Transatlantic impasse over turning steel green
The US is watching politics in the Midwest while the EU is fretting about the WTO
Caught in a steel trap
It all looked so optimistic in the heady days when President Joe Biden was newish in office and talking an optimistic game on resetting transatlantic relations. In October 2021 the US agreed to suspend Donald Trump’s national security-related Section 232 tariffs on steel and aluminium imports from the EU, temporarily no longer deeming basic raw materials from longstanding allies a threat to the American way of life.
The Biden administration instituted instead an annoying but somewhat less damaging set of import quotas. Also, Brussels and Washington started negotiations about creating a permanent green steel and aluminium (aluminum, whatever) club to encourage all countries to adopt low-carbon production. The noises emanating from the talks — which are supposed to come up with a deal by October, when the tariff suspension expires — have never sounded very cheery. Last week the FT revealed the state of play: an impasse.
The US plan, as described by media reports, participants and observers to the talks, supposedly attempts to fix two or three problems in the steel market in one go — reliable supply (the supposed national security angle), emissions-intensive production and worldwide overcapacity. However, it does this in a way that would seem to create perverse incentives and which would very probably be declared illegal at the World Trade Organization.
As far as we can tell, the US idea is for members of the climate club to calculate a nationwide average for carbon intensity of steel production and create tariffs to penalise non-members’ steel industries (and indeed perhaps other members’ industries, but at a less punitive rate) for higher emissions. It makes no commitments to do anything new to the US steel industry in terms of introducing carbon pricing or otherwise deterring emissions. This immediately creates a likely problem with the WTO rules against discriminating between domestic and foreign producers.
The plan pushes further towards WTO-illegal territory by also wanting tariffs to punish trading partners for subsidising overcapacity. (This is an issue for which trade defence tools such as antisubsidy duties of course already exist, of which the US is an assiduous user.) That extra market distortion element would prevent the US from using environmental loopholes in WTO law to justify the tariffs, since it has nothing to do with preserving the planet.
In return for accepting this, the EU is supposed to surrender its own painstakingly worked-out carbon border adjustment mechanism, at least as regards imports from the US. The CBAM has attempted to stay within WTO bounds by relating border charges to the EU’s own carbon emissions pricing scheme and by taxing imports based on the carbon intensity of individual producers, not the country as a whole.
On average, thanks to the prevalence of energy-efficient electric arc furnaces “mini-mills” rather than traditional blast furnaces, US steel production is already relatively low in carbon emissions. David Kleimann of the Bruegel Institute think-tank in Brussels, one of the most prominent public critics of the US approach, argues that by declining to charge its own producers for emissions and taking a national average for carbon intensity that’s pulled down by EAFs, the Biden administration’s proposal essentially uses a green smokescreen to protect America’s relatively inefficient and carbon-heavy blast furnaces from further decarbonisation and international competition. (Said steel plants are, of course, concentrated in the Midwest political swing states of Ohio, Pennsylvania and Michigan.)
From the EU’s perspective, signing up to the US proposal means putting transatlantic alliance-building ahead of fidelity to open trade and global rules. European Commission president Ursula von der Leyen — and trade commissioner Valdis Dombrovskis, an instinctively Atlanticist Latvian — are both generally well-disposed to Washington, or at least to the Biden administration. But this might well be a principles-swallowing exercise on which even they would choke.
Let’s see what compromise they can concoct. My bet would be they’ll punt the Section 232 suspension forward another couple of years when it expires in the autumn. This is based on an assumption that otherwise we’re in a classic Zugzwang situation where any move loses. Any solution based on current negotiating positions either damages Biden’s poll ratings in the Midwest or the EU’s cherished self-image as a green multilateralist.
At the very least an extension would get it past the next US presidential election. Of course, Trump might be back in the White House in two years’ time. At that point the whole idea of even trying to conduct genteel transatlantic policy discussions rather than just waiting for the next eccentric idea to burst out from whatever has replaced Twitter by then will seem very quaint indeed.