EU considers bitter pill to end Trump’s trade war

Europe is coming to the bitter realization that it will probably have to make a once unthinkable concession to end the trade war that U.S. President Donald Trump ignited, and which his successor Joe Biden is continuing.

Many Europeans had hoped Biden would revoke Trump’s steel and aluminum tariffs, but he hasn’t done so, even though the duties were imposed in 2018 on the highly questionable grounds that they were required to protect “national security.” Lowering the defense shield of Trump’s tariffs would expose Biden to blowback from politically sensitive steel milling communities like those in Ohio and Pennsylvania.

Under Trump, the EU accused Washington of bullying for trying to force Brussels to accept self-imposed export restrictions on steel and aluminum to end the tariff standoff. But the Europeans are now conceding that they might have to swallow a compromise under Biden that is uncomfortably similar to the one they so adamantly rejected under Trump.

“Everybody wants this to go away because it’s a leftover from Trump and stands in the way of better EU-U.S. relations,” one EU trade diplomat said, capturing the overall mood of suing for peace in Brussels. The backdrop to the conciliatory tone is a new diplomatic format — the Trade and Tech Council — where Washington and Brussels are trying to put the antagonism of the Trump era behind them to cooperate in areas such as robotics, microchips and artificial intelligence. Its first session was held on September 29.

Slap in the face

Under Trump, Brussels argued only a complete withdrawal of the tariffs would satisfy the EU, contending the duties were an illegal slap in the face of an ally. Former EU trade chief Cecilia Malmström said in 2018 the EU would “stand up to the bullies.”

Her successor Valdis Dombrovskis, however, is sounding rather more pragmatic, as he’s facing a race against the clock. If a solution isn’t found by December 1, the EU’s retaliatory tariffs would double. That would hurt the transatlantic relationship, and potentially undermine the Trade and Tech Council format.

Brussels also understands the pressure Biden is facing from the steel industry, unions and a part of his party, especially ahead of the upcoming midterm elections.

“Obviously there are very difficult questions, importantly, what you can actually do — and here I’m speaking a little bit like an American — to keep your steel industry, or your building industry, alive in the face of this overcapacity and not at the same time penalize the Europeans,” Rupert Schlegelmilch, who handles EU-U.S. relations at the European Commission’s trade department, said at a recent event.

A deal would also pave the way for the U.S. and the EU to jointly respond to excess steel from China, which both governments have acknowledged distorts global steel prices and undermines their domestic producers. It may even lead to a “green steel alliance,” with both sides working toward greener steel industries.

Quota or no quota?

Over the summer, Dombrovskis made a first opening, telling the FT that a possible solution may fall short of removing all barriers. That was seen as expectation management toward the EU’s steel producing countries.

In his visit to Washington D.C., Dombrovskis hinted at a more concrete compromise scenario.

“We are looking also on the agreements which have been reached by U.S., including on Canada and Mexico. And certainly, maybe elements from these agreements which also may be useful for the EU case. So, in essence, it’s not something we would not be willing to look at. Of course, we need to evaluate each situation on its own merit,” he told reporters.  

In the Canadian and Mexican cases from 2019, the U.S. agreed to suspend tariffs on steel and aluminum in exchange for its trade partners monitoring imports. If imports surge above historic levels, the U.S. can reimpose tariffs. 

In theory, these aren’t export restrictions because there are no immediate tariffs or quotas, but in practical terms it does represent a form of restriction and self-discipline as the U.S. will retaliate as soon as imports rise to a certain level.

By even mentioning the Mexico and Canada option, Brussels is trying to avoid the fate of Brazil, South Korea and Argentina, which obtained permanent tariff exemptions in exchange for accepting quotas on how much steel and aluminum they can export.

Washington initially offered Brussels a form of tariff-rate quota, according to Bloomberg. People with knowledge of the negotiations confirmed that step to POLITICO. This allows countries to export a certain limit of a product and have higher duties for products above that threshold.

This system is much stricter than the monitoring one. But in both scenarios, there’s a limit to what the EU can export to the U.S. in order to avoid tariffs.

Lighthizer’s ghost

In that sense, the ghost of Robert Lighthizer, the U.S. Trade Representative under Trump, is still haunting EU-U.S. trade relations.

Lighthizer’s legacy will mostly be remembered for his highly risky battle plan to smash China. But his trade war was broader and was tied to his obsession with America’s yawning deficit. The goal was to revive the strong-arm tactics he used as deputy USTR against Japan in the 1980s to get allies such as Mexico, Canada, Japan and the EU to impose restrictions on their own exports.

The idea of such voluntary export restraints, which are a form of trade self-censorship, is a clear red line for the EU. Dombrovskis repeated in Washington he wants a solution that is compliant with the World Trade Organization’s rules. Voluntary export restraints are prohibited by the WTO’s Agreement on Safeguards, and thus a no go for Brussels.

But while a form of monitoring arrangement allowing the EU controlled access to the U.S. market with certain limits does not break WTO rules, it is a step in the same direction.

Steel industry interests

For Dombrovskis, such a compromise makes sense in the broader scheme of transatlantic relations. But will EU countries, especially those who have skin in the game and steel industries lobbying them, accept such a compromise?

The stakes are high: The EU industry directly employs 330,000 people, and when including indirect and induced jobs in other sectors, creates 2.6 million jobs, according to a Commission report.

European Aluminium issued a statement saying it is “very concerned by the prospect of any agreement that replaces one trade-distorting measure, a tariff, with another distortion such as a quota or a tariff rate quota.” The steel lobby Eurofer also wants either an exemption from the 232 national security tariffs or alignment of the measures with Europe’s tariff rate quota to have a similar stabilization mechanism in place.

Steel-producing countries have turned decisions around before. For example, Dombrovskis was initially against an extension of steel safeguards imposed in response to the American tariffs, but eventually did extend the import restrictions.

Officially, the line of steel-producing countries is clear: All duties must be dropped.

But when negotiations are ongoing, you don’t show your hand. When pressed, diplomats are preparing for all scenarios, even tariff-rate quotas. Everything will depend on the final outcome, and how big the thresholds will be. The limits in the initial offer of the U.S. for example were not attractive enough for Brussels.

That said, the political will to get a deal done is there, several EU trade diplomats said. The diplomat cited first in this article added: “There’s a big motivation to solve this, but the solution has to be satisfactory.”

Leonie Kijewski, Sarah Anne Aarup and Steven Overly contributed reporting.

This article has been updated to clarify the steel lobby Eurofer’s stance on U.S. 232 national security tariffs.

This article is part of POLITICO’s premium policy service Pro Trade. From transatlantic trade wars to the U.K.’s future trading relationship with the EU and rest of the world, Pro Trade gives you the insight you need to plan your next move. Email [email protected] for a complimentary trial.