In a widely expected development, the US-EU Summit on Oct.20 failed to yield progress on the Global Arrangement on Sustainable Steel and Aluminium (GSA). Introduced over two years ago, GSA negotiations remain stuck in a complex impasse, necessitating substantial concessions that neither party is willing to provide. Nevertheless, and while the extension of negotiations might offer relief, GSA alone will not be enough to shield Europe’s steel companies from today’s global challenges.

Introduced over two years ago, GSA negotiations started as a bittersweet compromise to halt Trump-era Section 232 tariffs on EU steel and aluminium. They also sought to leverage a Transatlantic ‘momentum’ to infuse climate ambition into trade relations, within a framework expected to involve an increasing number of like-minded partners.

However, negotiations were swiftly overshadowed by intense discussions on ‘non-market excess capacity’, a term mainly describing China’s substantial capacity expansion since the late 2000s. This shift plunged the negotiations into murky waters, marked by the US’ insistence on joint actions against China’s overcapacity – and EU concerns over possible consequences within WTO regulations.

While non-market excess capacity remains a genuine contributor to deflated steel prices, the GSA’s overfocus on China misses the point. Even if protective measures against Chinese steel are agreed upon, they may not be enough to shield EU and US markets from its competitive onslaught. Tariffs on Chinese steel have hitherto failed to deter its influx into EU and US markets, especially during China’s economic downturns. Therefore, GSA-related measures are more likely to generate trade diversion rather than safeguarding domestic industries or greening Chinese steel – not least because the EU and the US account for only a fraction of Chinese steel exports.

Instead, for EU steel producers, proactive – and arguably painful – decarbonisation is one of the few viable options to remain competitive. The EU, together with Member States, need to reshuffle their regulatory and policy environments to allow for this process.

Can GSA disagreements find common ground? It’s all about who sets the ‘rules of the game’

GSA negotiations have been mired in disagreements long before the EU-US summit was convened. Key among them is the EU’s carbon border adjustment mechanism (CBAM). The EU’s flagship climate policy instrument, which entered its transitional phase in October 2023, imposes a levy on imports based on embedded carbon emissions, aligning them with the carbon prices paid by EU’s domestic industries.

The CBAM will test the EU’s capacity to influence other nations to introduce domestic carbon pricing. Sceptics anticipate WTO disputes or, at the very least, the fragmentation of national carbon pricing schemes as other nations retaliate. Optimists see a pioneering benchmark and first-mover advantage that could inspire other nations, leading to concerted global efforts.

What is beyond question today is that CBAM has added drastic complexities to GSA negotiations. Foremost, it indicates a huge disconnect between the EU’s perspective on carbon management and the US’ – where, though not entirely impossible in the future, domestic carbon pricing is politically unfeasible.

Instead, the US leans towards an import tariff based on grosso modo sectoral average emissions, without requiring domestic industry to undergo parallel carbon pricing. This rationale was evident in Senator Cassidy’s recently proposed Foreign Pollution Fee Act – which focuses on reducing the import of embedded emissions, yet does not incentivise domestic manufacturers to decarbonise.

These contrasting perspectives have been an unsurmountable obstacle. A US-sought ‘firewall’, with emissions benchmarked against sector-wide average emissions, would not find support in the EU. Exemptions potentially offered by US partners might be tempting – however, many would question the credibility of such a tariff without domestic decarbonisation commitments. Forming a GSA that is incompatible with CBAM – or allowing CBAM exceptions for US goods, as the US requested – would also be politically unfeasible for the EU.

GSA negotiations are a litmus test on whether international negotiations can reconcile diverse visions on trade-related climate policy – or end up in a bilateral tit-for-tat. Today, this impasse demonstrates a significant disconnect between the EU and the US, which risks leading to protracted regulatory battles and, ultimately, the fragmentation of global decarbonisation efforts.

What does this mean for the EU’s industry?

With GSA negotiations at an impasse, proactive decarbonisation remains the most viable pathway for EU’s industry to remain competitive against non-EU low-carbon goods and cheaper non-EU high-carbon goods. Indeed, the very success of the EU’s carbon regulatory model – with CBAM at its centre – hinges on industry’s ability to position itself as a lead market for low-carbon goods.

This won’t be easy. As the EU phases out free allowances by 2034, industry has about a decade to undergo this profound transformation. This relies on technologies that are either too expensive or hitherto underdeveloped. The market for low-carbon goods is also virtually non-existent. Deployment remains the critical bottleneck, pivotal for success.

To address this, the EU with its Member States should focus on reshuffling its regulatory and policy environment. The EU’s carbon regulatory model should be complemented by proper national policy mixes that comprehensively support industrial decarbonisation. However, recent research from the EU-funded project ‘C4U’  reveals that various Member States have incoherent or unadvanced policy mixes, with insufficient policy instruments for transformative industrial decarbonisation.

Coherent policy mixes are also crucial for avoiding merely ‘throwing money at the problem’, especially through relaxed state aid. While more generous state aid helps overcome limited EU funding, careful consideration should be given to providing extensive subsidies to industries without a properly designed national policy framework for decarbonisation, along with complementary support instruments.

In this context, finding working solutions for low-carbon industrial development domestically will be the main prerequisite for the EU’s to maintain its capacity to lead by example in the transition to net-zero, also in trade negotiations.

Any opinions published in this commentary reflect the views of the author and not of Carbon Pulse.