Why Biden’s Green Steel Deal Is Smart International Relations

In October 2021, the EU and US released a joint statement introducing the Global Arrangement for Sustainable Steel and Aluminum (GASSA)—a trade agreement aimed at decarbonizing the heavy metal sector and reining in global overproduction. While the details and structure of the agreement have yet to be hashed out, both sides have shown encouraging signs of cooperation by lifting tariffs on steel and aluminum products. As one of us wrote recently with Duke Law professor Tim Meyer, early indications of the arrangement show its promise not only in decarbonizing production but in setting an international relations framework that can be replicated to help fight climate change.

As negotiators move toward finalizing the specific market restrictions, membership criteria, and regulatory mechanisms of the deal by October 2023, it is worth reflecting on why the Global Arrangement is structured the way it is. Here, we review three pieces of scholarship that shed light on the value of some of the design decisions policymakers have made as part of the arrangement, and the choices they’ll continue to make.

Sectoral Thinking from the 1970s

In the early 1970s, the United States faced a drawn-out war in Vietnam, brewing inflationary woes, and chaos in monetary and trade relations brought on by the Nixon administration’s closing of the US gold window. Much like today, it was a moment during which the fundamentals of global order were up for grabs. In 1972, Jack Behrman, an economist and former assistant secretary of commerce under President Lyndon B. Johnson, wrote “International Sectoral Integration: An Alternative Approach to Freer Trade,” an article that questioned the efficiency of an economy-wide free trade strategy at the height of the Bretton Woods era. The article offered policymakers a way to think about reconciling industrial policy and trade goals. Although the piece attracted little attention in subsequent scholarship (and has only been cited 14 times, according to Google Scholar), it describes a critical juncture that resembles our current moment:

The ideal state of international economic integration, in the usual economic model, is that arising from free trade. But it is unlikely that we can reach that utopian state, for free trade is not wholly acceptable to any nation, including the United States . . . Free trade promises to maximize output of all participants, taken together, but national governments have become increasingly concerned about the distributions of benefits of the resulting industrial production.

Behrman notes that if government failed to take on this more active role, multinational corporations would fill the void. Quoting and then responding to the then-president of IBM Arthur K. Watson, Behrman writes:

‘We are not only building a world market, but in my judgment, we are creating the foundations of a free world community.’ But their concept of that community is likely to differ from what many national participants would like . . . Control over the multinational enterprise can be gained only by intergovernmental agreement, and that agreement is likely to be more readily achieved at the sectoral level.

Behrman goes on to propose an alternative to corporate-driven multilateral trade agreements: pursuing negotiations for each industrial sector separately, “in whatever bite-sizes would permit agreement among nations.” In the piece, he identifies steel, aluminum, autos, and a number of other sectors as experiencing special situations that deserve specialized treatment. Almost as if by design, these are some of the same sectors coming in for focused treatment today with the Inflation Reduction Act and Infrastructure Investment and Jobs Act.

The benefits of this industry sector-based approach stemmed from several factors. First, governments were becoming increasingly concerned not only about what was being produced but also how and where—that is, the processes and geography (national and subnational) of industrial ecosystems. New types of bilateral deals between nations secured a predictable sharing of benefits, ensuring resilience even if it came at somewhat higher costs. Traditional trade agreements that merely reduced tariffs did not give adequate “policy steer”—the ability to ensure that money incentivizes desired actions as well as a comprehensive social justice mission.

If governments were going to embrace policy steers, how would they use them? They could pay greater attention to price stability and trade disruptions in an industry, coordinate research and development subsidies, or even ensure maintenance of levels of union membership across a multinational’s supply chains (thereby giving labor a direct voice in governing the sectoral deals).

Behrman also notes that sectoral deals are particularly useful in industries in which state-owned enterprises are a significant presence, since negotiators do not have to worry about firms and states having different preferences. Finally, he notes that the architecture of these agreements would make them easier to obtain between countries of similarly high levels of development (like the US and European countries), but would create spillover benefits that would make it highly attractive for developing countries to join (and a sectoral deal would allow for industry-specific transfers of resources to developing countries in the supply chains).

Each of these design considerations is relevant for contemporary metal sectors. The political and social implications of the steel economy make “where” and “how” steel is produced critical questions, worthy of a sectoral approach akin to what Behrman describes. With regards to the “where”: China’s subsidies have flooded the global economy with carbon-intensive steel, making green steel more costly in an already competitive marketplace. A tariff or carbon border adjustment mechanism, as suggested in GASSA, would force polluters to internalize their externality and stabilize prices for involved members.

The contemporary metal sectors are also dependent on rare earth metals such as neodymium for higher-purity steel production. Currently, the United States imports 74 percent of rare earth metals from China, and 8 percent from Malaysia. With state-owned enterprises playing such a large role throughout the steel production supply chain, it is valuable to have ways to ensure stable international commodity flows by focusing on sector-specific agreements as opposed to economy-wide deals.

And with regards to the “how”: The green transition requires novel technologies that firms reasonably want to see scale before making multibillion dollar investments. The US steel unions are concerned that moving to cleaner steel production will increase prices and hurt the factories where they represent workers. However, by governing at the sectoral level, governments can better incorporate labor and firm voice, as Behrman explains.

He also states that integrating state-owned enterprises into arrangements is significantly easier at the sectoral level, since an entity being government-owned is not as much of a sticking point when governments themselves are the primary negotiators. State-owned enterprises are common in the steel sector—20 of the top 50 steel producers are either directly state-owned or the state holds significant shares in the company.

As Behrman’s essay shows, there is a strong precedent of starting sectoral cooperation in the steel industry, with the European Coal and Steel Community serving as the foundation for what would become the EU.

Lessons from Climate Hawks

Fixing the Climate: Strategies for an Uncertain World by Charles Sabel and David G. Victor argues for creating institutions that thrive and adapt under uncertainty. Published in 2022, this book on building institutions that can fight the climate crisis can be seen as a field guide for international Bidenomics. Sabel and Victor, both political scientists, call this experimental governance. The authors define experimental governance as an organizational structure that includes policy experimentation as an institutional feature through shared learning between ground-level and institutional-level problem solvers. Sabel and Victor suggest shaping international institutions through experimental governance when there is shared consensus on the need for change, but the path forward is uncertain. The authors assert that international institutions can tackle the technological and structural problems of climate change by creating a system built to innovate and incentivize changing the status quo.

In the last chapter of the book, Sabel and Victor draw connections between trade governance and environmental governance, explaining that the two face similar problems and could benefit from similar solutions:

In both domains, the failures of global diplomacy and presumptions of technocracy have left pressing problems unsolved, and bred public mistrust of global institutions. The Paris Agreement greatly loosened those constraints in climate, but it did not create anything approaching a complete, workable alternative. A similar—if less dramatic—movement to loosen the grip of consensus has been unfolding within the WTO as well, and in the WTO, this rejection of the old regime is going hand in hand with the construction of a new one.

Sabel and Victor offer an alternative trade mechanism to address the obstacles of global trade and decarbonization—the open plurilateral agreement (OPA). The authors define OPAs as conditional agreements that open a country’s domestic market to foreign goods if they meet certain standards. The authors outline three key characteristics of an OPA that distinguish it from more traditional trade arrangements¹: OPAs are domain specific, they have an adjustable framework, and they have flexible membership.

Let’s examine these in turn. While traditional trade agreements are economy-wide deals, OPAs are limited to one “domain” or sector. The authors argue that by limiting the deal to one domain, lobbies cannot sacrifice public interest for corporate interests. Traditional multi-sector trade deals allow interest groups to secretly protect their interests in one sector by securing a concession in another. Sabel and Victor argue that these kinds of backdoor horse trades occur outside of the public purview since they are more complex and often conducted in secret. By limiting the deal to one domain, any influence exerted must be done within the purview of that sector. Therefore, if public values are being foregone for corporate interests, the public will be able to see it and respond accordingly.

The second difference is that OPAs have an adjustable framework that provides continuous review, while traditional trade agreements often have fixed trade terms. Traditional agreements very rarely incorporate continuous review of the terms and mechanisms of trade, often limiting changes to marginal adjustments on an as-needed basis. OPAs, on the other hand, routinely review standards, making it possible to adjust for new information. Routine review of processes allows the members to address issues as they arise as opposed to fixed terms that are only reviewed in response to a crisis.

The final way the authors differentiate the two agreements is by their openness to new members. While traditional trade agreements have restrictive membership with strict terms members must agree to upon entry, OPAs have more flexible membership, in which members have a shared commitment with a few “musts,” as opposed to a laundry list of rules by which they have to abide. The US and many countries in the EU industrialized in a time without emission standards, arguably causing our current climate situation. To apply a more rigid standard on third countries from the start without providing the resources for success (such as technology transfers and market access) could undermine the effectiveness of the entire decarbonization enterprise. Climate clubs are effective ways of combating runaway emissions, and research suggests incorporating new members is a vital part of the process.

GASSA utilizes all three of these OPA design features. As described above, the arrangement is limited to the steel and aluminum sectors. Second, the arrangement has established a technical working group to develop shared methodology and standards for steel decarbonization. Details have yet to be released, but standard practice for working groups involves iterative review akin to those Sabel and Victor mention. And finally, GASSA is open to all members that agree to decarbonize their steel and aluminum industries. The agreement does not go into specifics of how a country must go about doing this, the process by which the steel must be produced, or even where the iron ore must come from. Instead, it is predicated upon the shared agreement of industrial decarbonization and the acknowledgement that different countries will necessarily have different paths to achieve this goal.

The View from the Neoliberal Era

In 2001, political scientists Barbara Koremenos, Charles Lipson, and Duncan Snidal published “The Rational Design of International Institutions,” which is one of the most widely cited pieces in international relations scholarship. The authors identify five dimensions along which international institutions differ in their design, and six critical variables that impact those dimensions. The table below outlines the relationships between the five dependent variables (listed on the left) and six independent variables (at the top) that Koremenos et al. draw upon. The table leaves blank the interactions the paper does not address.

How well does this rational choice framework explain the design choices in GASSA? In some ways, it explains them well. It will be challenging administratively to distinguish clean steel from dirty steel, or to distinguish steel originating in member countries inside the club from steel coming from third countries. This increases the severity of the enforcement problem (column 2, above). Likewise, the complexity of the green energy transition and the possibility that carbon-intensive domestic steel firms will renege on decarbonization commitments if profits take a hit increases the uncertainty of the actor’s behavior and preferences (columns 4 and 6). This uncertainty extends to non-club actors (c0lumn 5): Exporters such as India or China, for instance, could ramp up or ramp down subsidies, and ramp up or ramp down the carbon intensity of steel production. All these factors help explain why the US and EU decided to restrict membership while negotiating the international agreement to two members, so that they have greater control over how decisions are made, as well as the ability to adapt GASSA to account for the response of non-club actors.

There are also lessons from this framework for where GASSA negotiations might go next. Climate change is a global problem, and emissions anywhere affect warming everywhere. This means that all 195 countries on the planet are relevant actors in this discussion (column 3). Similarly, both climate change and industrial decarbonization have distributional effects (column 1) that disproportionately impact developing countries. Historic exploitation, limited market access, and insufficient technology transfers significantly raise the cost of decarbonization in the Global South. This supports the argument for the US and EU making good on their commitment to open up GASSA membership to third countries—developing ones in particular. As membership expands, we can expect pressures for the scope, flexibility, and centralization of decision-making to expand in kind. Non-steel producing nations might wish to see rules established on commodities in which they have a keen interest. Developing countries still in the process of industrializing might wish to see some flexibility in the rules if they need to use a certain amount of carbon-intensive blast furnace steel production to meet the demands of surging populations. And all of this might require states to (over time) delegate more authority to a centralized enforcement apparatus, so it is not seen as developed country governments running the show.

Conclusion

Despite being in its nascent stages, the Global Arrangement on Sustainable Steel and Aluminum has already been criticized by some trade experts. Critics argue that the deal cannot be effective since it limits membership to the US and EU. They also point out that the sector approach does less to decarbonize than economy-wide trade deals. Finally, some say that the WTO is the correct channel in which to address the issue. However, a look at the three pieces of scholarship described above shows that a sector-based approach with limited membership but flexible rules is a logical response to the current state of the world and of the metals industry. At the same time, as this experimentalist effort gets up and running, international relations theory suggests both membership and scope can be expected to grow.