Brussels defies US pressure to join its anti-China gang

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Better luck next time. The US came away empty-handed from Friday’s summit with the EU after the failure of its attempts to bounce Brussels into its wheeze to keep out Chinese steel by any means possible. The two sides didn’t even get the critical minerals deal which was supposed to be the meeting’s deliverable. In today’s newsletter I look at why the US crusade is faltering and how it’s seemingly always steel causing trade problems. Charted waters is on China’s declining lending to other emerging markets.

The roots of European resistance

The US’s bid for a green steel and aluminium club to exclude Chinese imports for their higher carbon emissions, or even a weaker version based on Chinese overcapacity, has stalled for now. The US will continue to suspend rather than eliminate the Trump-era tariffs on EU exports of those two metals while the sides continue to talk. It was all a somewhat predictable outcome from this meeting.

The US seems to have been genuinely surprised about EU resistance to their idea, but perhaps there are some things they haven’t grasped.

• Any deal that exempts the US from the carbon border adjustment mechanism (CBAM) is a staggeringly heavy lift. As far as the EU is concerned, CBAM is the necessary trade counterpart to its cherished emissions trading system. It’s spent a vast amount of time and energy designing and explaining it. Giving one country a pass risks pulling the whole thing down, and certainly making it far harder to defend at the World Trade Organization. Unlike the US, the EU can’t muster the bloc-wide money to do its green transition purely with cash rather than carbon pricing.

• It’s fortunately much easier for the EU to annoy the steel industry than it is for the US, where that industry wields absurdly outsized power. Pennsylvania and Ohio aren’t just swing states for President Joe Biden and Donald Trump: in 2002 George W Bush notoriously and cynically slapped obviously WTO-illegal tariffs on steel to win the midterms. By contrast, the European Commission and its member state governments don’t need support from IG Metall in the Ruhr valley or campaign contributions from ArcelorMittal to get re-elected or reappointed.

• Brussels knows it might be facing a President-elect Trump in 13 months’ time. It’s chary about putting a lot of credibility on the line for an agreement that could be torn up in seconds, especially if it means signing up to the general principle that WTO-incompatible clubs are the way to go.

Shocked! SHOCKED! It’s steel again

Quite honestly, the whole world trading system would be a lot better if the steel industry didn’t exist. Decades of subsidy and global gluts, interminable WTO litigation, endless negotiations at the OECD: it’s a permanent pain.

Its political salience is easy enough to understand. Steel is apparently symbolic of industrial virility and often concentrated in one-industry towns, meaning job losses are highly visible. I wasn’t quite nine years old at the time, but I vividly remember the shockwaves when the Shotton steelworks in north Wales, ten miles from my home town, laid off 6,500 workers in a single day.

Its economic heft is rather less. An increasingly capital-intensive industry, it doesn’t create many jobs these days. Costlier steel means higher input costs for the rest of manufacturing and construction: there are 80 jobs in downstream steel-using industries for every one in steelmaking. 

And so here we are. Ridiculously, steel played a massively disproportionate role in creating US disillusionment with the WTO thanks to an interminable dispute over “zeroing”, a particular methodology for constructing antidumping margins much used by the industry. It’s definitely a lucrative job-creation scheme for trade lawyers. Trump’s WTO-hostile USTR, Robert Lighthizer, was a former steel industry attorney who drove a Porsche. (Thinking about it, buying an imported car is grimly appropriate given the role of tariff-inflated steel prices in making US auto production uncompetitive.)

In fact, Washington’s proposal to gang up on China is particularly pointless given existing US and EU antidumping and antisubsidy duties on Chinese steel. 

Simon Evenett and Fernando Martín of the Global Trade Alert project, reliably on hand to deflate policymakers’ windy rhetoric with inconvenient facts, note that China sells less than 7 per cent of its total steel exports (and less than 24 per cent of its aluminium exports) to the EU and US combined. This isn’t enough of a stick to get China to change its emissions intensity.

Honestly, can’t we have a separate WTO for steel or import it from Mars or use bamboo in construction instead or something? Whole civilisations can rise and fall in the time it takes to conclude a steel dispute. Enough, already. Let’s have a transatlantic falling-out out over something else.

Charted waters

As China’s foreign policy efforts shift further towards more explicitly trying to recruit geopolitical allies, it’s pulling back from its traditional means of spreading influence — funding infrastructure through the Belt and Road Initiative. Whether low and middle-income countries are willing to join China’s gang without even getting roads and airports out of it remains to be seen.

Trade links

China has fired another shot in its export-control arsenal, this time by trying to deprive the US of a vital material for the electric vehicle industry by banning sales of graphite there.

Some signs the EU has absorbed the correct lessons of supply chain shortages during the Covid-19 crisis — a plan to stockpile and share medication rather than a wholesale reshoring of production.

Economic security experts Abraham Newman and Henry Farrell have a look at the concept (which I wrote about last week) in a very comprehensive piece in Foreign Affairs.

The FT’s Martin Sandbu’s Free Lunch newsletter looks at the prospects for Poland’s economy following the change in power after the election.

More FT wisdom in the inaugural newsletter on central banking by veteran economics commentator Chris Giles, here looking at the Bank of England’s forecasting and communications.