Economists are famous for disagreeing among themselves. Yet on the subject of free trade, economic opinion speaks almost with one voice. In a recent survey, 87.5 percent of PhD members of the American Economic Association agreed that “the U.S. should eliminate remaining tariffs and other barriers to trade.”
As Paul Krugman (not exactly a proponent of laissez-faire) has stated, “if there were an Economist’s Creed, it would surely contain the affirmations ‘I understand the Principle of Comparative Advantage’ and ‘I advocate Free Trade’.”
Indeed. Since the days of Adam Smith and David Ricardo, economists have been tireless in demonstrating the role free trade plays in promoting prosperity and harmony for all nations.
Yet the economic consensus in favor of free trade has not always been heeded. Still, it has led to a pronounced reduction in tariffs over the last two centuries. Recently, however, there has been a growing trend among environmentalists to use the tools of protectionism as a means of limiting energy production.
If successful, these efforts could not only threaten some of America’s core industries, but also risk sparking retaliation that could unravel much of the progress made on this front in the last several decades.
An Internal Embargo
Consider, for example, the case of natural gas exports. The United States is currently in the midst of an unprecedented oil and gas boom made possible by the innovative use of technologies like horizontal drilling and hydraulic fracturing.
Increased production has led to a sharp fall in American natural gas prices. Given that natural gas prices remain much higher in Europe and Japan, gas companies are eager to increase exports of liquefied natural gas (LNG). Yet as Evan Soltas recently noted, the Department of Energy is using a Bush-era executive order to impose a “de facto moratorium” on LNG export:
[In] 2004, President George W. Bush signed Executive Order (EO) 13337, which decreed that all proposals for energy-related facilities which cross U.S. borders must receive government approval. More specifically, it made it the prerogative of the Departments of Energy and State, through the Office of International Energy and Commodity Policy, to receive, consider, and approve or decline permit applications for ‘for the construction, connection, operation, or maintenance, at the borders of the United States, of facilities for the exportation or importation of petroleum, petroleum products, coal, or other fuels to or from a foreign country.’
The Office is responsible for determining whether any proposed energy facility “would serve the national interest…in such form and with such terms and conditions as the national interest may in the Secretary’s judgment require.”
Translation: All energy trade facilities, proposed or operational, exist by the grace of the federal government.
Environmentalist groups have also sought to prevent coal exports, successfully blocking the expansion of a coal export facility at the Port of Grays Harbor in Washington state. In Oregon, plans for a similar expansion prompted the state’s Democratic Governor to call for a federal environmental review.
And then there’s Keystone XL. The proposed pipeline by TransCanada would bring shale oil from the Alberta Tar Sands down through the United States to refineries along the Gulf Coast of Texas. Keystone provoked massive opposition among environmental groups. Approval of the pipeline was first delayed by the Obama Administration, then rejected outright after Congress forced a decision on the issue.
The rationale for each of these actions turns the traditional case for free trade on its head. By preventing the transportation of energy into and out of the country, environmentalists hope to lower overall energy consumption and thus stave off the effects of global warming. Walling ourselves off from world energy markets is unlikely to have much of an effect on global energy demand.
Shortly after the rejection of Keystone, for example, Canada announced plans to reroute its proposed pipeline east to Vancouver, for export to China. The rejection of Keystone XL will thus not prevent utilization of the Alberta Tar Sands; it will just prevent America from benefiting. Similarly, increased reliance on natural gas has led the U.S. to lead the world in reduced carbon emissions over the past five years. Europe, by contrast, is increasingly relying on coal to meet its energy needs. Limiting natural gas exports as a means of combating global warming may therefore be counter-productive.
The Candlemakers’ Petition, 21st Century Edition
While much of the new energy protectionism is based on concern over global warming, some of it is of a more traditional nature. In May, the Obama Administration announced it was placing a more than 31 percent tariff on the import of Chinese made solar panels. The Administration has also placed tariffs as high as 73 percent on imports of Chinese and Vietnamese wind turbine components, citing government subsidies.
The Administration’s actions are ironic in at least two respects. First, imposing the tariffs has the potential to actually reduce the use of renewable energy in the United States by making solar panels and wind turbines more expensive. Second, in response to U.S. actions, the Chinese government announced Monday that government subsidies to several American wind and solar projects were in violation of international free trade rules.
It’s true that, in the absence of government subsidies, neither American nor Chinese solar panels would be able to thrive in the U.S. energy market. The same is true for wind power. The existence of one market distortion, however, does not justify creating a second market distortion to cancel the first one out. Nor does the fact that a foreign government has imprudently subsidized an inefficient industry mean that the United States should do the same. In this case, though, it is possible that the threat of retaliatory action may ultimately lead both the U.S. and Chinese to reduce renewable energy subsidies.
While each of the above examples is troubling in isolation, together they reveal a disturbing pattern. Unable to stop energy production directly, the environmentalist movement is increasingly turning to trade barriers to prevent these resources from being fully exploited. But as the example of solar and wind tariffs show, protectionism, once unleashed, has a way of taking on a life of its own.