Trade Beyond Neoliberalism: Concluding a Global Arrangement on Sustainable Steel and Aluminum

On October 31, 2021, the United States and the European Union launched historic negotiations aimed at landing an agreement to increase trade in “green” steel and aluminum—that is, steel and aluminum produced in a way that emits lower greenhouse gas emissions than when steel is produced using conventional manufacturing practices. Were it to be concluded, the agreement—formally referred to as the Global Arrangement on Sustainable Steel and Aluminum (GASSA)—would represent a significant achievement in the United States’ trade and climate policy that has the potential to reshape global supply chains toward greater sustainability, protect the livelihoods of U.S. workers, and significantly contribute to industrial decarbonization.

These negotiations are playing out against the backdrop of American and European efforts to decarbonize their heavy industries to achieve net-zero climate targets by midcentury, as well as long-standing problems of excess capacity in global steel and aluminum markets. Steel and steel products have some of the highest embedded carbon content of all traded goods, and the iron and steel industry produces nearly one-third of global emissions from industry. Aluminum, meanwhile, is energy and carbon intensive and is consequential to global greenhouse gas emissions, albeit on a comparatively smaller scale.

Yet recent reporting reflects that GASSA negotiations have stalled on account of different U.S. and EU approaches to linking market access to the carbon intensity of traded goods, which may result in the deal being indefinitely shelved. This would be an immense missed opportunity. GASSA, if concluded in a way that links market access to carbon intensity, would mark a paradigm shift in the organization of cross-border commerce, one in which like-minded democracies use trade—and the institutions that facilitate and govern it—as a tool to address shared problems. Furthermore, by laying the groundwork for a transatlantic climate bloc, the deal would strengthen other U.S.-EU partnerships aimed at confronting some of the major global challenges of the 21st century—above all, climate change, but also the influence of authoritarian states in the international system and the need to recalibrate the global economy in a way that better serves the interests of workers and the planet.

This issue brief offers an overview of GASSA, explains why it matters, and examines challenges to its implementation. It assesses that a strong agreement would both constitute a major step forward in aligning trade with climate action and offer a productive mechanism for countering abuses of the global trading system by nonmarket economies while strengthening transatlantic relations. Finally, it recommends that if GASSA cannot move forward in a timely fashion, the United States should seek similar partnerships with other high-ambition steel- and aluminum-producing nations.

Background to the deal

In 2018, the Trump administration imposed tariffs of 25 percent on European steel products and 10 percent on European aluminum products under Section 232 of the Trade Expansion Act of 1962. The Trump administration justified the tariffs—which covered most U.S. trading partners—on national security grounds, provoking a sharp reaction in most European capitals, given that the United States and most European states are bonded together through the NATO alliance to ensure each other’s security. As a result of the tariffs, alongside a broader drop in demand relating to the COVID-19 pandemic, EU exports to the United States in steel and aluminum, worth about $7 billion, declined more than 50 percent between 2018 and 2020. Although the effects of the tariffs on the U.S. steel market are contested, some respected economists have concluded that they did not meaningfully affect domestic steel prices and coincided with an improved economic outlook for the U.S. steel industry.

As a “rebalancing,” or retaliatory, measure, the European Union imposed a range of duties on various U.S. products, including steel products but also motorcycles, bourbon, and other trade-exposed goods. Both the United States and the European Union initiated disputes at the World Trade Organization (WTO) over the other side’s tariffs. While steel tariffs addressed legitimate concerns the U.S. steel industry had over steel overproduction—concerns that European producers shared, ironically—they nonetheless were a major thorn in U.S.-EU relations, and the EU has pressed the new administration to reverse the tariffs since President Joe Biden came into office.

In October 2021, on the eve of the 26th U.N. Climate Change Conference in Glasgow, American officials announced they would exempt imports of European steel and aluminum from the Section 232 tariffs up to a certain volume through the end of 2023, beyond which the tariffs would remain in effect. In return, the European Union agreed to suspend its countervailing tariffs on a range of U.S. products and refrain from imposing additional tariffs that were set to go into effect on December 1, 2021. According to a joint statement released at the time of the announcement, this suspension would create space for the two sides to agree to negotiate “future arrangements” to address both “non-market excess capacity” and the “carbon intensity” of the steel and aluminum industries. In addition, both sides agreed to drop WTO disputes they had filed against one another concerning their reciprocal tariffs. And in a somewhat unusual move, they agreed to transfer those cases to arbitration panels, as permitted under WTO rules, based on the understanding that arbitration would only go forward if the arrangements contemplated in the deal were to fail.

In a separate, unilateral statement, the European Union asserted that it considers the residual tariffs on European steel and aluminum retained by the United States under the agreement to be “incompatible with World Trade Organization rules,” although there is no indication Brussels intends to challenge those tariffs before the WTO. Notably, although the European Union suspended its dispute relating to the Section 232 tariffs, other non-EU countries—Switzerland, Norway, China, and Turkey—pursued claims against them before a WTO adjudicative panel and obtained a finding that the tariffs were incompatible with WTO rules.

What GASSA would do

The “future arrangements” contemplated in the 2021 joint statement included, most significantly, measures that “restrict market access”—by imposing tariffs or other barriers to import—for economies that either contribute to global steel and aluminum oversupply or that do not meet certain emissions thresholds in their steel and aluminum production. In other words, this agreement could lead to the United States and the European Union coordinating efforts to impose costs on high-polluting steel and aluminum producers.

In addition, the two sides agreed to “refrain from non-market practices that contribute to carbon-intensive, non-market oriented capacity,” as well as ensure their domestic policies support these goals. Finally, they agreed to consult on government investment in decarbonization and “screen inward investments from non-market-oriented actors”—which, as discussed below, refers to nonmarket practices and actors, including Chinese steel producers. When the United States and the European Union came to agreement, they set a goal of concluding the negotiations in two years, by October 2024, and noted that the agreement could be expanded to include “like-minded economies.” This means that once the United States and the European Union reach an agreement, other allies could sign on, potentially making this the basis for a global agreement consisting of a large portion of the global economy.

Why GASSA matters

GASSA would be more narrowly focused than a conventional free trade agreement. But from an economic and climate perspective, the scope of the deal would nonetheless be substantial: Steel is one of the most used products in the world as well as one of the most widely traded commodities, both in finished products and as a component of other goods. There are few sectors of the global economy untouched by steel production, which is used in everything from cars, buildings, and appliances to wind turbines, nails, and screws. The annual value of global steel products has been estimated to be as high as $2.5 trillion, about one-quarter to one-third of which can be attributed to exported goods. Aluminum is likewise one of the most traded commodities in the world and a key component of many finished goods.

From the perspective of addressing climate change, the deal is even more consequential: The iron and steel industry accounts for about 11 percent of global CO2 emissions and nearly one-third of industrial emissions. Notably, the United States and European Union are the second- and third-largest import markets for steel—after China, which is both the largest importer and the largest exporter of steel—and are also major exporters. Aluminum, meanwhile, accounts for about 3 percent of global CO2 emissions.

American and European steel manufacturing is less carbon intensive than that of many other countries with major steel industries, particularly China and India, because of greater prevalence of low-carbon manufacturing methods, a greener electric grid, and greater efficiency in traditional blast-furnace production methods. Inflation Reduction Act and EU Green Deal Industrial Plan investments in steel decarbonization and related technologies such as green hydrogen mean that the carbon gap in steel and aluminum is poised to widen substantially in the coming decade. In contrast, the Chinese steel sector recently invested $100 billion in coal-fired steel production—the most carbon-intensive steel production method by a considerable margin.

By tying market access to sectoral manufacturing practices, GASSA has the power to shape production standards beyond the American and European markets. Specifically, by raising market barriers on imports of carbon-intensive steel and aluminum and creating a free-trade area for lower-carbon versions of those commodities, the deal creates incentives for other steel- and aluminum-exporting countries to pivot to greener production methods. The arrangement would also safeguard the livelihoods of American and European steelworkers by advantaging their lower-carbon steel vs. more-carbon-intensive steel produced in other regions. In this sense, GASSA could substantially reshape supply chains and significantly contribute to industrial decarbonization on a global scale. It would also be a boon to domestic industrial decarbonization efforts by rewarding domestic greenhouse gas emission improvements in the steel and aluminum sectors with access to a protected market.

Just as importantly, GASSA would mark a fundamental shift in understandings of how global trade should function that have persisted since the end of the Cold War. In particular, a strong GASSA arrangement would signal alignment between the world’s two largest free-market economies on two pressing issues: responding to the climate crisis and managing China’s role in the global economy. In addition, the deal offers a crucial opportunity for leading democracies to influence global trade rules and institutions with a view toward a more sustainable, fit-for-purpose global trade system. As an additional benefit, GASSA has the potential to strengthen transatlantic cooperation on a broad range of issues at a time when solidarity between democracies is more important than ever.

A long-overdue alignment of trade with climate action

Multilateral and plurilateral trade arrangements have, to date, done little to nothing to address the climate crisis. Arguably, they have contributed to it by lowering the barriers to carbon leakage—the shifting of production to regions with lower climate standards—through investor-state dispute resolution mechanisms, which favor corporate interests, and tariff reductions on high-emission products. No trade agreement involving major economies has sought to account for the carbon content of traded goods.

The European Union recently introduced a Carbon Border Adjustment Mechanism (CBAM), which imposes a fee on imported goods based on the carbon intensity of their production. Comparable legislation has been introduced by both Republican and Democratic legislators in the U.S. Congress. Both the EU CBAM and possible U.S. carbon tariffs are watershed developments in the sense that they reflect a shift toward internalizing negative externalities—that is, costs to society not reflected in the price of traded goods. Yet these measures are the product of a unilateral legislative process and have not been designed with a view toward compatibility with each other or with other economic and regulatory systems. As a result, they leave on the table the multiplying effects of aligning the combined market power of the two largest free-market economies, which together can act with far greater effect to influence global standards and production methods.

By contrast, GASSA may resemble a sector-specific version of what economists describe as a “climate club”—that is, a preferential trade arrangement between countries in which enhanced market access (or exclusion from market barriers) is linked to a common or harmonized set of emission reduction policies. A key feature of climate clubs is that countries inside the club will move toward freer trade between themselves. But countries that do not meet the club’s climate standards are subject to less favorable trade terms than countries within it. Here, again, China—whose steel has a carbon footprint that is nearly two times greater, on average, than U.S. steel and is widely exported to both the American and European markets—is the third party that stands to be most affected by the deal. But other countries with highly carbon-intensive steel industries, such as Russia and India, would also be affected absent significant measures to decarbonize their industries.

Notably, the disparity between U.S. and Chinese steel emission intensities differs by production method. Chinese steel produced by the traditional blast oxygen furnace (BOF) method—the most carbon-intensive method—produces about 50 percent more emissions than U.S. BOF steel. Meanwhile, Chinese steel produced using an electric arc furnace (EAF), a more recent manufacturing method that is less carbon intensive than BOF, is about three times more carbon intensive than U.S. EAF steel.

A new approach to managing the economic rise of China—and other authoritarian, nonmarket states

Although China is not mentioned by name in the joint statement released in 2021, it remains the elephant in the room. The joint statement’s repeated references to “non-market excess capacity” and the need to ensure “market-oriented conditions” clearly allude to Chinese steel production, which has surged from 15 percent to about half of global production since 2000. There are long-standing transatlantic concerns that the Chinese economic system of state capitalism has conferred unfair advantages to Chinese business and resulted in overproduction of key commodities—above all, steel—driving down global prices and harming domestic industry. Most notably, in 2018, the United States circulated a detailed memorandum to all WTO members concerning China’s “trade-disruptive economic model,” assessing that a variety of “non-market” practices—such as “massive, market-distorting subsidies,” foreign investment restrictions, and state-controlled financial institutions—had given Chinese manufacturing an unfair trade advantage to the detriment of market economies.

Although the European Union has been less vocal in challenging the Chinese economic model on a general level, it has repeatedly expressed frustration over Chinese steel overproduction and trade-distorting subsidies, most recently regarding subsidies to Chinese electric vehicles.

In this sense, GASSA would represent the first coordinated multilateral effort to address China’s integration into global markets without directly engaging Beijing or invoking WTO dispute resolution measures. It would also reflect a new approach to promoting Chinese climate ambition, in which direct engagement with Chinese authorities is supplemented by market-shaping policies that create economic and reputational incentives for Chinese manufacturers to decarbonize. Such an approach would reinforce unilateral measures to promote decarbonization of carbon-intensive sectors such as carbon tariffs, green procurement standards, and subsidies to clean industry.

China, of course, is not the only nonmarket state with a major role in the global economy. Russia, which the United States recently assessed to be a nonmarket economy, also produces considerable volumes of steel and aluminum, and steel production is expanding in a number of nondemocratic states in the Middle East and Southeast Asia, with a record of trade-distorting practices. As with China, GASSA would protect U.S. and EU industries from being undercut by steel and aluminum produced cheaply or in excessive quantities by these countries as a result of carbon-intensive manufacturing, exploitative labor conditions, or other unpriced externalities and social harms. In this sense, GASSA could be an important first step in reversing what U.S. Trade Representative Katherine Tai has described as a “race to the bottom” in the organization of the global economy, “where exploitation is rewarded and high standards are abandoned in order to compete and survive.”

A catalyst for remaking the global trade system

In recent years, the WTO and globalization itself have come under unprecedented pressure to remain relevant in an international environment defined by the U.S.-China geopolitical rivalry, supply chain disruptions, and the emergence of climate action as an urgent priority in the international agenda. As observed by current WTO Director-General Ngozi Okonjo-Iweala:

A series of shocks in the space of 15 years—first the global financial crisis, then the COVID-19 pandemic, and now the war in Ukraine—have created an alternative narrative about globalization. Far from making countries economically stronger, this new line of thinking goes, globalization exposes them to excessive risks. Economic interdependence is no longer seen as a virtue; it is seen as a vice. The new mantra is that what countries need is not interdependence but independence, with integration limited at best to a small circle of friendly nations.

Whether this accurately describes the position of the United States or another major economic power is up for debate, but there is little question that current U.S. trade policy is grounded in the assessment that economic integration cannot proceed on the neoliberal terms envisioned by the late 20th century architects of the WTO system.

On the one hand, GASSA can be seen as affirming the WTO’s continued relevance in managing trade relations between sovereign economies. The provisional lifting of steel and aluminum tariffs under the 2021 U.S.-EU agreement, with recourse to WTO arbitration should negotiations fail, could buttress the WTO system by using the WTO’s own procedures to resolve a dispute that would otherwise have languished under the organization’s currently inoperative dispute resolution mechanism. Even so, some analysts and senior European officials have expressed reservations that GASSA could, depending on its design, be incompatible with WTO rules. Although the WTO system has long tolerated plurilateral free trade agreements, in which participating countries reciprocally reduce trade barriers for one another, the same cannot be said for agreements to increase trade barriers on third-party countries; such arrangements could be read to run afoul of the WTO’s “most-favoured-nation” principle, which requires treating imports from all WTO members equally.

Yet such concerns are not reason to avoid moving forward with GASSA. The urgency of the climate crisis militates against an excessively cautious, self-limiting approach to the design of trade arrangements, and there is a case to be made that GASSA is a permitted trade measure under WTO rules. Ultimately, the trade system must be responsive to the broader policy context in which it operates and current public priorities—most notably the need for alignment with the global commitment to reduce greenhouse gas emissions. Given the outsize role the United States and European Union play in global trade, GASSA may prove to be a vehicle for reappraising WTO rules to better align with climate action.

In this respect, GASSA could have the surprising consequence of galvanizing a long-overdue conversation about overhaul of the global trade system. In particular, GASSA would add further ballast to an emerging trade reform agenda that recognizes that the WTO and the global trade system more broadly must move beyond their current focus on clearing barriers to trade—what U.S. Trade Representative Tai has called a system that encourages “low cost at any cost—and be regeared to promote specific kinds of economic activity that carry positive environmental and social benefits—for example, trade in low-carbon goods and goods that can support a green transition, such as inputs into EVs, photovoltaic solar panels, and wind turbines. If landed, GASSA would mark a major pivot toward what national security adviser Jake Sullivan has called the “new Washington consensus,” which rejects reflexive lowering of trade barriers and seeks alignment of trade policy and trade institutions with climate action, equitable economic growth, and resilient supply chains that avoid excessive dependence on any one country for strategically important goods. Sullivan has identified WTO reform as one element of this new approach to international economics.

A special economic relationship between democracies

GASSA negotiations began in earnest in November 2021, in the first year of the Biden administration. It is not surprising that the administration’s first major move in trade policy was with the European Union. U.S. trade officials have stated their desire to deepen economic ties with existing economic partners and allies and to use trade as a tool to strengthen global democracy.

GASSA would create a new set of economic relationships among the world’s two largest democratic economies, organized around a novel set of trade policy propositions. In other words, it could presage a long-term trend in the global trading system in which trade arrangements and the cross-border investment and supply chain cohere more closely with shared values among trading partners, rather than the narrow notions of economic efficiency that have created economic interdependence between the economies of democracies and authoritarian regimes such as China and Russia.

Of particular note, once established, GASSA could be broadened to one or more democracies in the Global South, such as Brazil, with requisite investment in lowering carbon intensity and (where needed) strengthening of core labor rights. In addition to the climate benefits, this would help address concerns that linking market access to climate ambition is a form of “green protectionism” designed to disadvantage developing countries.

A much-needed step forward in transatlantic relations

Despite a long history of security cooperation and shared democratic values, economic cooperation between the United States and the European Union has been a recurring source of tension and even conflict. During the Obama administration, negotiations over the Transatlantic Trade and Investment Partnership floundered and were eventually abandoned. And during the Trump administration, Brussels was blindsided with tariffs on national security grounds, which antagonized European leaders and prevented more constructive discussions over collaborating to address a range of economic challenges, including China’s unfair trade practices. More recently, provisions of the Inflation Reduction Act linking tax credits to domestic content incentives and providing direct subsidies for domestic production provoked anger and accusations of protectionism and trade discrimination from European officials, which in turn led the United States and European Union to begin negotiating a one-off agreement that would make European firms eligible for some of the disputed credits.

Given this history, GASSA represents a much-needed step forward in U.S.-EU economic relations, as it not only turns a page on past acrimony but also opens a pathway for U.S.-EU cooperation in other critical areas of the relationship, such as digital regulation, investment screening, and technology standards. Moreover, the agreement may serve as a template for trade clubs organized around standards other than climate—for example, labor standards—and facilitate coordination between Brussels and Washington in how they engage the Global South on economic issues. In short, GASSA should be viewed as a key building block in the construction of a durable U.S.-EU economic partnership, one that will prove vital in combating climate change, calibrating economic relations with China in a way that balances fair competition with the need to derisk key sectors, and ensuring that democracies are able to set the global rules of the road on technology and trade.

Conclusion

The particulars of any GASSA arrangement—provided it has tangible, market-shaping effects—are ultimately less important than the crucial precedent a deal would set in demonstrating that like-minded democracies can work constructively within the global trading system to condition market access on carbon intensity, all while managing the distorting practices of nonmarket economies. At a moment when climate change, the lingering aftershocks of the COVID-19 pandemic and Russia’s invasion of Ukraine, and a deepening U.S.-China rivalry have placed unprecedented strain on the post-Cold War consensus on globalization and regulation of cross-border trade, GASSA offers a potential path forward: a new approach to economic relations capable of meeting the challenges of the 21st century head on. However, for this new approach to succeed, leaders in both Washington and Brussels must be willing to set their differences aside and use their immense market power to guide the global economy toward a more sustainable, resilient future.

Given the urgency of the climate crisis, U.S. officials should also consider allowing the two-year tariff rate quota—which partially lifted the Trump-era Section 232 tariffs on European steel—to expire, if the European Union is unwilling to agree to a sufficiently ambitious global arrangement. This effort should include a firm implementation plan that sends a strong signal to industry that the future of steel and aluminum trade will be marked by clear carbon intensity-based tariffs.

In addition, U.S. officials should strongly consider pursuing a GASSA-like arrangement with other democratic trading partners with high levels of climate ambition—such as Canada, Norway, and Australia—while seeking to conclude negotiations with the European Union. As the world’s foremost economic power, currently led by an administration committed to climate leadership and democratic values, the United States is uniquely capable of providing proof of concept of a new model of trade policy that supports a just transition to a decarbonized global economy.

Acknowledgments

The authors would like to thank Ilana Solomon, Todd Tucker, and Ryan Mulholland for their contributions to this issue brief.