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How China and South Korea Hurt the Green Economy

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Pacific Money

How China and South Korea Hurt the Green Economy

Tariff cuts are needed to spark green growth, but Beijing and Seoul are resisting.

How China and South Korea Hurt the Green Economy
Credit: USFWS/Joshua Winchell

At this week’s G20 summit in Hangzhou, China, the state of the global economy featured prominently — chiefly, how to boost free trade and counter the rising tide of economic protectionism. Prior to the summit, Beijing was praised by UN chief Ban Ki-moon for adding green growth to the agenda in support of the Paris Agreement on Climate Change.

To this end, discussions included an affirmation of the G20 members’ common goal to conclude the Environmental Goods Agreement (EGA), talks on which started at the at World Trade Organization in 2014. This trade deal aims to reduce import tariffs to below 5 percent on a wide range of environmentally friendly technologies that can reduce carbon emissions. Among them are innovations in the fields of energy generation, air pollution control, water and waste treatment, and environment monitoring.

The global reduction of carbon emissions and new infrastructures that allow countries to better adapt to climate change depend on increased dissemination of such technologies. Smarter technologies promise environmentally-sustainable economic growth in developing countries. For instance, many lower and middle-income countries face huge increases in electricity demand as industries and communities grow and get connected to supplies. Here, technologies that do more with less – and as cheaply as possible – will be invaluable.

Very low tariffs do exist for green technologies, but tariffs can also be as high as 35 percent.  Such tariffs hit end users and consumers in the pocket, obstruct trade, and delay the adoption of new technologies. They are absurd when set against urgent climate change goals.

Understanding this, the 21 Asian member countries of APEC agreed in 2012 to reduce tariffs on 54 categories of environmentally friendly technologies.

The WTO negotiations take this further by widening the scope of tariffs cuts to include 300 product categories and more countries. The current talks include Hong Kong, Chinese Tapiei, China, South Korea, the United States, and the EU. Together they account for 85 percent of global trade in environmental goods – around $481 billion.

Solidarity then? Not quite. China and South Korea in particular want to exclude several important product categories from the deal to protect local manufacturers from foreign competition.

For instance, China and Korea are happy to include small gas turbines in the deal, but want to protect domestic manufacturers of the new generation of large gas turbines with high tariffs. These Co2-reducing monsters weigh as much as a fully laden Boeing 747, and deliver unprecedented electricity generation efficiencies. Manufacturers in the United States and Europe currently have the technological edge in this sector. Not only the backbone of new plants in the United States and Europe, these turbines are being exported to developing countries such as Pakistan where they will invigorate economic and social life by reducing the frequent blackouts that plague such countries.

Likewise, China and South Korea are reportedly resisting the inclusion of spare parts of gas engines in the EGA. But driving up the cost of parts by imposing tariffs is counterproductive; power plant operators will be forced to use cheaper, inferior parts, or not replace them when they should. Both will mean less efficient operation, and more pollution.

China and South Korea’s attempt to protect domestic industries is rooted in the faulty economic logic of the past. Domestic high-tech sectors are unlikely to develop if they are shielded from international trade and competition behind tariff walls. Knowledge-intensive sectors, such as the pharmaceutical industries of China and India, are embracing international competitors as partners and accelerating next-generation innovation by sharing expertise and technology.

Similarly, in the green technology sector, high-tech products are rarely manufactured in one country. Like consumer goods such as smartphones, they are the product of widely distributed global supply chains, with different countries manufacturing different components before they are brought together for assembly.

Few Asian companies will be able to develop in-house all the various technologies and components required to develop a new environmental technology. International alliances are vital, but tariffs are among the barriers to trade  which prevent “protected” companies from integrating into global supply chains.

China’s eventual gains for full participation in the EGA will far outweigh any short-term costs. Economic studies estimate the country could see a 10 percent increase in its exports. They add that China could reap $659 billion annually in economic benefits linked to improved environmental quality due to cheaper, more widespread environmental goods. This means less water and air pollution, increased energy efficiency and industrial productivity, and more use of cheaper, renewable energy. All these have a major positive economic impact.

The majority of members of the WTO’s Environmental Goods Agreement recognize the limits of technological autarky and the environmental damage caused by cost-inflating tariffs. Chinese and South Korea’s leaders should not stand in a way of a free trade deal that is universally good for the environment.

Philip Stevens is director of Geneva Network, a U.K.-based research organization working on trade issues.