Steel and its discontents

Two years ago, the US and EU agreed to lift Trump era tariffs on steel and aluminium, and US president Joe Biden and European Commission president Ursula von der Leyen promised to work on a longer term agreement about how trade of these strategically important goods should work.

The deadline for that agreement was set for the end of this month. But last week, when von der Leyen met with Biden in Washington to discuss details, the deal deadline was pushed to the end of the year. How the steel and aluminium agreement evolves will be a strong indicator of future US-EU relations and the shape of a new global trade system. So, how to read the tea leaves around this delay, and what it might portend?

For starters, the war in the Middle East has thrown a spanner into the timing of any major new deals in Washington. Everyone is distracted by whether this war will escalate, and what the ramifications will be for the world. (Bridgewater’s Ray Dalio is predicting a 50 per cent chance of a hot global conflict given we now have two major regional conflicts happening simultaneously).

But beyond that, there is a major issue to be overcome in any new US-EU deal around steel and other high carbon intensity products: Europe’s carbon border adjustment mechanism, or CBAM. This is a very complicated, very data intensive method for calculating the carbon load of products produced outside the EU, and then subjecting those that don’t meet domestic standards to a tariff that takes into account the extra carbon load. 

In theory, I’m for a price on carbon — indeed we need to have one if we are going to fight low labour and environmental standards, and the mercantilism that tends to fuel them. But the more that I learn about CBAM, the less confident I am that it will actually provide a workable solution. For starters, the very complexity of the system opens it up to gaming by all sorts of corporate and state interests. Secondly, the fact that the EU has taken great pains to twist CBAM into something that meets the World Trade Organization’s technocratic and (I think) impractical rules, gives it institutional sheen without actually making it enforceable or palatable to many other nations.

The White House, has, of course, taken a fundamentally different approach to the energy transition. Pretty early in the Biden campaign, it was decided that market mechanisms like carbon pricing actually wouldn’t get the country or the world to where it needed to be on climate. The neoliberal attempts to use such pricing mechanisms had failed for 40 years. As an alternative, the Biden campaign decided to think about global warming like war — a national emergency that called not for a market knows best approach, but blunt industrial strategy in the form of subsidies and fiscal stimulus for the clean transition.

Looking at the past two years, I’d say that the US has done better on climate than Europe. The Inflation Reduction Act has created a manufacturing boom and sped up investment into climate change technology like EVs. It has also forced similar subsidies in Europe, which are much needed, given that we are still several trillion dollars short of the investments needed to meet the world’s climate goals.

Indeed, a Rhodium study from July found that “for every ton of CO₂ reduced within the US, an additional 2.4-2.9 tons of CO₂ emissions reductions are achieved outside the US, thanks to IRA-driven cost reductions”.

My hope is that the delay in finalising the US-EU agreement will leave time for von der Leyen (who leans towards the White House’s view of the situation) to pull more of the technocrats in Brussels along with her (it’s always 1995 — ie the era of peak neoliberalism — at DG Trade it seems). I’m hearing that most national governments, even the German government (though of course not their auto industry), increasingly want to move towards a shared steel agreement, as well as a mutual path forward on how to deal with Chinese dumping, as a starting point for a broader decarbonisation plan across all supply chains. 

I’m actually hopeful that this will happen, despite the buck passing right now. I think if Biden and von der Leyen are together on this, the rest will follow, however haltingly. Ed, how would you read the tea leaves here?

PS In our Trade Secrets newsletter, Alan Beattie has more on how the US crusade for a steel and aluminium deal is faltering.

Recommended reading

• The weight loss drug Ozempic has become a phenomenon in the US, transforming waistlines, but also business models. Exercise companies and diet firms are worried about falling profits as more and more people — some who need it and many who don’t — go on the drug. While I’m for Ozempic for those whose health is at risk because of obesity, I thought this NYT op-ed had a thoughtful take on the wishful thinking behind such miracle drugs. They may help us shed pounds, but they won’t address the root problems that contribute to America’s fat problem — like car culture, suburban sprawl, food deserts and poor public healthcare.

• I was on a long flight to Asia this past week and took the opportunity to read Paolo Bacigalupi’s wonderful dystopian sci-fi novel The Windup Girl. It’s dark, brilliant and very much of our moment, with takes on artificial intelligence and its ability to both mimic humanity and dehumanise us, climate change and what it will do to our world, and the problems of corporate concentration, the global trading system, and the financialisation of food (see my column today, which touches on both those topics, here). I hope he writes a sequel, or that someone makes a movie of this one.

• And in the FT, I was fascinated by my colleague Peggy Hollinger’s Big Read on the race to tap solar power from space to fight climate change. Also, you have to love any feature Josh Chaffin writes, especially when it’s on New York City real estate.

Edward Luce responds

Rana, any EU-US trade talks nowadays are destined to fall victim to a dialogue of the deaf. They have very different approaches. The Biden administration wants to set up a western steel club that punishes China and does not particularly care what criteria it uses. The initial tariffs imposed by Donald Trump were based on national security (and remarkably included Canada and the EU). The Biden administration then fell back on environmental criteria. But the way it framed the new proposals broke World Trade Organization rules, which was met with EU objections. So now they are trying to shape another rule that would punish excess capacity countries (China) that dump steel on the global market. Whatever the ostensible ever-shifting principle, the goal is to target China. As our colleague Alan Beattie rightly points out “this is a show trial where the verdict and sentence are decreed in advance”. 

Unfortunately, the EU does not work this way. It still aims to stick to WTO rules. As you say, Brussels has devised a carbon border adjustment mechanism that is not simple. However, I don’t think that Washington is objecting to the CBAM’s complexity. Biden’s problem is that the mechanism would punish US steel and aluminium producers for their relatively high carbon intensity. So we are left with this mess. The US has postponed its “snapback” tariffs on EU steel and aluminium until January pending a resolution of this impasse. I suspect the EU will find a way of caving — especially if Ursula von der Leyen is in the driving seat.

Overall, however, Washington’s approach to trade leaves a sour taste in the mouth. In the name of the rules-based order, America is making up whatever rules suit its purposes with “the sure footedness of a mountain goat (the redoubtable Alan, again)”. On the principle that might is right, I suspect the US will ultimately prevail. But it should stop pretending it is following any coherent principles. World trade is now the law of the jungle. 

Your feedback

And now a word from our Swampians . . .

In response to “The agonised American Jewish debate”:
“There are some ironies here that point to the real issue. Progressive alignment with and support for Hamas is completely inconsistent with the values and interest groups normally associated with progressivism: LGBTQ; women’s rights among others. Hamas does not support those interest groups. The only explanation is ‘my enemy’s enemy is my friend’. That is the real issue.” — Neil Winward 

“I have been feeling this twinge recently from discussions, especially of my younger colleagues who are striking to protest the ‘US support of genocide by the Israeli government’ etc. I am also super afraid for Palestinians in Gaza and also wish there was some other way to address the problem. And I feel guilty when this little voice inside me says well, if the Hamas 10/7 slaughter hadn’t happened, we wouldn’t be here now . . . I also can’t imagine the trauma the Israelis living in border areas must be going through now. And Holocaust survivors for that matter. So thank you for giving voice to this internal whisper and making people like me, who support Palestinian rights and oppose Israeli policies towards them, feel validated and seen in this terrible moment.” — Dina Smeltz

Source: Economy - ft.com