Trade Cases

Leibowitz: No Deal in Sight on US/EU Steel and Aluminum Trade

Written by Lewis Leibowitz

In 2021, the US and EU called a timeout on their disputes about the US “national security” steel and aluminum tariffs and the resulting retaliatory measures by the EU.

The agreement back then rescinded the Section 232 tariffs and replaced them with a “tariff-rate quota” that allowed a measure of tariff-free trade. In exchange, the EU rescinded its retaliatory tariffs of 25% on several US exports, prominently including US whiskey, which hit Mitch McConnell’s home state of Kentucky especially hard.

IN PROGRESS... Leibowitz:The agreement also set a two-year period of negotiations to arrive at a permanent agreement that would (1) reduce carbon emissions and (2) restrict “non-market excess capacity” in the steel and aluminum sectors.

That two-year period expires in three months. Without an agreement by the end of October, the two sides could resume their trade war suspended in 2021.

That means that Section 232 tariffs (25% on steel and 10% on aluminum) could resume, and the EU retaliatory tariffs on whiskey and other products could be imposed, but this time at double the rates (50% on whiskey), stifling trade between the two huge trading blocs.

As with all trade disputes, there is also the possibility that the US and EU could extend the deadline; but that would seem very unlikely unless the two sides are very close to finalizing a deal.  Now, according to most reports, the two sides are not at all close to an agreement.

What divides them? First, the US wants to adopt an arrangement that sets carbon levels and charges tariffs on all steel and aluminum that do not meet those targets. Each country that enters a carbon-reduction regime would have the authority to set carbon limits and impose tariffs or other trade restrictions on countries that don’t meet those limits.

By contrast, the EU favors putting a price on carbon that applies to everyone, including the US and EU industries. In fact, the EU has already introduced a “carbon border adjustment mechanism” or CBAM. The EU has set a carbon price that its own industry must abide by. Any company with carbon emissions more than emission targets must pay by buying the right to emit carbon from other companies below that level.

The CBAM imposes similar taxes on foreign producers; countries that have set a price on carbon emissions are exempt from the tariffs. But the US has not set a carbon price and has no immediate plans to do so.

Regarding non-market excess capacity, both sides agree that it is a problem. I think addressing overcapacity is less important than addressing over-production, but that is an argument for another day.

The US wants to impose a cost on non-market economies that can produce too much steel. There is yet no accepted definition of “non-market overcapacity.” The US presumably would declare that a portion (perhaps a large one) of China’s steel and aluminum capacity meets the definition and would impose tariffs on imported steel.

The US, EU, and any other country would have to sign on to such an agreement to be a member of the market-oriented steel and aluminum “club.” Presumably, Russia and Belarus would be barred from the club for the duration of the Ukraine war.

The US proposal does not appear to contain any mandate or incentive for the US steel and aluminum industries to reduce carbon emissions. The US Department of Energy recently issued a report predicting that domestic steel producers would reduce carbon emissions largely by reducing production from integrated mills to 10% of the total from the current 30% of US production.

The EU, by contrast, would rely on existing trade remedy measures defining “non-market” practices that create excess capacity. The US approach has a good chance of violating WTO rules, at least as applied to China. But the US has not shown particular interest in complying with those rules if it does not agree with the outcome of cases.

So, we really have two disputes between the EU and the US, rather than one. The first deals with carbon and the second deals with “non-market” excess capacity.

The domestic steel industry favors the US approach out of self-interest. The Biden administration seems to go along with that approach. It fits with the unilateral imposition of tariffs in 2018 invoking national security; the WTO has determined that Article XXI(b) of the GATT does not sustain the US approach.

The CBAM is arguably consistent with WTO trading rules because it imposes a price on carbon emissions equivalently on domestic producers and imports. Under the CBAM, steel or aluminum from any country that does not set a price on carbon emissions and impose monetary consequences on its own producers is not entitled to an exemption from the CBAM. The US is currently facing tariffs under the EU CBAM regime.

After a year and nine months, the gap between the US and the EU has not gotten any smaller. An impasse is a distinct possibility, meaning that US importers and consumers can expect tariffs on imported steel and aluminum beginning in November. And industries that faced retaliatory tariffs in the EU can expect them to be reinstated, in some cases at double the 25% rate that prevailed until October 2021.

Is there a possible compromise, or will the two parties agree to postpone the day of reckoning? Perhaps—but, as noted above, the likelihood of extending the deadline depends on some measurable progress toward a compromise.

Right now, both parties are calling the other side’s proposals deeply in error. The specter of self-interest is appearing more and more clearly.

Unless some compromise is reached, consumers and manufacturers in the US and in Europe will face sharply higher costs. Sadly, the dispute will not help reduce carbon emissions or non-market overcapacity in steel or aluminum. There is still time to avert a serious breach in economic ties between the US and EU, but time is very short.

I am looking forward to participating in a panel discussion at the Steel Market Update Steel Summit on steel decarbonization and its impact on international trade. I hope to share more ideas with you in August.

Lewis Leibowitz 

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Lewis Leibowitz, SMU Contributor

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