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Welcome to Trade Secrets. Today I’m filling in for Alan. Brussels and Washington are facing increasing pressure to strike a climate-related deal for steel and aluminum. Although there is some common ground, both sides agree that managing climate change is essential. Charted Waters reveals how Russia is taking advantage of a loophole in the oil price-cap regime to earn more from crude oil sales to India than previously recognized.
Hope for a compromise emerged when Joe Biden suspended the Trump-era tariffs on European steel and aluminum as one of his early measures to keep peace with Europe. In place of national security tariffs, import quotas were imposed, accompanied by talks aimed at finding a permanent solution for low-carbon steel and aluminum trade while imposing levies on polluting producers. The goal is to address overproduction and reduce carbon emissions.
However, despite setting a deadline of October this year to reach a deal, little progress has been made between the two sides. Panic has begun to set in, according to our sources. The Americans have been frustrated by the EU’s insistence on its own approach, criticizing the European method as slow and cumbersome. This sentiment was also evident in the International Revenue Amendment (IRA), where Washington responded with minimal sympathy to European complaints about tax subsidies for companies building in the US that violated World Trade Organization rules.
The European Union views the Americans as cavalier and self-serving, arguing that the rules of the global trading system are clear and unambiguous, while Washington sees them as open to interpretation. Trade Secrets contributor Alan has covered the current negotiating positions on steel and aluminum talks here, so I won’t go into detail.
What is new, however, is Washington’s insistence that the deadline will not be extended. The clock is ticking, especially considering the August lull when both Washington and Brussels are quiet.
EU Trade Commissioner Valdis Dombrovskis has refused to speculate on whether the truce could be extended, but there is hope in Brussels that if significant progress is made, an extension could be agreed upon to finalize the details.
There is hope that a settlement could be reached in the next two to three months, as both sides agree on the need to address climate change. David Kleimann of the Bruegel think-tank in Brussels argues that the US, with its relatively low-carbon intensity and energy-efficient electric arc furnaces, is creating a “green smokescreen” to protect its higher-intensity steel plants in swing states Ohio, Pennsylvania, and Michigan. In the long run, these two goals are not necessarily contradictory. Carbon-heavy blast furnaces emit more greenhouse gases than energy-efficient electric arc furnaces, but winning these swing states could mean Biden retains the White House. Under a Democratic presidency, the climate impact may be more favorable, particularly if the full force of the International Revenue Amendment’s tax credits can take effect.
This trade-off can also be observed in the US domestic politics surrounding the Mountain Valley Pipeline. Climate activists criticize the White House for greenlighting the project, but the Biden administration needs Senator Joe Manchin’s support to retain power. In the short term, the fossil fuel pipeline is the trade-off made.
Negotiating trade agreements based on domestic political considerations is a normal practice. However, when it comes to negotiations with Europe, the goals of reducing global carbon emissions and achieving the Paris Agreement targets are the same. This offers hope for an agreement, even though top European officials may be reluctant to prioritize the transatlantic friendship over global trade rules. They have until October – time will tell.
Charted Waters
FT analysis has revealed that inflated shipping costs have allowed Russian companies to earn more from crude oil sales to India than previously recognized. The price cap principle dictates that oil must stay below $60 per barrel (for crude). However, Russian sellers now handle the freight when sending oil to India, giving them the leverage to charge more. Freight costs are not subject to the price cap, creating a loophole that enables Russian companies to charge significantly more than the actual shipping costs.
FT analysis shows that this overcharging, combined with fees earned from shipping the oil on Russia-linked vessels, may have amounted to $1.2 billion between April and July.
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