Terrible tariffs: The global trading system, action on climate change are both in the balance

When they met in Washington last month, President Joe Biden and European Commission President Ursula von der Leyen failed to resolve a festering disagreement over tariffs on steel and aluminum. The argument has dragged on for months because the European Union is rightly resisting the US approach and the Biden administration is reluctant to deviate.

Don’t mistake this quarrel for a narrow technical dispute. The future of the rule-based global trading system and the prospects for effective action on climate change are both in the balance. As the deadline for finding a solution draws near, US officials need to think again.

The mess began with former President Donald Trump’s so-called national-security tariffs of 25% on steel and 10% on aluminum. Lacking any real security rationale and imposing needless costs on US producers and consumers, this self-defeating policy should’ve just been scrapped. Instead, Biden’s officials are working to expand it — with a temporary system of import quotas (currently in place) to be followed, they hope, by a new pact with the EU that would apply a common tariff to steel produced elsewhere. The quota work-around is set to expire at the end of this year. As things stand, if there’s no new agreement, the Trump tariffs will be reinstated along with the EU’s retaliatory measures.

What’s the problem with the proposed pact on tariffs — or, as its advocates prefer to call it, the Green Steel Deal? There are several, but the biggest is that the measure would break promises that the US and EU have made to their other trading partners, violating the rules of the World Trade Organization that the US once championed.

Admittedly, some will see another nail in the WTO’s coffin as a feature not a bug, but that’s a grossly irresponsible take. The risks of global economic fragmentation are mounting. An accelerating retreat from the rule-based trading system is a potent threat to trade, growth and living standards. Biden’s team should be working on repairs to the system, not coming up with ways to dismantle it faster.

In proposing continued protection of the steel industry, Biden’s officials shifted the rationale from national security to fighting climate change. They say joint US and EU tariffs on imports from other countries would encourage cleaner domestic production. Trouble is, the EU already has such a policy. It’s phasing in a Carbon Border Adjustment Mechanism that will tax imports according to their carbon intensity — crucially, at a rate equivalent to the charges that EU producers pay for their emissions. The system gives domestic and foreign producers the same incentive to cut carbon, making it both effective and WTO-compliant. The US lacks an equivalent system, so using protection to boost domestic production won’t necessarily curb emissions and breaks the rules as well.Just in case, the administration has yet another rationale for its protectionist instincts — namely, the need to offset subsidies that China, in particular, uses to create chronic overcapacity and distort global steel production. This excuse is no more plausible than the others. There’s no call for a new tariff pact: The WTO provides adequate remedies in the form of antidumping and anti-subsidy duties, which the US and EU have already applied. Combined they account for less than 10% of China’s steel exports.Under pressure, the EU might yet cave to US demands. That would further damage the WTO, jeopardize global trade, hobble Europe’s carbon-pricing system and call into question the viability of its emissions trading system. It would also hurt the US economy, where for every job producing steel there are roughly 80 in industries that need steel as an input. If all this strikes you as an absurdly high price to protect a single well-connected industry, you’re right.

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