Guest post from Timothy Meyer (professor of law and the director of international legal studies at Vanderbilt Law School) and Todd N. Tucker (political scientist and director of governance studies at the Roosevelt Institute). Follow them @Tim_L_Meyer and @ToddNTucker.
The United States and the European Union announced a pathbreaking deal this past weekend on trade in steel and aluminum. The deal has two components. First, the United States agreed to lift its 25% tariff on steel imports and 10% tariffs on aluminum imports from the EU, and the EU agrees to stand down on both WTO disputes against the United States as well as retaliatory tariffs. Second, the US and EU agreed to work on a “Carbon-Based Sectoral Arrangement on Steel and Aluminum Trade.” The specific terms of this arrangement will be negotiated over the next two years, but we do know a few things: 1) the parties will “restrict access to their markets for dirty steel and limit access to countries that dump steel,” and 2) the arrangement will be open to third countries to join so long as they meet criteria relating to “market orientation and reducing trade in high carbon-steel and aluminum products.”
Our friend Simon Lester has questioned how this arrangement will reduce carbon emissions. Any answer about the specific mechanics is necessarily preliminary because the US and the EU have given themselves until 2024 to work out the details. Even the legal nature of the deal appears up in the air, with the US and EU referring to it as an “arrangement,” rather than an “agreement” – a choice of verbiage that suggests that the final instrument may be non-binding as a matter of international law. Having said that, we do think the broad strokes of how the arrangement might work are fairly clear.
First, as we have written in our proposed Green Steel Deal, the restrictions on market access for dirty steel should be paired with domestic investments in the US and EU on further greening the sector. Indeed, it is the restrictions on market access for cheap, dirty steel—along with domestic measures that both the US and EU are already contemplating, such as subsidies for industrial decarbonization in Build Back Better and the Bipartisan Infrastructure Bill in the US or the EU’s revisions to its Emissions Trading Scheme as part of its FIT for 55 plan—that will create the space for further investment and innovation in green metal production. Put differently, the US-EU arrangement is a complement to and further supports a series of domestically-focused measures in both jurisdictions. It recognizes that in a globally integrated economy, domestic policy and international trade policy must work hand in hand.
Second, the arrangement creates an incentive for countries to green their sectors in order to join the arrangement and gain market access in the US and EU. The theory here is pretty straightforward. Members of the arrangement will have to meet criteria (to be negotiated) regarding both green production of steel and aluminum and market orientation, in order to address overcapacity. In other words, domestic reform in exchange for market access.
Critically, the arrangement will result in an ever-expanding wall against dirty, dumped steel and aluminum. Remember, parties to the arrangement will impose market access restrictions on dirty, dumped steel, backed by strong rules of origin like that now applicable to imports from the EU to the US. Thus, any new members will not only have to invest in domestic reforms in their country that should lower carbon emissions; they will also reduce carbon emissions by drying up markets for the dirty steel produced in countries like China. Each country that joins thus reduces the incentive for, e.g., China to continue to produce dirty steel by reducing the market for that product. Indeed, we see no reason why countries that are primarily consumers of steel and aluminum might not be induced to join (perhaps if membership is tied to other kinds of benefits) and thus shift consumption from dirty steel to clean steel produced within club members. If those countries do not produce significant amounts of steel or aluminum, there are few costs to adopting green standards. The adoption of those standards in law now could, in turn, set those countries on the path to developing clean metal industries should they ever enter the field.
Moreover, the possibility of particularly severe market access restrictions – such as a ban on the import or sale of dirty steel in US and EU markets – sends one of the strongest signals to China yet that investing in decarbonizing its steel sector could be the key to the industry’s thriving past the decade. There’s no reason a priori to think that China could not or would not do so. As one of us (Tucker) wrote with Bentley Allan on the Washington Post’s Monkey Cage blog earlier this week, China’s vast policy bank apparatus enables it to do industrial conversion much more easily than in the US, that essentially lacks those types of institutions at present. Indeed, the US-EU deal is an example of what David Victor and Chuck Sabel call “penalty defaults that destabilize the status quo and motivate innovation.” This could be the impetus China needs to take its already substantial investments in green hydrogen (a key input to the green steelmaking process) and better systematize them. China currently supplies the majority of the world’s steel: if it wants to keep that position on international markets, or even remain competitive, the conversion starts to make a lot of business and common sense.
Simon worries that this mechanism will not work in practice because existing US and EU trade remedies on steel imports are so high that the additional restriction on imports from non-members of the arrangement won’t be enough incentive to join the club. That, though, is ultimately an empirical question to be answered during the next two years. If during negotiations it appears to the US and EU that 25% and 10% is not high enough, they can set the tariffs higher or choose other kinds of market access restrictions (we proposed banning dirty steel entirely, both domestically and via import, after a sufficient transition period).
Moreover, there is something odd about worrying that countries won’t be willing to take costly steps to remove the existing tariffs on metal imports. Since those tariffs were imposed 3 years ago, countries have complained bitterly about them and a number of countries—including the EU, Canada, Mexico, South Korea, Brazil, and Australia—have tried with varying degrees of success to negotiate their way out from under those tariffs. So the evidence is, actually, that countries will take measures to avoid 25% and 10% tariffs on steel and aluminum, respectively. The US-EU arrangement is just the process of turning that leverage into action. The relative market access advantage of club members over non-club members in club markets is a prize that rational exporters will push their governments to seek out.
Finally, there is a normative and political dimension to all of this. As Lauge Poulsen and Emma Aisbett have written, diplomats like joining things. The US and EU have announced a new in-group that there will be bureaucratic, media, and popular pressure to join – both to be on the right side of history and simply “in the room where it happens.” Not all political systems will be equally responsive to all of these mechanisms, but this dimension of the deal isn’t nothing.
