That causes backlash leads to trade wars. Benney 15 — Tabitha M. Benney, Assistant Professor of Political Science at University of Utah, 2015 (“Thinking Toward the Future: U.S. Carbon Pricing Strategies,” SSRN, Oct 29th, Available Online at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2756190, Accessed 07-18-23)

First, it would be considered unilateral protectionism and a direct violation of World Trade Organization (WTO) rules. In the past, such behavior led to the trade wars that prompted the Great Depression. Bear in mind that governments, in their wisdom, impose all sorts of taxes on domestic producers as well as regulations (for reasons of health, safety, working conditions, etc.) that are effectively equivalent to a tax (because they add to production costs). All put domestic producers at a disadvantage relative to foreigners. That would certainly be true of a carbon tax or fee. But WTO rules recognize no right to offset the disadvantage for domestic producers by allowing imposition of a tariff or some equivalent measure. In the eyes of the WTO, that would simply amount to unilateral protectionism. Such a blatant violation would undermine the Bretton Woods system, which was created to our advantage and greatly serves American interests by reducing trade inefficiency and promoting trade liberalization.

It is true, of course, that WTO rules do allow for some unilateral protectionist measures, but only in very limited circumstances defined by so-called "safeguard' provisions. Even if a claim could be made that all American exports were now differentiated goods based on either health and safety purposes or technological standards (i.e. labelling, technological advancement), the U.S. cannot initiate such a standard. Unilateral measures are authorized under the escape clause or in response to dumping or illegal export subsidies. The WTO is also authorized, under the dispute resolution procedures, to act if a foreign country is found in violation of the rules, but refuses to change policy. In such instances, the measures are allowed only in response to actions initiated elsewhere. The rules do not recognize a right to "level the playing field" in response to an initiative originating at home. Regardless, the U.S. would likely be challenged at the very least, which could be another cost to consider on the policy implementation side.

To think this through, let’s consider the example of the EU ban on Genetically Modified Organism (GMO) imports. Initially, EU reps argued that such crops were differentiated goods (on the basis of health risks) and therefore allowable by trade. The U.S. et al challenged the ban in the WTO system by claiming that it was an illegal nontariff barrier that served to protect domestic farmers in the EU. When brought before the WTO, the case was ruled in favor of the U.S. et al because the EU objections to the goods were not based on science and found to be discriminatory. Thinking about this example, there are many parallels between the cases. Both policies would be unfair to developing or smaller states that cannot afford such a system or do not have the capacity to administer such a program at home. Like the GMO case, the U.S. Carbon Fee would create another source of conflict in the WTO and in global trade negotiations. These similarities suggest that boarder adjustments for a U.S. carbon tax will need careful consideration.

Likewise, a boarder related adjustment for carbon fees might also be a violation of our many international trade agreements. The GMO case is clearly an issue in the current Transatlantic Trade and Investment Partnership (TTIP) negotiations between the EU and U.S. (Harvey 2015)3. Considering the existing disagreements over environmental issues with the Trans-Pacific Partnership (TPP), it is unlikely that Asia would be willing to accept such a policy either.

Finally, if China, or whoever might be our largest trading partner at the time, does not add the “carbon fee” it could lead to other issues. At worst, it could lead to a trade war with our largest trading partner. At best, the U.S. would be forced to roll back the carbon tax in all exporting sectors, thereby undermining the carbon tax policy. Most likely, the U.S. should expect to see retaliatory fees added to its exports while the case is being worked out (the EU case has been going on since 1994). As a result, related domestic industries would be unable to compete on world markets. The impact on U.S. competitiveness could be dramatic. For these reasons alone, a better understanding of boarder related impacts seem necessary. How this will impact U.S. competitiveness is also yet to be fully understood, but should be considered when deciding on a final policy proposal.