The ratchet effect of protectionism demonstrated by America and the EU

America is facing challenges as President Joe Biden implements new protectionist measures. One such challenge is the pending return of tariffs on aluminum and steel, originally introduced by President Donald Trump under the section 232 trade act. These tariffs are set to revert to their initial scope at the beginning of 2024, coinciding with the expiration of a deal between Mr. Biden and the European Union (EU).

The deal was designed to allow most EU exports to the US to continue unaffected by the tariffs, creating a window of opportunity for negotiating a comprehensive agreement known as the “Global Arrangement on Sustainable Steel and Aluminum” (GSA). Negotiators hope the GSA will help reduce excess capacity in steel markets and establish a joint approach to decarbonization without harming domestic producers.

However, at a recent summit, it became clear that more time is needed for negotiations. While the talks seemed straightforward as they involve only two products, steel and aluminum, the reality is that both sides have similar industry profiles, making negotiations more complex than expected.

Furthermore, the necessity of such an agreement is uncertain. Data from the OECD shows that steel mills worldwide are operating at the highest levels since 2000, due in part to China’s restructuring of its steel industry. Both the US and the EU have implemented measures to protect their domestic markets from state-sponsored imports, which have significantly reduced steel shipments from China to the EU and almost eradicated its presence in the US.

In addition to excess capacity, an agreement on carbon levies presents another dilemma. The EU’s ambitious plan to tackle climate change includes implementing a carbon price on imported goods. This contrasts with the US approach of using regulations and subsidies to encourage industries to adopt greener practices. Aligning these differing approaches into a common trade policy is proving to be a daunting task.

The EU is advocating for a carbon border tariff while the US is proposing a club that would impose common carbon tariffs on aluminum and steel, with higher tariffs for non-members. These differing approaches make reaching an agreement seem increasingly unlikely.

The future of the GSA remains uncertain. The EU may resort to continued negotiations and temporary solutions, resulting in no agreement at all. The complexities of these issues highlight the challenges ahead for US-EU trade relations.