Tuesday, June 30, 2009

Cap, Coerce, and Then Trade

. Tuesday, June 30, 2009

I once wrote a paper in which I asserted that international agreements are a consequence of dilemmas of domestic politics. Voters pressure politicians to enact regulation (say, to protect the environment). Producers ask legislators to not pass the regulation because it will put them at a cost disadvantage in international trade. Legislators are thus forced to choose between making voters happy but losing producer support (and campaign contributions), and making producers happy but losing votes.

I argued that legislators often escaped this dilemma by using international agreements to force foreign producers to accept regulations identical to those imposed at home. As Hubert Humphrey once said, "Germans don't vote" [in the U.S., that is] and so it makes sense to push the cost of regulation onto foreigners. Sometimes, however, foreign governments are unwilling to change their regulation. In such cases, the government that wants new regulation must somehow force the recalcitrant government to do so. I suggested that one way they did so was by threatening to impose even stiffer costs onto the reluctant government if it continued to refuse to enact new rules.

Though the paper is one of my most often cited, it has not had much impact on how people think about where international regulation comes from. (Someone once told me that this reflects the paper's unfortunate focus on something nobody cares about--the Basle Accord.) Every once in a while, however, something happens that reminds me that the paper says something important.

This time it is the Waxman-Markey cap and trade legislation. The intent of the legislation--reduce greenhouse gases--addresses concerns of the Democrats' median voter, who cares deeply about climate change. Producers, however, are concerned that the higher energy costs generated by cap and trade will disadvantage them relative to Chinese firms who are not facing higher energy costs because China does not regulate greenhouse gases. The solution, added late to the legislation, is to impose tariffs on goods from countries that do not regulate GHG (i.e., China). Nobody really wants to impose tariffs, but the hope is that the threat of tariffs will be sufficient to induce China to agree to international regulations on CO2 emissions.


Cap, Coerce, and Then Trade
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