The Environment vs Free Trade

The European Union is an integrated single market area where the member states do not impose tariffs or other major trade barriers on trade between themselves. They also have a common external tariff for third countries. In the past 10-15 years, the EU has negotiated towards free trade agreements with other parts of the world. Now, Union’s strategy to protect the environment will see a new form of tariff barrier imposed on imports from third countries, therefore undermining the ideal of free trade.

The new tariff envisaged by EU leaders, especially France’s President Nicolas Sarkozy, will put in place a tax on imports into the Union who have lower environmental standards than the 27-country bloc. In effect, that would protect the more polluting industries on the continent, such as chemicals and steel producers from cheaper products imported from abroad. Is it really worth it?

The decision to create such a tariff is as much an ideological question as a practical one. The EU has proclaimed its support for free trade many times and this is reflected in the trade negotiations it is conducting with the countries of the ASEAN and South America. In the framework of the WTO, the EU negotiates as a single actor most of the time and, judging from empirical evidence, it often declares its intentions to uphold the free trade ideal. Why it is breaching that now is a question that the leaders of the member states have to engage in dialogue on with the European Commission and possibly the European Parliament as well. After all, is it not better to be consistent in policy?

The Union has often been criticized for its Common Agricultural Policy, which provides extensive subsidies to farmers and therefore protects them from foreign competition. If the EU imposes a similar barrier using environmental reasons to protect a number of industries, that might cause problems with its trading partners. The Union should remember its roots, especially the time when the Commission was tasked with harmonization of technical standards, which was a substantial barrier to trade between the member states at the time.

Nevertheless, putting a tariff in place because of environmental standards can also have a different effect on the countries trading with the EU – they might increase their own standards to meet the Union’s and therefore not have to pay the tax. That would be a small foreign policy success, since it would mean the export of a structure to other states, making them comply with high standards. Also, it would be better for the environment, since more countries would become more environmentally friendly. It may sound optimistic, but it should be the Union’s aim in the longer-run.

At the same time, the EU is already going to enforce a similar tax when it comes to air travel. It is being called an “extraterritorial carbon tax” and it will come into place in 2012. That is when all airlines arriving to or departing from European airports will have to buy ‘pollution credits’. Basically, they will be paying an ‘air tax’ for polluting the European air. As absurdly as it sounds, that is what it is – we are now going to have to start paying for air.

Of course, airlines are not going to pay this tax from their profit, but rather the price of air travel will go up to accommodate it. From an environmentalist point of view, this means that people will start paying for an externality (air pollution) when traveling by airplane – something which most people do not think about. Whether this will have an impact on the number of passengers who use air travel will be an interesting question to look out for in two years time. Yet, from the other point of view, the common citizen’s one, this new tax will simply mean that flying will cost more and that hurts your wallet. The same question arises again – would you change your travelling habits if you had to pay more for a plane ticket? (And would that mean an end to Ryanair’s 15 euro return trips?)

It seems that from the very beginning of the decade, the European Union is taking the environmental question seriously. Perhaps creating barriers to trade in order to achieve their goal is a little too far though. The Union is often criticized for being inconsistent in its policies and this will be another such case. The great minds working for the EU should figure out a way to prevent this. They have the time and expertise, and if they could just focus on the means just as much as the ends, something ridiculously genius could come out of it.

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