International Economic Law and Policy Blog

Trump's Latest Tariff Talk

Former president Trump had the following exchange with his former economic adviser Larry Kudlow the other day:

Kudlow:

Let me ask you, what's your thinking here? Would you want tariffs on foreign goods coming into the US, take those revenues and cut taxes on American goods and American families here? Would that be something in the second Trump term?

Trump:

Yeah, there's a couple of things. Number one, I think we should have a ring around the collar, as they say. I think when companies come in and they dump their products in the United States, they should pay automatically, let's say a 10% tax. That money would be used to pay off debt. It's a massive amount of money, even a 10%. It's not going to stop business because it's not that much, but it's enough that would really make a lot of money.

The other thing I want to have is a matching tax where if India charges us -- India is very big with the tariffs, okay. I mean, I saw it with Harley Davidson, I was saying how do you do in a place like India? Oh, no good sir. Why? They have 100% and 150% 200% tariffs. So I said so they can sell their Indian motorbike -- they actually make a bike, Indian motorbike -- they can sell that into our country with no tax, no tariff. But when you make a Harley, when you send it over there, because they were doing no business, I said, how come you don't do business with India? The tariff is so high that nobody wants it. But what they want us to do is they want us to go over and build a plant, and then you have no tariffs. I said, well, that's not good. That's not our deal. Okay, that's not our deal. And I came down very hard on them. But India is very big, Brazil is very big on tariffs. I mean, very, very big. And we had a couple of people like the Senator from a place called Pennsylvania that I love. But this guy was just horrendous. I said, let me ask you a question. If India's charging us 200%, and we're charging them nothing for products, can we charge them 100%? No, sir, that's not free trade. Can we charge them 50% No. 25? 10? Anything? No. I said what the hell is wrong? This is something wrong. You know who I'm talking about?

Kudlow:

I do.

Trump:

Every single thing we tried to get through, he would try and block. So if India's charging us too, so what I want to have is called retribution, you can call whatever you want. They charge us, we charge them.

Kudlow:

Reciprocity.

Trump:

You could call it many names. You call it equalization. If they charge us, we charge them. Very simple. Now two things will happen, one of two things. Either they'll wipe out the tax and so will we, or we'll take in a lot of money and that's okay, too. But eventually what they'll do is they'll stop doing it. But we don't do that. We have countries that charge 100 and 150 and 200%. And we charge them absolutely nothing. ...

Not surprisingly, these statements generated a lot of attention, although it was frustrating that they didn't come up in last night's GOP primary debate, in which Trump did not participate. This would have been a good opportunity to press the candidates on their trade policy views.

As for Trump's statements, I don't see them as that much different than what he has said previously. He is stuck in a 19th century mindset, when tariffs were the primary source of federal government revenue. While his latest statements remind me that I would worry about the direction of U.S. trade policy if he became president again, I would have been worried even without those statements, and I'd worry about other policy areas more.

He's also stuck in an outdated way of thinking about trade agreements as mostly about tariffs. I wonder if anyone has pointed out to him that trade agreements also require intellectual property protection, and without such requirements U.S. intellectual property (including his own) would be at much greater risk. 

Finally, one thing that struck me as a bit funny is his use of the word "dump": "when companies come in and they dump their products in the United States, they should pay automatically, let's say a 10% tax." I can imagine many U.S. trade lawyers would be excited to have only a 10% anti-dumping tariff imposed on their client's products! But of course, Trump is probably just using the word "dump" to mean sell, rather than thinking about how to calculate normal value.

The thin line between "consistent with" GATT Article XXI and "pursuant to" GATT Article XXI.

A curious realisation from the newly released panel report for China – Additional Duties on Certain Products from the United States (DS558) – for thinking through the legal characterisation of security measures under WTO law.

After the United States – Certain Measures on Steel and Aluminium Products (DS544/552/556/564) panel reports were circulated on 9 December 2022, we knew the analytical framework for determining whether a member acted ‘consistent with’ Article XXI. We also knew that there is a different standard for evaluating security measures in assessing the applicability of safeguards provisions. Is it possible the measures were taken ‘pursuant to’ another GATT provision, as provided for in Article 11.1(c) of the Safeguards Agreement?  Is there a difference between the phrases ‘consistency with’ and ‘pursuant to’? Yes.

On 16 July 2018, the United States (US) requested consultations with China concerning China’s duties on US products. The composed panel was William Ehlers (Chair), Cristian Espinosa Cañizares, and Mónica Rolong. This dispute is the companion to the US – Steel and Aluminium Products (China) (DS544), which authored views on the applicability of the WTO safeguards regime to the US Section 232 measures.

In DS544, the panel concludes that the US measures were inconsistent with GATT Articles I and II. China claims that the Section 232 measures are safeguard measures inconsistent with GATT Article XIX and the Safeguards Agreement (enabling China to seek compensation by imposing duties unilaterally). The US disputes the applicability of Article XIX and the Safeguards Agreement. These are security measures! The DS544 panel agrees. It finds that the US measures were ‘sought, taken, or maintained pursuant to a provision of the GATT 1994 other than Article XIX, namely GATT Article XXI, within the meaning of Article 11.1(c) of the Safeguards Agreement. Article 11.1(c) of the Safeguards Agreement provides the following:

(c) This Agreement does not apply to measures sought, taken or maintained by a Member pursuant to provisions of GATT 1994 other than Article XIX, and Multilateral Trade Agreements in Annex 1A other than this Agreement, or pursuant to protocols and agreements or arrangements concluded within the framework of GATT 1994. [emphasis added]

Article 11.1(c) removes measures from the scope of the Safeguards Agreement, including the rules specified in the other subparagraphs of 11.1. Observing how other provisions set requirements, the panel finds that the terms ‘pursuant to’ corresponds to ‘the threshold issue of applicability’, leaving as a separate inquiry whether the measures are consistent with other GATT provisions. (7.79).

In this case, the relevant provision for evaluating whether actions were pursuant to Article XIX or not is Article XXI. As “pursuant to” is about applicability and not conformity, the panel assesses ‘relevant aspects of the design and application of the measures with specific reference to their legal characterisation under Article 11.1(c) of the Agreement on Safeguards.’ (7.83) The panel considers the national security considerations in the domestic legal instruments for the Section 232 measures (which includes the tariffs and country exemptions), namely the Department of Commerce steel and aluminium reports and Presidential Proclamations. The panel reviews how the US offered notifications and responded to WTO bodies following the adoption of the Section 232 measures. Based on this review, the panel finds that the US consistently referred to its actions as responding to national security interests. Accordingly, the panel concludes that the ‘central aspect of the design and application of the measures’ was related to ‘the United States’ determination of a threat to its national security under the relevant domestic laws.’ (7.96). The panel finds in para. 7.96:

While the domestic legal status or statements by a Member to official WTO bodies are not determinative of the legal characterisation of measures under the covered agreements in dispute settlement, the Panel considers such evidence to be relevant within the context of an objective assessment under Article 11.1(c) of the Agreement on Safeguards.

Accordingly, the US determination of a threat to its national security under Section 232 was a ‘central aspect of the measures with respect to their legal characterisation as being sought, taken, or maintained pursuant to Article XXI.’ (7.96) There is very little assessment here, despite analysts critiquing the Section 232 national security bases. The panel finds the DOC Steel and Aluminium reports persuasive in showing a serious security risk that the US domestic industries could not meet US security needs. In conclusion, the US measures are pursuant to Article XXI; therefore, the Safeguards Agreement does not apply.

What happens next?

To make a long story short, the panel concludes that the inconsistent measures are unjustified under GATT Article XXI(b)(iii).

Let’s turn back to DS558, the new report. China imposes tariffs on US goods because China takes the position that the Section 232 measures are ‘safeguard measures’ (this was before the DS544 panel rules otherwise). The US does not agree with China’s characterisation of the Section 232 measures as safeguard measures, bringing a dispute to the WTO over China’s tariffs. The parties dispute the relevance of GATT Article XIX and the Safeguards Agreement. The US argues that the Safeguards Agreement is irrelevant as its Section 232 measures protect security interests and counters that China’s additional duties are inconsistent with GATT Articles I and II (7.9).

Again, we turn back to the same question: if the Section 232 measures are taken pursuant to GATT Article XXI, then the Safeguards Agreement does not apply by virtue of Article 11.1(c) of that Agreement. The US notes the ‘compelling’ DS544 panel assessment of the Section 232 measures (7.39). In line with the DS544 panel, the DS558 panel finds that the terms “pursuant to” refer to the applicability of the Safeguards Agreement. There is no explicit reference to consistency with the GATT. The panel concludes, at para 7.91:

The Panel's understanding of Article 11.1(c) is that, in the case of measures sought, taken, or maintained by virtue of or under “provisions of GATT other than Article XIX”, the Agreement on Safeguards does not apply, irrespective of whether the measures are consistent with such other provisions. [emphasis added]

Article 11.1(c) excludes measures from the scope of the Safeguards Agreement, knowing that the Safeguards Agreement aims to secure WTO consistency of measures described in Article 11.1(a) and (b) of that Agreement. 

Next, what does it mean for a measure to ‘have been sought, taken, or maintained pursuant to’ GATT Article XXI?

The panel must determine if Article XXI ‘is the legal basis […] by virtue of or under which a Member has sought, taken, or maintained a measure.’ It evaluates the ‘design and expected operation of the Section 232 measures (para 7.109). To do so, it examines Section 232 (domestic legal basis), the Secretary of Commerce investigations that produced the DOC Steel and Aluminium reports, and Presidential Proclamations to evaluate the tariffs, country exemptions, and product coverage of the 232 measures to assess the ‘national security objectives’ pursued by the US. The panel notes the US's concern with maintaining capacity ‘in an unexpected or extended conflict or national emergency.’ (7.105) Again, the panel weighs how the US asserted its national security objectives in WTO communications and concludes in para. 7.111:

The Panel observes that the United States’ national security objectives are reflected in the application (tariffs, quotas) and non-application (exemptions, exclusions) of the Section 232 measures. The prescribed procedure for the adoption, modification, and removal of the Section 232 measures, and especially the provisions made for consultations with domestic authorities such as the United States' Secretary of Defense, further support the Panel's view.

The US characterisation of the measure plays a key role, which China argues should not be the determining factor. Nevertheless, the panel supports its conclusion with evidence from US domestic authorities and US notifications concerning the measures. (7.113) The panel recites the Secretary of Commerce’s assessment of the ‘weakening of the United States’ internal economy’ owing to the impact of imports on the US domestic aluminium and steel industries as an impairment to its national security. (7.115). The conclusion is in para 7.116, as follows:

The references to the economic welfare of the United States' domestic industries in the instruments considered above thus constitute one aspect of the United States' determination that there exists a threat to its national security. This aspect of the Section 232 measures cannot be divorced from its background and context, which reflect the measures' national security objectives and confirms that they were sought, taken, or maintained pursuant to Article XXI of the GATT 1994. [emphasis added].

Remember that when examining this exact evidence, the DS544 (and companion disputes) found the Section 232 measures were unjustified under Article XXI(b)(iii) as actions taken ‘in time of war or other emergency in international relations.’ But this does not play a part in the DS558 analysis here. The DS558 panel focuses on the DS544 panel’s assessment of Article 11.1(c) and emphasises that its task was not to assess consistency with Article XXI. The panel report does not indicate that the panel interrogated the US authorities when assessing the design, goals, and application of the Section 232 measures.

Where do we go from here?

First, Simon was right to emphasise to me right away that in its Article 11.1(c) analysis, the panel does not need to address Article XXI consistency formally. Instead, it must assess whether the measures ‘were sought, taken, or maintained pursuant to a provision of the GATT 1994.’ Having reread these reports, Simon remains right. And yet, the thin border between ‘consistency’ and ‘pursuant to’ seems to focus on the member’s characterisation of its measures, both domestically and at the WTO.

I think the DS558 panel presents a standard of review the US wanted the panel to use when evaluating consistency to GATT Article XXI in the Section 232 disputes (the ones it lost) – maximum deference to the US characterisation of its security objectives and that's it. In these Certain Measures on Steel and Aluminium Products disputes, the panels all find the Section 232 measures were taken ‘pursuant to’ GATT Article XXI (in the meaning of Article 11.1(c) of the Safeguards Agreement) but inconsistent with Article XXI. Although the DS 544 panel is highly deferential to the US understanding of its security objectives’ logic, design, and implementation regarding the safeguards argument, these panels never actually examine the US articulation of its essential security interests. Instead, the panels fixate on the situation giving rise to the US interests, leaving out any chance of asking questions about the connection between means and ends.  (Petros Mavroidis, Kamal Saggi, and I have a forthcoming World Trade Review article on these disputes).

Does this translate to anything other than interesting academic fodder?  

In a nutshell, this review should not prejudice an assessment of XXI consistency. In real practical terms, the DS558 panel report may be the most impactful for the governments currently negotiating with the US. The finding that the US acted “pursuant to” the WTO security exceptions remains a strong position for the US currently undertaking EU negotiations on the impacts of these Section 232 tariffs. It may further implicate (theoretically ongoing) ADR to settle the impacts of the measures with Norway and Switzerland. I’d like to know whether USTR will propose that all invocations of GATT Article XXI resemble the DS558 panel’s review, regardless of the safeguards defence. Would the members ever agree to such an interpretation?

When evaluating the consistency of Article XXI, the Certain Measures on Steel and Aluminium Products panel reports explain the irrelevance of US domestic authorities showing a national emergency as meeting the requirements of showing action during an emergency in international relations.  But what about when evaluating the actions taken to protect the articulated security interests in the context of the circumstances (if found to be scoped in under Article XXI(b))? We don’t know the answer.

To conclude, this raises some other interesting questions. While it may be plausible to see future disputes engaging safeguard measures and XXI(b)(iii) invocations (hinging on a notion of emergency action in a highly integrated global economy), would this apply to the other circumstances listed in Article XXI(b)? While the panel’s review does not mention the obligation of good faith, how does this obligation still curtail abuses of invoking security to deviate from WTO obligations? Would members agree to an interpretation that brings in this lower standard of review as an alternative to non-violation complaints? Is this a window opening for an assessment relating the ends and means of security objectives to measures taken?

UPDATE: I revised the opening line following some offline discussions, for I appreciate it can lead to confusion. I did not mean to suggest the panel’s interpretation of Article 11.1(c) of the Safeguards Agreement translates to a test of Article XXI of the GATT. When I referred to the standard of review, I meant the deference accorded to the US legal characterisation of Section 232 measures. Knowing the US's longstanding insistence on self-judging actions to protect security interests in WTO disputes, I reflected that the US may have wanted a comparable assessment of its Section 232 measures under Article XXI. Specifically, the objective question of characterising the Section 232 measures rested on the domestic authorities’ legal bases and how the US notified its measures to WTO bodies (in essence, unilateral power to determine the circumstances and the characteristics of security actions inconsistent with WTO rules). To clarify, a panel cannot transplant the DS558 panel’s Art 11.1(c) assessment over to Art XXI! In discussing the panels’ approach to the legal characterisation of safeguards versus security measures, the blog opens up for discussion on the significant implications of rebalancing as opposed to justifying a violation that otherwise engages SCOO if the measures are not made WTO-consistent (see discussion comparing Article XX or XXVIII as Jesse Kreier & Brett Williams expand in comments).

Guest Post: A Reply to Aaron Cosbey’s Comment on our CBAM Post, from Reinhard Quick, Saarland University and Isha Das, University of Passau.

This is a guest post from Reinhard Quick, Saarland University and Isha Das, University of Passau.

We would like to thank Aaron Cosbey for his thoughtful comments on our guest post and would like to reply by offering the following comments:

1. Prevention of Carbon Leakage

The imposition of CBAMs on selected imports to prevent carbon leakage is not a climate measure if the exporting country complies with its Paris obligations; it rather is an economic measure, or, allegedly, a protectionist penalty, to protect the domestic industry.

Aaron notes that the CBAM-Regulation is aimed at preventing carbon leakage. It is exactly this goal which, in our view, causes the Paris issue. The EU considers the CBAM-Regulation to be an environmental measure supporting its Paris Agreement goals.[1] One would therefore assume that the Regulation is consistent with the EU’s Paris obligations. Yet, hélas, it is not! The EU has deliberately decided to impose a European CO₂-price on selected imports in order to prevent carbon leakage (emphasis added). It does not apply the Paris Agreement’s differentiation requirements (CBDR-RC), nor does it allow the argument that exporting country’s climate measures are adequate to achieve the temperature goals. Only countries that have a system in place which leads to the same CO₂-price are exempted. This position is astonishing and, in our view, goes against the entire structure of the Paris Agreement which permits countries to formulate their own measures in the form of NDCs to meet the goals of the Paris Agreement. Furthermore, Paris accepts different speeds (CBDR-RC). The CBDR-RC requirement, even if defined loosely, expressly permits non-Annex I countries to have lower commitments than Annex I countries.  In practice, this means that developing countries are able, from a Paris perspective, to continue to produce climate-damaging products without being incompliant with their Paris obligations. We agree with Aaron that CBDR-RC does not imply that developed countries are obliged to import and consume climate-damaging goods from developing countries. We disagree with him however that Paris compliance is irrelevant in the context of CBAM. Paris compliance is relevant, since it establishes the legal standards for any climate change measure – including one preventing carbon leakage. Given the fact that the CBAM-Regulation elevates the prevention of carbon leakage to an overall principle not taking Paris principles into account, parties will put forward the argument, that the EU’s Regulation is an economic or protectionist measure not justifiable as a climate measure in a WTO case against CBAMs. This could be particularly true with respect to the GATT Article XX chapeau analysis, provided that the Regulation is found to be inconsistent with a GATT obligation. Aaron’s argument that the CBAM-Regulation treats imports in the same way as domestic products relates to the GATT non-discrimination principle and not to the EU’s Paris obligations. We would add that it is by no means clear whether EU-CBAM is to be considered in WTO terms as being a domestic measure applied at the border covered by GATT Article III:4 or whether it is a border measure covered by GATT Article II:1 (b).

The goal of preventing carbon leakage to us seems an economic, or worse a protectionist issue, not related to climate protection considerations. This is evidenced in the case of an exporting country having an ETS system in place which leads to a lower CO₂-price than the EU’s. The CBAM-Regulation provides in this situation that the importer has to pay the difference between the EU CO₂-price and that country’s CO₂-price. Without an inquiry on whether the climate protection measures of that country are compliant with her Paris commitments, this ‘penalty’ is not taken for climate but for economic purposes. Recently IMF economists have suggested to introduce a different CO₂-price for developing, intermediate and developed countries. If implemented, would such an agreement have an influence on the CBAM-Regulation or would the goal of preventing carbon leakage still trump an internationally agreed CO₂-price?    

2. The EU’s Adequacy Judgment of Third Country Environmental Action and the Paris Agreement’s Oversight System

In his comments Aaron mentions that the EU-CBAM does not judge the appropriateness and sufficiency of their trading partners’ environmental actions while imposing the CBAM. We believe that it is only upon a judgment of the trading partner’s domestic environmental actions – including, but not limited to, the presence or absence of a domestic carbon pricing system – that embedded emissions are calculated. According to Article IV.4 of the EU-CBAM Regulation if “actual emissions cannot be adequately judged”, then default values are to be used. In this regard, the Regulation does not explain what standards would apply to determine the adequacy of judging actual emissions. Consequently, the EU retains the ability to judge emissions, and by extension, the domestic environmental actions of their trading partners to determine if they can impose a CBAM price using actual emissions or resort to calculate emissions based on a default value.

We argue that the wording of Annex IV of the EU-CBAM allows it much discretion to decide the appropriateness of a third country’s environmental actions, when deciding to impose a default value. According to us, it is this unilateral determination which violates the structure and approach of the Paris Agreement’s Oversight System. The Oversight System was formulated to prevent such unilateral determinations of appropriateness and sufficiency of climate action of each party and to enable a collaborative effort towards strengthening climate action by all parties to the Paris Agreement. 

3. WTO Dispute Settlement

In not adjudicating compliance the Paris Agreement beggars its WTO neighbor.

It is typical for many multilateral environmental agreements not to adjudicate differences but to seek for a diplomatic solution in case of an implementation or compliance issue. The Paris Agreement is not different, it stipulates that compliance and implementation must be facilitated in a non-adversarial and non-punitive way. In fact, compliance and implementation have been explicitly excluded from dispute settlement under the Katowice Guidelines of 2018. Hence the exporting party cannot obtain from Paris a certificate of compliance which it could use in a WTO dispute settlement case.

This will not stop WTO members to attack the CBAM-Regulation as being WTO incompatible. One could argue that the Regulation violates GATT Article I and GATT Article II:1 (b) – if it is considered a border measure – or GATT Article III:4 – if it is considered a domestic measure applied at the border. If a violation is found and a justification is being sought the interpretation of the language of the chapeau of GATT Article XX will be decisive. And in this situation the issue of Paris compliance will enter through the backdoor when analyzing the issue of whether EU-CBAM constitutes an unjustifiable or arbitrary discrimination because the EU has not taken into consideration different conditions which may occur in the territories of the exporting member. Further, in the words of the Appellate Body, discrimination also occurs “when the application of the measure at issue does not allow for any inquiry into the appropriateness of the regulatory program for the conditions prevailing in those exporting countries”.

We do not know how this issue would be decided by a WTO panel on the CBAM issue, but we would forward the following arguments: First, the Paris Agreement leaves parties a choice of action, notably it does not require them to introduce a carbon-price. Second, the Agreement mandates differentiation, which allows developing countries to adopt less onerous measures than developed countries and to produce the covered products in a less climate friendly way provided their regulatory programme is, overall, in compliance with the Agreement. Third, the Paris Agreement calls upon the parties to implement its provisions in a “facilitative, non-intrusive non-punitive way” and repeats this language also with respect to compliance. Furthermore, the whole concept of implementation and compliance is based on the prerogative that it is not up to individual parties to decide on the adequacy of other countries’ climate actions, but it is up to the Oversight System to help parties implement the Paris Agreement and comply with it. When relating these points to the application of the CBAM-Regulation, one could argue that the measure constitutes an arbitrary discrimination.

We recognize Aaron’s skepticism, yet we would like to recall the requirements of US-Shrimp, to account for different conditions in different countries and allowing flexibilities to all trading partners to meet the measure imposing country’s standard of protection in their own manner, continue to be applicable to the CBAM. Indeed, the settled position at the WTO is that while the measure imposing member can determine the level of protection aimed at, it must allow its trading partners the flexibility to formulate measures appropriate to their jurisdictions to meet that level of protection.[2]

 

[1] Preamble to the CBAM Regulation, especially paragraphs (1), (2), (3), (4) and (15); Article 1 of the CBAM Regulation

[2] See for example- WTO Appellate Body Report, EC-Asbestos (2001), paragraph 168; WTO Panel Report, Brazil-Retreaded Tyres (2007), paragraph 7.108; WTO Panel Report, US-Gasoline (1996), paragraph 6.22.

 

Guest Post: American ‘green’ protectionism, industrial decarbonsiation, and transatlantic steel and aluminium negotiations – a response to Todd N. Tucker and Timothy Meyer

This is a guest post by David Kleimann (PhD) - a visiting fellow at the Brussels based Bruegel think tank. He wishes to thank Todd N. Tucker and Timothy Meyer for productive debates in past and future.

In July of this year, I published a Bruegel working paper titled ‘Section 232 Reloaded: The False Promise of the Transatlantic ‘Climate Club’ for Steel and Aluminium’. In this paper, I analyze a plan for a transatlantic “green steel deal” authored by Todd N. Tucker and Timothy Meyer and compare EU and US negotiation proposals for a so-called “Global Steel and Aluminium Arrangement (GSA)”.

In said Bruegel publication, I write that

“both the TMP [Tucker/Meyer plan] and the USTR negotiation proposal place great emphasis on taxing imported steel and aluminium, but do not credibly suggest parallel domestic restrictions on high-emission US steel and aluminium production. (…) What’s more, both the TMP and the USTR proposal appear to be designed precisely to avoid confronting the US steel and aluminium sectors with the decarbonisation challenge and, instead, exclusively target third country steel exports for at least the first decade of the scheme’s operation. (…) It is therefore argued here that both the TMP and the initial USTR negotiation proposal are ill-suited to support the achievement of proclaimed policy objectives other than maintaining the tariff protection afforded to US steel and aluminium industries, as originally imposed by the Trump Administration.”

In a response to my paper published by the Roosevelt Institute, Tucker & Meyer contend that my Bruegel publication “seems to willfully mischaracterize both our arguments and the negotiation history between the US and the EU”. This is a very serious allegation. It would require, one imagines, that the authors can substantiate their claim, at least in parts. This is not the case. A diligent review of Tucker & Meyer’s arguments can only lead to the conclusion that their claim is baseless, unfounded, and their arguments riddled with errors. Moreover, Tucker & Meyer’s response reinforces the impression that they either do not fully appreciate or, alternatively, downplay the scale and quality of the US industrial decarbonisation challenge while they double down on the justification of blatantly protectionist US policy proposals.

In the remainder of this post, I address Tucker & Meyer’s claim in detail and further elaborate on my argument that the US has not been a credible negotiator for a “clean steel deal” proposed by Tucker & Meyer or a ”global sustainable steel and aluminium arrangement” as proposed by the United States Trade Representative (USTR).

In a nutshell: the analysis of USTR’s initial negotiation proposal for a “Global Sustainable Steel and Aluminium Arrangement” demonstrates that USTR does not intend to make any commitments prescribing US domestic industrial decarbonisation of the steel and aluminium sectors. At the same time, the USTR proposal outlines a plan, in great detail, for discriminatory customs tariffs that would only be loosely related to the emission intensity of steel and aluminium imports. Their adoption would set highly distortive incentives, if any, for third country producers to decarbonize.

Carbon-intensity based market access restrictions can legitimately be enacted as a corollary and mirror of domestic restrictions on industrial emissions once these are in place. A well-designed carbon border adjustment along the lines of established best practices, or non-discriminatory product standards enforced at the border, can legitimately complement equivalent restrictions on domestic industrial produce and emissions. Such measures can prevent carbon leakage, help generate domestic political support for emission regulation and taxation, and even set precise incentives for third country producers to decarbonize.

Both the Tucker/Meyer plan and USTR’s initial negotiation proposal turn this logic upside down by frontloading an elaborate and arbitrary import tariff regime while domestic carbon pricing or other restrictions on domestic industrial emissions (and hence: credible bilateral GSA commitments, for that matter) remain elusive. The political strategy underlying these plans is, if implemented, bound to infuriate trading partners and will sow conflict in US international relations in the years to come. This is avoidable. Instead of engaging third countries in negotiations over ‘carbon tariffs’, the US government should prioritize domestic legislative initiatives to advance industrial emissions regulation, systematically engage stakeholders to ensure the political sustainability of such endeavors, mirror cost-imposing policies at the border, and provide aid for industrial decarbonisation in resource-scarce third country jurisdictions.

The salience of this debate is not confined to the steel and aluminium sectors and transatlantic negotiations for a so-called ‘Global Steel and Aluminium Arrangement’. It extends to US energy intensive trade exposed (EITE) industries more broadly: a new US bipartisan political consensus is currently in the making which, in essence, justifies ‘carbon tariffs’ applying to imports without imposing a similar tax or restrictions on domestic industrial emissions. The result of respective preparatory US legislative efforts is not a forgone conclusion. The US may yet turn to more constructive and less isolationist policies. It is clear, however, that a new quality and scale of US ‘green’ industrial protectionism and the (painful) paradox of American climate nationalism is becoming a prospect that US partners are now forced to address.

I. US ‘green’ protectionism and transatlantic steel and aluminium negotiations

In my recent Bruegel publication, I write that “both the [Tucker & Meyer plan] and the USTR proposal appear to be designed precisely to avoid confronting the US steel and aluminium sectors with the decarbonisation challenge and, instead, exclusively target third country steel exports for at least the first decade of the scheme’s operation.” Tucker & Meyer take issue with this sentence and claim, as noted above, that it makes for a mischaracterization of their arguments and the negotiation history between the US and the EU.

This is incorrect. Nothing in the Tucker & Meyer response, their plan for a “green steel deal”, or USTR’s negotiation proposal contradicts the finding quoted above. To the contrary, let’s recall:

• Both the TMP and the USTR proposal’s adoption would effectively exempt US steel and aluminium exports from EU CBAM charges, thereby nullifying the decarbonisation incentives that the EU CBAM sets for US steel and aluminium production;

• The TMP calls for the adoption of an import tariff on steel of between 25% and 50% for the first ten years of the scheme’s operation, without corresponding restrictions on domestic steel production. In addition, Tucker & Meyer propose that the tariff revenues collected from importers should be used to subsidize the US steel industry;

• The USTR negotiation proposal would similarly result in the application of tariffs on non-club members without requiring any taxation or any corresponding restriction on emissions for domestic producers;

• To be eligible for preferential market access under the transatlantic club arrangement, crucially, the USTR proposal requires that an import shipment originates from a country whose average steel and aluminium industry emission intensity is similar to the average emission intensity of those industries in the United States and the EU, and thereby vastly reduces incentives for individual third country producers to decarbonize;

• The US steel industry is (if measured in terms of average industry-wide emission intensity) – already the cleanest in the world, which is a result of a competitive restructuring process of the US steel sector in the 1990ies (and not of climate policy or emission regulation). In essence, US steel producers made major private investments in mini-mills operating lower-emission electric arc furnaces. US proposals for a global steel and aluminium arrangement, in other words, picked a sector for bilateral negotiations that requires comparatively little decarbonisation. Average US aluminium industry emission intensity, in contrast, is much higher than in many countries, which may explain why USTR, in its initial negotiation proposal, included an opt-out clause for commitments on aluminium.

In summary, the policy design features proposed by USTR and the TMP would have two main immediate effects:

• Members of such an arrangement would permit themselves to apply import taxes on steel (and aluminium) that are only loosely related to the carbon intensity of specific steel import shipments, thereby setting highly distorted incentives for individual third country steel and aluminium producers. For instance, a zero-emission-steel shipment originating from non-member jurisdiction would be charged a punitive tariff, whereas a high-emission-steel shipment originating from a member jurisdiction would be subject to preferential market access. Put in yet other words, the proposed scheme would allow that two distinct steel import shipments, which are characterized by the exact same carbon intensity, are taxed differently based on criteria that individual producers cannot cater to.

• Members of the arrangement would not be required to apply the same tax (or an equivalent restriction, or, in fact, any restriction at all) on domestic steel and aluminium produce that is characterized by the exact same carbon intensity as taxed imports. At the same time, domestic steel producers would receive subsidies funded by tariff revenues (as proposed by the TMP). In other words, while steel imports from non-members – clean or not – would be taxed, even the most polluting domestic coal-fired blast furnace produce would remain free of equivalent, similar, or in fact any related restrictions and, moreover, exempt from the EU CBAM if exported to the EU.

It is not the purpose of this post to delve into a discussion of WTO compatibility of the “green steel deal” proposed by Tucker & Meyer or USTR’s negotiation proposal for a “Global Sustainable Steel and Aluminium Arrangement (GSSA)”. It may suffice to note at this point that the impossibility of justifying such a scheme under WTO law appeals to common sense and indicates functionality of WTO law in this area (eg GATT Article XX General Exceptions).

II. US industrial decarbonisation and transatlantic steel and aluminium negotiations

At the center of Tucker & Meyer’s response to my Bruegel publication stands the argument that the paper did not appropriately account for domestic industrial decarbonisation elements of their plan or USTR’s negotiation proposal. This is incorrect.

Tucker & Meyer write:

“First, we agree with the Bruegel paper that the US should work to further decarbonize its domestic heavy metal sectors, and not only impose trade restrictions on dirty imports. Indeed, the very first plank of our Green Steel Deal proposal was that “like-minded countries would create a steel-focused international climate club, where the condition of membership is to convert, as soon as is feasible, all domestic steel production to green methods” (p. 20). After year 10, we proposed that “products—domestic and imported alike—that meet green standards will be allowed on the market; products that don’t, won’t” (p. 24). Similarly, the US’s December 2022 negotiating proposal links the imposition of tariffs to the average or maximum intensity of domestic production, which would ratchet in ambition over time as the domestic industries further decarbonize. (The Bruegel paper praises the inclusion of a ratchet mechanism in Europe’s counterproposals, without noting that the initial US concept paper also included a ratchet.)”

Despite some fortunate agreement in principle, this paragraph deserves thorough unpacking and refute.

Three observations are accurate: first, USTR negotiators are not in a position to make credible bilateral commitments on domestic emission reductions in the US steel and aluminium sectors, because the US currently lacks the necessary domestic policy toolkit to implement such obligations. Given the deficient US policy toolkit, secondly, Tucker & Meyer’s suggestion for a transatlantic obligation to ban ‘dirty steel’ after 10 years of discriminatory import taxation (as discussed on p. 7 of my paper) is neither credible nor realistic. Third, and perhaps unsurprisingly against this background, USTR’s negotiation proposal does not actually contain any commitments on US domestic emission reductions for the steel and aluminium sectors, but, in contrast, “exclusively targets third country steel exports” (p.3 of my Bruegel paper). In the following, I discuss these observations in reverse order.

    i. USTR’s GSA negotiation proposal does not contain any commitments on US industrial emissions reductions

First (and contrary to Tucker & Meyer’s claim), my Bruegel paper takes note of a ratchet mechanism in both the US negotiation proposal (p.8 – “This benchmark would be adjusted downwards over time to reflect increasing ambition”) and the EU proposal (p.12). (Contrary to Tucker & Meyer’s claim, moreover, my paper does not “praise” the inclusion of a ratchet mechanism in either proposal).

Tucker & Meyer, secondly, misconstrue the function of said ratchet mechanism (note the term “similarly” in the paragraph quoted above). The function of the ratchet mechanism is not to impose obligations on GSA members to decarbonize their steel and aluminium sectors now or in the future. In contrast, the purpose of the provision is to tighten a condition for GSA membership over time. Both proposals contain the following text passage:

“The average emissions intensity of steel products and of aluminum products originating from a potential member could not be more than a certain percentage higher than the average emission intensity of similar goods produced in the [EU and the US]. This cut-off figure would be revised downward periodically based on updated emissions data, creating a ratchet mechanism to increase ambition over time.”

For greater clarity: it is the condition for GSA membership that becomes stricter as the initial GSA members periodically update data on their decarbonisation progress, which sets the benchmark for third countries’ entry to the club. The mechanism would not impose ratcheting restrictions on the permissible carbon intensity of US and EU domestic production at any given moment in time.

Third, it is noteworthy that the implication of the US and the EU proposals for this membership criterium differs significantly in one key aspect, among others, despite overlap in language: the US proposal links non-membership to punitive tariffs whereas the EU proposal does not.

To sum up: USTR’s negotiation proposal includes no commitments to US and EU emission reductions whatsoever.

    ii. Proposals for a transatlantic agreement on emission reductions in the US steel and aluminium sectors lack credibility

In a section dedicated to the issue, I discuss Tucker & Meyer’s proposal for a ‘dirty steel product ban after 10 years’ (p.7):

“Without US domestic legislative instruments prescribing the decarbonisation of the US steel and aluminium sectors, the TMP’s vague bilateral legal requirement for ‘greening steel production methods within ten years’ would thus make for the only (and undefined) burden applicable to the US side, compared to the carbon price charged to European producers via the ETS in the period of 2026-2034”

The point here is obviously not to deny that Tucker & Meyer would like to see - after 10 years of discriminatory and unjustifiable taxation of steel imports - a yet to be defined product emission standard that would apply to domestic and imported steel products likewise. The point here is that – in view of the deficient US policy toolkit - the proposal for an international commitment of this kind is neither credible nor realistic. This may well be the reason why USTR’s negotiation proposal does not, as a matter of fact, include any commitments to domestic emission reductions.

To counter this impression, Tucker & Meyer point to a number of recent US policy developments, including the allocation of US$ 5,8 billion in a federal funding program for the decarbonisation of US energy-intensive manufacturing industries (e.g. steel, aluminium, cement, and chemicals), enhanced incentives for carbon capture, and public investments into clean hydrogen. Tucker & Meyer also cite the US Buy Clean Initiative (which introduces discriminatory ‘Buy American’ provisions in US government procurement of clean materials). “As the US only has a small number of the most carbon-intensive blast furnaces, this mix of private and supply- and demand-side policies puts a clean steel industry within reach”, Tucker & Meyer believe.

I generally agree with Tucker & Meyer that these programs are fortunate US policy developments. They are, however, vastly insufficient to achieve the decarbonization of the US steel and aluminium industries within 10 years (as proposed by the TMP) or even by 2040.

A look at US steel sector characteristics and recent developments in the industry make this point evident: in 2022, “the small number” of high-emission coal-fired blast furnaces (BF) referred to by Tucker & Meyer produced 31% of 80 million tons of US crude steel output whereas the electric arc furnaces (EAF) of US mini-mills accounted for the rest of US steel production. EAF emissions are relatively easy to abate through the decarbonization of energy generation. US blast furnace emission abatement, on the other hand, is notoriously difficult to accomplish both technologically and politically: in distinction to their EAF mini-mill counterparts, US integrated blast furnace based steel mills are unionized and located in the Midwestern swing states of Ohio, Michigan, and Pennsylvania, in addition to Indiana and Illinois. These factors render these installations political fortresses against efforts of full decarbonisation (which would require their operative closure) and import tariff reductions (e.g. the elimination of the Trumpian Section 232 steel and aluminium tariffs).

Given the regulatory lacuna in US government prescriptions for industrial decarbonisation, US operators of integrated steel mills continue to make major investments into the refurbishment of their high-emission production capacities. Cleveland Cliff, the Ohio based steelmaker that runs half of all integrated steel mills in the United States, continues to reline its blast furnaces in the years to come. (Note that the investment in a relining of a blast furnace allows for an additional 20-25 years of operation of the respective installation). One of the company’s announcements states that "[t]he carbon capture project is future. The hydrogen project is future because we still don't have hydrogen”. Meanwhile, the Cleveland Cliff just extended a coke supply contract over 1.2 million tons per year until 2035. Viewed in this context, it appears that the industrial decarbonisation of the US steel sector is currently out of reach.

Europe, no doubt, also experiences setbacks in industrial decarbonisation efforts targeting the steel and other sectors while EU funds and state aid are pouring into the decarbonisation of existing installations and development of clean production technologies. It is, however, the EU’s emission trading scheme (ETS) and the broader recently adopted fit-for-55 legislative program that makes the crucial difference, providing for a phase-out of free emission allowances between 2026 and 2034, full carbon pricing applying to every ton of industrial GHG emissions by 2034, and a parallel and commensurate phase-in of CBAM charges for emissions embedded in imports. These legislative accomplishments vastly diminish prospective returns on investments in emission intensive steel and other domestic industrial production and set incentives for the reduction of imported product emissions.

It is against this background that EU negotiators demand that initial or prospective GSA members have introduced domestic laws and regulations that will lead to measurable intermediate progress towards decarbonization by 2030 and 2040, as well as legally binding commitments towards full decarbonization of the steel and aluminium sectors by 2050.

This demand seems to give justice to the fact that no international agreement alone could possibly force the decarbonization of Midwestern steel mills and other emission intensive US industries. US industrial emission reductions will require tough and unenviable domestic political and legislative efforts towards effective emission regulation and/or taxation. Emission based import restrictions adjusting for a domestically charged carbon price could legitimately and sensibly be adopted in parallel. Alternatively, domestic product emission standards could be enforced at the border in a non-discriminatory manner. International cooperation will be important to ensure coherence and convertibility of such measures across jurisdictions.

A bilateral ‘rich-countries’ agreement on ‘carbon tariffs’ in absence of equivalent domestic restrictions, on the other hand, would earn contracting parties accusations of climate policy hypocrisy, ‘green imperialism’, and make a mockery of ambitions for an equitable global transition towards net-zero.

III. Miscellaneous provisions in transatlantic steel and aluminium negotiations

On government procurement and other provisions under negotiation, Tucker & Meyer write:

“We also agree with the Bruegel paper that it would be desirable to have GASSA members commit that a certain amount of their procurement of steel be low-emissions and that they should also explore other ways to incentivize low-emissions technologies. The Bruegel paper commends these elements in Europe’s counterproposal, while failing to mention that the same elements were in the initial US concept paper, or noting the progress the US has made on this front domestically.”

This is incorrect. The Bruegel paper mentions the inclusion of low-emission government procurement provisions in both negotiation proposals (p. 8 and p. 12). As regards progressing US domestic policies, it is noteworthy that the US federal government’s ‘Buy Clean’ initiative discriminates against foreign low-emission materials, thereby missing an opportunity to set incentives for third country producers to decarbonize. An in-depth discussion of this issue, however, exceeded the scope of my Bruegel working paper. I agree with Tucker & Meyer, however, that transatlantic leadership by example in the area of non-discriminatory government procurement of low-emission materials would be highly desirable.

Secondly, Tucker & Meyer claim, as quoted above that I commended the inclusion of a provision in the EU proposal that calls on GSA members to “consider additional policy measures to incentivize the adoption of promising emerging technologies” but failed to commend the inclusion of the same sentence in the US proposal.  

This, too, is plainly and simply incorrect. My Bruegel paper does not refer to this sentence. However, I concur with Tucker & Meyer that it makes for a commendable provision.

IV. ‘Tariff first, decarbonize later’ – concluding thoughts on US climate & trade nationalism

To reiterate a point made further above: the salience of this debate is not confined to the steel and aluminium sectors and transatlantic negotiations for a so-called ‘Global Steel and Aluminium Arrangement’. It extends to US emission intensive industries more broadly: a new US bipartisan political consensus is currently in the making which, in essence, justifies ‘carbon tariffs’ on imports that do not meet US average industrial emission intensity benchmarks, without imposing a similar tax or restrictions on domestic industrial emissions.

A policy implementation of this newly developing US climate and trade policy paradigm (which may be best described as ‘tariff first, decarbonize later’) is not a forgone conclusion but would further jeopardize US international credibility, place a heavy duty on US consumption of clean industrial produce, as well as undermine international climate and trade cooperation more broadly. It is this scenario that the European Union and other US partners may now be forced to address and prepare for if the US continues to move in the direction of ‘green’ industrial protectionism and ‘climate nationalism’, that is. There is, however, still time for the US to change course and to work more constructively with the EU and others to find non-isolationist policy solutions to the global climate challenge that generate the conditions for a just and more equitable global transition to net-zero emissions.

Pence and Ramaswamy on Trade

I've got two more entries in my GOP presidential candidate trade policy monitoring exercise: Former Vice-President Mike Pence; and entrepreneur Vivek Ramaswamy, who has no political background but seems to be polling well enough to get into the upcoming Republican primary debate. What are the chances that either of these two becomes president? Probably pretty small, but you never know, so here goes with their statements on trade policy.

Pence talked a bit about trade policy recently, which you can see on these two videos.

Host:

Part of engaging China, as you mentioned, is our trade policy. And I think trade policy has really been sort of indicative of the division in the GOP, the change in the Republican Party from more free trade, beat China with our economy and make friends around the world by making goods that are cheaper and better than communist countries do. That was sort of the theory of Reaganism and really much of the conservative movement up through recent years really. That does not seem to be the case, you know, the Trump administration passed something like $80 billion worth of tariffs on $380 billion worth of imports, and not just from China, but from other countries -- allies like Canada and Mexico. This was on steel, aluminum, washing machines, sort of you name it. And the Biden [administration] admits this has sort of been bipartisan agreement to some extent between the Trump administration and the Biden administration, who's left a lot of those tariffs in place. Would a Pence administration change that tariff regime? Would free trade and economic relationships -- Trans Pacific Partnership TPP, for instance -- is that in the toolkit of a Pence administration in terms of reengaging China, or putting pressure on China? How do you see America's trade policy moving forward?

Pence:

Well, I think it's a wonderful question. I'll give you a really short answer, which might be more welcome than my previous ones. My policy would be free trade with free nations. Look, I think you can create a tremendous incentive for reform by rewarding access to the most powerful economy in the world to nations that respect the right of contract, private property or free market countries. And ... I don't know why the Biden administration hasn't moved out on a free trade agreement with the UK.

...

The way we move forward with China, because I saw them move, is when we imposed those tariffs on Chinese goods coming into the United States, China came to the table, Heath. And a lot of people forget about January of 2020, before that pandemic struck our nation, China came forward with a Phase One trade deal. They haven't lived up to a whole lot of it from what I read in the newspapers, but it's what finally got them to move.

And I really do believe that the principle that I would bring to the Oval Office is free trade with free nations. Let's lean in to expanding access to markets around the countries that respect the rule of law, private property, the right of contract, free markets.

But at the same time, let's use access to the most powerful economy in the world to drive the kind of reforms -- not just open access to China's market, but also to drive the other kinds of reforms that will ultimately advance human freedom in that notion.

The China part here is interesting because he starts out by saying that the China tariffs worked by getting China "to the table," but then he seems to acknowledge that the Phase One deal didn't actually work very well, and then he goes back to arguing for using tariffs to bring reforms to China. For whatever it's worth, at this particular moment, I'm not sure anything is going to move any administration away from tariffs on China, and objective evidence about what has worked and not worked in recent years in terms of market access and other reforms in China won't make much difference.

The non-China part seems like it would take us back to a more traditional Republican trade policy. I'm not sure how much can be achieved, though, as a lot would depend on who is in Congress.

And here is Ramaswamy:

Ramaswamy:

... what I basically stand for is a level playing field. That's what we need. And I think that that doesn't exist. I think most people acknowledge that. I think that that's not going to happen automatically. That's going to require, by the way, a policy that I think is also really important that goes straight along with it, is reentering the Pacific trade relationships around the rest of the rim of the Pacific. The CPTPP. I think we should reenter it. I think this is a little bit different than ... the course of action taken by Trump and exiting the TPP. I think that was actually a poor decision.

Host:

Maybe one that makes more sense for the people over here, right? Because I think Trump canceled it because first of all, it wasn't fair to Americans, right?

Ramaswamy:

Exactly.

Host:

It really wasn't, but also it was unfair to people over here. It was beneficial to corporations, but not to the, you know, local farmers here, your mom and pop stores, who would have been completely obliterated by the TPP. So maybe a fairer version of that would make more sense.

Ramaswamy:

Exactly. And I think that I'm a silver lining guy. I think that I can use the leverage of the fact that we did exit to be able to say, alright, here's what we need done differently, in a number of the countries from Japan on down, to be able to say here's how we reenter that on fairer terms. And so that's what I'd like to see. And I think that's one of the things early on, actually, even ... forgetting about where we get to on China, the first thing that's easiest to do is actually to reenter the rest of that Pacific trade relationship, including the other members of the CPTPP. That puts us in a strong position from a trade perspective to then take a look at where we stand vis-a-vis China.

I'm not sure how familiar Ramaswamy himself is with any of the details of the TPP/CPTPP, but I do think that some experienced Republican trade policy folks could do a decent job with this approach, although it's not clear whether they would have better luck than Obama in getting a final deal through Congress. I do think it could be done, but it won't be easy, and miscalculations are possible.

In a Deal with Taiwan, Biden Secures his First Trade Agreement

This is a co-authored post by Inu Manak, who is a fellow for trade policy at the Council on Foreign Relations in Washington, DC, and Amanda Lin, who is an intern for trade policy at the Council on Foreign Relations and a graduate student at the Elliot School for International Affairs at George Washington University in Washington, DC.

Trade has not been a top priority for the Joe Biden administration, which has instead pursued domestic economic objectives such as the landmark Inflation Reduction Act and CHIPS and Science Act. However, the strategic and economic importance of Taiwan has motivated the first stage of a broader trade agreement with Taiwan, the first that the Biden administration has concluded. While this first agreement under the U.S.-Taiwan Initiative on 21st-Century Trade is not a comprehensive deal, it is significant in and of itself and lays the groundwork for deeper commitments in the future. Congress’s recent approval of the deal also signals to U.S. trading partners that the United States remains interested in traditional trade pacts despite the current administration’s domestic agenda.

The U.S.-Taiwan Initiative on 21^st Century Trade

The U.S.-Taiwan Initiative on 21^st Century Trade, the first agreement of which took less than a year to negotiate, covers eleven areas of negotiation, four of which were concluded in May 2023: trade facilitation, good regulatory practices, anticorruption, and small- and medium-sized enterprises. The issues left to be negotiated include agriculture, standards, digital trade, labor, environment, state-owned enterprises, and non-market policies and practices.

The majority of the provisions in the concluded deal focus on trade facilitation, reducing the bureaucratic barriers to trade and simplifying the customs process for producers and consumers. A chapter on customs administration and trade facilitation includes commitments for the digitalization of trade processes—such as e-invoicing, online enquiry points, electronic payments—and a single window system for the submission of trade documentation. The good regulatory practices chapter is modeled after the U.S.-Mexico-Canada Agreement (USMCA) and obligates more transparency in the regulatory process, including early planning, regulatory analysis, and consultation. There are also separate provisions for services domestic regulation, modeled after the World Trade Organization (WTO) initiative of the same name. The last chapter encourages more investment and trade between small- and medium-sized enterprises from the United States and Taiwan by providing more access to information as well as training.

While the first phase’s outcomes are significant—particularly considering the speed of the talks—there is much left to negotiate. The remaining issue areas are also some of the most contentious. On agriculture, Taiwan and the United States have different approaches to risk assessment for food health standards. For instance, Taiwan upholds restrictions on certain biotechnology and genetically modified agricultural goods. There are other agricultural issues as well, such as Taiwan’s tariff-rate quotas on sixteen agricultural products (though it is unlikely those will be addressed in subsequent negotiations given the Biden administration’s reluctance to put market access on the table).

In addition, the overlapping and potentially conflicting provisions prompt a closer evaluation of the deal. If Taiwan is already a member of the WTO and a signatory of the Trade Facilitation Agreement and Joint Initiative on Services Domestic Regulation, how much do the recent deal’s provisions improve existing trade conditions? And, as talks on the digital trade chapter get underway, it remains to be seen whether the United States will pursue conditions reflective of its commitments under the USMCA, or whether it will borrow from ongoing negotiations under the auspices of the Indo-Pacific Economic Framework, or even the Trans-Pacific Partnership agreement, from which it withdrew in 2017. Therefore, while the first phase of the deal is a good start, it is a far cry from a comprehensive trade agreement that can deliver the economic opportunities needed to deepen trade relations between the United States and Taiwan.

What’s at Stake

For both economic and strategic reasons, Taiwan is an important trading partner for the United States. It is the eighth-largest merchandise-trading partner, with $114.1 billion in total goods trade, and the seventh-largest source of U.S. imports. Discussions to strengthen bilateral economic ties have been ongoing for decades and have taken many different forms. The Trade and Investment Framework Agreement (TIFA), signed in 1994, has been one of the main platforms to address trade issues with Taiwan, including its ban on U.S. beef and pork products, which has long been a sore point in bilateral trade relations. In the past, the U.S. Trade Representative (USTR) suspended TIFA talks to signal its displeasure over Taiwan’s trade restrictions, so negotiations have developed in fits and starts.

All the same, Taiwan has been interested in a more comprehensive trade agreement for years. The Donald Trump administration renewed the strategic focus on Taiwan as a means to counter China’s growing influence in Asia, and the Biden administration has pursued talks along similar lines. As a major hub for semiconductor production, Taiwan remains vulnerable to supply chain disruptions and intellectual property theft, as well as issues surrounding export controls.

The U.S. Congress has also taken notice of Taiwan’s strategic importance. In 2020, a bipartisan group of fifty senators called on the USTR to start the process of negotiating a trade agreement with Taiwan to further the goal of “a free and open Indo-Pacific” and to counter “China's use of unfair trading practices and other policies to advance its economic dominance in the region.” Such robust bipartisan support for a stronger trade relationship with Taiwan undoubtedly motivated Congress to recently pass a bill approving the first agreement in the U.S.-Taiwan Initiative on 21^st Century Trade, which Biden just signed into law.

The content of the deal and the politics surrounding its approval point to a possible shift in U.S. trade policy if Congress continues to reassert its trade authority. The Biden administration should take advantage of the bipartisan commitment to Taiwan and pursue a comprehensive, high-standard trade agreement with substantive market-access provisions to ensure that economic ties between the United States and Taiwan can be secured for years to come. U.S. trading partners should also pay close attention to how these talks unfold and the role that Congress plays in pushing them along. A more assertive Congress could help revive many stagnant trade dialogues and open the way to more collaborative trade initiatives in the near future.

Guest Post: Europe’s Attempt To Get Back in Pole Position in the Electric-Vehicle Subsidy Race

This is a guest post from trade lawyers Victor Crochet & Elyse Kneller

The transition to electric vehicles (“EVs”) is at the centre of recent international economic tensions. European manufacturers have long been market leaders in the automotive industry. However, the shift away from combustion engine vehicles may be throwing a spanner in the works. While European Union (“EU”) car makers and governments have taken a long time to start developing an industry around affordable EVs, China, on the other hand, got ahead of the game quite early and has been supporting the development of its EV industry over the last two decades. China’s most recent measure to prop up EV sales is the extension by 4 years of a non-discriminatory purchase tax exemption scheme amounting to around USD 4,000 per vehicle. The EU and its Member States are now grappling with China’s quick rise to becoming the world leader in EV manufacturing as imports of Chinese EVs into the EU increase rapidly.

The growth in Chinese EV exports to the EU has led to rumours that the European Commission could initiate trade defence investigations on imports of EVs originating from China. However, this has yet to materialize and for good reasons. Such a move might lead to retaliation from Beijing which could initiate its own trade defence investigations on imports of commercially important goods originating from the EU in response. It would also certainly mean that exports of Western brands of EVs made in China get caught in the net of the measures.

In this context, it seems that some EU Member States are taking the matter into their own hands. France has announced its intention to revise its current EV subsidy scheme in order to better take into account the carbon footprint of vehicle production. Under the current framework, an Ecological Bonus of up to EUR 7,000 (capped at 27% of the cost of the EV) may be obtained for the purchase of a new EV, provided the EV costs less than 47,000 euros. The revision, which could become applicable by the end of 2023, would introduce additional eligibility criteria requiring the production of the EV to respect strict environmental standards including with regard to the amount of carbon emitted during the production process, with the implicit goal that the Ecological Bonus be reserved solely for vehicles produced in Europe and that imports from Asia be excluded (see for example, the Minister of Economy Bruno Le Maire’s remarks here). While other EU Member States have not yet followed suit in introducing their own de facto discriminatory measures, it appears that some of them, including Germany, are warming up to the idea and might do so in the near future.

Such subsidies seem in line with the reactions the United States of America (“US”) wanted to get out of its partners when enacting the Inflation Reduction Act (“IRA”). However, they still differ from each other. Under the IRA, a tax credit of USD 7,500 can be granted to EVs that undergo their final assembly within North America. From 2024, half of the tax credit (i.e., USD 3,750) is eligible to EVs that are manufactured with at least 40% (80% after 2026) of critical minerals that are extracted or processed in the US or in a country with which the US has a “free trade agreement”. The other half of the tax credit is eligible to EVs with at least 50% (100% as of 2028) of the value of the components used in the battery manufactured in North America. Furthermore, the IRA prohibits access to the tax credits where the battery contains any components or critical minerals sourced or manufactured from “a foreign entity of concern”. This means any foreign entity that is “owned by, controlled by, or subject to the jurisdiction or direction of” North Korea, China, Russia or Iran.

The EU and its Member States’ approach to supporting their EV industry thus differs from that of the US. While they share the same principal goal of developing EV manufacturing domestically, the US’ measure aims to move the entire US EV supply chain away from principally China and Chinese entities. France’s proposed measure is expressly about reducing carbon emissions during the EV production process, but many political statements have hinted that the goal is rather to protect EU companies from import competition and to attract EV manufacturing investment in the EU, even if that investment is made by Chinese entities.

Furthermore, while the US’ IRA appears de jure discriminatory, on the other side of the Atlantic, the EU and its Member States have not yet given up on complying with international trade rules when it comes to competing with China. They argue that France’s proposed EV subsidies would not run afoul of WTO rules. This is however questionable as the proposed subsidies would likely constitute de facto discrimination and might be difficult to justify under the aim of protecting the environment especially considering all the political declarations indicating the protectionist intent of the measure.

In this regard, the EU and its Member States’ seemingly more legal approach might still end up creating quite some diplomatic friction, as was the case with the IRA. Depending on their exact design, EV support measures like the proposed French EV subsidies and potential follow up by other Member States might also lead to uproar, especially if they end up excluding EVs produced by trading partners in East Asia. Indeed, the EU and its Member States’ unwillingness to blatantly disregard international trade rules in the same way the US does might lead them to lack the flexibility to accommodate these countries’ governments, except if they manage to carefully calibrate the measure so as to benefit these allies while also excluding China.

Reducing Carbon Emissions from Steel and Aluminum: A Follow-Up Rebuttal

Thanks to Tim Meyer and Ben Heath for responding to my "The Effectiveness of the GASSA in Reducing Carbon Emissions" post, in which I argued that trade remedies could undermine their argument for tariffs designed to encourage decarbonization of the steel and aluminum sectors.

Let me first say that I was very excited to see this statement from them about trade remedies:

In the original Green Steel Deal proposal, one of us, writing with Todd Tucker, called for a “peace period” among club members, in which they would not challenge each other’s decarbonization efforts. Although the proposal did not separately discuss trade remedies, it would be sensible to include them in the peace period as well.

To be honest, I thought about declaring victory at this point and calling it a day! If Todd, Tim, and Ben can get a trade remedy carveout for clean energy goods, that would be quite an accomplishment. 

But not surprisingly, I thought of more things to say.

One big picture point is that, while I agree that steel and aluminum are important, I don't think having the U.S. focus so heavily on these two sectors as part of international talks is a good idea. The way this comes across is that the U.S. wants to emphasize the areas in which it sees itself as particularly good in terms of carbon emissions, such as steel, and deemphasize the areas in which it is bad. The political strategy here seems to be to find an approach under which the U.S. only has to do a little work on decarbonization while others have to do a lot. Maybe that's fine as an opening negotiating tactic, but the U.S. has to be willing to address its problem areas. For this reason, I think its proposals might go over better as part of a broader  international decarbonization plan, rather than an initiative devoted to just steel and aluminum.

More generally, Tim and Ben put a lot of emphasis on the value of clubs. I do think clubs can be helpful here, but if we are thinking about effectiveness in relation to decarbonization, there may be better ways to construct the club.

In my view, the most effective approach to decarbonization is a globally coordinated carbon tax. Tim and Ben make reference to the use of "unilateral CBAMs," and it's possible we will end up with a bunch of uncoordinated CBAMs that complement domestic efforts. But before we go down that road, what I would push for here is an internationally agreed set of domestic taxes on industrial products (including steel and aluminum of course) that is based on the carbon intensity of the products. Ideally, just about all countries would sign on, and would apply the agreed upon taxes, but it could end up being just a club of willing governments. (You can accomplish something similar through regulations rather than taxes, but that might be harder to coordinate).

Believe me, I understand why this will be hard to achieve politically! I have theories about how a revenue-neutral carbon tax could get support from across the political spectrum here in the U.S., but they are just theories. However, as Tim and Ben note, "the world just experienced the hottest month on record and 2023 is likely to replace 2016 as the hottest year on record," and "climate effectiveness should be the lodestar." Thus, we need to come up with a policy that offers a significant reduction to carbon emissions. It may be politically easier to do something less, but at a certain point you are watering the policy down so much that it doesn't have enough of an impact to come close to solving the problem.

Staying with political considerations for a moment, I understand why Tim and Ben (and Todd) want to try to use the existing Section 232 steel and aluminum tariffs as part of a political compromise that gives the steel and aluminum industries something they want while also doing something constructive on decarbonization. But keep in mind that there is a big omission when you rely on tariffs: Domestically made products sold in the home market won't be affected. That's a significant gap in coverage. If we really want to give companies an incentive to reduce their carbon emissions, let's apply the measure to all products, not just internationally traded ones. If you are only using tariffs, companies could respond by just decarbonizing enough production to satisfy the demand for traded products. I'm still skeptical that countries will do much of this at all (it would help if Tim, Ben, and Todd could get that trade remedy carve out), but nevertheless, there are inherent limitations if you rely on tariffs.

Another problem with tariffs as opposed to taxes is the conflict they will almost certainly generate. Even if you put aside the issue of WTO compliance, there is still the issue of more basic trade conflict. Tim and Ben talk about getting "Canada, Turkey, Mexico, Korea, etc." on board with this effort. But how will these countries react to the U.S. GASSA proposal? My sense is that many people in these countries will have concerns about this approach. Can the U.S. bring them on board with some combination of carrots and sticks? Maybe. We do have a lot of carrots and sticks to throw around! (Although I can imagine several circumstances in which the carrot funding dries up). But if there's an alternative plan that people in other countries would consider more fair and effective, why not put that one out there? If we are trying to coordinate a global effort, it's worth thinking about how the rest of the world sees things.

Also related to foreign governments, let me just reiterate something from my previous post: It would be really helpful to get China on board with this. This is a challenge because just about everyone in the U.S. has something they want China to do or not do at the moment. Establishing a hierarchy of demands is difficult, but this one is pretty important. If we are trying to lower carbon emissions in steel, aluminum, and other industrial products, it would be great to have the biggest manufacturer on board. And I don't think that creating a club that excludes them is likely to be successful in this regard.

Finally on tariffs, if we are going to use tariffs for decarbonization, how about doing things a different way? In their rebuttal, Tim and Ben talk about the value of "preferential trading rules," noting as examples "the GATT/WTO itself, the EU, and the expansion of the Canada-US Free Trade Agreement to include Mexico." If these are the examples they like, how about a plurilateral trade deal that lowers existing tariffs on goods produced with low carbon emissions? At one point, Tim and Ben even refer to "a common market for green steel and aluminum." Maybe they would be on board with this idea then? From what I can tell, their current proposal focuses only on imposing tariffs above those previously agreed through trade negotiations, with some countries then being exempted from those higher tariffs. But as an alternative, we could lower the existing tariffs for imports of low carbon goods. A trade remedy carveout fits nicely with this idea.

Assuming that internationally coordinated carbon taxes or a tariff lowering trade agreement are just too difficult politically, which they may be, an alternative club approach -- or maybe it can include everybody, so it's not really a club -- is to develop proposals for subsidies that are strictly tied to decarbonization efforts, and then have an environmental exception that exempts those subsidies from challenges at the WTO (and via CVDs). The SCM Agreement did have a limited environmental exception, but it expired. I think it could make sense to have it brought back in broader form. In theory, GATT Article XX(g) could be used for this, but most people believe that Article XX does not apply as an exception to the SCM Agreement. Thus, to make sure these subsidies are permitted, let's draft an SCM Agreement exception that makes it crystal clear.

Tim and Todd did mention subsidies and other domestic actions in their piece published at the same time as the one by Tim and Ben:

With the Inflation Reduction Act in August 2022, the US greenlit a nearly $12 billion program (half-public, half-private) for heavy industry decarbonization, with additional incentives for carbon capture and other emissions-controlling pathways. Also that month, the CHIPS and Science Act created a Low Emissions Steel Manufacturing Research Program that will advance relevant R&D efforts at the Department of Energy. The November 2021 Infrastructure Investment and Jobs Act and executive orders helped launch a Buy Clean agenda that is set to decarbonize government-procured steel and aluminum. The Department of Energy has published an industrial decarbonization roadmap that identifies iron and steel as a priority, and is spending billions to create green hydrogen hubs that can supply the steel industry. Bipartisan groups in Congress are active on developing further legislation to decarbonize steel. And US firms continue to make moves toward further decarbonizing of steel. As the US only has a small number of the most carbon-intensive blast furnaces, this mix of private and supply- and demand-side policies puts a clean steel industry within reach. ...

This seems like a good start, although some of the details are a bit fuzzy. I think we can get more specific here, and then make the case to others as to why they should do the same thing. And for developing countries that can't afford it, we can fund it. Again, politically difficult, I know! But sometimes a problem is serious enough that you have to find a way to do things that are politically difficult.

Guest Post: EU’s CBAM vs. the Paris Agreement: A response to Quick and Das

This is a guest post from Aaron Cosbey of IISD

I am an unlikely defender of the EU’s CBAM, knowing full well its weaknesses and limitations. But in my opinion those faults do not include any of the arguments mustered against it by Reinhard Quick and Isha Das in their guest post “The EU’s CBAM-Regulation stands in contrast to fundamental EU-obligations under the Paris Agreement”.

What follows is a rebuttal of four of their key arguments.

Argument 1. If a country is in compliance with its Paris Agreement pledge (i.e., its nationally determined contribution, or NDC), then the CBAM should not be applied to it; that country’s compliance should be considered “a measure equivalent to what the ETS is for the EU.”

The CBAM is a tool aimed at preventing leakage. It is slated to replace the previous tool aimed at that goal – free allocation under the EU’s emissions trading system. The fact that a country is complying with its NDC has no direct bearing on whether the producers of goods in that country would, absent a CBAM and absent free allocation, lead to leakage – that is, whether they would gain market share over carbon-priced EU competitors. Achieving a country’s NDC in accordance with its national circumstances may mean sufficient action under the Paris Agreement, but does not mean sufficient action to prevent its firms undermining climate efforts in other countries through trade. In other words, Paris Agreement compliance is irrelevant to CBAM.

Further, nothing in the Paris Agreement indicates that compliance should be relevant to the CBAM. Nowhere in that agreement do the Parties agree that NDCs in good standing constitute a free pass to other countries’ markets no matter what the carbon footprint of their goods. The authors invoke the principle of common but differentiated responsibilities and respective capabilities (CBDR-RC), arguing that it means that developing countries should be allowed to prolong GHG-intensive production. There is support for that argument in the literature on CBDR-RC. But they go further, in what I believe is a novel and dubious interpretation, to argue that importing countries may not discriminate against such GHG-intensive products – that CBDR-RC implies that developed countries are obliged to import and consume climate-damaging goods from developing countries.

That interpretation is certainly not rooted in the text of the Paris Agreement or the UNFCCC, where CBDR-RC is never defined, even operationally. In fact, the closest thing we have to a definition in those texts is in UNFCCC Article 3.1: Parties should be guided by CBDR-RC, and therefore “the developed country Parties should take the lead in combating climate change and the adverse effects thereof.” It may be a stretch, but I could argue that the EU is taking the lead by imposing a full carbon price on its producers and consumers – in an effort matched by no other country – and that CBAM is a necessary complement to make such ambition possible.

Argument 2. The CBAM “unilaterally judges the appropriateness and sufficiency of the climate measures taken by their trading partners. Such judgment contravenes the Paris Agreement’s Oversight System which aims at helping Parties to comply with their obligations in a non-intrusive and non-punitive way. In case the ambition of a Party is deemed insufficient, Articles 13 and 15 of the Agreement will elicit suggestions of more ambitious NDCs.”

Under CBAM, credit is granted only to price-based climate policies in the country of export, and perhaps this is what the authors mean by a judgement on appropriateness of climate measures. Not allowing credit for non-price-based measures, however, is not a judgement that they are inappropriate means for addressing climate change. It is a much narrower judgement: that they are not effective means for preventing leakage in the goods covered under CBAM. (Whether that’s a valid assumption is an arguable question, but it’s a completely different question.)

The CBAM in no way judges the sufficiency of other countries’ climate measures. CBAM charges will be applied to imported goods, based mostly on firm-level production data, and will be applied equally to all, without taking into account the strength or weakness of the exporting countries’ policies.

Even if CBAM did make judgements about sufficiency it would not, as the authors claim, “contravene the Paris Agreement’s Oversight System” by unilaterally duplicating its role. I assume by “Oversight System” the authors mean the Article 15 Committee (the Paris Agreement Implementation and Compliance Committee). Contrary to what the authors suggest, nothing in that Committee’s mandate, or Articles 13 and 15, or the Paris Agreement as a whole, is aimed at determining whether a Party’s climate ambition as expressed in its NDC is sufficient, or whether its progress against its stated NDC targets is sufficient. The Article 15 Committee focuses on helping countries comply with their legally binding obligations to pledge and report.

Argument 3. Failing to give CBAM credit for the non-price-based climate measures taken by trading partners “deprives other parties of their freedom of choice and imposes on them, in a punitive way, a European carbon price.”

The EU’s trading partners are free to use whatever type of climate measures they choose within their borders. The EU’s failure to grant credit for their internal regulations does not deprive them of this sovereign right, any more than EU technical regulations such as quality standards deprive trading partners of the right to set their own internal standards.

Of course the CBAM does impose a European carbon price on foreign producers (indirectly, via importers). Does it do so punitively? Well, it does so in exactly the same measure that such prices are imposed on domestic producers. So in that sense it is not punitive.

I should ask: if the authors think that not crediting for foreign non-price-based climate measures is punitive, would they be satisfied by an amendment to the CBAM that did allow such credit, but that also imposed increased border charges to account for the cost of those same non-price-based climate measures within the EU? Because crediting foreign producers for regulatory costs but not crediting EU producers for the same costs strikes me as punitive for EU producers.

Argument 4. Such failure to recognize non-price-based efforts would cause CBAM to fail the conditions of GATT’s Article XX exceptions – it conflicts with the Shrimp-Turtle AB paragraphs 164-165 on taking into consideration the different conditions that may occur in the territories of other WTO members.

The authors may be right, and only time and a WTO dispute will settle the question. But I am skeptical.

The offending measure in Shrimp-Turtle was an outright ban on imports of products from countries that the US had not certified as using the same technologies or achieving the same results as those that were being demanded of US producers. In the case of the CBAM there is no ban; products are free to enter the EU, and in fact if they have low enough embodied carbon they will enjoy a carbon cost advantage over the EU’s domestically produced like products. And in the case of the CBAM, the EU is not certifying its trading partners’ policies as adequate as a condition of import. Again, the adequacy of national-level policies is irrelevant to the CBAM; it is predominantly focused on individual producers’ GHG intensity. It is thus fundamentally different than the disputed measure in Shrimp-Turtle.

DeSantis on Trade Policy: More China Comments

As part of a speech yesterday called "A Declaration of Economic Independence," Ron DeSantis had the following comments on China trade issues:

So the elites in this country have failed. Time and again, they've imposed policies that have proven short sighted and have proven counterproductive. And just look back a quarter of a century ago with what we were told would happen with China. They said if you granted China special trading status and put them in the World Trade Organization, that China would become more democratic, that it would guard against forced transfers of technology, that you wouldn't have a mass relocation of American manufacturing to China, and that we would be safeguarded against surges of Chinese imports. What actually happened over these past 25 years, China has become more authoritarian, more powerful and more ambitious. We've seen our relationship marred by the theft of our intellectual property, trade dumping, currency manipulation, and espionage. Our industrial base here in the United States has hollowed out. We've developed a dangerous dependence on Chinese supply chains, and our companies have been exposed to a hostile security apparatus. The elite sold us a bill of goods when it came to China. They were wrong and we need to get it right.

...

We have to restore the economic sovereignty of this country and take back control of our economy from China. The abusive relationship, the asymmetric relationship between our two countries must come to an end. No more massive trade deficits, no more importing of goods with stolen intellectual property, no more preferential trade status. We need to incentivize the repatriation of American capital and investment here in the United States so we can recapture our supply chains and build a strong durable industrial base. And in Florida, we've actually taken action against the CCP. We have banned the purchase of land in Florida by members of the Chinese Communist Party or its affiliates.

In response to questions after the speech, DeSantis had this exchange:

Question:

I'm just curious. So you spoke about electric vehicles. You announced your presidential run with Elon Musk. Do you have a problem with the business he's doing in China? Can you talk a little bit about that?

DeSantis:

Well, look, I think that if you ask him, I think he's acknowledged that we need to do more of the rare earth minerals here in the United States, or at least in countries that are not as adverse to us. So I certainly recognize that and I think that that's something that our China policy is going to look to address. That will take time. That's not going to happen tomorrow, but we got to do that. In the meantime, forcing people to do the EVs, you know, I think is a big mistake. First of all, a lot of Americans, they just don't want it. And I think that Tesla creates really good product. It's not necessarily something that I would be able to afford or would want, but I get [that] people like it, but to make the Fords and the GMs do all this for electric, you are not going to see the demand for that.

DeSantis is repeating a lot of his earlier comments on China trade here. I hope that at some point the GOP presidential candidates are pressed to offer some details about their overall trade policy plans.