Executive summary
In using the removal of Section 232 ‘national security’ tariffs on steel and aluminium imports as a bargaining chip, the United States demands that the European Union engage in negotiations on “global steel and aluminium arrangements to restore market-oriented conditions and address carbon intensity”. The US demand has reportedly been inspired by a blueprint that would establish an international institutional arrangement – labelled a ‘climate club’ – which would externalise market-access restrictions afforded by US Section 232 tariffs to the customs borders of club members. While the declared objective is to incentivise non-members to adopt low-carbon steel (and aluminium) production methods the US blueprint suffers from various design flaws including inefficient incentives, WTO inconsistency and incompatibility with the EU Carbon Border Adjustment Mechanism.
The effectiveness of the proposed US scheme is severely compromised by the plethora of policy objectives it pursues, which go far beyond the goal of incentivising industrial decarbonisation in third countries, including secondary (ie protectionism) and tertiary (ie global power competition with China) objectives. The initial negotiation proposal submitted by the United States Trade Representative (USTR) to European Commission trade negotiators incorporates many if not all the problematic elements of this blueprint, setting the US on a collision course with the negotiation proposal put forward by the European Commission. This paper concludes that the adoption of the scheme proposed by USTR would result in a step backwards for international climate and trade cooperation, whereas not adopting the EU proposal would make for a missed opportunity. Given the sharply diverging negotiation positions and associated respective domestic constraints on both sides, however, policymakers should start to engage stakeholders now to manage expectations towards a low-ambition negotiation result, if any.
Introduction
On 31 October 2021, the European Union and the United States agreed on temporary measures to settle their dispute over US Section 232 ‘national security’ tariffs on EU steel and aluminium products. In addition to opening tariff rate quotas for historical EU export volumes, the joint EU-US statement mandates negotiations on a “global steel and aluminium arrangements to restore market oriented conditions and address carbon intensity”, with a deadline of 31 October 2023. The relevant paragraphs are an eclectic mix of transatlantic policy objectives in the areas of steel and aluminium decarbonisation, sectoral overcapacity, non-market practices and inbound investment screening:
“Compatible with international obligations and the multilateral rules, including potential rules to be jointly developed in the coming years, each participant in the arrangements would undertake the following actions: (i) restrict market access for non-participants that do not meet conditions of market orientation and that contribute to non-market excess capacity, through application of appropriate measures including trade defence instruments; (ii) restrict market access for non-participants that do not meet standards for low-carbon intensity; (iii) ensure that domestic policies support the objectives of the arrangements and support lowering carbon intensity across all modes of production; (iv) refrain from non-market practices that contribute to carbon-intensive, non-market oriented capacity; (v) consult on government investment in
decarbonization; and (vi) screen inward investments from non-market-oriented actors in accordance with their respective domestic legal frameworks.
“To enhance their cooperation and facilitate negotiations on a global sustainable steel and aluminum arrangements, the United States and the EU agree to form a technical working group. Through the working group, the United States and the EU will, among other things, confer on methodologies for calculating steel and aluminum carbon-intensity and share relevant data”.
At the time of writing – 20 months after the formal launch of negotiations and four months prior to the deadline, negotiators have set up two technical working groups – one covering the carbon intensity element and one covering the overcapacity element of the negotiations. They have also exchanged negotiation positions in the form of concept notes in December 2022 and January 2023 respectively.
On 10 March 2023, European Commission President Ursula von der Leyen and US President Joe Biden declared, as part of a further joint statement (The White House, 2023), that they were “committed to achieving an ambitious outcome in the Global Arrangement on Sustainable Steel and Aluminum negotiations by October 2023. The arrangement will ensure the long-term viability of our industries, encourage low-carbon intensity steel and aluminum production and trade, and restore marketoriented conditions globally and bilaterally. Together, we will incentivize emission reductions in these carbon-intensive sectors and level the playing field for our workers. The arrangement will be open to all partners demonstrating commitment to countering non-market excess capacity and reducing carbonintensity in these sectors”.
But beyond this declaration of joint ambition, US and EU perspectives and their initial negotiation proposals diverge sharply in terms of both policy design features and the overall approach, objectives and vision of transatlantic and international climate and trade cooperation. This paper sets out the EU and US perspectives on the ongoing negotiations and evaluates US and EU initial negotiation proposals as the transatlantic talks slowly but surely approach the 31 October 2023, deadline. The October deadline could mark either a breakdown of negotiations and automatic reinstatement of US Section 232 tariffs on imports of steel and aluminium from the EU, or a transatlantic agreement on a ‘Global Steel and Aluminium Arrangement’. An agreement could follow either the US or the EU’s vision for climate and trade cooperation, with all of the imaginable scenarios having considerable economic and climate policy implications for the US, the EU and the rest of the world.
As a benchmark for evaluation, Falkner et al (2022) noted that a prospective transatlantic climate club must be assessed on the basis of whether it adds or distracts from the multilateral climate regime or diverts resources away from crucial national abatement efforts. Here, we assess both the US and EU proposals for the arrangement against both the multilateral and the national benchmark, among others.
David Kleimann (PhD) is a trade expert with 15 years of experience in law, policy, and institutions governing EU and international trade.
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