On Friday, a summit meeting between the U.S. and the EU will be held in Washington to, among other things, finally resolve the dispute over protective tariffs on steel and aluminum that has been simmering since 2018. Much is at stake, especially for the European steel industry. The industry's primary goal is the elimination of punitive tariffs. Ultimately, both sides are attempting to find a solution to address the issue of overcapacity in the global market. It's a delicate balance between protectionism and climate protection.

Donald Trump had imposed punitive tariffs on steel and aluminum products on numerous countries in 2018, including the EU. The justification provided by the US President was a perceived threat to national security. It was only by the end of 2022 that it was determined that these tariffs had been unlawful. China, Norway, Switzerland, and Turkey had filed complaints against these tariffs. The EU, on the other hand, had refrained from taking legal action and instead reached an agreement with the Biden administration in fall 2021 to suspend the punitive tariffs for a period of two years. By then, an agreement was supposed to be worked out to establish a kind of climate club that would offer protection against overcapacities and climate-damaging steel imports.

The suspension of tariffs is coming to an end, yet the so-called General Agreement on Sustainable Steel and Aluminum (GSSA) is still pending. Without a new arrangement, the tariffs will be reinstated in 2024. They amount to 25% for steel imports from the EU and 10% for aluminum products.

As a result, the European steel industry has high expectations for the summit: "We expect that Commission President Ursula von der Leyen and US President Joe Biden will announce a fundamental agreement that outlines an ambitious framework, providing clear guidelines and encompassing the essential elements of the Global Arrangement on Sustainable Steel and Aluminum," says Axel Eggert, General Director of the European Steel Association (Eurofer). The details are expected to be worked out by the end of the year.

The initially bilateral agreement should be open to like-minded countries, provided they adopt the practices of the transatlantic partners. According to Eggert's assessment, individual measures have no chance of addressing the issue of overcapacity.

The global steel market has been imbalanced for quite some time. Supply significantly outpaces demand, and this trend is increasing. Based on OECD figures, global crude steel capacity exceeded global demand by 570 mill. tons (t) in 2022. This is significantly higher than the 136 mill. t produced by the 27 EU member countries. By 2025, the gap between supply and demand is estimated to widen to 644 mill. t.

Recent data suggests that by 2026, an additional 150 mill. t of production capacity can be expected. Due to the significantly higher cost base of EU steel manufacturers, their export prospects continue to worsen. In the EU's foreign trade, 30 mill. t were already lost between 2012 and 2022.

Overcapacity is primarily created in the Asian region, the Middle East, and North Africa, mainly based on environmentally harmful blast furnace technology. According to Eurofer, the global steel industry is responsible for 10% of global CO2 emissions. The new capacities alone are expected to lead to more CO2 emissions within three years than the entire EU steel industry will save by 2050, illustrating the scale of the issue. The reason the market doesn't rebalance is that in many places, state investors are behind the capacity buildup, who do not care about the market equilibrium.

Both the EU and the US are net importers of steel and, in collaboration, could exert a much greater influence in enforcing environmentally friendly production. The German Steel Federation (Wirtschaftsvereinigung Stahl) also hopes that the GSSA could be "the starting point for deepened international cooperation on climate protection." Additionally, it could provide a way to definitively resolve the ongoing trade dispute. Last but not least, the GSSA is seen as a means to effectively address global overcapacity.

The lack of progress in the GSSA negotiations primarily results from differing views on how to deal with World Trade Organization (WTO) rules. While the WTO rules are considered sacrosanct by the EU, and it tries to combat unfair trade practices with traditional tools like antidumping and anti-subsidy measures, the USA is increasingly hesitant about the concept of a rule-based global trade system.

In the context of the steel market, the American focus is on measures that can effectively combat global overcapacity. However, there are also voices speculating that the Biden administration, under the label of "sustainability," has found a way to extend the punitive tariffs imposed solely for protectionist purposes through the GSSA. As per law experts, the planned agreement is WTO-compliant because the World Trade Organization allows different treatment of individual countries based on environmental considerations.

The extent to which the EU is genuinely willing to refrain from using the outdated tools in the WTO toolbox remains to be seen. Recently, there were reports of considerations within the Commission to initiate anti-subsidy proceedings against Chinese steel imports, similar to the approach taken with electric cars. Nevertheless, proponents of the GSSA argue that traditional trade protection instruments are not suitable to solve the problem. They contend that anti-subsidy procedures are too cumbersome, only take effect after the damage has been done, and are also limited to narrowly defined product groups.

Nonetheless, it should not be forgotten that the Cross Border Adjustment Mechanism (CBAM) entered its testing phase at the beginning of this month and is scheduled to be fully operational by 2026. The CBAM is a climate tariff that will be imposed at the EU's external borders on cement, iron/steel, aluminum, fertilizers, hydrogen, and electricity. The tariff rate is determined based on the carbon intensity of the product being imported.

This new instrument aims to offset cost disadvantages incurred by local producers due to climate protection requirements. However, according to steel associations, this instrument is not suitable for addressing overcapacity issues in the global market.

Therefore, Eurofer sees the planned agreement as "perhaps the only opportunity to achieve substantial emissions reductions in the global steel industry." Sigmar Gabriel, in his role as Chairman of the Supervisory Board of Thyssenkrupp's steel division, echoes this sentiment. The Chairman of the Atlantik-Brücke calls on the EU to ensure fair competitive conditions with suitable measures. "Otherwise, there will not only be no green steel production in Europe, but none at all," Gabriel says.

The EU's concerns about the (initially) bilateral move, which primarily targets China, may also be related to the fear of retaliatory measures. In the summer, the People's Republic had imposed export restrictions on two metals crucial for semiconductor production.