Saturday, March 28, 2009

Could Chinese Climate Negotiations Lead to a Revival of American Manufacturing?

I heard the other day in class and on NPR that Chinese climate negotiators in DC have floated a trial balloon of saying that international agreements to reduce carbon emissions should be the responsibility of the consuming countries, not the exporting countries ( 

While this seems like an attempt by China to weasel out of reducing carbon emissions, which would harm their economy, what would happen if this system (end user responsible for the environmental costs of consumed products) were adopted? (Ignore for a moment the accounting nightmare to figure out exact emissions, and the erosion of sovereignty this would entail if end user countries were able to make environmental changes in producing countries).

China's main comparative advantages in the past twenty or so years that they've been a manufacturing exporter have been low labor costs and lax environmental control. They've passed off the negative externality of pollution to the Chinese people, which means that the benefits of manufacturing go to the factory owners (to be simplistic) but the cost of dirty air and water are borne by surrounding community. So the end user (Americans buying Barbie dolls, for instance) does not pay the full cost of the product, and which is what the climate negotiator in the article wanted to rectify. At the same time, recall the increasing strictness of environmental protection laws in the United States since the 1970s, which in part accelerated the decline in American manufacturing (combined with globalization and decreasing costs of shipping permitted China to become a manufacturing power as soon as it opened itself to the world after Deng Xiaopeng). Erin Brockovich type scandal aside, this means that the full cost of American manufacturing is borne by the American consumer.

So if tomorrow America took responsibility for the costs of Chinese pollution, presumably it might not make sense to continue importing goods from China because to bring Chinese manufacturing to American (stricter) environmental standards would place a huge "exit tax" on exported goods and price those goods out of the market. Faced with the cost and difficulty of continuing with Chinese production, the higher labor costs in the United States might not be an impediment to manufacturing, particularly as environmental costs have been internalized over the past 40 or so years. It would also lead to higher prices for American consumers, but wouldn’t the average consumer want for her money to stay in the United States in general and particularly during a recession, at least in the short term before economies of scale would bring down the price of goods?

Of course, I've made the assumption that ostensibly high Chinese pollution control costs (given the low current technology they use and the cost for the US to clean it up or pay via some cap-and-trade mechanism) plus labor costs are higher than US pollution control costs plus labor costs. Also, I assume that manufacturing and export contracts can be turned around rather quickly to ramp up US production.

So this Chinese climate negotiator’s trial balloon could inadvertently mean a revival of American manufacturing, but it would also have negative consequences for Sino-American relations. It would the effect, if not the intent, of protectionism. It would deprive China of export earnings, which would instead remain in the US. Without the deep financial ties between the countries (or weaker ties going forward) there would seem to be less of a "strategic partnership" between the countries and more cause for tension and conflict.

Just a thought.


perla.jennifer said...

This might be over simplifying things, but why not divide the tax 50 – 50 between the producer and consumer of goods. At least this was the first thought that came to mind when Dr. Webber was speaking on the matter. This way everyone get to participate in the solution to the probably, but I’m sure the key player aren’t to thrill to play nice. I guess the main problem is having an enforcer apply the rules. I think the US needs to man up to the problem admit that we are one of the main contributors to the world’s pollution problem, and help establish a tax that would be split equally among the players.
Or I agree with this post in that if Americans borne the tax responsibility of pollution then importing goods from Chinese might not be as necessary as before. This in return could revive the manufacturing in the US allowing for growth. Or could this mean that the US will find alternative countries to produce cheaper goods that do not impose a pollution tax of some sort.

perla.jennifer said...
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