To say that Donald Trump’s presidency has been a turbulent ride would be putting it mildly, it appears. From challenging the election results on Day 1, through the healthcare debacle, the appointment of poorly qualified candidates to posts of high responsibility, not fully thought-out bombings, disagreements with virtually all of the United States’ intelligence agencies, even leaking sensitive information to Russian officials in what John Oliver dubbed “Stupid Watergate” (which started the conversation about a possible impeachment), it appears that, impossibly, President Trump outdid himself this Thursday as he announced the United States will be withdrawing from the Paris agreement on climate change.
What is the Paris Agreement? Simply put, the Paris accord is one of the few noble things humanity has done in recent years. It is a United Nations initiative under which 195 countries’ leaders gathered in Paris in December 2015 and agreed to fight pollution and other kinds of climate damage from 2020 onwards. The agreement itself is more of an act of good will - it does not force any given country to take fixed measures; each state retains its sovereignty and control over how they alleviate climate change. In other words, according to the Paris Agreement 195 countries agree that climate change is a serious problem and promised to start taking measures to do less damage in the future by adopting more sustainable policies.
What was supposed to happen? It was expected that all 195 countries would ratify the agreement on June 1, 2017. However, the United States along with very few others went back on their word and decided to withdraw. According to President Trump, the deal is not “fair” to the United States and he wants to negotiate a better deal, a statement that struck many economists as odd, considering the Paris Agreement won’t force the US to do anything they don’t want to do. Even China whose heavily industrialized economy is arguably the largest polluter in the world supports this global effort. Guess who the second largest polluter is.
Why might America feel that way? In all fairness, adapting environmentally friendly solutions is an expensive enterprise. Doing things in a way that is cleaner and safer takes more time and effort, adding to the production costs of most goods. That is the price to pay if we want the planet to have a future longer than 50 years. However, Trump feels that this won’t be fair to American businesses, which is why he decided to withdraw from the agreement.
The Fallout In less than 24 hours it seems that Trump’s decision has invoked a tremendous amount of reactions from all over the world. Germany, France, and Italy outright refused to negotiate with the United States. The newly-elected President of France Macron issued a now-viral video statement once again inviting scientists and engineers to relocate to France where they are committed to work on climate control. 25 of America’s biggest companies including Apple, Facebook, Google, and Microsoft sent an official letter to Trump warning him against a withdrawal. More backlash is still emerging from all around the world.
The truth is that even if one shares Trump’s concern that local businesses could suffer from this international endeavor, he could actually hurt the American economy more by withdrawing. Trump might start a trade war, warns CNN.
Essentially, by not complying with the agreement and using the older, cheaper (but more harmful for the environment) methods of production, the United States could produce goods at a cheaper price than other countries and try to gain an advantage in global exports. However, countries could employ the so-called carbon tariffs and charge the United States high fees when their goods enter other countries, cancelling out the “benefit” that Trump is trying to create. In this scenario American businesses will still be punished with high costs, but the environment will suffer too, so nobody wins. More than that, everybody loses. Not to mention that some of the states might lose even more because they have local laws that pertain to carbon emissions and would suffer the potential carbon tariffs unjustly.
Considering how important trade has been to Trump’s platform so far, things seem quite precarious. Investors are increasingly withdrawing their trust from the United States and choose to bet on safer trading instruments such as gold. Trade deals will likely be getting extremely complicated between the US and the rest of the world. Things are already tense between Trump and China, not to mention Canada and Mexico and the NAFTA deal. In the increasingly insecure economic climate of the United States we would likely see damage in job and wage growth, the Fed will have more grounds not to proceed with the planned June hike, and the dollar might tumble down.
We cannot cover this issue comprehensively right now as it is still unfolding. Keep an eye on pairs with the USD as the dollar has been dropping in value - this could exacerbate as more reactions and opinions weigh in on the matter.
