US President Joe Biden was handed a number of ticking time bombs by his predecessor Donald Trump. One of them was an ongoing trade war with the EU, in which Trump had slapped tariffs on imports of steel and aluminium from Europe in 2018. The EU in turn launched retaliatory tariffs on everything from blue jeans to whiskey, and filed a complaint at the World Trade Organisation (WTO).
Although the EU was hopeful Biden would rescind Trump’s tariffs, the fear of political blowback from the US steel industry, a powerful force in key swing states, has kept him from doing that. The European Commission, in turn, maintained it would not rescind the retaliatory tariffs and WTO challenge unless the US scrapped its tariffs. This deadlock lasted until autumn 2021, when Commission officials acknowledged they would have to change tack if they wanted to move forward on a transatlantic agenda and work together with the US in combatting state-funded overcapacity in Chinese steel mills.
So, on the sidelines of the G20 summit in Rome in October, President Biden and Commission President Ursula von der Leyen announced a truce that sees an EU capitulation in exchange for a reduction – not removal – of US steel and aluminium tariffs. The legal basis for Trump’s duties, a European “security threat” to the US, remains in place and will still be used to place limits on imports of metals from Europe. European countries balked at Trump’s suggestion that the EU, allies with the US in NATO, represents a security threat. However, Trump, who consistently showed hostility toward western European countries and the EU throughout his presidency, stuck with this characterisation. One EU official described the truce as “a pig requiring all the lipstick in the world”.
The lipstick announced in Rome is a new “carbon-based sectoral arrangement” between the EU and US on steel and aluminium production. The arrangement is a bone thrown to the EU, which has been preparing a possible carbon border tax (CBAM) on carbon-heavy imports from countries without climate action and would prefer not to have to use it against the US.
The two sides have agreed to work together over the next two years towards a “global arrangement on sustainable steel and aluminium” production, which together account for approximately 10% of global carbon admissions. “The global arrangement will add a powerful new tool in our quest for sustainability, achieving climate neutrality, and ensuring a level playing field for our steel and aluminium industries,” said von der Leyen.
Details of how the arrangement would work are few and far between, but the general idea is that the US and EU will agree a common way to measure lifecycle emissions in the steel and aluminium sectors and eventually restrict imports into their markets of metals that exceed a certain carbon content threshold. Even if this arrangement never actually comes to fruition, the announcement sends a strong signal to steel producers globally, including in China, that it is worth investing in emissions reductions.
A first for green trade
“The strange conflation of these two quite separate issues – overcapacity [in China] and carbon content – is clearly intended to separate China from the pack,” said Uri Dadush, a non-resident fellow at the Brussels-based think tank Bruegel, in December 2021. Both the US and the EU believe China is flooding their markets with low prices through its ability to overproduce. It is hoped that the US-EU alliance could counter that trend by allowing European and US production to become cheaper. Or more likely, penalising imports from China with a cost for not producing in a ‘green’ way.
The arrangement may end up focusing more on tackling overcapacity than carbon content, but if the carbon reduction component really is fleshed out it would represent the first major trade deal to put carbon at its heart with measurable standards that exclude certain players.
Dadush added: “A standards-based approach to reducing emissions and potentially containing carbon-laden imports – which is clearly the route preferred by the US – is far more likely to be practicable and less likely to generate WTO challenges than the EU’s tax-based approach as envisioned in its carbon border adjustment mechanism.”
Yet a US-EU bilateral partnership, which seems to explicitly reject the multilateral approach used for emissions in other sectors like maritime and aviation, could face challenges at the WTO. The deal would create in miniature what the EU wants to create with its CBAM (which may itself run afoul of WTO rules): imports from countries with strong climate policies are treated more favourably than imports from countries with weak climate policies. The key difference is that the US-EU steel and aluminium arrangement would focus on results, whereas the CBAM, still being drafted, would probably focus on whether countries have a price on carbon.
“The case [for WTO compatibility] may be stronger if several countries participate in the scheme and if the intention was to extend the scheme to a wide array of products,” argued Dadush. “It would be necessary to demonstrate that all imports which comply with the standard, from wherever they are sourced – including China – are allowed.”
EU lawmakers have reacted cautiously to the G20 announcement, worried it may be a sleight of hand by the US to avoid putting in place domestic emissions reduction plans meaningful enough to avoid being hit with the CBAM. “We have to see whether the newly announced actions will lead to greener steel,” said Bernd Lange, chair of the European Parliament’s trade committee.
A win for the US steel industry
In the US, the response to the deal is much more positive. The near consensus view inside the Biden administration and among outside experts is that a global green steel club would be a boon for the US industry, which leads the world in low-carbon steel production.
“The world’s first carbon-based arrangement on steel/aluminium trade: a major win for US workers, industry, consumers, and climate. This arrangement will discourage trade in high-carbon steel, protect US jobs, and reinforce the strength of the US-EU relationship,” wrote Brian Deese, a senior advisor to President Biden and director of the National Economic Council, on Twitter.
Sasha Mackler, executive director of the Energy Project at the Bipartisan Policy Center, called the deal a “creative, strategic, smart linkage of global trade and climate. We know that climate policy and economic policy are intertwined – this move makes it explicit.”
“The US-EU trade deal on steel and aluminum is a major win for American workers, American industry, and the climate. It rightly sets a standard established by domestic steel and aluminum manufacturers, which already lead the world in clean production,” wrote Josh Freed, senior vice-president for the Climate and Energy Program at the think tank Third Way, on Twitter.
US steelworkers also support the deal. The deal will “provide a much-needed opportunity to address the non-market predatory practices of China and other countries that have distorted global markets, while also spurring dialogue over climate concerns stemming from countries whose industries are far more carbon intensive than those in the United States and the EU”, said United Steelworkers International president Tom Conway in a statement.
The US steel industry’s competitive advantage rests on having largely transitioned to electric arc furnace-based steel production.
Steel is typically manufactured in one of two ways. Iron ore is reduced in a blast furnace, a carbon-intensive process that accounts for about 75% of global production, or scrap steel is melted in an electric arc furnace, a more efficient process that accounts for the other 25% of production. The electric arc furnace method “can be mostly decarbonised if recycled steel is used as the feedstock and if the electricity that feeds into the furnace is itself decarbonised”, wrote Todd Tucker and Timothy Meyer in a Roosevelt Institute report published in June 2021.
Electric arc furnaces are used in 65% of steel production in the US but only 6% of production in China, where half of the world’s steel is made, according to Tucker and Meyer. The shift to electric arc furnaces means the US steel industry is 75–320% more carbon efficient than other global producers, finds consultancy CRU International in research commissioned by the non-profit Climate Leadership Council. The global producers that come closest to matching the US’s carbon efficiency are Canada and the EU. In Germany and Italy, electric arc furnaces account for 30% and 75% of steel production, respectively.
“America produces steel while emitting less carbon dioxide than all our major competitors," writes the Washington, D.C.-based Council. "Under the current rules of climate and trade, our manufacturers get no credit for their cleaner operations."
The US-EU steel and aluminium deal is an attempt to confer an advantage on low-carbon producers in both markets, as well as in other countries that choose to join the pact.
What comes next
The US and EU aim to complete negotiations on the steel and aluminium arrangement by 2024. A joint technical working group will develop a methodology to assess the carbon content of traded steel and aluminium, which will be used to restrict or perhaps ban dirty imports.
Tucker of the Roosevelt Institute told Energy Monitor what could emerge, at least in the near term, is what effectively already exists separately in the US and EU: a common external tariff on high-carbon steel. Under the terms of the US-EU agreement, “there is unfettered commerce [in steel and aluminium] between the US and EU, and there is restricted commerce with everyone else”, he says. The restriction to commerce is the tariff now assessed by each market: the remaining 25% Trump-era tariff assessed by the US on steel and aluminium from non-EU markets and the EU’s own global steel tariff, also effectively 25%, for non-US products.
“If it turned out that the green premium for moving to decarbonised steel production is sufficient– some estimates put it around 25% – it could be that is actually a pretty good compensation for having to comply with the more costly production methods,” says Tucker.
Over time, the US and EU, and other members of the pact, could even move to ban high-carbon steel.
“You could go further and have a complete prohibition on the import or sale of dirty steel in countries inside the club,” says Tucker. “While that seems fairly extreme, given the way steel could eat up the remaining carbon budget for the world in the next couple of decades, without bold action more serious measures start to look more valuable.”