Biden needs leverage to reform the WTO

Last week, the United States, the European Union and Japan announced that they will relaunch their trilateral initiative on subsidies and state-owned enterprises at the Nov. 30-Dec. 3 World Trade Organization (WTO) ministerial conference in Geneva. Coming on the heels of the U.S.-EU agreement to resolve tensions surrounding Trump-era national security tariffs on steel and aluminum, the Biden administration’s approach to trade policy – one based on building leverage among like-minded economies to achieve multilateral goals – is coming into focus.

The three trade ministers representing the trilateral economies first announced their initiative at the last WTO ministerial conference in Buenos Aires in 2017. They met five times after that and issued their last communiqué in January 2020. That document reflected progress in identifying new areas where WTO rules needed to be updated to take account of the behavior of non-market economies such as China. But it did not put forward a strategy for obtaining concrete results.  

Now the Biden administration and its EU and Japanese counterparts have an opportunity to remedy that failing of the Trump-era trilateral by taking three further steps: launching negotiations among themselves on rules for subsidies and SOEs; turning those talks into a plurilateral agreement among a wider group of market-based economies; and introducing that agreement for adoption by the full WTO membership. Only by pursuing the first two steps of economic statecraft will the U.S., the EU and Japan be able to bring enough diplomatic heft to the WTO bargaining table on behalf of their collective interests in reforming the global trading system.

A similar dynamic is at work in the U.S.-EU agreement in late October at the Rome G20 summit to suspend the national security tariffs imposed by President Trump in 2018. Trump’s tariffs affected all imports of steel and aluminum, even from allied and friendly countries.

With the goal of pushing back against Chinese overproduction of its carbon-intensive steel, the transatlantic partners have now agreed to a two-year suspension of the tariffs. During this time, they will seek to arrive at a “new arrangement to discourage trade in high-carbon steel and aluminum that contributes to global excess capacity from other countries and ensure that domestic policies support lowering the carbon intensity of these industries.” Mirroring the trilateral initiative’s members, the U.S. is already in talks with Japan that could lead to Tokyo joining this new effort. 

The U.S.-EU steel deal will in principle lead to an alignment between the two sides on a methodology for measuring the carbon intensity of steel that they could then jointly use to determine penalties against third-country imports that do not meet high transatlantic climate standards. That methodology will need to take account of both the EU approach to climate policy (which includes an explicit carbon price through its Emissions Trading System) and U.S. measures that rely mostly on regulation to meet climate objectives.

If Washington and Brussels were successful in that exercise, they would be agreeing to what could be called a joint carbon border adjustment mechanism (CBAM) for the steel sector by the end of 2023. That’s a little more than two years before the EU plans to introduce its own CBAM covering five carbon-intensive sectors: iron and steel, aluminum, fertilizers, electricity, and cement.  

And if the U.S.-EU mutual understanding on how to account for carbon intensity in steel were extended to other products and to other countries with high climate standards in their industrial production methods, there would exist an avant-garde group that could spearhead a campaign to reform WTO rules so they strike a better balance between trade and climate goals. There is insufficient clarity currently about whether the WTO’s Article XX governing exceptions to free trade would cover CBAMs and other tools that aim to create space for climate goals, even if they temporarily restrict trade.

Given the failure of the Trump administration’s go-it-alone approach to trade policy, and currently outmoded WTO rules, the Biden administration’s middle path – building coalitions of market-based economies – may be the only realistic option at the moment for advancing U.S. national interests in the multilateral trading system.

Peter S. Rashish is senior fellow and director of the Geoeconomics Program at the American Institute for Contemporary German Studies at Johns Hopkins University and the author of the newly published report, “The Trade-Climate Nexus and the Future of the Global Trading System.”