U.S. Scales Back Hopes for Ambitious Climate Trade Deal With Europe

For the past two years, the United States and the European Union have been working toward a deal that would encourage trade in steel and aluminum made in more environmentally friendly ways to combat climate change.

But longstanding differences on the way governments should treat trade and regulation have cropped up, preventing the allies from coming to a compromise. With an Oct. 31 deadline to reach a deal approaching, the United States has significantly narrowed its ambition for the pact, at least in its initial iteration.

The outcome has been deeply disappointing for American negotiators, including Katherine Tai, the United States trade representative in charge of the talks, according to people familiar with the negotiations. In speeches last year, Ms. Tai described the potential deal as “historic” and “a paradigm-shifting model” that would reduce carbon produced by heavy industries, while also limiting unfair trade competition from countries like China, which has been pumping out cheap steel that is not manufactured in an environmentally friendly way.

U.S. negotiators had envisioned setting up a club of nations committed to cleaner production, initially with Europe and later with other countries, that together would act to block dirtier steel, aluminum and other products from their markets. Steel and aluminum production is incredibly carbon intensive, with the industries together accounting for about a 10th of global carbon emissions. But Europeans raised a variety of objections to the approach, including arguing that it violated global trade rules for treating countries fairly.

Now, the Biden administration is trying to salvage the talks by pushing for a narrower deal in the coming weeks. The more limited U.S. proposal currently includes an immediate agreement for countries to take steps to combat a flood of dirtier steel from countries like China, as well as a commitment to keep negotiating in the coming years for a framework that would discourage trade in products made with more carbon emissions, the people familiar with the negotiations said.

The agreement is expected to be a point of discussion at a summit planned for Oct. 20, when President Biden will meet the president of the European Commission, Ursula von der Leyen, at the White House.

The stakes are high: The United States is poised to bring back Trump-era tariffs on European steel and aluminum on Jan. 1, unless the sides reach an agreement, or American negotiators issue a special reprieve. Mr. Biden paused those tariffs for two years in 2021, when negotiations began with Europe.

Restoring cooperation between the United States and Europe after years of rocky relations during the Trump presidency has been a key objective for Mr. Biden and his deputies.

But the talks faced a basic obstacle: the United States and Europe have fundamental differences in how they are addressing climate change, trade and competition from China, and neither side is yet willing to significantly depart from its own policies.

The Biden administration has largely dispensed with traditional trade negotiations focused on opening international markets, arguing that past trade deals that lowered global barriers to trade helped multinational corporations, rather than American workers, while supercharging the Chinese economy.

Instead, the Biden administration has embraced tariffs, subsidies and trade arrangements that protect industries in the United States and allied countries, while blocking cheaper products made in China. It has done so in lock step with U.S. labor unions, which are opposed to removing tariffs and other policies that protect their industries.

The European Union has criticized the American tariffs and subsidy programs as protectionist policies that threaten to undermine international trade rules.

“This administration is trying to significantly retool the way we go about global economic engagement,” said Emily Benson, the director of Project on Trade and Technology at the Center for Strategic and International Studies, a think tank. “What’s unclear is the degree to which our allies buy into that agenda.”

For their part, European officials are putting their efforts into an ambitious new carbon pricing scheme, that would tax companies across a range of industries in Europe and elsewhere for the greenhouse gases emitted during manufacturing. European officials have urged the United States to adopt a similar approach but American officials argue such a system is not viable in the United States, where Congress would be unlikely to impose new carbon taxes on American companies.

The two governments also differ in how to approach China, which makes more than half of the world’s steel, often by burning coal. American steel makers say their Chinese counterparts receive generous government subsidies that allow Chinese steel to be sold at artificially low prices, unfairly undercutting competitors.

European officials have been more reluctant to target China specifically. While the E.U. government has begun to take a more skeptical look at Chinese exports, many European nations still regard the country more as a vital business partner than a geopolitical rival.

Given the close alignment between the United States and Europe on many issues, the history of trade negotiations between the governments is surprisingly bleak.

The Obama administration pursued a trade deal with Europe that ultimately crumbled as a result of irreconcilable differences over regulation and agriculture. After lobbing both criticism and tariffs at Europe, the Trump administration tried for a more limited agreement, with similarly unimpressive results.

The Biden administration successfully de-escalated some of those trade fights. But fundamental differences remain in how the United States and Europe view the role of government and regulation.

“It’s incredibly complicated, largely because we have markedly different priorities,” said William Alan Reinsch, the Scholl Chair in International Business at the Center for Strategic and International Studies. “I can see a path but the path involves both sides making concessions that they really don’t want to make.”

Miriam Garcia Ferrer, a spokeswoman for the European Commission, said the countries were “fully committed to achieving an ambitious outcome” by October.

The European Union is seeking a permanent solution to U.S. tariffs and “re-establish normal and undistorted trans-Atlantic trade” while also driving decarbonization and addressing the challenge of global steel overproduction, Ms. Garcia Ferrer said.

Sam Michel, a spokesperson for the U.S. trade representative, said that the Biden administration had “been fully committed to these negotiations over the last two years and we are hopeful both sides can reach an agreement that demonstrates the close partnership between the United States and the European Union.”

People close to the talks say the outcome has been particularly disappointing given the close alignment and warm relations between Mr. Biden and Ms. von der Leyen, and Ms. Tai and her counterpart, Valdis Dombrovskis, the European commissioner for trade.

Ms. Tai and Mr. Dombrovskis committed earlier this year to meeting every month. Mr. Dombrovskis, the former prime minister of Latvia, hosted Ms. Tai at a seaside dinner in the Latvian capital in June, and she brought him to the White House on July 4 to watch fireworks from the lawn.

U.S. officials initially thought those meetings might mark a turning point for the negotiations. In a trip to Brussels in July, Ms. Tai told her counterparts that time was running out and that they needed to get something done.

But that top-level commitment did not fuel momentum at lower levels of the bureaucracy, and progress fizzled as European negotiators left for summer holidays.

The pace of talks has accelerated over the past month, but for a much more limited agreement.

Jennifer Harris, a former senior director for international economics at the National Security Council who played a key role in starting negotiations, expressed optimism that progress could be made in the final days and weeks of the negotiations, especially given the upcoming meeting between Mr. Biden and Ms. von der Leyen.

The talks now need “the kind of swift injection of tailwind that only leaders can provide,” she said. “I don’t think either leader is going to let this thing fail.”