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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 faced criticism within the EU for appearing to unilaterally support Israel’s response to the Hamas atrocities. Additionally, the EU seemed indecisive about whether it would suspend aid to the Palestinian Authority. On Friday, von der Leyen will have another opportunity to demonstrate her leadership skills as she attends an EU-US summit in Washington with President Joe Biden. In today’s newsletter, we discuss concerns within the bloc about how she might disappoint trade purists and make too many concessions to Washington’s continually evolving plans to block imports of Chinese steel and aluminum. We also provide an update on oil prices following the Hamas attack.
If you have any questions or comments, feel free to email me at [email protected].
A Cynical Deal on Steel
Ever since Ursula von der Leyen’s encounter with Donald Trump at the Davos gathering in 2020, where she promised an unrealistic transatlantic trade deal “in a few weeks,” there has been anxiety throughout the EU about what she might give away when she next meets her US counterpart. Although the official announcement won’t be made until January, the outline of a potential deal is beginning to emerge to address a problem inherited by President Biden from his predecessor. Trump imposed tariffs on steel and aluminum on several countries, including the EU, using spurious national security grounds. The Biden administration replaced these tariffs for EU exporters with a temporary quota system.
In exchange for permanently abolishing these tariffs, Washington has been urging Brussels to establish a global agreement on “green steel.” This arrangement would involve jointly imposing tariffs on steel and aluminum produced by environmentally unfriendly manufacturers (namely, China), which other like-minded countries could join. Given that this proposal clashes with the EU’s carbon border adjustment mechanism and is likely illegal under WTO rules, Brussels has been hesitant to proceed. US Trade Representative Katherine Tai recently condescendingly dismissed this hesitation as an emotional response.
The EU remains apprehensive that von der Leyen might eventually concede to Biden’s demands, even if not immediately. If the EU holds its ground, an alternate US-backed plan could be adopted that is expedient yet less obviously in violation of WTO rules. Washington now suggests blocking Chinese steel due to the country’s excessive steel production, which leads to dumping on the global market. An EU draft proposing this approach has been circulating, outlining potential indicative tariffs of 10% for aluminum and 25% for steel. Remarkably, these figures align with the current Trump tariffs. This draft perpetuates the narrative that the verdict and sentence were predetermined.
The Biden administration deserves praise for its agility, if not subtlety. The argument for imposing tariffs on China has evolved from one rationale to another and one supposed legal justification to another. It began with national security concerns, then pivoted to environmental preservation, and now emphasizes addressing excess production capacity. The administration maneuvers adeptly, akin to a mountain goat nimbly navigating treacherous terrain while wearing a hi-viz vest that says, “Take Your Steel And Shove It, China.”
Taking a Ride on Washington’s Ferrous Wheel
The question now is whether Brussels is cynical enough to embrace this deal. David Kleimann of the Bruegel think-tank aptly compares it to an expedient fix made by von der Leyen’s predecessor, Jean-Claude Juncker, with Trump in 2018. To prevent Trump’s imposition of tariffs on European cars, Juncker promised a bilateral transatlantic zero-tariff deal on goods that would have violated WTO guidelines. (Ultimately, this deal never materialized.)
To be fair, there are strong pragmatic reasons for Brussels to accept this agreement, as long as it does not include carbon tariffs. Firstly, it would help preserve the EU’s carbon border adjustment mechanism (CBAM), a crucial component of its environmental policy and one of the few potential pathways to a global carbon price. Secondly, it creates the perception of action without necessarily making a significant difference since the EU (and the US) already have numerous trade defense measures in place against Chinese steel. Finally, it is prudent to separate steel disputes from the rest of trade policy since they tend to be prolonged and intractable. However, it is concerning for the EU to contort itself to accommodate the whims of Washington, particularly if those policies originated from Trump. This deal is not an isolated example. Another trade agreement being discussed in this week’s meeting is a bilateral deal on critical minerals that would enable European companies to access tax credits for electric vehicles under the US Inflation Reduction Act. The drafting process of the IRA did not seem preoccupied with potential WTO disputes.
Now, it’s easy for someone like me to sit at my desk, smugly perched on the solid ground of principles, and criticize deals like this. I don’t have to worry about getting re-elected, reappointed, facing steel lobbyists demanding action, or preventing a dispute from escalating into broader trade conflicts. However, whenever Brussels aligns itself with Washington’s efforts to confront China, its image as a rule-abiding multilateralist erodes further.
Charted Waters
Following the Hamas attacks on Israel, oil prices have risen, albeit not dramatically. This suggests that, for now, investors are not factoring in a major regional conflict in the Middle East.
Trade Links
Adam Tooze’s Chartbook provides an excellent analysis of the long-term decline of the Gazan economy.
For those seeking a more collaborative approach to climate and trade policies than the current US approach, the Peterson Institute’s Chad Bown and Kimberly Clausing propose a method for the EU, US, and China to work together.
The Merics think-tank, based in Berlin, offers an extensive overview of China’s new economic strategy.
According to India’s Finance Minister in an interview with the Atlantic Council think-tank, the IMF’s shareholder countries are expected to increase the fund’s resources without shifting voting power from high-income to middle-income countries, as I predicted in a previous newsletter.
Peter Foster, a colleague at the FT and author of the excellent Britain After Brexit newsletter, points out a major flaw in the UK Labour opposition’s growth plans—an improved trading relationship with the EU.
The Wall Street Journal reports that China’s electric vehicle manufacturers are investing in South Korea and Morocco, which have preferential trade agreements with the US. This will enable them to enter the American market.
Trade Secrets is edited by Jonathan Moules.
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