Monday 14th July 2014

Wind Watch

It won’t be quick. That is, if it happens at all. But talks are underway to try to form a global agreement for free trade of environmental goods, including wind turbines.

Last Tuesday, diplomats from the European Union, US, China and 11 other governments in the World Trade Organisation kicked off talks about a proposed Environmental Goods Agreement. The aim is to liberalise international trade worth almost $1trn each year, which could cut import tariffs by up to 35% on a wide range of clean technologies.

The first phase of negotiations will focus on eliminating tariffs on clean technology, and the second state will aim to remove non-tariff barriers, including bureaucratic and legal issues. If all goes to plan — and, given the protracted nature of these types of discussions, we’re sceptical —then a deal would be done by next November’s Paris climate change summit.

Instinctively, scrapping such tariffs looks like it should be a good idea. It would reduce the barriers for firms looking to sell products overseas, and the plan’s backers say it would also lead to the rollout of the most innovative and efficient products globally. But, alas, it isn’t that simple.

We need only look at the dispute over tariffs that were introduced by the US a couple of years ago to reduce an unfair advantage for Chinese manufacturers selling turbine towers in the US. This is a controversial area and such an agreement would require close inspection.

Some manufacturers would stand to lose more than they win. Yes, it would enable them to sell their products in other countries without having to pay such punitive tariffs, but it also means they would face more pressure in their home markets from international rivals. This isn’t necessarily a problem if it forces companies to improve the quality of their products.

The argument about innovation is also somewhat spurious. Such an agreement may enable innovative manufacturers to sell their products to sell their products without punitive tariffs. But it also makes it easier for lesser manufacturers with cheaply made products to go into overseas markets and undercut their more innovative rivals.

History shows us that it isn’t always the manufacturers with the best products that win out. In retail, we need only look at the popularity of Primark to see how low-cost often wins. Businesses can’t be afraid of competition, of course.

But scrapping tariffs could put unintended pressure on manufacturers’ margins. That in turn affects how much money they can invest in research and development; and will make it tougher for new entrants to establish their own indigenous manufacturing base. And then there is the pure commercial reality about whether it makes sense to buy a more efficient product from the other side of the world, if the energy cost of shipping is higher.

This isn’t to say that we’d be against an Environmental Goods Agreement. We just greater transparency and clarity of policy decision making at an early stage, if commerce is to truly benefit.