A cynical transatlantic deal on steel

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Hello from Trade Secrets. Last week wasn’t exactly a triumph for Ursula von der Leyen’s ambition for the EU to play a full geopolitical role. The European Commission president took flak from inside the EU for giving what looked like unequivocal unilateral backing to Israel’s response to the Hamas atrocities, while the EU flapped around incompetently about whether it would suspend aid to the Palestinian Authority. On Friday, von der Leyen will have another go at playing world leader, this time with President Joe Biden at an EU-US summit in Washington. Today’s newsletter describes nerves in the bloc about how she might dismay the trade purists and cede too much to Washington’s ever-morphing plans to block imports of Chinese steel and aluminium (aluminum, whatever). Charted waters is on oil prices following the Hamas attack.

A cynical deal on steel

Ever since Ursula von der Leyen met Donald Trump at the Davos gathering in 2020 and came out promising a vague yet wildly unrealistic transatlantic trade deal “in a few weeks” there’s been anxiety throughout the EU about what the head of the commission will give away when she next sees her US counterpart.

This time round, though the actual announcement will be pushed to January, the outline of a potential deal may emerge to fix a problem Biden inherited from his predecessor. Trump eccentrically slapped tariffs on steel and aluminium on a bunch of countries, including the EU, on bogus national security grounds. The Biden administration suspended the tariffs for EU exporters and replaced them with a temporary quota system.

In return for the killing them permanently, Washington has been pushing Brussels to create a global arrangement on “green steel”. This would jointly impose tariffs on steel and aluminium from emissions-intensive producers (that is, China), which other like-minded countries could join.

Since that’s basically incompatible with the EU’s carbon border adjustment mechanism, and probably illegal under WTO rules, Brussels has so far resisted — a sentiment that US trade representative Katherine Tai rather oddly and patronisingly characterised recently as having difficulty with the idea “at an emotional level”.

There remains nervousness in the EU that von der Leyen will give way to Biden, if not now then at some point in the future. If the EU does hold the line, it will probably agree instead a US back-up plan that is also expedient but less obviously WTO-illegal. Washington has shifted to suggesting blocking Chinese steel because of the country’s excess steelmaking capacity, which leads to its output being dumped on the world market.

Under this wheeze, an EU draft of which has been floating around, the bloc would use trade defence (antidumping and countervailing duties) to keep out Chinese steel. 

It’s not hard to see this as a pretty shameless case of a fresh rationale being fitted around the existing proposal. The draft EU paper gives as indicative potential tariffs the figures of 10 per cent for aluminium and 25 per cent for steel, which by an incredible coincidence equal the Trump duties currently in place. This is a show trial where the verdict and sentence are decreed in advance.

You’ve got to give the Biden administration marks for agility, if not subtlety. The argument for putting tariffs on China has leapt from rationale to rationale and from one supposed justification under WTO law to another. It started off with protecting national security, hopped effortlessly to defending the environment and is now alighting on eliminating excess capacity with the sure-footedness of a mountain goat — admittedly a mountain goat wearing a hi-viz vest emblazoned “Take Your Steel And Shove It, China”.

Taking a ride on Washington’s ferrous wheel

The issue now is whether Brussels is cynical enough to get on board with the deal. David Kleimann of the Bruegel think-tank accurately compares it to an expedient fix von der Leyen’s predecessor Jean-Claude Juncker did with Trump in 2018. To forestall Trump putting tariffs on European cars, Juncker promised a bilateral transatlantic zero-tariff deal on goods that would have broken WTO guidelines. (In the end it never happened.)

To be fair, there are strong pragmatic arguments for Brussels taking this agreement, as long as it doesn’t contain a carbon tariffs element. For one, it would help preserve CBAM, a centrepiece of the EU’s environmental policy and one of the few potential routes to getting a global carbon price. For another, it gives the impression of action without necessarily making much difference: the EU (and the US) already have many trade defence measures on Chinese steel. And in general it’s wise to isolate steel disputes from the rest of trade policy since they tend to be interminable and intractable.

But it’s really not a good look for the EU to contort itself according to the whims of Washington, especially not a policy inherited from Trump. It’s not the only example. The trade deliverable from this week’s meeting is a bilateral deal over critical minerals that will allow European companies to access tax credits for electric vehicles under the US Inflation Reduction Act. The IRA is another initiative whose drafters didn’t stay awake at night fretting over what a WTO dispute settlement panel might think.

Now, it’s easy for the likes of me to sit at my desk, perched smugly on the dry rock of principle, and criticise deals like this. I don’t have to get re-elected, or reappointed, or face an irate gang of steel lobbyists banging on my door, or prevent a dispute spilling into wider trade relations. But whenever Brussels gets dragged along with Washington’s plans to bash China, a little bit more of its image as a rule-following multilateralist crumbles into the Atlantic Ocean.

Charted waters

Oil prices rose after the Hamas attacks on Israel, but not massively, suggesting that for the moment investors are not pricing in a major regional conflict in the Middle East.

Trade links

Adam Tooze’s Chartbook is excellent on the long decline of the Gazan economy.

For those who like their climate and trade policy a bit more collaborative than the current US version, the Peterson Institute’s Chad Bown and Kimberly Clausing have come up with a way that the EU, US and China can work together.

The Berlin-based Merics think-tank has a big overview on China’s new economic strategy.

The IMF’s shareholder countries will agree to increase the fund’s firepower without (on this occasion) shifting voting power from high-income to middle-income countries, India’s finance minister said in an interview with the Atlantic Council think-tank. (I predicted this the other week.)

FT colleague Peter Foster in the excellent Britain After Brexit newsletter points out the big hole in the UK Labour opposition’s growth plans — a better trading relationship with the EU.

The Wall Street Journal reports how China’s electric-vehicle manufacturers are investing in South Korea and Morocco, which have preferential trade agreements with the US, to be able to sell into the American market.

Trade Secrets is edited by Jonathan Moules