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In a show of unity at a time of turmoil, President Joseph R. Biden Jr. met with EU leaders at a Washington summit in October. Afterwards, they condemned Hamas, supported Israel, and vowed to back Ukraine “as long as it takes.” But the meeting was a total failure on agreeing to anything to alleviate transatlantic trade tensions.
Progress is urgently needed—and in fact possible—to defuse US-EU confrontations on “green” production of steel and aluminium and on critical minerals, for which both sides have an interest in reducing dependence on China.
Joining Biden at the White House were European Commission president Ursula von der Leyen and European Council president Charles Michel, a reflection of warming relations since Biden took office. Regular transatlantic conversations occur frequently these days about coordinating support for Ukraine and sanctions on Russia, showing that the United States and the European Union are speaking the same language.
How might Europe and the United States build on their partnership?
How to make steel greener and punish China
In the last two years, negotiators from the European Union and the United States have been discussing a Global Arrangement on Sustainable Steel and Aluminium (GASSA) proposed by Washington as a means to defuse transatlantic tensions while also discouraging carbon-emitting steel production in other parts of the world.
Under the US proposal, Washington would abolish the tariffs on steel and aluminium that former President Donald Trump, invoking national security, imposed on the European Union and other allies under Section 232 of the Trade Expansion Act of 1962. The European Union would in turn lift the countermeasures that it imposed on the grounds that the Trump tariffs were noncompliant with World Trade Organization rules. Biden, when campaigning, promised to get rid of the tariffs.
Once Biden took office, the European Union and the United States agreed to temporarily suspend the respective tariffs and seek a joint solution. The United States gave the European Union quotas instead, for 54 product categories, multiplied by 27 member countries, summing up to just over 1,400 quotas in total. Steel production is important in many swing states in the United States, and it is also key for several European countries. The production is, in general, particularly dirty and carbon intensive.
The United States proposed that the European Union enter a long-term partnership on more sustainable steel while addressing nonmarket practices in other trading partner countries. Tariffs would be imposed on imports of steel and aluminium from countries with carbon-intensive production, meaning China. The European Union has been reluctant to agree on this proposal. Why, Europe asks, should they make concessions to escape tariffs they consider unjustified from the beginning? Also, it is no secret that the United States is trying to find an alternative solution to the European Union's legislation on carbon fees, the so-called Carbon Border Adjustment Mechanism (CBAM), which aims to put a carbon price on imported products such as steel, aluminium, fertilizer, and cement entering the EU market.
Talks on this issue are at an impasse, and likely to remain so, even if they continue during the fall. But failure to reach agreement would, in the worst-case scenario, result in the return of the tariffs on steel and aluminium, and also a return of Europe´s retaliatory tariffs on whiskey, orange juice, Harley-Davidson motorcycles, among others—goods worth around $3.6 billion.
The European carbon mechanism would impose border fees on carbon-intensive imports. It took effect in October, initially asking companies to report and map the carbon emission of their exports. The actual collection of carbon fees will only start in 2026. The United States will be affected but to a small extent compared to other countries. The main aim of the CBAM is to avoid carbon leakage but also to ensure that European producers that have adopted tougher carbon measures can compete against third-country producers.
The deadline for the European Union and the United States to reach an agreement on GASSA has been postponed until the end of the year. In the joint statement of the recent summit, there was only a vague reference to progress and a call for continued talks in the coming months. Anonymous sources from both sides have confided that the partners are still very far apart: The United States reportedly refuses to get rid of the tariffs even if there is an agreement; the Europeans are said to find the quotas bureaucratic and cumbersome, and have noted European steel producers have lost market shares to Mexico and Canada since their introduction.
Flexibility is clearly needed from both partners. The United States must acknowledge that the CBAM is a fact, and that Europe is not eager to find other solutions undermining the mechanism, especially as the United States has no carbon price mechanism at all. Furthermore, the intended tariffs in GASSA need to be WTO compliant for the European Union to agree. As for the European Union, it needs to be flexible with its trading partners who use alternatives to a CBAM to put a price on carbon. It is doubtful, however, whether a compromise can be found before both partners enter election campaigns next year. If there is no agreement and the US quotas are still in place, the European Union should consider keeping their countermeasures. A transatlantic spat is however not what the world needs right now.
A potential critical minerals agreement
The other contentious point of discussion between the European Union and the United States is the US Inflation Reduction Act (IRA) of 2022 and its impact on European companies. Whereas Europe has welcomed the IRA’s massive investments in green transition technology and in fossil free energy, it has also expressed concerns about the discriminatory local content requirements. In addition, there is a fear that the new American industrial policy will trigger a global subsidies race. On the other hand, the European Union is also opening the floodgates for more subsidies and softening of state aid rules.
To access the full tax credits, the IRA stipulates that batteries in electric vehicles must be made with a certain percentage of critical minerals processed in the United States or in partner countries—that is, countries with a free trade agreement with the United States. To fit the European Union under this umbrella, the two sides have agreed to negotiate a smaller agreement; Presidents von den Leyen and Biden announced the plan at a meeting in March. Their goal was to negotiate a targeted critical minerals agreement for the purpose of enabling relevant critical minerals extracted or processed in the European Union to count toward the requirement for the clean vehicle IRA tax credit.
The critical minerals deal would not be a trade agreement in the traditional sense, as it would not address tariffs and market access. The aim is purely geopolitical, trying to agree on common terms for reducing the dependence on China for these minerals. Both Europe and the United States have some these minerals, but most of them are not accessible or ready to be processed any time soon. It is also possible for a larger group of allies to work together to reduce their dependence on lithium, magnesium, cobalt, nickel, among others, all key elements for the green transition and further digital development. For example, earlier this year, the United States and Japan signed an agreement that could serve as a template.
Negotiations are ongoing and have been blessed both by the European Parliament and EU member states and should not be complicated. In the statement from last week´s summit, there was only a short reference to the need for further work.
The clock is ticking for an agreement
There is a mutual interest for both the United States and the European Union to find agreement on how to move forward and conclude the negotiations, both on sustainable steel and on critical minerals. The green transition will necessitate an increase in demand for critical minerals such as nickel, cobalt, copper, and lithium. Europe and the United States are far too dependent on China for these minerals. Ideally, they would find a way to partner on investment and broader cooperation with other allies in a kind of minerals club, even though they also compete for the access of safe, cheap, and sustainable minerals to put in wind turbines, sewage systems, electric vehicles, and other green technologies.
A way forward on the steel agreement is absolutely necessary. Nobody wants a return of the tariffs. Time is running out: The United States is already in an aggressive presidential election campaign, and advisers to former President Trump have alluded to a possible flat 10 percent tariff on all imports to the United States, should the November 2024 election return him to the White House.
European parliamentary elections also take place next year, in June, followed by potentially new leaders in the European Commission and the European Council. With the current global situation, open disagreements between Brussels and Washington will only benefit authoritarian leaders throughout the world who are seeking to undermine democracy, rule of law, and the global world order. The coming months might be the last chance for the transatlantic partnership to deliver.
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