Leibowitz: U.S.-EU Steel, Aluminum Deals Seek Lower CO2 - a Trade Law Revolution?

First, a few details emerged about how the deal was struck. The most interesting, if not the most important long-term, was the quantity of steel and aluminum from Europe that is permitted free of duty, effective Jan. 1, 2022. It is 3.3 million metric tons of steel and 384,000 metric tons of aluminum (18,000 MT unwrought and 366,000 MT wrought).

In a briefing last week, U.S. officials discussed the yawning gap between the U.S. and EU quantities proposed. The 3.3 million MT number for steel was a compromise between a lower U.S. proposed quantity and a much higher EU proposal. To narrow the gap, the U.S. agreed to an automatic two-year extension of exclusions already granted to EU exporters and U.S. importers that were used during fiscal year 2021 (ending Sept. 30). For this reason, there is no two-year extension for aluminum exclusions. U.S. importers must reapply for exclusions.

The 3.3 million MT steel number is less than EU steel exports in 2017. But imports in 2017 were too high, according to U.S. officials, and those high import levels helped produce the Section 232 tariffs. So a compromise was reached. The deal allows the quota-free tariff level to increase or decrease based on changes in the demand level in the U.S. But that provision is complicated too.

Second, the U.S. announced last week that it was discussing similar arrangements with the UK and Japan. No word yet on the outcome of those discussions. The UK and Japan should be low-hanging fruit: both are staunch U.S. allies, and both competed at a high level of sophistication. But snags in those deals can’t be ruled out.

What other countries might be in line for tariff rate quotas rather than tariffs? The list is certain to grow – countries that are NATO allies will push for similar agreements. Turkey is a NATO member. But there are no indications as yet that Turkey will be among the first nations to reach an agreement with the U.S. Asian countries that promise not to transship or finish “dirty” steel or aluminum could be included. Again, there are no indications as to how that might work.

Another list includes Brazil, South Korea and Argentina, which I mentioned last week. Those countries have quota agreements. But the U.S. does not permit imports from those countries that exceed the negotiated ceilings – an “absolute” quota. Brazil especially is a major player in the semifinished steel market. U.S. companies that make steel products would eagerly anticipate a TRQ on slabs, billets, etc. from Brazil. So far, there is no announcement; and there is an issue about the cleanliness of Brazilian steel production. A recent program run by the United Nations encourages steel producers to rely less on coal and more on charcoal. But in Brazil, the charcoal is made from burning trees in the rainforest. That issue may come up in any talks with the U.S. about changing steel and aluminum import restrictions.

Third, the U.S. and EU announced their intention to agree on limits to steel and aluminum produced with high levels of carbon emissions. That is fairly revolutionary in the trade world – tariffs are based now on the nature of a product, not on how it’s made. But already we have exceptions, and throughout history we’ve had more. Antidumping and countervailing duty law is an exception, where price discrimination and subsidies affect duty rates. And in the U.S, the president was, once upon a time, authorized to adjust tariff levels based on comparisons of the cost of producing a product in the U.S. and in exporting countries.

There is no guarantee that this power will (or even can) be employed responsibly – in fact, there is a pretty good argument that it’s not being used responsibly now, with 500% antidumping margins and unverifiable costs of production.

Once an agreement is reached between the U.S. and the EU on carbon emissions (that may be a tall order), other countries will want to have quota agreements with the U.S. The U.S. will, no doubt, condition those agreements on reducing the chance of “dirty” steel or aluminum being traded. We don’t know yet how that will work.

The joint announcement of the U.S. and the EU about their arrangement said that this deal should be finalized within two years and take effect in 2024. There are many issues to deal with before the agreement is finalized. But there is no question that it will affect steel and aluminum trade.

Some are asking whether this new initiative will mean an end to the Section 232 tariffs and quotas within the foreseeable future. The news is not good for a quick end. The Trump tariffs and quotas provided the Biden administration an opportunity to pair protecting the U.S. steel and aluminum industries and addressing climate change. I’ve said for a while that the administration will not end the measures without compensation from trading partners.

Perhaps a more important issue is whether climate change will drive trade policy more than market economics. If carbon emissions can affect tariff rates, what other issues might affect them? Human rights, price levels, costs of production, wage levels, collective bargaining practices? With all those factors at play, markets could matter less than politics in opening (or closing) markets. We should discuss and debate which issues rise to a level of utmost importance and let private sector industries know what is expected of them. Otherwise, we might be signing up for a lot of surprises.

Lewis Leibowitz

The Law Office of Lewis E. Leibowitz
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E-mail: lewis.leibowitz@lellawoffice.com

P.S. – Leibowitz will be the featured speaker for our next Community Chat webinar on Wednesday, Nov. 17 at 11 a.m. ET. Register here.