The Development Promise of a Green Steel Deal

July 18, 2023

The United States and European Union are currently deadlocked in talks over how to use trade policy to combat climate change, with a particular focus on creating a joint standard for “clean” steel and imposing restrictions on imports that do not meet it. While the sides are stuck on how to reconcile their efforts with international law, developing countries are concerned that the whole idea of penalizing carbon-intensive imports will discriminate against poor nations that rely on fossil fuels to grow. The US-EU debate has paid little attention to these complaints, as the priority in the initial negotiating rounds is securing an acceptable bilateral outcome by an agreed deadline of October 2023. However, as both sides contemplate expanding the membership and scope in subsequent talks, there are ways to address the legitimate concerns of emerging markets. In so doing, the US and EU may also find a solution to the legal conundrum, and a path to green trade.


International Law Is International Politics

In press coverage of its talks with the US, the EU is often painted as putting compliance with the World Trade Organization (WTO) rules above other considerations. The US, which has blocked appointments to the WTO’s Appellate Body and effectively rendered the body null, is portrayed as being more cavalier about the rules. Yet this depiction misses that the EU has engaged in what is essentially a political, rather than narrowly legal, campaign to squeeze its own climate policy—a border tax that requires imported goods to comply with the EU’s Emissions Trading System (ETS)—through chinks in the WTO’s armor.

So what did the EU do? After announcing its intention to move toward the carbon border adjustment mechanism (CBAM), the EU persuaded the WTO to open a special session of a standing Committee on Trade and the Environment, to establish conditions under which states might use the exemptions to cover trade restrictions that protect the climate. The EU is not only represented on the committee; its own Green Deal formed the base proposal from which the negotiations have flowed. In the meantime, the EU has implemented a phased introduction to the CBAM. This has allowed other states to test-drive, in the context of the committee, their own standards against the EU’s proposal, and allowed the EU to adjust the CBAM in response. And this process has preempted some disputes that might have resulted from faster implementation. If the CBAM ends up looking compliant, it’s because the WTO system adjusted to make it so.

Why would the WTO make such allowances? The answer lies not in trade law, but elsewhere in international politics, in the agreement of the UN Sustainable Development Goals (SDGs) in 2015 and the signing of the Paris Agreement in 2016. The WTO rules already allow that states may be granted exemptions to the General Agreement on Tariffs and Trade (GATT) in order to comply with their legal obligations under other international agreements. My own research at the WTO’s headquarters has shown that at a time of rising populist sentiment, WTO officials are eager to show that the GATT is part of, and not in conflict with, other, less controversial, international institutions like the UN. As a WTO official told me in 2019, “You could conceive that you would have a government imposing trade measures that are pursuant to commitments that they have undertaken in environmental agreements . . . could be under Paris, could be under SDGs. So then . . . there needs to be that clarification as to what would prevail, but I think that the WTO agreements are flexible enough to allow for it.” It is in that spirit that the body has been willing to work with the EU on the CBAM.

These episodes hold lessons for the Global Arrangement on Sustainable Steel and Aluminum (GASSA) process. The steel standard that the US and the EU hope to agree on will be different, of course. Yet the experience of threading the CBAM through the Committee on Trade and the Environment is a reminder that since international law is a product of what states agree on, making carbon standards compliant with international law, as written, can be less important than making them compliant with the broader international political consensus. Listening to developing countries offers one way the US and EU might achieve that consensus. And since there is likely to be a few years’ phase-in of market access restrictions under the GASSA, this gives both the EU and US time to launch similar consultations.


The Value of Financial Solidarity

Emerging economies have argued that carbon-linked trade restrictions unfairly place the cost of compliance on small firms in the Global South, which cannot afford the expensive factory upgrades or certification permits that will be required to get their goods into “climate club” markets. Where these agreements allow countries to certify their own goods, some states will struggle to fund such inspection regimes. Either way, there is a risk of penalizing countries for being too poor to meet the conditions of market access that will enable them to grow. Countries including Cambodia, India, South Africa, and Vietnam have already raised this complaint regarding the EU’s own policies.

Given that the global effects of climate change will fall disproportionately on poor countries in Asia and Africa, rich countries like the US and EU members cannot claim moral high ground in combating climate change if the tools used to do so leave the most vulnerable holding the tab. Moreover, there are straightforward solutions to address the legitimate complaints of developing countries, which, if implemented, would have the effect of making mechanisms like the GASSA more effective in both environmental and geopolitical terms. Here’s how.

First, the US, EU, and other wealthy countries could offer grants to subsidize transition to the new standard for developing economies. At meetings in Japan in May, G7 countries signaled their willingness to do this, committing to create a “Partnership for Resilient and Inclusive Supply-chain Enhancement.” The G7 statement gave little detail about how such a partnership might work, but one model might be the subsidy agreement between the US, UK, Germany, and South Africa brokered at COP26 in 2021: Under this agreement, the donor countries committed to offer $8.5 billion to help South Africa phase out its use of coal.

As part of the GASSA or as a complement to it, donors might offer countries that produce steel, like Brazil or Turkey, funding to transform their production to meet the standard. They might also offer countries that import steel to use making goods which eventually end up in US or EU markets, like Mexico, funding to buy clean steel for those inputs. Donors might pay for this from the 0.7 percent of gross national income they are already committed to spend on development under the SDGs. Alternatively, development banks have an important role to play in pooling donor funds and facilitating access for developing economies. Incoming World Bank director Ajay Banga has already indicated that climate finance will be an area of focus during his tenure, and this kind of funding should be part of any World Bank package.

Second, the GASSA should be accompanied by direct financing to firms in the supply chain that will need to undertake upgrades to retain their ability to sell to US and EU buyers. This could take the form of technology transfer from their buyers, export credits that offset other costs of trade in exchange for what firms will be investing in GASSA compliance, loans to support firms in altering their production or consumption practices, or even phased introduction of the new rules—as the EU has implemented with the CBAM—that give supplier firms time to catch up. Here too, there is an important role for development banks to play: The World Bank has a private-sector arm, the International Finance Corporation, that lends to firms in developing countries. The World Bank could make an IFC fund available to firms in developing countries that can show that some of their products are headed for the GASSA bloc.

Third, some developing countries raising distributional complaints about the move to “climate clubs” are understandably sore because they have in the past wanted to impose trade restrictions to achieve important policy objectives of their own, and been blocked by WTO challenge. Were the GASSA members to guarantee that these countries would be free from legal challenge if they departed from a narrow reading of GATT on issues that mattered to them, some would be willing to accept the cost of a carbon barrier on the US and EU border. India, for example, has suggested it intends to challenge the EU’s CBAM, but has also indicated that it would stand down the challenge if given policy space to protect its technology industry with barriers of its own.

Building in these types of policy levers—subsidies or loans for transition to clean production at both the country and firm levels, and space for industrial policy—is both right and prudent. It takes the cost of addressing climate change off the backs of the most vulnerable, while also making clubs like the GASSA more effective. If countries that currently have a financial incentive to buy cheap and carbon-intensive steel—either for domestic consumption or as an input to manufactured goods—are given incentives to buy from more sustainable suppliers, that expands the policy’s environmental reach. To the extent that the cheap and carbon-intensive steel that the GASSA hopes to replace comes largely from China, giving developing countries an alternative supply route at no extra cost to them is a geostrategic win for the West. For wealthy economies like the US and the EU, the cost of these incentives is a small price to pay to achieve our climate goals, with significant political upside.

Moreover, by building on the existing commitments to development funding that both the US and EU members have made, development finance built in as part of the GASSA would also help the two parties finesse the politics of WTO compliance, by placing the deal within the scope of international agreements that WTO officials already recognize. It has been over 15 years since the WTO’s efforts to broker a global agreement on trade and development—the Doha Round—collapsed in acrimony between developed and developing countries. A climate agreement that appeared to revive the link between trade and development would have a valid claim to be furthering the WTO’s own goals, rather than impeding them.

In this way, addressing the legitimate concerns of developing countries, as part of GASSA design, will also make it easier for the US and the EU to get the policy through multilateral fora, and open a path to green trade.