Protectionism Wears A Green Mask This Halloween

The two-year U.S.-EU ceasefire on tariffs was originally due to expire on October 31. If the dispute is not settled, the Trump-era tariffs on steel and aluminum — and the EU’s retaliatory tariffs — could spring back into effect. American manufacturers would pay more for European steel and aluminum, while European consumers would pay more for a variety of U.S. goods, ranging from Harley Davidson motorcycles to bourbon whiskey. The strong strategic transatlantic partners could find themselves back in Trump’s trade war.

A deal might be in the works—let’s just hope it isn’t mostly a mask for more protectionism. President Biden and European Commission President Ursula von der Leyen are scheduled to meet on October 20. They were expected to strike a deal, though both sides recently agreed to extend their arbitrary deadline by two months to the end of the year. So there may be a longer negotiating window.

Depending on where you sit, October talks might still bring a trick, a treat, or both. One speculation is that the Americans might just be able to trick the Europeans into giving them an exemption from carbon border-adjustment mechanisms. U.S. steel and aluminum producers might get treated to continued higher prices and protection from lower-priced imports.

Steel production and carbon emissions are complicated, especially in Europe. Europeans have spent years trying to put a price on the practice of emitting carbon and carefully design a carbon border-adjustment mechanism (CBAM) that imposes a tariff on certain carbon-intensive imports. The tariff aims to equalize the carbon price between imports and EU goods produced under Europe’s environmentally stringent emission-trading system.

However, it’s even trickier than that. Pricing carbon is a simple textbook way to incentivize lower carbon emissions. The European Commission wants to see CBAM successfully implemented in a manner consistent with World Trade Organization rules. A laudable pursuit. But that would mean all trading partners getting equal treatment with no free passes. Understandably, WTO enthusiasts in the EU fret about a deal that gives the U.S. a free pass. That would be a clear violation of the Most Favored Nation principle, which is to treat all countries equally.

For U.S. metal producers, a small and powerful group, it’s simple: They’d like to allow steel and aluminum imports from Europe to continue to escape the U.S. section 232 tariffs as long as import volumes remain below historic levels. This keeps prices in the U.S. elevated without inviting trade retaliation.

Part of a potential deal, reportedly, is that the EU would agree to help build a tariff wall around the transatlantic marketplace to keep out low-priced metals from nonmarket economies like China. That brings us to the other side of the story.

The U.S., EU and others have been working on so-called overcapacity in steel since the late 1970s. When supply goes up, prices go down, which is welcomed by companies that use steel in their manufacturing but draws screams of horror from steel producers. Enlisting the EU’s help in building this tariff wall could shield U.S. and EU producers from lower prices. The protectionism comes at a hefty cost to the much larger group of manufacturers who use steel and aluminum.

But in America, steel producers tend to carry more political sway than steel consumers. With the U.S. presidential election around the corner, perhaps von der Leyen sees the writing on the wall and figures that the more she can help Biden placate an important constituency, the better the odds of having him in office for a second term instead of the more combative Trump.

To be fair, it is not straightforward how the U.S. would adhere to CBAM right now anyway, because that mechanism is fundamentally based on pricing carbon. That not only means determining the price but also identifying the carbon content in U.S. exports to the EU, and then calculating the border adjustment accordingly. There is no current market or market price for carbon in America. Biden has been pursuing a “carrot and stick” approach to carbon emissions — enticing cleaner energy with tax and investment subsidies, while imposing stricter regulations on emitters.

There is a silver lining to different governments trying different climate strategies: Over time, hopefully, policymakers will see which way works better and then reassess. But in the meantime, there is ample room for special handouts to favored industries like U.S. steel producers. With the presidential election around the corner, Biden is eager to please them, and Europeans might be willing to be dragged along.