred with all kinds of ills even when it’s not deserved,” he said. “If the demagogues and nativists making nonsensical claims about trade are getting a hearing, it is trade’s cheerleaders that deserve some of the blame.”

via www.nytimes.com