guardian.co.uk
It's payback time for Kyoto
Special report: global warming
Special report: George Bush's America
Larry Elliott
Monday April 9, 2001
The Guardian
In the film Trading Places, Dan Ackroyd is a yuppie commodities broker whose life is ruined after his cunning and crooked bosses make a bet that he can be turned into a member of the criminal underclass while a small-time hustler (Eddie Murphy) moves in the opposite direction to become a rich, respectable member of the haute bourgeoisie.
When Ackroyd discovers what his employers have done for a one-dollar wager, he seeks revenge. His immediate thought is to load up a shotgun and seek violent retribution, but in the end is persuaded by Murphy that the best way to get back at rich people is to hit them where it hurts - in their wallets.
Politicians in Europe have - metaphorically speaking - been looking for their shotguns since George Bush said that the US would not abide by its commitments under the Kyoto agreement on global warming. The president's view is that cutting emissions of greenhouse gases would be bad for the American economy. And in the president's scheme of things, the American economy comes first, second and third. The big polluters of corporate America have received a quick payback for all that campaign funding.
Bush's repudiation of the Kyoto agreement has caused outrage in other countries, not because the Americans under Clinton were making great strides towards cutting carbon dioxide emissions (they weren't) but because Bush made it abundantly clear that he thought America's economic might meant that it could blow a big, fat raspberry at the rest of the world. A European Union mission was sent to Washington but, predictably enough, returned empty handed.
But all is not lost. There is a way the rest of the world could respond effectively to this expression of American selfishness because it is the rest of the world that is bankrolling America's excessive consumption, which in part, is the reason for its high CO2 emissions. As can be seen from the first chart, US greenhouse gas emissions per capita are the highest in the developed world for any country other than Luxembourg. There are a number of reasons for this, including the fact that - as the Organisation for Economic Cooperation and Development noted in its annual health check on the US last year - consumption of fossil fuels is encouraged by gasoline prices being too low. "Automobile users probably do not pay their full external cost, even when climate change is ignored."
So, with driving cheap and the economy growing rapidly, Americans have bought more cars and bigger cars over the past decade, along with vast quantities of other consumer goods. The consequences of all this over-consumption are highlighted by the second chart, which shows what has been happening to the US current account in recent years.
The burgeoning deficit is clear evidence that America is living beyond its means. But the current account - broadly trade in goods and services - only makes up one half of a nation's balance of payments. The other half is the capital account, which shows whether a country is a net importer or a net exporter of capital, either in the form of direct investment in new plant or through the buying and selling of financial assets. Since the balance of payments should, by definition, balance, a deficit on the current account has to be matched by an equivalent surplus on the capital account. In reality, measurement problems mean that this does not always happen, but as the US current account has risen so it has increased its dependency on capital flows from the rest of the world.
The amount it sucked in to finance its spending habit more than tripled from $113.3bn (£78.7bn) in 1995 to $399.1bn last year as the current account headed towards the record deficit of $435.4bn in 2000. As such, savers in Germany and Japan are indirectly allowing American consumers to carry on polluting the planet at the current rate. This burden will become even heavier if Bush uses up the American budget surplus to finance his tax-cut plans, since at least under Clinton the failure of consumers to save was partly offset by the saving done for them by the government.
Severe consequences
But the bottom line is that without the help of savers in the rest of the world, American consumers would have to consume less and save more, and the result of that would be a considerable slowdown in US growth.
The policy implications of this should be quite clear, even to those rightwing ideologues who believe that America is entitled to do exactly what it wants. Bush is free to say that the US will break its Kyoto commitments, but the rest of the world is equally free to respond by cutting off the flow of funds to finance the US current account deficit. For Bush, the consequences would be far more severe than abiding by Kyoto, with an almighty crash on Wall Street and - as Robert McTeer, the president of the Dal las Federal Reserve admitted on Friday - a collapse in the value of the dollar. "Capital inflows are holding the dollar up despite the negative tone of the current account deficit," Mr McTeer said, adding that for the moment the US remained an attractive place for the world's savers. "If something should happen to cause them to lose faith, then there would be a problem and a dramatic downward pressure on the dollar."
Of course, a deliberate attempt by Europe and Japan to stem the flow of capital to the US could be seen as a classic example of cutting off your nose to spite your face, because the impact of a sustained and deep American downturn would have knock-on effects on the rest of the world. But there are a number of points that need to be made. The first is that a day of reckoning is coming for the US sooner or later anyway. At some point, the days of live-now-pay-later will have to stop. A rebalancing of the global economy, with a smaller US current account deficit and a smaller Japanese current account surplus is much to be desired.
The second point is that the Europeans and the Japanese would never need to make their threat explicit. A quiet word at a meeting of G7 finance ministers, backed up with a juicy non-attributable quote to the press would have the alarm bells ringing in the White House within five minutes. Third, while Tokyo might not want to see an appreciation of the yen against the dollar at a time when the Japanese economy is so weak, the Europeans would certainly like a stronger euro, which would facilitate lower interest rates and restore some pride after the single currency's battering since January 1999. Finally, the idea that the big financial institutions are a law unto themselves and would refuse to cooperate is a myth. French banks, for example, rarely say anything negative about the euro because it has been made clear that the ministry of finance finds such behaviour "unhelpful".
Will this be contemplated? It depends of how serious the rest of the world is about global warming and how willing it is to stand up to the US. But let nobody say that there is nothing that could be done. There is. What's needed is a strike by European and Japanese capital. Get militant, comrades |
