As more companies commit to net-zero emissions, global trade experts are studying the linkage between trade and environmental policies. Their hope? To reveal which types of policies protect or encourage business, while supporting important sustainability goals.

For instance, a study done by recent Flexport webinar guest Joe Shapiro, Associate Professor at UC Berkeley, shows that, on a global scale, countries charge higher tariffs on lower-emission goods and lower tariffs on higher-emission goods.

The practice, called tariff escalation, is meant to protect domestic industries by discouraging processing activity in countries where raw materials originate. But it also accelerates climate change by encouraging higher-emissions goods.

So trade policy may still trump environmental policy, but companies can learn more about how they intersect to inform their own sustainability initiatives.

Read the transcript below or for the full conversation, watch The State Of Trade: The Economics of Green Supply Chains.

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Transcript

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Phil Levy: . . . We're going to discuss why trade and the environment are connected—each clearly an important issue on its own, but what is the intersection of the two?

Why should we be thinking about this intersection? What links these two issues?

Joe Shapiro: . . .There is definitely evidence that if a local area has stricter environmental policy, it discourages investment and production and economic activity from industries where the regulation is particularly costly.

For example, in the US, the Clean Air Act has this policy called nonattainment, where certain counties that are too polluted have much more strict environmental policy. And there's a string of really influential research papers showing that when a country gets more regulation in that way, there is less investment, and firms that were operating there tend to be more likely to move abroad.

So there is direct evidence that regulation is not free and creates real costs.

Read More: (Chasing Net Zero Emissions: Start Here to Limit Climate Change)[https://www.flexport.com/blog/chasing-net-zero-emissions-start-here-to-limit-climate-change/]

On the other hand, there's also a lot of research trying to say, look, developing countries have weaker environmental regulation. Do we see a lot of evidence that energy intensive and polluting industries are more likely to locate in those countries that it's giving them a strong incentive?
And it's much harder to find clear evidence of that kind of international specialization because of environmental policy. . .

I guess, the other sense is that if countries are deciding where to specialize production, energy-intensive companies are also often capital-intensive, and you might find the weakest environmental policy in the lowest income countries, but it's hard to access capital and skilled workers.

Environmental policy . . . doesn't seem to be the leading driver of activities per se, across countries.

Phil Levy: . . . So let's go back then to discussing how we've seen the
intersection between trade and environmental issues.

Climate Policies Haven't Focused on Trade Emissions

Joe Shapiro: The graph here on the left is a simulation of global climate change and how policy would affect that.

[But] pollution doesn't pay attention to where political boundaries are. Be it's city, state, county, or country. And so solving those problems often requires coordination across the States or across countries. So the graph on the left is about climate. The graph on the right is about your pollution and the way many people think about climate change is that it's going to require many countries to invest in clean energy and climate policy from one country to do it alone might not be fully effective and it can be more costly.

. . . But for example, Will Nordhaus when the Nobel Prize in Economics, a couple of years ago, for his research on climate change in his proposal, he gave it an address to the American Economic Association and then published in the top journal in the field, it's to create this idea called climate clubs, where he suggests the WTO could essentially rewrite its charter to say that if you want the benefits of free trade, then you also need some kind of minimal climate change policy.

That's increasing academic discussion. When I was talking to EU people they're aware of it. It's not on the front page of policy, but I think so far environmental policies have not been the primary driver of trade. It's not likely they will ever be the main driver. But if you think about how to achieve coordination across the US States, we have the federal government that helps coordinate across the States.

But then if you ask what is a way to get The US and China and the EU and India, all to cooperate on climate change? It's harder to achieve cooperation just through volunteering. And it's unappealing to use sticks like threats and force or anything like that to get cooperation. And so I think the discussion instead has been about other ways to use trade policy and cooperation in economic terms to help achieve more cohesive trade policies, and also address climate cooperation.

Phil Levy: Let me ask you a question about that, if we think so often you get developing countries arguing that, Hey, we see a natural progression here that as countries get wealthier, one of the things they do is they want better environmental quality. In Econ purlins, it's a luxury good.

You get richer, you do more of this. And, they observe and they say The US had its dirty period and Europe had its dirty period. And then they developed their industries as they went there. It's unfair to ask developing countries to adopt these policies when they're still at that poor earlier stage.

Is the idea here to develop an appropriate level of environmental policy, or is there a common environmental policy? How should we think about that?
Fairness is an incredibly important question in designing trade policies where there's a lot of concern about unequal effects . . .

I think if you look at predictions though, the groups that are going to bear the largest cost of environmental problems, like air pollution and climate change are low income countries and especially low income consumers in those countries, it's harder for them to migrate away from disasters.

. . . All the ways you can think about adapting to live in a world with more environmental problems is harder to do than those in low income countries. So there have been multilateral negotiations like the Paris Agreement, a way that low-income countries were brought on board for recent agreements, like the Paris Agreement, and they were not with CUDA protocol was partly realizing this is a cost to everybody.

If we don't coordinate, it's not just The US that's going to suffer. It's also India, China and Mexico. It was actually in their very strong interest about it. No, there's a fairness question. Who's supposed to lead how large would the cost be, and to some extent that's a political and an ethical question, which is extremely important.

. . . Please, Susy, jump in.

Susy Schöneberg: It's also [about] presenting opportunities, right? So for companies that want to develop products that make it easier or cheaper for people and companies in those regions to actually green the operations, or make sure that they can reduce the energy consumption, whatever it might be. It's also presented an opportunity, and regulation could help us create incentives for those companies who take advantage of those opportunities. So while we talk about the policy perspective a lot. I also feel that we can think about these policies as positive incentives.

Joe Shapiro: . . . Academics often use the word linkage to describe the idea that you would use trade to achieve other ends, like using trade policy to solve human rights problems. You use trade policy to solve environmental or mental problems. And a lot of trade researchers worry about linkage because the world has achieved an incredible degree of coordination.

. . . And so there's a lot of anxiety. If we start using trade policy to pursue other ends, maybe we will lose some of the cooperation in trade.

. . . There's concern that using trade to achieve environmental ends it's just protectionism in disguise. There are academic papers including mine, which show that there are incentives to use an environmental policy for protectionism. I think academics would have no arguments.

. . . But I think the consensus is, it is only allowed if a country treats the environment domestically the same as the environment abroad. So it would violate WTO protocol if you applied an environmental policy to imports, but you did not apply it to domestic production. That has been tested in various guises.

The Environmental Bias of Trade

Joe Shapiro: . . . This is one of my favorite graphs ever, although I'm sure it looks somewhat dry and uncompelling relative to maps and pictures that you might see. Let me just quickly tell the backstory of this graph.

There's a lot of discussion of carbon border adjustments or carbon tariffs, which mean if a country had a climate change policy and were worried, they would just start to import energy intensive goods like steel and aluminum.

They could adjust their tariffs to be higher on energy-intensive goods and that would solve this worry about a country that tries to address climate change is going to decrease its competitiveness.

Every country already has tariffs that are different across different industries. Maybe countries already have that kind of trade policy to benefit the environment and nobody noticed. Maybe countries already have higher tariffs on energy intensive goods.

So I looked around the world and said for every country, let's look at the tariffs that they applied to different goods and ask, “Are they charging higher tariffs on dirty goods?”

And, it turns out, exactly the opposite happens. They're charging higher tariffs on clean goods and lower tariffs on dirty goods.

So if you look at this graph, when you go to the right, we've got the most energy-intensive goods with the highest carbon emissions rate—and those have the lowest levels of protection, the lowest tariffs.

Then, when you go on the left, those are clean goods that emit very little carbon for dollar output. And they have very high tariffs.

It turns out this happens literally in every country around the world. It's been happening for at least 20 to 30 years.

. . . One consequence of it is that trade policy today is actually accelerating climate change, because it is encouraging trade and production and consumption and the dirty goods that have lower levels of protection.

And it is discouraging production consumption or trading clean goods that have high levels of protection.

Phil Levy: I am interested in why, is this deliberate or is this because of, this sort of correlates with something else?

Joe Shapiro: I'm pretty sure it's not deliberate because I've talked to a lot of government policy makers in the US and EU and Australia, and nobody realized this was happening.

. . . Nobody had tested about it before, and I looked at many explanations for why this could be happening. And the leading reason is that trade policy is driven by political concerns. And some of those political forces are very strongly associated with pollution intensity.

And the one that seems to be most important is how upstream an industry is in a supply chain . . .

So steel, cement, petroleum, aluminum? Those tend to have very low tariffs, and they're mostly goods that are sold at other firms.
And then downstream goods—pencils, glasses, cigarettes—those tend to have fairly high tariffs.

. . . Economists and policymakers refer to that as tariff escalation . . . And a reason people think that happens is that every firm in industry wants to lobby policy makers to have high protection on their own goods to protect them from foreign competition. But they also want to have low levels of free trade protection on their inputs so they can buy goods at low costs.

And that means that everybody is lobbying politicians, have the lowest tariffs on most upstream goods and also the dirtiest goods . . .

Phil Levy: . . . Susy . . . when businesses look ahead, when they think
about what's coming, what do they foresee? What do you foresee?

How Might Climate and Trade Policies Change?

Susy Schöneberg: What we have heard so far is, one, that trade really matters for the climate change discussion—but also that the climate change discussion influences trade policies. . .

So the big question is: Why would this change, and what would we anticipate?

. . . There are two important questions to look at. One is we know that in the past, it wasn't easy to assess emissions in certain areas.

And if you can't measure something right, you also can't really optimize it or improve it. And this has changed, there are many different reasons for why it's now easier to have access to this kind of data and to make sure that we can actually measure and attribute the emissions from transportation.

The second, I think question or hint that we got, that something might change is there has been a lot of debate about how to split emissions between countries. So for everyone who doesn't know a lot of the climate agreements, the international ones work based on national greenhouse gas inventories.

So that means that at a country level, they assess their national greenhouse gas inventory, and then they set certain goals for their own inventory for how they want to reduce the emissions. And then overall on a global standard, there's a global emissions goal that, given based on the Paris Agreement, we want to hit as a global economy . . .

Let's say a ship travels from China to the US and the question is how do you split those emissions? Do you split it in half between the two regions, should the owner of the ship actually be responsible for those emissions? If you think about where this company is headquartered, and there were a lot of difficult questions that couldn't be solved, now that the pressure has increased and as Joe has described earlier, it's pretty clear that there will be large costs if we don't tackle this topic . . .

How To Start Greening Your Supply Chain

Susy Schöneberg: And if you think about running your supply chain and the steps here, I will focus on transportation specifically, right?

. . . Let's see how we can make the assessment of transportation related emissions really easy. I think the first step is to really make it as I said, an intentional part of your decision making.

This can happen as part of the company mission. We learned earlier that a lot of companies already defined this as a pillar of their company mission, but also you, as an employee can decide to make this part of your job responsibility and think about how does it affect my day to day and maybe create a business case to show that this is a valuable event investment while preventing future risk for your business.

The second steps, that is to really measure your emissions and establish a baseline so that when you were starting and that you can set goals efficiently . . .

Can you increase the utilization in your containers or increase the use of consolidation or alternative biofields and options, so how can we think about the whole network?

. . . We still have to burn the fuel to power, the ships and planes. So
there are also options to compensate all the emissions that you can't reduce. Studies have shown that we actually have to really takes you to out of the atmosphere and compensate for our carbon emissions to actually meet our carbon reduction goals . . .

Many companies recently have also announced that they want to become carbon neutral and the next decade. And so you can invest into projects like carbon offsets or you can also invest in carbon removal technologies . . .

So the next time you might look at a quality or you try to transport your goods, maybe you do not only consider cost of transit, but the environmental impact, because we know that this has costs too.

To hear the full conversation, watch The State Of Trade: The Economics of Green Supply Chains. Or to join our experts next time and submit your own questions, check out our upcoming webinars.