Sina Schuldt/picture-alliance/dpa/AP Images
The ArcelorMittal Bremen steel mill on the River Weser in Germany, April 3, 2023
Two years ago, the U.S. and the European Union agreed to temporarily lift Trump-era tariffs on steel and aluminum.
Former President Trump had used Section 232 of a Cold War–era law protecting industries vital to national defense to impose tariffs of 25 percent on steel and 10 percent on aluminum. The EU retaliated by taxing iconic U.S. products, including Harley Davidson motorcycles and bourbon whiskey.
In 2021, President Biden and European Union President Ursula von der Leyen announced that they would suspend the tariffs for set quantities of aluminum and steel “entirely produced” in the EU, while they worked out a longer-term trade deal.
Since then, the Biden administration has pressed for a Global Arrangement on Sustainable Steel and Aluminum, a trade deal linking U.S. and European markets that would tax steel producers based on whether they are in the club, and also on the carbon intensity of their metal.
The club would retool and extend the Section 232 tariffs with a greener, more “friendshored” gloss. Whereas Trump’s original tariffs taxed all non-U.S. steel at a flat rate, hitting allies including the EU and Japan, Biden’s plan is mainly aimed at excluding China. And while Trump argued that steel imports threatened national security by weakening the U.S. manufacturing base, the new plan would also emphasize climate change.
“The important thing is that there be a market access restriction,” said Todd Tucker, the director of industrial policy and trade at the Roosevelt Institute, whose work has shaped the administration’s strategy. “There’s a variety of ways to structure that. One is a complete ban on trade in dirty steel. Another is maintaining the Trump-era tariff rate … just kind of keeping that, but then changing the justification, so that instead of national security, it would be climate and climate security.”
Brussels and Washington had committed to reaching a deal by this October, when the billions of dollars in tariffs were scheduled to snap back into place. Yet, while both the U.S. and EU were said to be eager to compromise ahead of an October 20 White House visit by von der Leyen, the EU has resisted the steel club plan, wary of denting its reputation as a green multilateralist.
Politico reported on Monday that negotiators have pushed back the deadline to January. The troubled transatlantic trade deal sheds light on the broader challenges of decarbonizing trade-exposed industries with big carbon footprints. It may also expose the limits of the U.S.’s ability to use climate considerations to advance its national-security “friendshoring” agenda.
THE IMMEDIATE OBSTACLE to the green steel club is that Brussels is already rolling out a complex tariff mechanism of its own: the Carbon Border Adjustment Mechanism (CBAM), a much-anticipated effort to integrate the bloc’s domestic carbon tax with overseas trade.
The EU is using its internal carbon tax to make it more expensive for its firms to produce polluting goods. By itself, that could be an incentive for European companies to make or buy carbon-intensive goods elsewhere, effectively exporting their emissions to areas with laxer environmental regulations. So-called “carbon leakage” would be something of an own goal, making European industry less globally competitive without actually reducing emissions.
To protect its producers and its climate goals, then, the EU is imposing a “border adjustment,” requiring companies to pay tariffs on some carbon-intensive imports, including steel, aluminum, cement, hydrogen, and fertilizer. These tariffs will be linked to the domestic carbon price, in a scheme that will require heroic amounts of data collection and tracking. If it succeeds, the EU plans to expand the scheme to other sectors, including cars and chemicals.
Developing countries have complained that the CBAM could disrupt their domestic industries. Steelmakers in Brazil, for example, worry that steel diverted from Europe as a result of the scheme could flood the Brazilian market. The EU has been adamant that the CBAM is a climate policy, not an industrial policy, that follows necessarily from its carbon tax.
“CBAM is not about trade protection, but about protecting the EU’s climate ambition,” EU commissioner for the economy Paolo Gentiloni wrote in the Financial Times. Core to this claim is that the CBAM treats all comers equally, forcing countries to pay more to import goods with a higher carbon footprint.
The U.S. has been more forthright about linking its industrial, decarbonization, and security goals.
The steel arrangement “could be the first major trade deal to tackle both emissions intensity and over-capacity,” National Security Adviser Jake Sullivan said in an April speech outlining the administration’s foreign policy, “linking trade and climate in a way that has never been done before.”
The immediate obstacle to the green steel club is that Brussels is already rolling out a complex tariff mechanism of its own.
In December of last year, the U.S. proposed a “climate club” of steel-producing nations, which would tax importers based on whether they were in the club, and the carbon intensity of their steel. A version of the proposal reviewed by The New York Times detailed limits on the overproduction of steel and on activity by state-owned enterprises, which would keep China out of the club.
The same month saw rising alarm in Brussels, in a somewhat delayed-onset backlash to Buy American green subsidies in the Inflation Reduction Act. “We have all heard the stories of producers that are considering to relocate future investment from Europe to the U.S.,” von der Leyen said in a speech announcing that Brussels would loosen limits on state aid rules, making it easier for German and French firms to pursue industrial policy.
But the bloc can only bend so far in attempting to compete with U.S. subsidies.
“European steelmakers will face high costs for steel production, because they have to pay for emissions certificates, and the CBAM is meant to compensate for that. If you have the U.S. steel industry not only not paying for their emissions, but also benefiting from subsidies, they are obviously in a much more beneficial economic position,” said Lukas Hermwille, a researcher on climate governance at Germany’s Wuppertal Institute.
Others argue that European insistence that the U.S. subsidy-led system is incompatible with the CBAM is bureaucratic intransigence, a failure of creativity.
“The EU’s interpretation of what the WTO rules require is almost a caricature of what activists said in the 1990s, which is, ‘No, this actually does pose a hard limit on sovereign policy space around climate,’” Tucker told the Prospect. He pointed out that some European trade unions and national governments see more room for overlap.
A paper Tucker wrote with Tim Meyer, a professor at Vanderbilt Law School, heavily shaped the administration’s plan. Their Green Steel Deal proposed an arrangement in which “[m]ember states would have the freedom to choose the methods they would employ to green the steel sector, but there would be agreement on the menu of acceptable production methods.”
“Because effective action on climate change requires, as a practical matter, accepting a diversity of national approaches, WTO considerations should be secondary in the design of a green trade policy,” Tucker and Meyer wrote.
Critics of Washington’s approach point out that the U.S. is uniquely capable of drumming up demand. “The U.S. is the only country that can just swipe the credit card” to clean up its heavy industry, an EU trade expert familiar with negotiations told the Prospect.
Meanwhile, the U.S.’s heavy new subsidies for green steel have made Washington’s complaints that China is a “non-market” producer of steel ring hollow.
Asked about that apparent hypocrisy, Tucker argued that it is the outcome of failed trade liberalization. “For many years, the U.S. approach was, let’s get China to play by the rules, and when that happens, all will be well,” he said. “Different parts of the U.S. political scene have come away from that perspective, as reality has mugged all of us.”
Former National Economic Council director Brian Deese has argued that one way to parse legitimate from illegitimate subsidies, and avoid a subsidy race, is by looking at whether supply is saturated or scarce in critical sectors. By that logic, it’s fair game to subsidize lower-carbon steel.
But a further obstacle to a club of rich producers is figuring out how to define green steel in the first place.
“NOBODY REALLY KNOWS what green steel is,” Rebecca Dell, director of the industry program for the ClimateWorks Foundation, told the Prospect.
If anyone knew, it would be Dell, a climate scientist who served in the Obama Department of Energy and now spends much of her time trekking between steel production facilities around the world.
But defining green steel is deeply political. The U.S. trade representative had proposed a measure that sounds, on the surface, decent enough: Judge every piece of steel according to the average emissions of the steel sector of its country of origin.
That metric has the virtue not only of being neutral-sounding, but also much less complex than trying to determine the carbon footprint of every bar of steel shipped across borders.
It is also self-serving. U.S. steelmaking is, on average, among the lowest carbon-emitting in the world, because of its heavy reliance on recycled scrap steel. But using an average would shield the dirtiest parts of the industry from cleanup.
Starting in the 1970s and ’80s, when East Asian producers—first Japan and South Korea, and later China—became significant threats to U.S. and European steel producers, the U.S. and European industry pursued different strategic responses to overseas competition.
The U.S. noticed that, having been industrialized for a long time, it had a fixed stock of steel that dwarfed the steel holdings of its Asian competitors. As Dell put it, “to have scrap, you need to be rich enough to have things made out of steel—and then wait 25 years.”
To take advantage of that unique resource, the U.S. invested in making higher-quality steel out of scrap. Europe, meanwhile, decided that its comparative advantage is in the very highest-grade steel, so it developed aeronautical-grade and similar steels, and sent its scrap abroad.
“The incentives for domestic and trade policy on steel push in opposite directions.”
Those divergent paths also implied investments in different steel production processes. Steel can be produced in integrated blast furnaces—in the U.S., these are the iconic coal-fired steelworks of Western Pennsylvania—or in electric arc furnaces, or mini-mills, which melt scrap using energy from electric currents, and can be powered by renewable energy.
The conventional, coal-dependent blast furnace remains the dominant steel production method in Europe, which like the U.S. is investing heavily in steel decarbonization using hydrogen.
Mini-mills are also much less labor-intensive than blast furnace production, and in the U.S., they have been concentrated in the non-union South. (The tagline of one leading, non-union mini-mill: “We’re a technology company. We just happen to make steel.”)
This puts Biden, who has called himself the most pro-union president, in a tough spot when defining green steel. In the U.S., Dell explained, “the incentives for domestic and trade policy on steel push in opposite directions.”
Policies that distinguish as much as possible between different types of steel help protect union steelworkers, pushing the administration more in the direction of something more like California’s Buy Clean standards. But the U.S.’s mini-mill production helps bring down overall emissions from its steel industry. So on trade matters, it is incentivized to push for aggregate measures of carbon intensity, which shield its dirtiest production from pressure.
The EU, meanwhile, favors distinctions that distinguish between blast furnaces and electric arc furnace production, in order to ensure its blast furnaces remain competitive.
Some of the fight is about a market for green steel that has not yet come into existence. It could be stimulated by efforts like the Industrial Deep Decarbonization Initiative, a pledge to use public procurement to buy green steel and cement at a premium.
“The idea is to create a lead market with a premium price for green steel,” said Hermwille. “If the definition uses the same threshold for scrap and primary steel, the risk is that this premium demand will favor converting secondary steel, and there will be no premium demand left for virgin steel from hydrogen-based steel processes.”
“The big fear that if we stop producing primary steel, we’ll also lose subsequent part of the supply chain—we’ll lose industry to places with more favorable renewable energy conditions,” Hermwille added. “Germans are not willing to give away one single blast furnace.”
IN THE ONGOING NEGOTIATIONS, the U.S. trade representative had last year proposed using an average carbon-intensity threshold, an official familiar with the negotiations told the Prospect, but the EU rejected that plan.
“We heard a lot of concern from the EU on the WTO consistency of using an average, and we thought there are arguments to get over that concern,” the official said. But the U.S. adjusted their proposal, the official said in an interview last week, to “a trade measure aimed to eliminate importation into our markets of any steel or aluminum that’s more carbon-intensive than what we produce domestically. So that’s not an average, that’s a highest-emitter threshold.”
“What it would mean is that, if a product is produced in any other foreign jurisdiction that is more carbon-intensive than what is produced here, then we would seek to adopt a trade measure that would effectively eliminate that importation,” they said.
Olof Gill, European Commission spokesperson for trade and agriculture, told the Prospect he remains optimistic about a deal. “It might not resolve all of the technical issues at that start point, but if there’s enough of a political framework put in place, then details can be staggered,” he said.
But with both sides stuck in an all-moves-lose position, it is more likely that they will extend something like the current truce, and come up with empty commitments to announce at the eventual press conference.
That sort of face-saving has a history. From the Rose Garden in 2018, for instance, Trump and Jean-Claude Juncker, former president of the European Commission, admitted that they had failed to reach a deal to bring down industrial tariffs, before pivoting to agriculture.
“The European Union can import more soybeans from the U.S.,” Juncker offered. Left unsaid was the fact that this was already happening. Two months earlier, China had stopped buying U.S. soy, sourcing the livestock feed instead from Brazil. U.S. soybeans were already being diverted to the EU.
That didn’t stop Trump from touting the win. “Soybeans is a big deal. And the European Union is going to start, almost immediately, to buy a lot of soybeans—they’re a tremendous market—buy a lot of soybeans from our farmers in the Midwest,” he said.
“It will also make trade fairer and more reciprocal,” Trump added. “My favorite word: ‘reciprocal.’”
