In many sectors, the European Union (E.U.) has shackled the industries of its member states with iron regulatory fetters. The resulting underperformance of many European sectors ought to give pause to stateside regulators who envy their continental counterparts’ outsized control over markets.
The E.U. recently enacted a carbon border adjustment mechanism (CBAM), a de facto carbon tariff on many imports. Its rates will correspond to the auction rates of Europe’s cap-and-trade carbon-credits framework, the Emissions Trading System (ETS). The CBAM will serve a dual purpose: to offset the competitive disadvantages the ETS foists on the continent’s industry and “to encourage cleaner industrial production in non-EU countries.” Thus, the E.U. hopes to export its disastrous climate policies rather than buoying its own markets through deregulation. By conditioning access to its massive markets on compliance, it hopes to extend its regulatory power worldwide.
The CBAM – and the talking points surrounding it – have found considerable support on both sides of the American political aisle. Democrats favor the policy as an environmentalist measure. Populist Republicans wish to coddle manufacturing as the GOP increasingly reverts to its ancestral protectionism. Indeed, Congress is now considering the PROVE IT Act, introduced recently by Sens. Chris Coons (D-Del.) and Kevin Cramer (R-N.D.). The bill would likely “lay the scientific foundation for moving forward with a carbon border adjustment,” according to Coons.
But a CBAM would do little to protect the environment. One Heritage Foundation model estimated that eliminating totally all U.S. carbon emissions would cool global temperatures by less than 0.2 degrees Celsius (0.36 degrees Fahrenheit) by the year 2100. Even doing so for the entire Organization for Economic Co-operation and Development (OECD) block would reduce temperatures by only 0.5 degrees. The vanishing emissions reductions a CBAM could effect would hardly offset its economic costs.
Politicians should not accept protectionists’ rosy forecasts that tariffs will stimulate domestic economic growth. While tariffs of any sort provide targeted sectors with limited encouragement, they impose far heavier burdens on the economy at large – particularly on consumers and manufacturers who source materials from protected industries. For example, a recent report from the U.S. International Trade Commission relates that President Donald Trump’s flagship steel and aluminum tariffs cost downstream manufacturers $13.6 billion from 2018 to 2021. “Even factoring in tariff‐related gains for protected U.S. metals producers, we still ended up around $5 billion poorer on net through 2021,” the Cato Institute’s Scott Lincicome writes.
Accordingly, America’s ballooning tariff schedule will on net stifle national productivity and job growth. According to the Tax Foundation’s Erica York, “The Trump-Biden tariffs will reduce long-run GDP by 0.21 percent, wages by 0.14 percent, and employment by 166,000 full-time equivalent jobs.” The report also notes that “Other countries imposed retaliatory tariffs on U.S. exports, which we estimate will further reduce U.S. GDP by 0.04 percent and eliminate 29,000 full-time equivalent jobs.”
Nonetheless, tariffs have maintained a tenacious foothold in many politicians’ hearts since the founding – and well before. Tariffs’ benefits (being concentrated within relatively small groups) make protected industries into quite interested and motivated lobbyists. But their costs, while monetarily larger, fall diffusedly across the economy. “In consequence…producer groups will invariably have a much stronger influence on legislative action and the powers that be than will the diverse, widely spread consumer interest,” economist Milton Friedman argued in Capitalism and Freedom. Tariff-reliant industries often cut through political opposition like shock troops through an extended, thinly stretched defensive line.
Conceived in liberty, America’s comparative economic excellence has proved unrelenting and extraordinary. For example, since 1990, America’s share of the G7’s nominal GDP has spiked from 40 percent to 58 percent. Mississippi (America’s poorest state) enjoys an average income per capita (adjusted for purchasing power) in excess of $50,000 – which bests France. “In Germany, Europe’s economic powerhouse, GDP per person (adjusted for purchasing-power parity) is $58,000,” The Economist reported in 2022. “That puts it level with Vermont, but far below New York ($93,000) and California ($86,000).”
Such exceptional prosperity is neither inevitable nor indestructible. The various theories of centralized economic planning each party espouses could, if implemented, handily drag America into economic mediocrity. Environmentalism and protectionism – despite their advocates’ fondest wishes – can kill productivity as easily as any other ill-conceived regulatory regime.
Americans should view the European regulatory apparatus rather as a warning of technocracy’s costs to prosperity than as an instruction manual.
David B. McGarry is a policy analyst at the Taxpayers Protection Alliance.