Over the weekend, the U.S. and the EU reached a trade deal on steel and aluminum. The deal, referred to as “World’s First Carbon-Based Sectoral Arrangement on Steel and Aluminum Trade,” is viewed as a significant step forward in transatlantic climate collaboration. However, such a “green deal” on steel and aluminum may not achieve its intended goals and result in unintended consequences.
The U.S.-EU deal includes two components. The first is the U.S.’s agreement to remove its import tariffs on steel and aluminum exports from the EU up to certain quotas. The second is the EU’s agreement to pause its retaliatory tariffs on U.S. exports. Inu Manak and Scott Lincicome published a detailed analysis of the tariff deal here. Additionally, both sides will spend the next two years negotiating an agreement on steel and aluminum trade to encourage low-carbon production.
According to the press release, the arrangement seeks to “restrict access … for dirty steel and limit access to countries that dump steel in our markets…”
One possible way to move forward with the arrangement is for both sides to implement tariff-free trade in steel and aluminum, and levy tariffs on carbon-intensive steel and aluminum exports from other countries. Such a climate trade deal resembles a “climate club” idea—jurisdictions that produce cleaner goods form a club, and impose punitive measures on other non-club members. In a recent commentary, I discuss in detail the potential challenges to a climate club.
It is great news that both the U.S. and the EU decided to remove the distortionary tariffs harmful to economic growth. It is also encouraging that both sides collaborated on steel and aluminum—two of the most carbon-intensive industries. Working on decarbonization technologies and improving emissions measuring and reporting, for example, are important areas for collaboration.
However, there might be several challenges to implementing the U.S.-EU trade deal on steel and aluminum. The trade deal might reduce the effectiveness of the EU carbon border adjustment mechanism (CBAM) proposal. Steel and aluminum are two of the six industries covered in the CBAM proposal released this July. According to the proposal, exports from countries with an explicit carbon price would be fully or partially exempted from the border import tax.
A well-designed carbon border adjustment should be applied equally to all trading partners regardless of domestic climate policies. My white paper discusses this in detail. It would seem that the Biden administration is trying to have the US steel and aluminum exports exempted from the EU CBAM through the trade deal as there is not an explicit carbon price in the United States. If that’s the case, important questions would need to be addressed in assessing how the trade deal and the CBAM would interact. Would the trade deal be expanded into other industries such as cement so US exports in those industries would also be exempted from the CBAM? Would other countries try to follow suit and strike a sectoral trade deal with the EU to be exempted from its border import tax?
Additionally, the trade deal may risk violating the non-discrimination provision in the WTO rules. Trading partners of the US and the EU may file complaints with the WTO against the sectoral arrangement. Other countries could choose to join the trade deal, or retaliate by imposing tariffs on U.S. and EU exports sold to those countries.
Without knowing the full details of the U.S.-EU trade deal on steel and aluminum, its positive impact might have been overstated. Leaders in the U.S. and the EU need to consider the potential implications and downsides when addressing climate change in international trade.
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