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The EU and the U.S. want to gang up against China’s coal-fired blast furnaces in a green steel alliance — but no one is sure how that will happen.
The proposal for a united front against Beijing was a keystone of the truce on steel tariffs struck between Washington and Brussels at the end of October to end the trade war ignited by Donald Trump in 2018. Instead of fighting each other with duties on each other’s metal, America and Europe vowed to combat the common foe.
They have, however, attempted these kinds of mobilizations against Beijing for years. Indeed, in a scarcely veiled reference to Chinese steel, the U.S., EU and Japan pledged in late 2017 to rein in global sectors with excess capacity.
The problem is that it’s always proved easier to agree to plan action, rather than actually doing anything.
No one doubts China is a mighty problem, both in terms of subsidized overproduction and environmental damage. It produces more than half of the world’s steel and its output is also one of the most carbon-dioxide intensive in the world. If there were a way to force China to go green, that would be highly significant as the global steel industry accounts for around 11 percent of total global CO2 emissions.
It should come as no surprise that the transatlantic joint statement on October’s deal was short on details. A European Commission official acknowledged both sides had not gone into any of the details of the future agreement. “There is a political commitment to try this … but it will take a while to figure out what it will look like,” the official said.
EU trade ministers in their meeting last week barely touched upon the plan to work on greening steel because it was too “premature,” a senior EU diplomat said.
Previous attempts to address overcapacity such as the Global Forum on Steel Excess Capacity or the trilateral negotiations between the EU, the U.S. and Japan on industrial subsidies have not yielded much. “What has been tried, between the U.S., EU and Japan, which was to put some pressure on China on subsidies, I feel is going nowhere,” said Pascal Lamy, former EU trade commissioner and WTO chief.
The added goal of decarbonizing steel and aluminum production complicates the exercise even more.
To date, the U.S. and EU approaches to restricting carbon-heavy imports have not been compatible, raising concerns about future trade disputes. The EU in July unveiled a carbon border tax on steel, iron, cement, fertilizers, aluminum and power imports to subject foreign competitors selling dirtier goods to the same conditions faced by their EU counterparts. Washington has opposed this, calling it a “last resort.”
In theory, global trade could benefit from a transatlantic convergence on carbon pricing. But if the U.S. plan is to create a carbon club to make the EU forget about its carbon border tax, the Commission’s response is a simple “no.”
Todd Tucker, director of governance studies at the Roosevelt Institute, a Washington, D.C. think tank, sees several paths for the U.S. and EU to align on carbon standards for the steel industry. They could develop a system that gives credit to one another’s producers for investments in greener production facilities and adherence to domestic regulations, he said.
People involved in the upcoming negotiations acknowledge the drawing board is still blank, however. The first step will be a technical working group to develop a common methodology to measure how much carbon is emitted during steel and aluminum production.
Steel cartel
Even if the two sides were to agree on a shared, carbon-based standard, the next challenge is to incentivize others to follow that standard.
The most straightforward approach would be to impose tariffs on steel and aluminum products from countries that don’t adhere to it, something both sides have hinted at.
“One of the elements which we’ll be discussing is how to restrict market access for those participants that do not meet conditions for market orientation or that do not meet standards for low carbon intensity of their products,” the EU’s trade chief Valdis Dombrovskis told reporters when announcing the deal.
The idea is that this would drive up the cost of dirty steel and ensure domestic policies to support lower carbon intense production. In a best-case scenario, this would nudge other major emitters into upping their climate efforts.
Industry leaders expressed optimism the agreement could force China to reform at least some of its trade practices.
“Anything that can be done to force the Chinese to pay to account for the higher level of carbon emissions they do, I think, will put some pressure on them to take some action,” said Kevin Dempsey, president and chief executive of the American Iron and Steel Institute.
The European steel organization Eurofer called the agreement “an extremely important step forward.”
“Two of the three major players share the same values when it comes to market economies, to climate and to democratic values,” said Axel Eggert, Eurofer’s director general. “We, or I should say, the EU, have long hoped that China would move toward a more Western approach of a market economy. That has not happened.”
Trade friction
Creating this kind of clean steel grouping — protected by barriers — can, however, also easily breed fragmentation, walls, retaliation and friction. The approach is also likely to encounter resistance at the World Trade Organization.
Brussels desperately wants to avoid the perception that it’s using the climate argument as a cover for some sort of transatlantic steel cartel and insisted in the negotiations that the future arrangement has to be in line with the rules of the World Trade Organization.
Again, it doesn’t know how to square that circle yet.
“That is one of the headaches, one of the challenges that we are going to have: to find a way to actually transpose in a non-discriminatory way our commitment to the steel agreement into something which works for all,” the Commission official said. “I will be honest. I don’t know really know how we are going to do that because we have not gone into any of these details.”
It is not impossible. Tucker said the U.S. and EU could not only rely on their political clout to squash opposition, but could make a compelling case that their trade policy is justified because it’s crafted to achieve an environmental goal.
The World Trade Organization provides a limited number of reasons in which countries can be exempted from its rules. One of them is measures related “to the conservation of exhaustible natural resources.”
“It is discriminatory, but it can be justified,” said Lorand Bartels, trade counsel at the global legal firm Freshfields and a professor in international law at the University of Cambridge. “Provided that the mechanism is properly designed and calibrated to combat climate change, then it could survive scrutiny.”
World peace
A lot of it will come down to the degree of trust between the transatlantic allies. In a statement, Commission President Ursula von der Leyen called the steel and aluminum deal “a milestone in the renewed EU-U.S. partnership.”
Cooperation on steel lay at the heart of European integration after World War II. Determined to prevent another such catastrophe, European governments hoped pooling coal and steel production would make war between historic rivals France and Germany “not merely unthinkable, but materially impossible.”
But don’t hold your breath for world peace — or even better transatlantic relations — because of a global steel alliance.
Behind the scenes, EU officials and diplomats are skeptical about all the declarations of transatlantic love. There has obviously been an improvement in the willingness to cooperate since Trump left the presidency. But the hostile American arrogance under Trump has been replaced by the politer arrogance that has characterized transatlantic relations for decades. The bitter pill Brussels had to swallow to get out of the steel and aluminum tariffs — accepting quotas on its own exports — is only the latest proof that Joe Biden is not going easy on the EU.
A concrete example of that distrust is a clause in the tariff deal which requires EU steel exports to be melted and poured in the EU. American steel producers lobbied for that rule to prevent steel from China being passed off as an EU product. “For far too long, China was routing its cheap steel into the U.S. via Europe,” U.S. Commerce Secretary Gina Raimondo said.
That shows how, in the end, industries on both sides of the ocean will remain competitors, with tensions over capital investments in making their plans environmentally friendly.
“Europe has been trying consistently to hijack the environmental message and they by no stretch of imagination … are even close to what we have been accomplishing here in the United States,” said Lourenco Goncalves, chief executive of Cleveland-Cliffs, an American steel and iron company.
Sarah Anne Aarup contributed reporting.
This article is part of POLITICO’s premium policy service Pro Trade. From transatlantic trade wars to the U.K.’s future trading relationship with the EU and rest of the world, Pro Trade gives you the insight you need to plan your next move. Email [email protected] for a complimentary trial.
