In an episode of Yes Minister, one could imagine a scene where Jim Hacker, the Minister, is advised by Sir Humphrey Appleby on how to publicly advocate for free trade while privately implementing protectionist policies. Sir Humphrey might say, “Minister, in public, we must vocally support the principle of free trade, extolling its virtues of economic growth and international cooperation. However, in the corridors of power, we must ensure our national industries are shielded from the same competitive forces we advocate for others.”
The West often advocates for developing countries to open up their markets, reduce tariffs, and embrace free trade, arguing that it fosters economic growth and development. Yet, concurrently, these Western nations sometimes adopt protectionist measures under the guise of climate action, such as imposing tariffs on imports deemed environmentally unsustainable or subsidising domestic industries to make them more competitive against foreign imports.
The Carbon Border Adjustment Mechanism (CBAM) is perfect example of this. It makes market access conditional on production methods, particularly concerning environmental standards. By prioritising low-carbon products like steel, aluminium, cement, and fertilizers, CBAM aims to foster an internal market that benefits EU industries investing in green technology. This mechanism could, theoretically, drive innovation by making environmentally friendly production more competitive, as high domestic carbon taxes in the EU would make “green” products like steel and aluminium more viable compared to carbon-intensive imports.
However, the strategy of conditioning market access on production methods might have unintended consequences. While CBAM protects the competitiveness of EU industries producing low-carbon materials, it places downstream industries, such as car manufacturers, at a disadvantage. These sectors, which rely on the aforementioned materials, face competition from imported goods that may be cheaper because they are produced with less stringent environmental standards. The protective umbrella of CBAM does not extend to these industries, creating a dichotomy within the EU’s own market, where the drive for low-carbon raw materials does not benefit all sectors equally.
CBAM, in its current incarnation, could be counterproductive, even for Europe itself. It risks isolating European industries from global markets, potentially stifling innovation rather than promoting it. The mechanism may lead to increased production costs for European manufacturers, undermining their competitiveness on the global stage. The political sustainability of CBAM is questionable; as the broader impacts on the economy become apparent, there could be substantial pressure to amend or roll back the mechanism to prevent harm to the broader EU industrial base, including vital sectors like automotive manufacturing.
The EU is not alone in this exercise. Funnily, it has expressed significant concerns with US’ Inflation Reduction Act (IRA). The IRA aims to promote domestic clean energy production and reduce inflation, marking a significant move towards addressing climate change in the US. However, its emphasis on local content requirements, particularly the ‘Made in America’ mandates for vehicles and batteries, has sparked criticism for potentially impeding exports to the US and encouraging EU firms to relocate to benefit from the IRA’s tax incentives. This has led to apprehensions in the EU about a possible shift of manufacturing and investment from Europe to the US, prompted by the alluring subsidies of the IRA.
In reaction, the EU has launched its Green Deal Industrial Plan, incorporating the Net Zero Industry Act and the Critical Raw Materials Act, to strengthen its domestic manufacturing base for crucial technologies, while avoiding the extensive subsidies characteristic of the IRA.
In an ideal world, free trade would prevail, allowing markets to operate without restrictions, benefiting the entire economy through the “invisible hand” of self-interested actions. However, the real-world practice of international trade often revolves around quid pro quo, reflecting a pragmatic approach similar to Niccolò Machiavelli’s view that leaders must be practical and sometimes ruthless.
The Covid lesson
The Covid-19 pandemic highlighted the vulnerabilities and dependencies inherent in global supply chains, particularly as countries experienced first-hand the risks of over-reliance on a single nation, such as China, for critical supplies. This has led to a re-evaluation of free trade principles, emphasising the need for self-reliance and national security.
This is traditional geopolitics at work, with Western countries using the climate agenda as a veneer to protect their industries. This approach intertwines economic actions with strategic objectives, leveraging environmental concerns to reinforce economic and national security. Through this strategy, Western nations aim to lessen their vulnerability to global market shifts and geopolitical strains, while securing a foothold in the green economy.
When India announced its Aatmanirbhar Bharat initiative, the Western critics were quick to label it protectionist. Yet, these are the same countries that cleverly dress their protectionism in the noble garb of the climate agenda. The irony is palpable: the West, under the veneer of environmental concern, protects its turf, while scoffing at India’s attempt to fortify its own. This selective criticism exposes a double standard, mocking the very principles of free trade and fairness they purportedly champion. Needless to say, India is not protecting its domestic industry. It is rather incentivising international players to come and manufacture in India through PLI. Aatmnirbharta is not about autarky, it is about building India as a global manufacturing hub.
More people should read John Maynard Keynes’ 1933 essay on National Self-Sufficiency. Keynes, initially a firm believer in free trade, evolved his economic philosophy towards advocating national self-sufficiency. He articulated: “I was brought up, like most Englishmen, to respect free trade not only as an economic doctrine...but almost as a part of the moral law.” However, his perspective shifted due to the economic turmoil and unemployment of the post-World War era, leading him to question the adequacy of free trade in addressing the economic challenges of his time. Keynes began to see the value in protective tariffs and national economic management as tools to mitigate domestic unemployment and economic instability. This change was not a rejection of free trade’s principles but an adaptation to the global economic realities.
Thus, the West should stop wrapping its protectionist agenda as climate action. It should call a spade a spade.
The writer is Officer on Special Duty, Research, Economic Advisory Council to the Prime Minister. Views are personal