The heavy metal club that would hurt China and Australia

“I think it is one of the most consequential things that we’re working on between the US and EU with respect to trade.”

At the meeting, the EU’s Commissioner for Trade, Valdis Dombrovskis, said that, while the EU was already working on carbon footprint methodologies, with a trans-Atlantic initiative on sustainable trade it could be made broader. It could be (and inevitably would be) expanded to other products.

The EU already has had its own somewhat broader approach to carbon-intensive trade, with its controversial “Carbon Border Adjustment Mechanism” plan due to start operating from the start of next year. Under that plan the EU would impose a levy/tariff/tax on imports of carbon-intensive products like steel and fertilisers.

The mechanism has been designed to avoid putting EU companies at a competitive disadvantage to competitors that, unlike those in the EU, don’t pay a price for their emissions.

While the mechanism will be introduced next year, its first three years will involve only reporting of emissions intensity from a relatively small number of carbon-intensive imports, enabling the EU to conduct data, liaise with affected countries and prepare the way for the mechanism to be fully operational in 2026.

It has been characterised by some as a form of protectionism. The proposal the US has put to the EU would eventually extend the shade of a protectionist umbrella over a much larger group of economies, although it could create initial friction with steel-producing US allies like Japan and South Korea because the US and EU would initially be the only members of a club that the US envisages would expand over time.

Members of the club would incur a tariff rate of zero for their cleanest products, with the tariff rate scaling up in line with the levels of carbon intensity in particular products. The tariff rates would rise over time to create incentives for reducing emissions.

The legality under world trade rules of the kind of agreement the Biden administration is contemplating is unclear. If the plan were implemented it would be almost inevitable that China, and others, would challenge it at the World Trade Organisation.

The WTO recently declared that the 2018 tariffs that the Trump administration imposed on steel and aluminium violated global trade rules, although the US (which has settled a similar dispute with the EU over those tariffs, replacing them with import quotas) has said it rejects the WTO finding.

Donald Trump used national security interests as cover for the 2018 tariffs so it is possible Biden could do the same. Reportedly, the administration is still working it way through the legal issues.

Introducing a climate-related initiative into trade relationships will be complex and generate blow-back from those outside the agreement, and not only those directly targeted.

As a major exporter of the raw ingredients for steelmaking and aluminium production – iron ore, coal, bauxite and alumina – Australia, for instance, could be materially impacted if China’s steel and aluminium industries were to shrink.

It is inevitable, however, that as some countries impose explicit or implicit prices on carbon emissions within their own economies they will want to do what the EU is doing and offset what would otherwise be a significant competitive disadvantage for their industries by applying similar costs to imports.

The US proposal is muddied by the inclusion of “fair trade” and “responsible” trade objectives in what’s ostensibly a climate change response even as the tariffs flowing from Trump’s trade war with China remain in place.

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The Biden administration continues to add more trade sanctions on Chinese companies and is quite open about trying to prevent China from challenging the US in key technologies that could determine both economies’ futures and which emerges with or, in America’s case, maintains geopolitical dominance.

One of the great successes of the Biden administration has been the repair of relationships with Europe, and other traditional allies, that were undermined by Trump’s “America First” approach to trade and security issues. That has been reflected in a growing wariness within Europe of China’s economic and military ambitions.

If the US, EU and their allies were to create, predominantly as a response to climate change, a first world trade bloc whose foundations are two of the three major global economic regions with the barrier to entry emissions targets that China, India and less developed economies can’t easily achieve, that trans-Atlantic relationship would reshape global trade and the distribution of economic activity.