Welcome to Trade Secrets. Once in a while it’s worth reminding ourselves that tariff and investment and regulation policy are all very sexy and attention-grabbing, but much of what determines the health of globalisation in the short to medium term is boring old economic growth. In that light, the persistence of inflation in the UK and the interest rate hawkishness at the European Central Bank conference last week are somewhat worrying. Charted waters today looks at the different experience of inflation across the big advanced economies and what it means for policymakers’ credibility. Just one main piece today, on the EU rejecting (so far) the US’s idea of fixing a transatlantic steel dispute by bringing in a whole new bunch of tariffs on other countries. Caught in a steel trapIt all looked so optimistic in the heady days when President Joe Biden was newish in office and talking an optimistic game on resetting transatlantic relations. In October 2021 the US agreed to suspend Donald Trump’s national security-related Section 232 tariffs on steel and aluminium imports from the EU, temporarily no longer deeming basic raw materials from longstanding allies a threat to the American way of life.The Biden administration instituted instead an annoying but somewhat less damaging set of import quotas. Also, Brussels and Washington started negotiations about creating a permanent green steel and aluminium (aluminum, whatever) club to encourage all countries to adopt low-carbon production. The noises emanating from the talks — which are supposed to come up with a deal by October, when the tariff suspension expires — have never sounded very cheery. Last week the FT revealed the state of play: an impasse.The US plan, as described by media reports, participants and observers to the talks, supposedly attempts to fix two or three problems in the steel market in one go — reliable supply (the supposed national security angle), emissions-intensive production and worldwide overcapacity. However, it does this in a way that would seem to create perverse incentives and which would very probably be declared illegal at the World Trade Organization.As far as we can tell, the US idea is for members of the climate club to calculate a nationwide average for carbon intensity of steel production and create tariffs to penalise non-members’ steel industries (and indeed perhaps other members’ industries, but at a less punitive rate) for higher emissions. It makes no commitments to do anything new to the US steel industry in terms of introducing carbon pricing or otherwise deterring emissions. This immediately creates a likely problem with the WTO rules against discriminating between domestic and foreign producers. The plan pushes further towards WTO-illegal territory by also wanting tariffs to punish trading partners for subsidising overcapacity. (This is an issue for which trade defence tools such as antisubsidy duties of course already exist, of which the US is an assiduous user.) That extra market distortion element would prevent the US from using environmental loopholes in WTO law to justify the tariffs, since it has nothing to do with preserving the planet.In return for accepting this, the EU is supposed to surrender its own painstakingly worked-out carbon border adjustment mechanism, at least as regards imports from the US. The CBAM has attempted to stay within WTO bounds by relating border charges to the EU’s own carbon emissions pricing scheme and by taxing imports based on the carbon intensity of individual producers, not the country as a whole.On average, thanks to the prevalence of energy-efficient electric arc furnaces “mini-mills” rather than traditional blast furnaces, US steel production is already relatively low in carbon emissions. David Kleimann of the Bruegel Institute think-tank in Brussels, one of the most prominent public critics of the US approach, argues that by declining to charge its own producers for emissions and taking a national average for carbon intensity that’s pulled down by EAFs, the Biden administration’s proposal essentially uses a green smokescreen to protect America’s relatively inefficient and carbon-heavy blast furnaces from further decarbonisation and international competition. (Said steel plants are, of course, concentrated in the Midwest political swing states of Ohio, Pennsylvania and Michigan.)From the EU’s perspective, signing up to the US proposal means putting transatlantic alliance-building ahead of fidelity to open trade and global rules. European Commission president Ursula von der Leyen — and trade commissioner Valdis Dombrovskis, an instinctively Atlanticist Latvian — are both generally well-disposed to Washington, or at least to the Biden administration. But this might well be a principles-swallowing exercise on which even they would choke. Let’s see what compromise they can concoct. My bet would be they’ll punt the Section 232 suspension forward another couple of years when it expires in the autumn. This is based on an assumption that otherwise we’re in a classic Zugzwang situation where any move loses. Any solution based on current negotiating positions either damages Biden’s poll ratings in the Midwest or the EU’s cherished self-image as a green multilateralist.At the very least an extension would get it past the next US presidential election. Of course, Trump might be back in the White House in two years’ time. At that point the whole idea of even trying to conduct genteel transatlantic policy discussions rather than just waiting for the next eccentric idea to burst out from whatever has replaced Twitter by then will seem very quaint indeed.Charted watersWhether the big economies get past the global inflationary shock without much higher rates and a serious slowdown is obviously important for growth and hence trade. But there may also be a longer-term credibility effect for policymakers, beyond the central bankers whose job it is to control inflation.If the US continues to weather the inflationary shock relatively well compared with the eurozone and the UK, you can imagine the Biden administration’s interventionist industrial and trade policy taking some of the credit. In reality, whatever other benefits it has, America’s better performance owes less to Bidenomics than to receiving a relatively small energy shock from Ukraine and the absence of a boneheaded, self-inflicted disruption like Brexit. But the White House calling its green subsidy splurge the Inflation Reduction Act, while it might have been disingenuous, is looking quite smart right now. Trade linksThe FT reports on how Chinese carmakers are planning to shake up the European auto market with EU-based production as well as exporting there. Leaders of EU member states met at the end of last week to discuss their stance towards economic engagement with China. As this Reuters headline drily put it, “EU agrees to de-risk from China and debates what this means”.Evidence from S&P Global shows that supply chains are almost back to normal in terms of activity, inventories and seasonality — and volumes of consumer goods shipments are now around pre-pandemic levels rather than the extraordinarily high levels we saw during lockdowns.Speaking of the freight industry, China is urging developing countries to oppose a new tax and restrictions on emissions from international shipping.A piece in Foreign Policy magazine argues that the expansion of the Brics emerging markets grouping to include other countries would be more about the extension of Chinese power vis-à-vis the US rather than the emergence of a truly multipolar world.Trade Secrets is edited by Jonathan Moules More
