US-EU steel agreement ‘mission impossible’, says trade expert

Significant differences between EU and US climate and trade-policy toolkits and objectives, and the overall prohibitive costs of aligning around a lower US denominator render the proposed transatlantic Global Steel and Aluminium Arrangement (GSA) a “mission impossible and highly undesirable”. So says David Kleimann, visiting Fellow at Bruegel, in a new working paper.

In his “Section 232 reloaded: the false promise of the transatlantic ‘climate club’ for steel and aluminium” working paper, Kleimann says the US proposals would mean the EU would have to shelve its Carbon Border Adjustment (CBAM) regulation, unlink its carbon border adjustment (CBA) policies from its mature and tested Emissions Trading System (ETS), and give way to evidently less-efficient, less-effective, less-legitimate and WTO-inconsistent policy solutions.

The US proposals are “exclusive and coercive club setting, devoid of defined obligations for domestic restrictions”, Kleimann observes in the paper read by Kallanish. “The European Commission proposal, in contrast, notionally and practically reflects the German G7 Presidency’s proposal for open and inclusive climate cooperation, providing for joint ambition of long-term decarbonisation targets, while allowing for climate policy diversity, subject to the constraints of participants’ international legal obligations.”

65% of US steel production is already among the cleanest in the world. This means US proposals for embedded emission benchmarks restricting market access for imports would be expected to accommodate EAF performance standards and blast furnace transition from the outset. This would make for de-facto discrimination, for international trade legal purposes, against imports from non-member countries, Kleimann notes.

Such accommodation of US domestic producer interest would be achieved by using average domestic industry emissions as a benchmark, which is precisely what the United States Trade Representative (USTR) has proposed in GSA negotiations, instead of production-route-specific emission standards, as proposed by the EU.

“The Tucker-Meyer plan (TMP) and the USTR proposal hence appear to cherry-pick an industrial sector for transatlantic climate club cooperation where the US is already comparatively carbon-efficient without having to impose domestic regulatory restrictions at the outset. Viewed in this context, it appears that the plan has one overarching aim and effect: to protect the US national steel and aluminium sectors – and the unionized integrated blast furnace steel mills in midwestern swing states in particular – to a maximum extent and for as long as possible, from the financial and socio-economic burdens associated with industrial decarbonisation,” Kleimann explains.

The US proposals would also effectively grant US exporters an exemption from EU CBAM charges, he adds.

The EU and the US should instead focus their joint efforts on more flexible, pragmatic and fruitful cooperation objectives. “Transatlantic climate and trade diplomacy should be viewed akin to a technical-cooperation opportunity that knows only ‘winners’ (i.e. beneficiaries) as long as it is not loaded with secondary (e.g. protectionist) or tertiary (e.g. global power competition) objectives, which distract from the only two legitimate ends of climate and trade nexus cooperation: emissions abatement and the prevention of carbon leakage,” Kleimann notes.

The least disruptive result for the October 2023 GSA negotiation deadline may well therefore be to prolong the status quo and settle for a more informed, pragmatic and inclusive climate and trade cooperation roadmap for the years to come, Kleimann concludes.

Adam Smith Poland