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In Green Steel Discussions, the United States Is Playing Dirty

A deadline to reach a deal on a green carbon club for steel and aluminum between the United States and the European Union (EU) was again pushed back after the latest round of talks fell apart last month. The negotiations, meant to iron out a Global Arrangement on Sustainable Steel and Aluminum (GASSA), began in 2022 after the Joe Biden administration struck a deal with the European Union to replace the “national security” tariffs put in place by the Trump administration with a temporary quota system. This temporary workaround is set to expire on January 1, 2024, which could trigger the reintroduction of President Donald Trump’s tariffs—25 percent on steel and 10 percent on aluminum—and invite the reimposition of retaliatory tariffs on U.S. goods exported to the EU. Both sides are eager to avoid a trade war, but the wide gap between the two on the GASSA reveals a more troubling problem with U.S. policy—that it seeks to cement the Biden administration’s protectionist approach to trade and climate while using Trump’s disastrous trade policy as leverage.

The Proposals in Play: Washington v. Brussels

Despite commitments from both the United States and the European Union to reach an agreement, negotiations remain gridlocked. The October summit resulted in no substantial progress, though both sides agreed to continue their dialogue. The stalemate stems from the deal’s far-reaching objectives, which go beyond settling the dispute over the Trump administration’s “national security” Section 232 actions (which the Biden administration has not only continued, but defended in court). Instead, the Biden administration has complicated the removal of those tariffs by launching talks aimed at two very different goals: decarbonizing the steel and aluminum industries—which account for approximately 10 percent of global emissions—and combatting non-market practices from competitors such as China.

Though the United States and European Union separately agree that these additional goals are worth discussing, they are deeply divided in their approaches. While Washington’s “Green Steel Deal” calls for the application of the 232 tariffs as a common external tariff levied against third countries, Brussels wants to fully eliminate the 232 tariffs and replace them with a global arrangement based on their Carbon Border Adjustment Mechanism (CBAM). The CBAM policy places tariffs on carbon-intensive products entering the European Union that are price matched against the amount of carbon emitted during production, and which correspond to charges EU producers pay under the EU Emissions Trading System (ETS).

The inability to bridge the gap between these two proposals stems from three fundamental divides: respect for the international rules-based trading system, different approaches to the decarbonization of heavy industry, and disagreement over how to best address overcapacity and non-market practices.

Who Needs a Rules-Based Trading System Anyway?

The EU asserts that the Biden administration’s proposal runs afoul of World Trade Organization (WTO) rules by imposing external tariffs that violate international-trade commitments. Because the EU ETS places a tax on domestic producers that is similar to its CBAM tax on foreign producers, the EU approach is, in theory, WTO-compliant. It treats domestic and foreign firms in exactly the same way. The United States, however, does not have a domestic carbon tax, but instead wants to apply a tax on foreign imports that do not meet its criteria for green steel. Such taxes raise two problems: they would impose tariffs on imported goods that are higher than the tariff rates the United States promised its trading partners it would charge, and they would extend preferential treatment to U.S. steel over foreign steel.

Meanwhile, advocates of Washington’s “Green Steel Deal” argue that because WTO law was created prior to the climate crisis, its rules should be of secondary importance to taking action. They also claim that those measures follow recent precedents of balancing WTO norms with public-policy needs under the WTO’s general exceptions.

This divide indicates a deeper schism in the transatlantic relationship over the WTO’s centrality in the global trading system and the need for adherence to its core principles to ensure a stable and predictable trading system that binds all countries to the same rules.

Greenwashing in Plain Sight

Aside from the core disagreement over WTO compatibility, the effectiveness of the Biden administration’s proposal on its decarbonization objectives is also up for debate. From what is known of U.S. proposals thus far, it is hard to argue that GASSA will improve U.S. decarbonization efforts in a meaningful way without additional domestic action to regulate carbon emissions. Some have argued that decarbonization incentives and commitments introduced in the Inflation Reduction Act (IRA), the CHIPS and Science Act, and the United States’ relatively clean steel and aluminum production processes are enough.

At the center of this debate is the way that carbon emissions should be assessed and penalized. The United States has proposed calculating steel and aluminum emissions targets through an economy-wide industry-average emissions-intensity benchmark that would have the effect of giving individual emissions-intensive producers preferential access to the steel club, while discriminating against producers that are less emissions-intensive that are located in markets with higher average industry-wide emissions. Since U.S. and EU steel is already quite green, this would also not incentivize more ambitious decarbonization efforts. The European Union, by contrast, has developed an emissions-trading scheme that targets emissions at the firm level, meaning that individual firms are rewarded for efforts to green their industry, and those that do not can be singled out for higher taxes. This not only incentivizes foreign producers to meet EU targets, but for EU producers to strive for even better emissions standards. The major challenge, however, is that the United States has not taken significant action to establish a domestic carbon tax, though there have been some notable proposals in Congress.

The European Union has also expressed concerns about using Section 232 as a common external tariff to enforce the GASSA, arguing that it would undermine collaborative international climate initiatives and disincentivize producer-led decarbonization efforts. Because the tariff determination is based on third countries’ average industry emissions, even if a producer decarbonized, they would continue to face trade barriers if it was not part of an industry-wide initiative. Likewise, this system would enable free riders to benefit from other companies’ decarbonization efforts.

Non-Market Practices—It’s All About China

The Biden administration also hopes to use the “Green Steel Deal” to address the issue of steel overcapacity caused by non-market practices, such as subsidies. This is largely reflective of the U.S. Trade Representative’s desire to garner bipartisan support for the deal and claim that the administration is being tough on China—a good political talking point for the campaign trail. However, the European Union is hesitant to push China further away as it seeks to maintain their strained economic relationship, while also recognizing that global steel decarbonization will not be possible without China’s cooperation.

Other mechanisms already exist to address non-market practices. For instance, the United States and European Union already imposed substantial antidumping and countervailing duties on Chinese steel. In fact, only 7 percent of China’s steel exports go to the U.S. and EU markets, so GASSA would do little to add to existing trade remedies Chinese firms already face. Furthermore, discussions on steel overcapacity at the Organization for Economic Cooperation and Development (OECD) could generate broader political support for addressing non-market practices.

Don’t Leave “Green” out of the Steel Deal

The Biden administration is trying to achieve three separate goals in steel negotiations with the European Union: protect the U.S. steel industry; address non-market economy distortions; and decarbonize. Of these, the latter is the only goal that is clearly consistent with international trade rules. That goal should be the priority of the talks, and a genuine green steel deal should welcome any country that wants to join, regardless of whether they are a market economy. The political economy is simple—if tariffs on dirty steel are significant and there is a broad base of countries imposing them, it will be harder for dirty steel to find a market, and thus apply pressure on the relatively dirty steel industries in China and Russia to downsize their operations.

The clock is ticking to reach a deal by the end of the year. The European Union should not undermine its own efforts to green its economy by getting wrapped up in the Biden administration’s latest protectionist boondoggle, which is in an effort to protect domestic steel interests and shore up votes in pivotal electoral districts. Instead, it should push the United States to focus on decarbonization and drop the dirty trick of leaving “green” ambitions out of the deal.

Source : Cfr