This is a very big deal indeed. Here’s what it involves.
The E.U. and U.S. are burying their fight over steel and aluminum.
Under the plan, the E.U. and the United States will stop applying punitive tariffs on each other’s steel and aluminum exports, at least so long as those goods flows are kept within historical levels. President Biden inherited a steel and aluminum trade dispute from former president Donald Trump, who took unilateral measures to win Midwestern voters by raising the depressed global prices brought about by high Chinese subsidization of its industrial sector. Because the price of commodities such as steel tend to converge globally, and because metal can be shipped through secondary markets like the E.U., the United States applied the tariffs to all imports, not just those directly from China. The E.U. retaliated by launching complaints at the World Trade Organization (WTO) and by applying identical rates to U.S. exports.
The United States and the E.U. plan to replace these tariffs with “the world’s first carbon-based sectoral arrangement,” which they say they’ll come up with over the next two years. The details are yet to be worked out, but the idea is that both jurisdictions will align on ways to measure the life-cycle emissions in the steel and aluminum sector, and ultimately will place restrictions on imports into their markets that do not use environmentally safe methods. In the meantime, they will keep tariffs on Chinese and other third-country production. Because U.S. and E.U. producers tend to be more environmentally friendly than China already, this will effectively be a common external green tariff. The WTO cases will be dropped.
This will change the way steel is produced.
The deal sends a message to steel producers globally. They need to invest now in clean production methods like green hydrogen (which are already being successfully employed in Sweden) or risk being permanently shut out of global commerce. It also avoids a legally and politically fraught ruling by the WTO over whether Trump’s tariffs were justified on national security grounds. Ironically, Trump, who was both a climate denier and a WTO hater, has set in motion a process that might end up saving both.
The E.U. played hardball.
The immediate cause for today’s announcement was the adoption earlier this year of a proposal made by European Commission President Ursula von der Leyen for a “carbon border adjustment mechanism” (CBAM) under the European Green Deal. This CBAM involved a tariff or other barriers, that the E.U. would apply to goods based on their carbon intensity.
The CBAM was going to begin in a small number of trade-exposed, emissions-intensive sectors, including steel, aluminum, cement and fertilizers. While the E.U. bent over backward to ensure that the measure was compatible with WTO rules, it was inevitably going to lead to a political clash. By design, the CBAM privileged imports from home countries that had explicit prices on carbon. Complying with the CBAM would have been hard for the United States. The Biden administration instead favored a strategy based on standards, investments and equity. But because the E.U. played the first move, the United States faced a short timetable and difficult choices if it wanted to cooperate with the E.U. It had to negotiate or risk facing trade barriers.
The strategy was effective: The United States came to the table. Within months of von der Leyen’s announcement, there was a deal.
The deal opens up new possibilities.
This deal shows that agreements like the WTO’s treaties are fundamentally political and open to change. States don’t need to worry so much about bending or breaking the rules if they want to step outside of the WTO and create deals that allow aggressive action against climate change in specific sectors.
Ironically, the new deal — which does not mention WTO compatibility once — could end up being more WTO compatible than the E.U.’s opening proposal. Because it is neutral on the means of decarbonizing and focuses instead on the ends (lower-emission steel), this new deal is probably more defensible under the WTO’s environmental defense provisions. (For elaboration on this point, see here.)
Climate policy is shifting away from big multilateral negotiations.
This is the latest development in an ongoing shift in global climate policy. Since 2010, action has shifted away from the official U.N. negotiation process to bilateral and multilateral actions to advance green growth and sectoral specific strategies. This is a big change from the global climate politics of the 1990s and 2000s that tried to build a comprehensive global carbon price. Today’s announcement shows that the failure of this approach was not a death knell for ambitious global climate action.
Instead, the deal provides a blueprint for global green industrial strategy. States can cooperate to decarbonize global sectors with heavy emissions like steel with specific mixes of policies and financial investment that built green industry at home, while putting pressure on dirty industries abroad.
Certainly, this pact is in part motivated by the desire to decouple Western economies from China. But China may well meet and exceed the standards. The Chinese government has shown that it can use green industrial policy effectively in specific sectors. Moreover, recent research suggests that the best and fastest route to global decarbonization may be to forge collaborative global supply chains, as was done in wind and solar. Thus, the deal envisions both novel rules to green the steel sector with more traditional trade stabilization rules to guard against import floods. In any event, the CBAM seems to have jump-started serious climate action in a sector responsible for a significant chunk of the world’s carbon emissions.
Bentley Allan is an associate professor at Johns Hopkins University Department of Political Science. Follow him on Twitter @bentleyballan.
Todd N. Tucker is a political scientist and director of governance studies at the Roosevelt Institute, and the author of “Judge Knot: Politics and Development in International Investment Law” (Anthem Press). Follow him on Twitter @toddntucker.