EU, US green steel showdown: How to decarbonise trade

On 31 October 2021, the EU and the US temporarily resolved their Trump-era trade dispute over steel and aluminium tariffs by signing a joint statement on a “Global Arrangement on Sustainable Steel and Aluminium.”

This saw the removal of tariffs they levied against each other, agreeing to work together towards a decarbonised steel sector. Moreover, they decided to defend workers and fight global overcapacity, a key issue for the US that wanted to protect itself from subsidised Chinese steel.

The idea was that the agreement would be open to other countries who want to collaborate in less carbon-intensive steel and aluminium production, serving as a blueprint for making trade more environmentally friendly.

But the race is now to resolve key outstanding matters and conclude the agreement before US steel tariffs and the EU’s countervailing duties come back into force by 31 October.

Johanna Lehne, a trade and industrial decarbonisation expert at the climate change think tank E3G, who recently called for a reset of the negotiations, told EURACTIV, “Everything that we’ve heard suggests that they’re still quite far apart.”

A climate-friendly trade system?

The US government would like to form a “Green Steel Club” that protects itself with a common external tariff for steel and aluminium from third countries with more polluting steel industries or countries that subsidise their industry too excessively and thus create a global oversupply problem.

This would be convenient for the US as it could build on its current 232 tariffs, which it levies for national security reasons.

“What the Biden administration is trying to do is essentially convert that 232 system into a climate-friendly system,” Timothy Meyer, a professor in international law at Duke University with a specialisation in international trade, told EURACTIV.

The tariff level would be calculated by the “carbon intensity” of a third country’s steel and aluminium industry: The more polluting the steel sector in a given country, the higher the tariff.

Once there is a methodology to calculate carbon intensity, such an arrangement incentivises third-country governments to green their steel sectors.

Or green-washed protectionism?

But this approach has serious issues, as David Kleimann, a trade expert at the European think tank for economic policy Bruegel, points out.

“A tariff based on the average emissions intensity of a sector does not give the individual producer an incentive to decarbonise,” he told EURACTIV, saying that all the burden would then be on the state.

While the US has the financial means to support industry in this, many poorer countries do not, argued Kleimann, who called the US approach “sparkling protectionism,” accusing it of green-washing.

He also thinks that the 232 tariffs are not a good basis for establishing the new system and prefers the European approach of levying a carbon border adjustment levy, as the EU plans to do with the CBAM (Carbon Border Adjustment Mechanism). Under this mechanism, a range of imported goods will pay a price based on the current EU carbon price and how much carbon was emitted in the production process.

Instead of a common external tariff, the EU would rather see a global arrangement based on carbon prices for steel and aluminium that could be levied at the border.

This would incentivise countries and individual steel companies to decarbonise their production.

Fundamental differences

However, the US administration is critical of this approach as it would require the US to refrain from an external tariff and implement a system similar to the EU’s instead. This would also mean implementing a domestic carbon price, which seems politically unfeasible in the political landscape of the current US Congress.

Over the summer, Timothy Meyer and Todd N. Tucker of the Roosevelt Institute, whose 2021 policy paper on a “Green Steel Deal” seems to have strongly influenced the US administration’s position, had a heated back and forth of policy papers with Bruegel’s David Kleimann who criticised their approach, before his policy paper was in turn criticised by Meyer and Tucker, after which Kleimann criticised the criticism.

This fight between academics also exposed how difficult it is to build a “global arrangement” on a trade issue if the partners do not understand on which basis trade policy should be conducted.

While the US has distanced itself from WTO principles, using the unilateral imposition of tariffs as a tool that suits its interests, the EU is still trying to pursue WTO compatibility.

Or, as Johanna Lehne put it: “WTO compatibility – even though that is a very open term and there are different interpretations – is still a bit of a holy cow in the EU.”

Trade barriers everywhere

Holy cow or not, WTO compatibility only allows the imposition of tariffs at the border if they compensate for a domestic policy that creates costs for domestic producers. The EU has this domestic policy in the form of the carbon price, which is why it argues that the CBAM is WTO compatible, but the US lacks such a policy.

Moreover, fighting overcapacity – a key interest of the US – is not considered a legitimate reason for trade barriers under WTO law. That’s why the EU tries to fight overcapacity, not by imposing tariffs, but by using its foreign subsidies regulation.

But, as Meyer points out, the paperwork companies will need to adhere to CBAM, and the foreign subsidies regulation could be so costly that it could also be considered a trade barrier.

“The potential trade barrier between the US and the EU from having different systems in place is potentially quite significant,” he said.

Room for collaboration

However, despite their differences of opinion, Meyer, Kleimann, and Lehne think there is room for collaboration between the EU and the US, especially in agreeing on a common methodology to measure steel and aluminium carbon emissions.

On Thursday (24 August), the EU Commission’s trade chief Valdis Dombrovskis met with US Trade Representative Katherine Tai in India, saying they hoped to reach an agreement by autumn.

Bruegel’s David Kleimann expects this to be a very light agreement in which the EU and the US would give each other a little more time to discuss by extending the deadline while adding declaratory language about wanting to work together.