William Krist's Blog, page 9

Election Smoke & Mirrors: Assessing Biden’s Recent Tariff Moves Against China

Now that the dust has settled, what should executives make of President Biden’s recent restrictions on certain goods sourced from China?

 

Unlike President Trump’s across-the-board import tax increases on Chinese goods in 2018 and 2019, the tariff increases announced on 14 May 2024 by the Biden Administration will affect just 14 product categories. The Biden Administration prefers selective decoupling from China, which is restricted to a limited number of sensitive sectors. Just $18bn of Chinese imports are expected to be affected, less than 5% of total Chinese annual imports to the United States.

The very fact that President Biden felt he had to take this high-profile measure is a testament to three factors:

The tightness of November’s US presidential election.
Biden’s desire to shore up his base vote in key swing states comprised mainly of trade union members working in traditional manufacturing sectors, and their families.
How few friends China has in Washington, D.C.

In terms of corporate impact, there are two drivers: timing and the scale of current sourcing from China.

Some goods shipped from China — including aluminum, cranes, electric vehicles, face masks, lithium-ion batteries, and steel — will face higher import tariffs this year. The disruption could be felt very soon, and procurement managers will already be reviewing sourcing alternatives.

Higher tariffs on semiconductors won’t be rolled out until 2025, providing a strong incentive to bring forward any plans to import from China. Ironically, this may create the very export surge from China that the Biden Administration says it wants to prevent. However, China is not a big supplier of semiconductors to the USA in the first place.

Natural graphite, magnets, and medical gloves shipments from China won’t get hit with higher tariffs until 2026. This will delay any supply chain responses, especially if President Biden is re-elected and if there are doubts that he will follow through on these tariff measures.

As mentioned above, the other consideration is the amount of sourcing from China in the first place. In the case of EVs, China already faces 25% tariffs, and few are currently shipped to the USA.

In summary, the near-term disruption for supply chains will be concentrated on a small number of products. This is not welcome for the firms affected, but Biden’s May 2024 tariff moves do not presage widespread upheaval. Indeed, some analysts have argued that Biden’s recent tariffs amount to election-year window dressing and were designed to look tough but disrupt little. Optics matter. To date, Chinese retaliation has been uncharacteristically modest, reinforcing assessments that Biden’s May tariff move was electoral smoke and mirrors.

So, is Biden’s move no big deal?

Not so fast. Where Trump was erratic and transactional in his dealings with China, Biden’s team has been methodical and persistent. Current US Administration officials deemphasize decoupling from the Chinese economies but reckon there needs to be “a small yard and a high fence.” By this, they mean that some sectors and technologies are — or should become — off-limits to Chinese buyers, firms, and investors. A ramping up of restrictions on inbound and outbound investments and technology sales involving all or selected Chinese firms has been the hallmark of Biden’s first-term trade policy.

Indeed, the May 2024 tariff measures apply to some sensitive sectors where China is effectively excluded from US markets. Those tariff measures often involve eye-watering increases in import taxes (up to 100% in some cases and far in excess of what Trump imposed), which is a testament to the height of the fence Biden seeks.

If the Biden team could state once and for all the commercial deals it is prepared to allow and those it doesn’t, then executives could plan. However, technology evolves over time — as do Chinese tactics to circumvent US controls — and, not unreasonably, Washington, D.C., reserves the right to change the terms of commercial engagement with China.

This raises fears that the yard will expand over time and the fence will get higher — even if Biden wins re-election. Such situations clearly call for scenario planning. After all, Trump’s plans for higher tariffs on China’s imports are well known.

The other big unknown is how China will ultimately respond. The Biden team informed Beijing weeks in advance of its tariff hikes — probably on the grounds that no one likes surprises. So far, Beijing has turned the other cheek and has not hit back. Many trade policy analysts reckon China won’t retaliate too forcefully or publicly for fear of increasing the odds Biden will lose being re-elected. The argument that clinches it for many observers is surely that President Xi and his new team don’t want to see Trump return to the US Presidency, not least because of the latter’s threat to impose an additional 60% across-the-board tariffs on US imports from China.

I am not so sanguine. President Xi’s newish team is widely regarded as very nationalistic and may want to burnish these credentials by striking back against US exports at a time of their choosing. Moreover, given Donald Trump’s self-professed admiration for “strong men” (a group that includes Xi), the Chinese may estimate that for all Trump’s bluster, they can reach a deal with him that is preferable to anything Biden’s team is likely to offer. We will see how long Beijing holds its punches.

Is this episode over? Are any other trade policy threats on the horizon?

Biden’s team probably hopes it has done enough to protect its standard bearer against accusations of going soft on China, but that doesn’t mean that trade diplomacy is over for the year. US policy has been to systematically cultivate support from other Western governments for its approach to Chinese commercial relations. In this regard, developments at the G7 are what to watch.

Created in the 1970s and expanded, the G7 is a club of Europe’s four largest economies (France, Germany, Italy, and the UK), as well as Japan, Canada, and the United States. Their government leaders and ministers meet often. In fact, for some time now, US officials have sought to persuade counterparts in the G7 that Chinese industrial policies, subsidies, and outright trade restrictions are a first-order threat to Western living standards.

If last week’s G7 Finance Ministers and Central Bankers’ communiqué is anything to go by, the US has succeeded. The third paragraph of this declaration states: “We will enhance cooperation to address non-market policies and practices and distortive policies, including those leading to overcapacity through a wide range of policy tools and rules to ensure a global level playing field. While reaffirming our interest in a balanced and reciprocal collaboration, we express concerns about China’s comprehensive use of non-market policies and practices that undermine our workers, industries, and economic resilience.”

The way the G7 works is that prominent statements found high up in the Finance Ministers’ communiqué tend to find their way into their Leaders’ Declaration. Ultimately, the question is whether the G7 will back these words with deeds. A similar declaration in June 2023 by the US and five allies (three are G7 members) went nowhere — or, at best, can be viewed as coalition-building. Given the divisions in Europe between firms and governments over the merits of decoupling with China, concerted action by the G7 against China this year is far from assured.

Still, the fractures in the world economy are widening. Executives who operate or source from Chinese firms in sectors where there is said to be excess capacity in China should be on alert. Those sectors include, at minimum, aluminum, cement, construction, electric vehicles, solar panels, and steel. That Chinese exports blocked from the US can be deflected to other foreign markets means executives from Western Europe, Japan, and emerging markets need to keep trade policy developments on their radar as well.

Simon J. Evenett is currently a Professor of Economics at the University of St. Gallen and on 1 August 2024 will join the Faculty at IMD. He is also Co-Chair of the WEF’s Global Council on Trade & Investment and the Founder of the St. Gallen Endowment for Prosperity Through Trade, home of two of the leading independent monitors of how governments shape international business.

To read the full column as it was published by IMD, click here.

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Geopolitics is Corroding Globalization

The following article was published in the June 2024 issue of the International Monetary Fund’s Finance & Development Magazine. To read the full F&D Magazine, click here.

 

How should the IMF respond?

As the IMF turns 80, its core macroeconomic mission still deserves to be pursued and prioritized. The ongoing corrosion of globalization—reinforcing and being reinforced by geopolitical fragmentation—increases the vulnerability of all but the largest economies to foreign economic shocks, arbitrary swings in current account balances, interruptions in access to dollar liquidity, and accumulation of unsustainable debt. The increasing politicization of international finance and commerce by China, the European Union, and the United States has, however, put at risk the IMF’s ability to assist member countries and limit exploitative behavior by the governments of the three largest economies. For the sake of global economic stability, the IMF must get out in front of these dangers.

But stability will not be achieved by broadening the institution’s remit in an effort to pander to the changing whims of the largest shareholders, though that response might be understandable as a short-term political approach. Instead, the IMF must emphasize its unique role as a multilateral conditional lender and a truth teller regarding international debt and monetary issues. This role justifies greater operational independence, along the lines of central banks.

First, the broader and more discretionary the core IMF agenda, the greater the vulnerability of member countries to the geopolitical machinations of large-economy governments and the market flows they influence—which is precisely the threat that is currently on the rise.

Second, broad consistency in both substance and process in dealings with member countries is critical to the legitimacy of the IMF’s decision making, especially when members are most vulnerable. Technocratic evenhandedness is essential to successful buy-in by all members over the long run, even at the expense of some local support in short run. Inconsistencies of the sort imposed by the US on successive programs with Argentina or by the EU’s “troika” role in the euro area crisis are likely to grow over time.

Third, although there are other international forums to address inequality, climate, and other global issues, only the IMF can be a quasi-lender of last resort and speaker of truth to economic power on debt and monetary issues. The IMF cannot put up substantial funds for longer-term development and global public goods—or mobilize private financing on an ongoing basis—as others can. It should be ready to trade its seat in these discussions for greater institutional (not just de facto) independence in its core mission.

We are likely at the early stage of a cycle of cross-border distrust among the big three economies feeding demands for self-reliance and then demanding that smaller economies choose sides. The IMF may have only a brief window to build its institutional strength before it is pressured recurrently to choose sides between major shareholders.

More central than ever

The IMF’s core macroeconomic mission is to address member nations’ vulnerabilities that arise through cross-border commerce and financial flows and manage the international monetary system that underlies those flows. In their recent assessment, Floating Exchange Rates at Fifty, Douglas Irwin and Maurice Obstfeld point out that many of the problems the IMF and the Bretton Woods agreements were designed to address are inherent to international finance. These problems remain, even though the postwar fixed exchange rate system was abandoned in favor of today’s non-system:

Exchange rate flexibility allows for monetary independence, yielding low inflation, but still does not prevent sudden stops and financial crises.
Foreign economic shocks are still transmitted, often with substantial effects on smaller and lower-income countries.
Capital flows often drive large rapid fluctuations in current account deficits.
Interruptions in the availability of dollar liquidity to member economies have major repercussions, sometimes causing financial crises.
Self-insurance efforts by large-surplus economies—whether through currency manipulation or replacement of imports with subsidies and tariffs—reduce global growth and impose adjustments during recessions on others.

As a result, there is no getting away from crisis lending with conditionality when member economies lose access to financial markets or suffer capital flight. The IMF’s ability to provide credible conditional adjustment financing, cushion groups of economies from common economic shocks, and restore access to market liquidity while restructuring international debt obligations is therefore more, not less, central than ever.

Only the IMF can provide this support on a multilateral, nearly universal basis. Any other institution or bilateral intergovernmental arrangement offering emergency financing will give that lender prejudicial influence over the borrowing country.

Benefits of surveillance

Surveillance of spillovers from the misguidedly excessive self-insurance policies of the largest economies, if consistently pursued, has a good shot at benefiting the global economy. Small achievable changes in the policies of those economies can aid many significantly, boost IMF credibility, and reduce risk. Similarly, by seeking to coordinate on cross-border debt and monetary issues, the IMF can generate benefit by influencing small changes in (or offsetting) behavior by lenders and reserve currency issuers. The more independent the IMF, the greater its legitimacy in its interaction with members.

The IMF must also call China, the EU, and the US to account through surveillance of their increasingly political and bullying control of access to their markets and its spillovers to the rest of the world. When China or the US conditions access to its payment systems or fossil fuel exports on national security goals, uncertainty reverberates through the rest of the world. Emerging markets’ growth prospects rise and fall as the big three economies arbitrarily determine who gets to produce their imports and who does not.

Let the other international economic and financial institutions—the World Bank, the Organisation for Economic Co-operation and Development, the Group of 20 major economies, and so on—take their seats at every arguably relevant table and maximize their funding. The IMF is the only multilateral institution that deals directly with cross-border spillovers and macroeconomic volatility. The IMF is the only multilateral institution that can engage in macroeconomic conditionality with any hope of legitimacy and of changing borrower policies. The IMF is the only international entity that can force negotiation, albeit not necessarily rapid restructuring, by private sector investors. And the IMF is the only international organization that can chide the big three economies in precise terms with respect to their policies and not just ask for more contributions to public goods.

In surveillance, as in lending and other policy decisions, the EU, the US, and China have a common interest in making sure that each is criticized according to the same criteria, with the same frequency, and through the same public channels. The IMF should lock in on independent frankness rather than a mutual nonaggression pact over US fiscal deficits, Chinese exchange rates, and the EU’s ill-timed austerity, which served the world so poorly in the 2000s and 2010s.

Confronting new challenges

To better achieve its mandated goals and shore up its legitimacy, the IMF should aim for greater operational independence, akin to that of most central banks, while maintaining external evaluation of its competence by its members and having them set its overall goals. This is already taking place to some degree with respect to executive board approval of specific program decisions, for example. Continued progress will likely require narrowing down the IMF’s mandate to its core functions in exchange for more autonomy in specific policy decisions. Yielding some turf is what the Fund must do in terms of governance deals without compromising its evenhanded treatment of members.

Given the growing distrust among the US, the EU, and China, there should be a way forward to a mutual agreement to give the IMF that operational insulation. Securing such an agreement, with clear limits on what the IMF can address, would assure each of the big three economies that the other two will not be able to exercise control in situations that really matter to them. All macroeconomic institutions depend upon such a mutual recognition that it is better to yield control to be confident that there will be no abuse of power in turn. The absence of adequate insulation of IMF operations will likely splinter the global financial safety net, with divergent politicized conditionality; allocate access to funding unevenly, if not unfairly; and diminish stability of the international monetary system.

By focusing on its core mission, the IMF can adapt to the new global economic challenges arising from the fragmentation of geopolitics and the corrosion of globalization. Particularly worrisome is the largest economies’ increasing tendency to link access to their markets to various political loyalty tests or side payments. All manner of access is affected—exports to those countries, employment and technical knowledge in high-tech and other industries deemed “critical,” financial services and liquidity, foreign direct investment into and from those countries, and cross-border aid and lending. Intentional or not, this is the kind of national-security-driven fragmentation that the creation of the Bretton Woods institutions 80 years ago was aimed to prevent.

There are of course other imminent global challenges: climate change first and foremost, but also pandemics, food security, technology competition, trade wars, real wars, and the mass migrations all these induce. For member countries other than the big three, these challenges are likely to be experienced as recurring, increasingly frequent macroeconomic shocks. To the extent that these are simultaneous shocks across many member countries, the IMF should provide special facilities or lending to those members on common terms and insist that the big three economies change their behavior or offset the shocks.

Exercising best practice

For the majority of its members, then, it is essential that the IMF’s advice on macroeconomic policies to manage shocks and the vulnerabilities they expose follow best practice, and is consistent for all members, whatever the source of the shock. This is in the long-term best interest of the big three economies as well. But their governments are increasingly tempted either to insert their geopolitical preferences into IMF decisions or to shield their protectionist self-dealing from surveillance, despite the large impact on others.

The IMF can thus best serve its membership—including the big three—as a bulwark of technocratic multilateralism against politicized bullying in financial and other market access. A significant step in this direction would be greater IMF executive board ability to pass decisions by qualified majority voting—meaning restriction of the largest shareholder’s ability to exercise a veto—except on long-term or quasi-constitutional issues. This exchange of narrowness for the sake of operational independence would be helpful because the IMF would not be putting more US taxpayer funds at perceived risk or using them to serve mission creep.

Another step forward would be to adopt stricter and more consistent rules limiting IMF lending to economies at war, for example, with respect to Israel, the West Bank and Gaza, and Ukraine today. There is, of course, a need for support and eventual reconstruction assistance, but if the IMF is seen as taking sides while conflict is ongoing, it may split the world economy even further. For the first time since the 1980s, military conflicts directly involving the major powers’ allies on opposite sides are occurring and are likely to continue. The IMF should forestall falling into this trap.

Beyond China, the US, and overrepresented EU economies, the IMF’s members, particularly low- and middle-income countries, should view these challenges as an opportunity to have more say on matters that affect them deeply. Enhanced operational independence would go hand in hand with continued IMF accountability to its board for evaluation of its policy execution and for goal setting. The Bretton Woods institutions must be more reliable in the coming years if the big three economies continue to retreat from rules-based globalization in favor of with-us-or-against-us exclusionary economics. For all the immediate pressure on the IMF, well intentioned or otherwise, to respond to its largest shareholders on any given issue, insulation from increasing geopolitical division would be more than prudent. Greater operational independence is the prerequisite for addressing any and all of the other global economic challenges as geopolitics corrodes globalization.

Adam Posen is president of the Peterson Institute for International Economics.

Posen

To read the full article as published by the International Monetary Fund, click here.

To read the full article, click here.

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Trump’s Proposed Blanket Tariffs Would Risk a Global Trade War

Former President Donald Trump has promised more tariffs if reelected, 60 percent against Chinese goods, 10 percent against products from the rest of the world. These are in addition to the tariffs he imposed during his time in office and presumably on top of some noteworthy tariffs added to by President Joseph R. Biden, Jr., including the 100 percent tariff on Chinese-made electric vehicles (EVs). China was considered a strategic competitor under the former Trump administration’s National Security Strategy; other countries were not. Into this “rest of the world” category fit allies, neighbors, and just innocent bystanders.

Why 10 percent? Why all countries? There is no other reasonable explanation than that Trump considers all trade to be “unfair” in some respect, or at least disadvantageous.

This isn’t normally the way presidents act when it comes to tariffs. Additional tariffs are generally imposed very selectively, under trade remedy statutes crafted by Congress. They are actions taken pursuant to a finding that a particular product is involved in a specified unfair trade act, or it may be that the new tariff is a surgical retaliatory measure to open a market for a specified American product.

Many uncertainties surround Trump’s proposals.

We don’t know why 10 percent was chosen or why it would remain at 10 percent once imposed, but we do take Trump at his word on tariff matters—think about his fulfilling his pledge on day one of his time in office to withdraw the United States from the Transpacific Partnership (TPP) negotiated by President Barack Obama with Asia Pacific countries. He also already applied tariffs at a level of his choosing, first to steel and aluminum imports, and then to most imports from China, which netted out to 19 percent, a third of what he is promising now.

But didn’t President Biden just put on massive tariffs on Chinese goods? It is true he kept his predecessor’s blanket China tariff and then added some very high selective tariffs of his own. The new Biden tariffs place 50 percent tariffs on semiconductor imports from China. But that trade is modest, just under $1 billion a year. This compares with US chip imports from all sources that amount to about $6 billion each month.

The number of Chinese EVs being imported into the United States is even harder to detect (most press articles on the new tariffs on EVs contain no data), but only about 2,000 of these vehicles entered the United States from China in 2024 Q1. The EV tariff is a pre-emptive strike against these imports, not because they caused injury to the domestic automobile industry, but because they might prevent the industry being served by domestic American companies. The 100 percent tariff could be circumvented. Transplants could come in, but the United States, as opposed to France, has not put out the welcome mat for Chinese car investment. The bottom line is this new Biden measure affects $18 billion in trade coverage at present, as compared with total US merchandise imports of $ 3.826 trillion in 2023.

There is no reason to assume that the US tariff would not be met with additional foreign tariffs. The European Union, Canada, and Mexico retaliated immediately when Trump put on the steel and aluminum tariffs in 2018. Does the United States then go another round of escalating tariffs at that point? Or does it all get sorted out, as it did pretty much in that case? Even so, it is high stakes game, and what is at stake is the health of the US economy and that of the rest of the world.

The indiscriminate imposition of tariffs would no longer be confined to a trade war with China, if that is where the United States is headed, but a war against trade itself. It is time to remember some largely forgotten economic history. Fifty years ago, in 1970 when the Congress was considering import quota legislation, trade speeches were larded with allusions to the dangers of Smoot-Hawley level tariffs and “beggar-thy-neighbor” policies. Everyone knew then what those terms meant. The 1930 Tariff Act was a bidding war of members of Congress trying to give import protection to their constituents. The Congress, which under Article I of the US Constitution has authority over commerce, raised tariffs on imports to an average of 47 percent. This caused immediate retaliation from about a dozen countries, including Canada and Mexico. A year later, Great Britain abandoned its free trade policy, authorizing its Board of Trade to impose tariffs of up to 100 percent of value. The Board imposed tariffs of up to 50 percent immediately. Economists agree that high tariffs broadened and deepened the Great Depression, when US unemployment reached 25 percent and we nearly lost our democracy.

These are not yet the conditions we face today. US tariffs average around 3 percent, and unemployment is under 4 percent. Despite the headline-grabbing numbers for the high Biden tariffs, this is not Smoot-Hawley.

Unlike the Biden tariffs, the Trump plan is for increased tariffs on all products from all countries. It is not just America First; it is America Alone. Politicians and the public, here and abroad, are getting used to the idea of having higher tariffs, de-sensitized to the fact that high tariffs ought not to be the new normal. They are in fact added taxes on us, and having them will have real costs.

Beyond this, there is a risk of contagion. US treasury secretary Janet Yellen has invited other countries to follow the United States in its imposition of China tariffs. Given that there is an undeclared US trade war with China, this is not surprising, although it is not normal for modern secretaries of the treasury to be tariff proponents. Europe is also expected to act by putting into place much milder tariffs on EVs from China. This is likely be followed by a Chinese response in kind, already being bruited about, affecting luxury autos. Where would this end?

The impact of an unlimited trade war between the United States and China is one thing. China accounts for 16.5 percent of US imports, still relatively small compared with the nation’s experience in 1930. But the next administration, depending on the outcome of the election, could be working on building tariff walls, this time against world trade.

Only trade experts can readily tell that the two, Trump and Biden, are not using tariffs in the same way. The American public and foreigners looking on can be excused if they don’t see a difference. In the 1930s, President Franklin D. Roosevelt led the way back from Smoot-Hawley and blanket trade protection. A second Trump administration, freed from an awareness of history, may lead the world toward experimenting with blanket protection, tight-rope walking over an economic abyss. If Biden, sometimes compared to Roosevelt because of his federal programs, is given a second chance, he will need to be clear that his trade policies will be designed to be good for America and good for America’s friends abroad. The American president was formerly seen as “leader of the free world.” That honor requires a trade policy that other nations can emulate, that can be both to their advantage and ours.

Alan Wm. Wolff is a distinguished visiting fellow at the Peterson Institute for International Economics.

To read the full blog piece published by the Peterson Institute for International Economics, click here.

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U.S. Leadership on AI Global Governance

Artificial Intelligence (AI) is poised to become one of the most impactful and consequential societal revolutions of the 21st century, with enormous benefits and risks that the world is just beginning to understand. 

This paper will outline the AI global governance landscape and associated gaps in policy in order to establish the importance of U.S. leadership in developing a global AI regulatory framework – one that protects U.S. economic and national security interests, advances U.S. competitiveness, while ensuring transparency, protecting human rights, and promoting essential democratic values – as societies attempt to set the AI rules of the road for decades to come. 

The United States, the European Union (EU), and China have each embraced different AI regulatory models. The U.S. has pursued a more limited government model that fosters innovation, encourages private sector initiatives, and limits risks. The recently passed EU AI Act embraces a more restrictive regulatory role over the use and design of the technology, protecting consumers and privacy, while restricting various AI applications. 

Meanwhile, China is advancing a state control model with extensive censorship and surveillance capabilities. This is especially concerning as it spreads its model when it sells technology across the Global South.

In the U.S., the Biden Administration released its Executive Order on AI (EO) in October 2023, which builds on earlier efforts to establish guardrails for industry and directs funding for R&D and talent development, while establishing a government-wide effort for AI deployment through federal agencies. 

For now, the U.S. leads the world in terms of total AI private investment. However, AI is being deployed across China at a much quicker pace than in the U.S. While the U.S. still leads in AI, the Chinese government is investing considerable funding and political capital to close the gap. 

Multilateral efforts to create common governance structures and guardrails for AI have accelerated, through the UN, the OECD, the G7 and other forums. U.S. leadership and its governance model are reflected in many of these early efforts.

In order to lead the way on global governance for AI, the U.S. needs to build on its current efforts in several important ways. 

First, the Congress must pass a comprehensive federal privacy law. Strong privacy legislation would contribute to a healthy regulatory ecosystem and build greater credibility for U.S. positions on AI globally. 

The U.S. will need a comprehensive endeavor to prepare its workforce for the new AI economy. This must include a focus on job training and transition to address the significant job loss that will occur as many low-income and low-skill jobs are replaced by AI. Creating a pipeline of AI talent will also be key for U.S. global competitiveness. 

Globally, the U.S. should prioritize its participation in international standards bodies which have been working to create a common set of standards for AI. China prioritizes its participation and leadership in these organizations, and the U.S. needs to do the same, to advance its approach to ethical AI and transparent standards. Similarly, agreements across national safety institutes are critical to allow countries to work together on measurement science and harmonization of testing and other guardrails.  

The U.S. must rejoin the digital trade negotiations from which it withdrew in late 2023. U.S. absence opens the door to other countries advancing their own governance models, which could compromise U.S. economic security and put U.S. AI developers at a disadvantage. It could also usher in more punitive rules that impede innovation and hamper democracy. 

The U.S. EO calls on federal agencies to increase their AI capacity and AI workforce, and to responsibly adopt AI into their operations, while managing risks from AI’s use. The U.S. must use this deployment across the federal government as a testing ground for AI regulation and deployment, deepening its regulatory infrastructure, and establishing guidelines and regulations that other countries can adopt. 

Inclusivity among diverse stakeholders is essential to get AI governance right. Transparency in the U.S. policy process, together with a tradition of facilitating stakeholder input into regulations and laws, positions the U.S. to be a leader in developing inclusive regulations that reflect diverse interests. 

Perhaps the most acute short-term threat that AI governance raises is its impact on democracy. With elections this year in at least 64 countries, including the U.S., the increased sophistication of AI in facilitating misinformation and disinformation is of grave concern. We have already seen the use of deepfakes and misinformation used in political campaigns, including in the U.S. 

The U.S. must take steps to ensure election integrity at home and abroad. It must position itself to lead the effort to regulate misinformation, minimize false information spread by bad actors and protect democratic values. 

U.S. economic and national security depends on getting AI global governance right. Working with diverse stakeholders to harness the power of AI, investing in training, reskilling, and deploying AI in an inclusive, transparent, humane, and democratic way is essential to ensure AI achieves its full promise. The U.S. should use its domestic initiatives to lead the way on global AI governance, ensuring that AI does not become a tool of authoritarians, but rather is used to make societies more equitable, ensuring a brighter future for all the world’s citizens.

ALI-White_Paper-05142024-FINAL

To read the full white paper as published by the American Leadership Initiative, click here.

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Time to Reset the U.S. Trade Agenda

Over the past three years, U.S. Trade Representative Katherine Tai and National Security Advisor Jake Sullivan have worked to articulate a “worker-centered” trade policy while arguing for a “new Washington consensus” in U.S. international economic policy that will foster global investment and cooperation on issues like climate and development. Tai, Sullivan, and other U.S. officials have succeeded in laying out a vision for American industrial policy, one that has attracted hundreds of billions of dollars of announced investment in U.S. computer chip manufacturing and clean energy technology. Treasury Secretary Janet Yellen also has popularized the concept of “friendshoring”—the idea that U.S. allies and partners can benefit as multinational corporations diversify away from China. This term first appeared in a 2021 White House report on supply chains.

But when it comes to the brass tacks of trade—trade deals, tariff lines, the paperwork that companies have to file at the border, and other mechanics—U.S. President Joe Biden’s administration has not articulated a coherent agenda. At times, the administration has tried to use the specter of China’s economic threat to generate support for trade deals. One notable example is its signature Indo-Pacific Economic Framework (IPEF), which is intended to strengthen economic relations between the United States and countries across the Pacific. But geopolitical arguments for deals are failing to carry the day. Last November, deep congressional skepticism and electoral concerns spurred the administration to indefinitely postpone the IPEF trade pillar, and it is unclear whether it will complete the work even after the 2024 election.

Former president Donald Trump, in his current campaign to return to the White House, does have a clear vision for trade: he has announced plans to deploy tariffs and other protectionist measures to support favored U.S. industries. The architect of Trump’s trade policy between 2017 and early 2021, former U.S. trade representative Robert Lighthizer, has argued that the United States should vigorously deploy tariffs and other trade restrictions both to protect U.S. industry and to force not only China, but a variety of European and Asian countries, to cease unfair trade practices. However, a number of experts have raised concerns about the economic impacts of these policies as well as the risks they would pose to U.S. geopolitical relationships.

Resetting America’s trade agenda and developing a trade vision capable of drawing broad support across Washington is going to require the government to, as Steve Jobs would have said, “think different.” Rather than treating trade deals as a geopolitical endeavor that the United States should suffer through to support America’s allies and partners, or pursuing Trump’s vision of simply reducing trade (the geopolitical argument), the United States should get back to a basic premise that has guided successful trade policy in the past—that policymakers can develop and promote trade policies that advance American economic interests as well as American geopolitical interests.

Given the nature of the economic challenges the United States currently faces, this approach will require policymakers to spend less time on the geopolitics and more time on the economics. That choice, in turn, will encourage a shift in the primary focus away from regional deals and toward narrower sectoral deals that address the problems of greatest concern to most Americans, such as climate, energy, and the looming artificial intelligence (AI) revolution. To actually solve those problems, the United States should be open to using a new set of tools in creating trade deals, including those related to financial instruments, development, and national security. Today’s biggest challenges cannot be solved simply with market access and regulatory cooperation. The next chapter in American trade policy will need to entail new types of sectoral deals between the United States and key allies and partners on a set of issues that include climate and energy, supply chains, and AI and the digital economy.

The Rise of the Modern Trade Paradigm

Rebooting America’s trade agenda first requires understanding why the protrade consensus that prevailed from the 1990s to the mid-2010s—the most recent era of significant U.S. trade dealmaking—broke down.

Since the end of World War II, the United States has undertaken successful rounds of trade dealmaking during periods when trade deals had both a clear geopolitical and a clear economic logic. In the late 1940s, in the aftermath of the war, the deal that fit both U.S. geopolitical and economic interests was the General Agreement on Tariffs and Trade (GATT). Geopolitically, American policymakers saw the GATT as a tool to shore up Western alliances in the nascent days of the Cold War. From an economic perspective, trade negotiators designed the GATT to be an antidote to prevent a return to the “beggar thy neighbor” tariff policies of the 1930s, which postwar economists and policymakers saw as having exacerbated the Great Depression. The agreement required reductions in tariff rates and ensured that members accorded each other “most favored nation” trading status to put further downward pressure on tariffs over time. From a U.S. perspective, American officials also understood the GATT as a tool to help open markets to U.S. goods at a time when the United States was the world’s largest net exporter and needed foreign markets to replace war-driven demand for U.S. industry. Reductions in foreign tariffs on U.S. goods provided a major direct benefit for American industry.

The United States pushed to expand the GATT several times during the Cold War. The so-called Kennedy Round of 1964–1967 resulted in additional tariff reductions and began to establish disciplines around dumping, the practice where a country sells a product internationally at a lower price than the product sells for in its home market. The Tokyo Round of the 1970s expanded participation in the GATT to more than one hundred countries, seeking to include much of the nonaligned developing world. It began to try to tackle nontariff barriers and “voluntary export restraints,” a type of measure where countries would agree to limit export quantities in exchange for avoiding tariffs. With the introduction of a Subsidies Code, the Tokyo Round also began to introduce the concept of rules around subsidies.

However, the modern trade orthodoxy that guided U.S. trade policy from the end of the Cold War through the mid-2010s crystallized in the late 1980s and early 1990s. The fall of the Berlin Wall ushered in America’s unipolar moment, when America’s geopolitical policymakers saw an opportunity to use trade and economic relations to anchor its former Soviet adversaries and emerging geopolitical competitors, notably China, in a U.S.-led international order. Presidents Ronald Reagan, George H. W. Bush, and Bill Clinton, meanwhile, presided over a period of neoliberal economic consensus in Washington that Washington thought was an economic model appropriate for the world as well. Trade policy and trade deals (as well as other policy levers such as the International Monetary Fund) offered a tool to promote that U.S. economic model abroad. This intersection of geopolitics and economics ushered in a remarkably productive period of trade policymaking, with initiatives such as the North American Free Trade Agreement (NAFTA), the World Trade Organization (WTO), and free trade agreements (FTAs) with more than a dozen nations. Other related policies included the Africa Growth and Opportunity Act (AGOA), which cut tariffs on imports from democratic countries in Africa in a bid to foster development and democratic progress on the continent.

The deals of this era had a clear geopolitical logic. NAFTA was designed to strengthen the North American political union and, in the eyes of both presidents Bush and Clinton, to provide an eventual pathway toward a more democratic and economically unified Western Hemisphere—a vision that George H. W. Bush’s son and later president George W. Bush, took further with the Central America–Dominican Republic FTA (CAFTA-DR) a decade after NAFTA entered into force. The WTO, and China’s ultimate accession to it at the end of the decade, reflected the prevailing 1990s geopolitical view that a global trading arrangement would help draw countries like China toward the West. As Clinton said of China’s accession in 1999, “it represents the most significant opportunity that we have had to create positive change in China since the 1970s,” noting that China was “agreeing to import one of democracy’s most cherished values: economic freedom. The more China liberalizes its economy, the more fully it will liberate the potential of its people.” Or, as George W. Bush said about U.S. legislation to enact the CAFTA-DR agreement, “this bill is more than a trade bill. This bill is a commitment of freedom-loving nations to advance peace and prosperity throughout the Western hemisphere.”

FTAs with Morocco (2004), Bahrain (2005), and Oman (2006), enacted in the years following the 9/11 terrorist attacks, were intended to bolster American allies in the war against Islamic terrorism and with the aspiration that economic progress could reduce the terrorist threat. In a 2003 presidential speech, George W. Bush laid out his economic vision for the region, which proposed bilateral FTAs as stepping stones toward a Middle East Free Trade Area. As he remarked, “across the globe, free markets and trade have helped defeat poverty, and taught men and women the habits of liberty.”

The economic logic behind these deals was as important as the geopolitics. From a macroeconomic perspective, the trade deals of this era reflected a view that the U.S. economy could benefit from offshoring lower-value U.S. manufacturing in order to lower consumer costs, while encouraging the domestic growth of higher-value industries like software, healthcare, and value-added manufacturing. As Clinton put it in 1993, “this debate about NAFTA is a debate about whether we will embrace [economic] changes and create the jobs of tomorrow, or try to resist these changes, hoping we can preserve the economic structures of yesterday.” Trade globalization was thought to create opportunities for new U.S. exports, encourage innovation by forcing companies to compete globally, and lower consumer costs. Furthering Clinton’s argument in support of NAFTA and an aspirational Latin America free trade deal, policymakers also thought that an expanded U.S. trade block could deliver the economies of scale needed to compete with the emerging European Union trade block and growing intra-Asian regional trade.

With the texts of the deals themselves, trade policymakers sought to promote the then-prevailing economic consensus in Washington, which championed reduced government subsidies; nondiscrimination for goods produced by other countries; lower regulatory burdens for business, including the then-nascent digital economy; and strong intellectual property (IP) protections. Policymakers also sought to promote higher labor and environmental standards and to tackle challenges like corruption. Senior figures in Washington often spoke of these goals as raising standards internationally and writing global rules based on U.S. rules.

The WTO’s Agreement on Subsidies and Countervailing Measures (SCM Agreement), which went into effect in 1995, for example, drastically expanded the pre-WTO GATT’s disciplines regarding industrial subsidies. Throughout the text of the WTO agreements and U.S. FTAs, countries agreed to accord “national treatment” to each other’s goods, committing not to give preference to domestically produced goods. In most U.S. FTAs, and with respect to the countries that have signed up to the WTO’s Government Procurement Agreement, this nondiscrimination commitment even extended to government procurement of goods—meaning that the U.S. government, for example, should not show a preference for U.S.-made cars over foreign cars when buying for the federal fleet. Of course, these agreements also required governments to allow U.S. companies to bid on their procurement contracts.

U.S. FTAs typically included chapters ensuring that FTA partners offered IP protections comparable to U.S. IP protections. Several also sought to codify legal immunity for digital platforms regarding content posted by their users, just as platforms have immunity in the United States from lawsuits over user-posted content. Free data flows generally were protected, and governments made other commitments to not limit the operations of digital platforms operating in their countries. Trade policymakers also regularly touted deal language that promoted workers’ rights and environmental standards.

The final chapter of this era of trade policymaking was President Barack Obama’s support for the Trans-Pacific Partnership (TPP), a trade deal between a dozen economies in the Americas and Asia negotiated by the Obama administration in 2016. The TPP expanded on earlier FTAs from the 2000s and early 2010s, including by developing new disciplines on state-owned enterprises and currency manipulation. But the Obama administration made its case for the TPP largely on geopolitical grounds, arguing that it would be an important economic counterweight to China’s influence in the Pacific and an economic pillar of the administration’s “pivot to China.”

The Modern Paradigm’s Fall From Grace

Obama signed the TPP in January 2016. But even as he pushed for congressional ratification of the deal, it was becoming clear that the trade paradigm that had dominated Washington policy discussions since the early 1990s was falling out of favor. By late 2015, key congressional leaders had begun to express skepticism of the emerging TPP provisions, and ultimately they never scheduled a vote on the deal. Both of the major presidential candidates in 2016, Democrat Hillary Clinton (who had supported the early development of the TPP while serving as Obama’s secretary of state) and Republican Donald Trump, opposed the deal on the campaign trail, and Trump withdrew the United States from the deal shortly after his inauguration in 2017. (The other members of the deal, led by Japan, moved forward and completed the deal, rebranded as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, in 2018.)

As president, Trump generally eschewed traditional trade deals in favor of a tariff-heavy approach to trade, intended to put pressure on China while protecting U.S. industries, like steel, that he deemed important. Nevertheless, he did successfully enact the U.S.-Mexico-Canada Agreement (USMCA), an overhaul of the NAFTA agreement from twenty-five years earlier. And while some in the trade policy and national security communities hoped that Biden would launch negotiations to reenter the TPP, Biden has instead launched trade initiatives like the IPEF that are intended promote cooperation on trade and standards but do not provide access to the U.S. market as traditional FTAs would. And even without U.S. market access, such initiatives have proved politically controversial. In November 2023, for instance, Biden indefinitely postponed finalization of the trade-related aspects of IPEF owing to concerns by Democrats in Congress that the deal would be politically harmful and due to opposition by American labor unions. Biden also quietly postponed nascent trade talks with the United Kingdom and Kenya that began in the last months of the Trump administration, and late last year his trade representative, Katherine Tai, withdrew long-standing U.S. support for proposed digital trade rules at the WTO. Trump, in his campaign to regain the presidency this year, has doubled down on his commitment to tariffs and other protectionist measures rather than deals, floating the idea of imposing a 60 percent tariff on goods imported from China and a 10 percent tariff on products imported from everywhere else.

Of course, trade has long been a hot-button political issue. Texas billionaire H. Ross Perot made his opposition to NAFTA a signature issue in his 1992 independent presidential campaign against Bill Clinton and incumbent George H. W. Bush, and trade deal approvals have always been hard fought in Congress. But for the twenty-five-year period between 1990 and the mid-2010s, geopolitical and economic logic were able to overcome that political opposition to see deals to fruition. Today, there is scant evidence that new trade deals could get through Congress, and a dwindling number of elected political leaders are willing to argue in favor of them. There are several reasons for this change in political support.

The first is the shifting U.S. relationship with China. Although economic research from the 1990s and early 2000s generally found that expanding U.S. trade flows had at most a limited impact on U.S. manufacturing employment, with other factors such as automation playing a larger role, research from the mid- and late 2010s found that the “China shock” of growing U.S.-China trade in the 2000s had substantially more disruptive impacts on jobs. Moreover, communities adversely impacted by the China shock have seen little recovery over the past decade. Adverse employment impacts from trade with China, combined with China’s rise as a geopolitical competitor, have led to bipartisan support for “derisking” U.S. supply chains from China, fueled the arguments of trade skeptics, and renewed a focus on U.S. domestic manufacturing.

The second reason is shifts in domestic political preferences. It is true that some polling shows that the majority of Americans are supportive of trade: a 2023 poll commissioned by the Chicago Council for Global Affairs, for example, found that 74 percent of Americans say “trade is good for the U.S. economy.” But as prominent economist Alan Blinder pointed out several years ago in Foreign Affairs, “most Americans’ belief in free trade is a mile wide but an inch deep,” with polling responses varying widely depending on which questions are being asked and whether Americans are asked only about trade in the abstract or also about American manufacturing and jobs.

Trade policy is a classic example of an issue where a constituency that is invested deeply in and affected by an issue, such as specific U.S. industries and workers who face the risk of losses from trade, exert more influence than a majority of voters who may benefit from lower prices but who do not see their well-being as being deeply connected to trade issues. Recent polling by American Compass, a conservative organization that is skeptical of trade deals, has also shown that while a plurality of Americans thinks they personally benefit from globalization, a similar plurality thinks the United States as a whole has been harmed. Other recent polling suggests that on trade, more Americans trust Trump, with his zeal for tariffs, than trust Biden. Academic research, meanwhile, indicates that while Trump’s tariffs were an economic mixed bag, they won Republicans votes at the ballot box.

A third reason is that the raw economic benefits of trade deals have become less compelling. Take the TPP as an example: even the Obama administration’s own official estimate found that the TPP would add just 0.15 percent to U.S. gross domestic product (GDP) after a decade, hardly a compelling economic justification for the deal. And in the years since Trump abandoned the deal, actual U.S. trade flows have still moved in a beneficial direction: China’s share of U.S. goods imports declined from a high of over 20 percent in the late 2010s to approximately 15 percent last year, while the absolute value of U.S. goods imports from China fell last year to the lowest level in a decade. Trade with allies and partners also has grown: since 2017, U.S imports of goods from India are up 37 percent, up 80 percent from Indonesia, up 61 percent from the Philippines, and up a whopping 200 percent from Vietnam—the last of these now exports goods valued at a quarter of its entire GDP to the United States. The United States became India’s largest trading partner in 2023, while U.S. exports to the European Union and European imports from the United States are both up more than 25 percent over the past few years. Overall U.S. exports today substantially exceed prepandemic levels, reflecting growing global demand for U.S. energy, agriculture, and manufactured goods, as well as U.S. services.

Meanwhile, Americans traditionally thought to be adversely impacted by trade are doing well. Real wages for lower-income Americans grew strongly in 2023, and, in a reversal of the trend that has prevailed for most of the past two decades, the real wage growth for lower-income Americans over the past two years has been higher than the rate of wage growth for higher-income Americans. Women and Black Americans also saw historic gains in the labor market. A situation where both U.S. companies and U.S. workers are doing well creates little incentive to open U.S. markets to more competition. Numbers like these reinforce skepticism about the benefits of new FTAs.

But perhaps the most important reason for declining U.S. political support for new trade deals is that the economic theory of the case that underpinned the deals of the 1990s to the mid-2010s has fallen out of favor in Washington. At a fundamental level, a bipartisan consensus has emerged in Washington that the United States should rebuild its manufacturing industrial base and focus more on the economic well-being of American workers. Irrespective of whether prioritizing manufacturing optimizes American economic growth, there is strong political support for doing so.

In some sectors, U.S. domestic support for reindustrialization is driven by geopolitics: Congress’s bipartisan support for the CHIPS Act in 2022, which will provide more than $75 billion in incentives for manufacturing semiconductors in the United States, was driven in part by concern that a conflict between China and Taiwan could cut off America’s access to the chips it needs for industrial, defense, and consumer applications. In other sectors, such as manufacturing clean energy technologies, the push for reindustrialization is driven by a combination of geopolitical desires—ensuring that the United States is not dependent on China for green technologies—as well as domestic economic interests in boosting manufacturing employment in emerging manufacturing sectors. Across the political aisle, Biden’s trade representative Katherine Tai and Trump’s former trade representative Robert Lighthizer are united in a view that a goal of trade policy should be to raise wages and well-being for workers and that, for too long, trade policy has focused on benefits to consumers.

At a macroeconomic level, this desire to reindustrialize in many respects runs counter to the economic theory that underpinned many of the major trade deals of the past, which posited that U.S. workers would move up into “higher value” sectors like information technology, healthcare, and advanced manufacturing as the United States offshored lower-value (and lower profit margin) types of manufacturing. Moreover, many of the tools that policymakers want to deploy to rebuild manufacturing may run up against the trade rules that the United States long supported. Many of the United States’ European and Asian allies, for example, argue that the manufacturing subsidies the United States adopted in the CHIPS Act and particularly the green energy–focused Inflation Reduction Act violate the spirit and likely the letter of provisions of the WTO and U.S. trade agreements that long sought to limit industrial subsidies or at least give countries the right to retaliate against them. Likewise, “Buy America” provisions that direct the U.S. government to purchase American-made products run counter to trade rules on government procurement long supported by the United States.

The United States confronts a similar dynamic with respect to policymakers’ preferences on technology and the digital economy. Going back to the early days of the internet and continuing through the 2019 U.S.-Japan digital agreement, U.S. trade agreements have sought to promote light-touch regulation of the tech sector, guarantee the free flow of data across borders, and protect tech companies from lawsuits for content posted online. Today, Democrats and Republicans alike are pursuing a much more aggressive regulatory approach to technology companies, including competition policy crackdowns, efforts to repeal companies’ immunity for content posted online, and increased restrictions on cross-border data flows, at least to China. Some members of Congress and policy experts in the United States even want to revisit long-standing patent and copyright protections—such as the Biden administration’s current consideration of exercising “march in rights” to override patents to reduce drug costs—arguing that U.S. law has become too protective of intellectual property. The rise of generative AI is also likely to prompt a profound reassessment of intellectual property protections. These shifting domestic preferences, much like America’s growing preference for industrial policy, in many ways run counter to provisions historically supported in U.S. trade deals and will require a reassessment and overhaul of the trade rules America pushes for.

How to Reset the Agenda

Faced with fading support for FTAs, over the past two years trade-focused experts, industry lobbies, and protrade officials in Washington have floated a number of ways to reboot support for trade deals. The most popular approach has been to lean heavily on geopolitical arguments for trade. Commentators and political figures from across the political spectrum have argued that geopolitical competition with China makes trade deals with allies important: a late 2023 report by the bipartisan U.S. House of Representatives Select Committee on China, for example, argued that to compete with China the United States should “pursue trade agreements with strong rules of origin and high standards,” and it suggested Taiwan and possibly the United Kingdom and Japan as partners. As the Washington Post put it more succinctly in the title of a 2023 editorial, “To compete with China, the U.S. should put real trade deals on the table.”

Geopolitics has been the driving argument for the Biden administration’s IPEF. As Commerce Secretary Gina Raimondo said at a 2022 launch event, the IPEF “marks an important turning point in restoring U.S. economic leadership in the region and presenting Indo-Pacific countries an alternative to China’s approach to these critical issues.” Commentators such as Matthias Dopfner, meanwhile, have argued that Western democratic states should create a democratic trading block that increasingly would align trade policy with values while establishing the type of large economic scale that drives the efficiency gains that have been a long-standing economic argument for trade.

The idea of a broad democratic trading bloc is appealing as a long-term vision. But there is little reason to expect that geopolitical arguments for trade will prevail in the debate—particularly after they failed both to gain support for the TPP and to prevent Biden from postponing the IPEF trade pillar. The political and policy reality is that, aside from America’s robust defense budget, Americans are wary of policies that they perceive as requiring the American taxpayer to pay for the benefit of even other democratic states, as evidenced by the comparatively low levels of U.S. foreign assistance, and, more recently, the sharp congressional debate over continuing U.S. military and economic support to Ukraine. Framing trade deals as a sort of tax the United States should pay to strengthen the democratic world against China and other autocracies is unlikely to be a winning argument in the American heartland without a healthy dose of economic self-interest thrown in as well. Moreover, a number of large emerging market democracies that would be an important part of a democratic trading block, such as India and Brazil, have traditionally pursued protectionists trade policies and seem unlikely to be interested in a broad market liberalization in the near or mid-term.

A handful of former officials, seeing the political success of the USMCA—Trump’s updated NAFTA—have argued that the new agreement could be expanded to add additional members, potentially ultimately countries on both sides of the Pacific. But here, too, both the politics and the policies likely would prove challenging. Although there was broad bipartisan support for USMCA, that support reflected the fact that the United States already had a trade deal with Mexico and Canada (NAFTA) and bipartisan recognition that after twenty-five years, elements of NAFTA were in need of an update. Adding more countries, which would de facto result in the United States entering into new agreements with countries that did not have preexisting FTAs, would carry a different and almost certainly more challenging set of political dynamics. Instead, the way to reset the trade agenda is to start by resetting the economic logic of deals. If successful periods of trade policymaking have occurred in the past when the United States saw deals as advancing both its economic and its geopolitical interests, policymakers need deals that work on the economics as well as the geopolitics.

To reset the economics, policymakers should start by thinking less about traditional goals of market liberalization and more about discrete global challenges that require international economic cooperation—and possible ways of using trade deals to address those challenges. This would almost certainly mean pivoting from a bilateral or regional approach to trade to a sectoral approach to trade that brings together different sets of international partners to address discrete challenges.

Start with climate and energy. Global climate change poses an existential threat, as carbon dioxide emissions hit a new global high in 2023 despite years of international promises to address the problem. The United States accounts for only about 15 percent of total global emissions, whereas traded goods and services account for perhaps 25 percent of global emissions. Trade policy offers a powerful tool to tackle the 85 percent of emissions that originate outside the United States. Meanwhile, many U.S. allies and partners face a near-term challenge of securing their supplies of traditional fossil fuel energy, particularly following Russia’s 2022 war on Ukraine. European allies, for example, have had to scramble to find substitutes for Russian oil and gas. Even the United States remains far too dependent on Russia for uranium for nuclear power.

A climate and energy agreement could bring together a group of countries with the technologies and critical materials needed to produce clean energy, such as South Korea on battery technology, Indonesia for critical minerals, and the European Union for its role in clean power. The countries could work together to coordinate clean energy supply chains and industrial policies to promote the adoption and manufacturing of clean energy technologies. They also could commit to technological cooperation on clean energy technologies, with members, for example, offering streamlined permitting for nuclear energy construction from other member states. As with any trade deal, there would be an economic give and take: the United States and Europe, for instance, could offer countries access to incentives for green energy manufacturing in exchange for reliable access to critical inputs produced with high environmental and labor standards.

Meanwhile, the United States and Canada, major producers of traditional fossil fuels, could commit to providing access to fuels such as liquefied natural gas to address near-term energy security needs while the green transition is underway. The United States also could commit to maintaining high tariffs on Chinese clean energy technologies, including Chinese clean energy technologies produced in third countries, leveraging supply chain diversification away from China as an incentive for participation. It might also make efforts to lean heavily on the European Union and other allies to agree to impose similar tariffs on their imports of green energy products, such as electric vehicles (EVs), from China.

Conversely, countries could coordinate so-called carbon border adjustment mechanisms, which impose tariffs on products based on their carbon emissions, to put pressure on nonmember states like China and other highly polluting countries to reduce their emissions as well. Indeed, the United States and Europe are already discussing miniature versions of coordinated trade action for the clean economy. The proposed Global Arrangement for Sustainable Steel and Aluminum would promote trade in low-carbon steel and aluminum products, and proposed agreements on critical minerals would offer foreign battery materials makers some access to U.S. Inflation Reduction Act subsidies. These nascent steps could be bolstered and expanded into a compelling agenda.

A second sectoral area for trade policy focus would be to develop an “economic security” arrangement that coordinated industrial policy measures while strengthening supply chains for critical products. Countries such as Germany and Japan have joined the United States in pursuing new industrial policy measures, as in the case of the European CHIPS Act, which provides incentives for semiconductor manufacturing in Europe to match the U.S. version. Although this approach is welcome, in that it will likely spur further global production of important products like green technologies and semiconductors, poorly coordinated industrial policy measures risk triggering global subsidy fights and creating incentives for companies to play governments off against one another in a bid to maximize subsidies beyond those strictly needed to spur a project.

Meanwhile, the United States continues to face significant supply chain risks for other key products, such as medical devices and pharmaceutical ingredients. The production of many pharmaceuticals ingredients and some medical devices is concentrated on China and India. The United States, Europe, Israel, and a number of other countries, however, have a strong interest in resilience. An economic security arrangement could enable like-minded countries to coordinate industrial policy measures and promote supply chain resilience across critical products.

A final area for a sectoral agreement is AI and the digital economy. The United States has already begun to promote shared global standards for AI development through the G7’s Hiroshima process. Over time, an AI and digital economy agreement could link G7 political agreements into binding commitments for a larger number of countries to adopt. With respect to the digital economy, such agreements could establish shared standards and rules of managing data flows to strategic competitors, notably China, to prohibitions on government review of source code for apps and software developed in participating countries and expanded access to the digital economy and trusted telecommunications network infrastructure.

Sectoral agreements also would let the United States reconceptualize the tools that are included in a trade agreement. Since the first modern FTA in the 1980s, American trade agreements have focused on reducing tariffs and aligning regulations, generally around American standards. But trade—the actual exchange of goods and services and the associated economic activity—depends at least as much on policies and tools outside the scope of these FTAs as it does on FTA provisions: effective infrastructure, streamlined permitting processes, access to capital, and a skilled workforce. It is time for the United States to open the aperture of what a trade agreement can include to bring in a larger set of tools and potential commitments. For example, an AI and digital economy agreement should not be limited to governance and regulatory standards—it also should include meaningful financial commitments to help developing-world partner countries procure secure Western telecommunications equipment, rather than relying on Chinese suppliers. Similarly, a climate and energy agreement should include commitments to work together on streamlining the permitting process for high-priority projects that require a footprint across participating countries.

National security tools should also be on the table. The Committee on Foreign Investment in the United States (CFIUS) and export controls have come to play a far more prominent role in the international economy in recent years. Here, the United States should use trade deals in an offensive rather than defensive manner, for example, using trade deals to lock in commitments by foreign governments to restrict Chinese acquisitions of strategic companies in their countries. But the United States should also use its own national security tools as an incentive. A climate and energy agreement, for example, should promise to whitelist reputable automotive companies from allied nations like Japan for streamlined CFIUS approval, ensuring that they can invest in promising EV and autonomous driving companies in the United States. A digital economy agreement could include commitments not to impose export controls on allies without advance notice and consultation.

Finally, sectoral deals will let the United States focus trade provisions on specific facilities, rather than country of production. When the Trump administration negotiated the USMCA, for example, it included novel provisions that required workers to be paid at least $16 an hour for automotive parts to qualify for USMCA tariff treatment—essentially meaning that only certain Mexican plants qualify. Sectoral trade agreements are well suited to take this type of approach: a climate and energy agreement, for example, could offer foreign-made electric parts access to some of the subsidies contained in the Inflation Reduction Act, but only for facilities that meet the highest labor and environmental standards.

Negotiating large sectoral agreements undoubtedly will be challenging, as countries argue over the scope of covered sectors, market access, and the commitments to put on the table. But sectoral agreements also offer a new set of opportunities—to reframe trade deals as solving tangible problems that matter to the American people and to the world at large, and to negotiate rules that would internationalize some domestic policy changes within the United States.

Addressing China—and Whither the WTO?

Of course, a rebooted U.S. trade agenda is not just about deals with allies—it also requires addressing the U.S. trade relationship with China.

For many years, the strategic paradigm of U.S. trade policy toward China was defined by the hope that economic ties would persuade China to continue on a course of gradual economic and political liberalization. By the mid-2010s, it was clear that this paradigm had failed, prompting Trump to impose sweeping tariffs in a bid to generate negotiating leverage to compel China to change its economic model. China responded to the tariffs, initially with retaliatory tariffs on U.S. exports like agricultural products, and ultimately Trump offered tens of billions of dollars in assistance to U.S. farmers to offset the impacts of Chinese tariffs. Later, China offered a handful of concessions as part of a “Phase 1” trade deal, largely to avoid a threatened future tariff escalation. However, China steadfastly refused to make more fundamental changes to its economy and market, and there is no evidence that China’s willingness to reform has increased in the years since.

Moreover, even in the unlikely event that China made additional trade concessions to the United States, it is far from clear that they should be accepted: the United States has a strategic interest in reducing its dependencies on China in critical goods irrespective of whether China offers better terms on trade. For example, even if China somehow offered to allow American firms to produce critical minerals or EV batteries in China on fair terms, the United States has a strategic interest in ensuring that its domestic markets are not reliant on those supplies. The United States of course should pursue appropriate, fair terms for trade in nonstrategic goods, but when it comes to critical products, the U.S. objective should be to derisk the relationship, not for American and Chinese firms to compete on a level playing field.

Against that backdrop, the United States should rebalance its China tariffs to prioritize derisking rather than leverage for a deal. For example, it should raise tariffs on products where supply chain vulnerabilities remain acute, like EVs, batteries, medicines, and critical materials, while potentially offering some reductions in tariffs on nonstrategic consumer goods.

Effective derisking will require more than simple tariffs on China, however: it also will require measures to reduce the Chinese content in imports from third countries. There is a growing body of evidence, for example, that some of America’s growing imports from Vietnam are of products composed mostly of Chinese components, with low-value finishing work done in Vietnam. The United States needs to revisit the so-called rules of origin that determine what a product’s country of origin is for tariff purposes to begin derisking the upstream elements of critical supply chains. It also needs to figure out how to tackle China’s dominance in a handful of strategic construction industries, like shipbuilding and port infrastructure, where China’s impacts are global.

Though a U.S. pivot to sectoral agreements and more active management of the U.S.-China trade relationship could offer the potential to reboot the U.S. trade agenda, it will draw even more questions from U.S. allies about whether the United States has any residual support for the WTO. The WTO still serves as a basic framework for trade between nearly 200 countries, but the simple, often unspoken reality is that many American policymakers today regard the WTO as an outdated institution that reflects a different geopolitical moment. One of the WTO’s core tenets is that countries would accord each other preferential “most favored nation” trade status, in that the United States would set similar tariffs for both competitors like China and allies like Germany. With the resurrection of great power geopolitics as a defining feature of international relations, for most American policymakers it makes little sense for the United States to promote a global trading regime. Instead, most U.S. policymakers would prefer to see the development of a U.S.-centered trading bloc or blocs among allies and partners.

That said, most of America’s allies remain committed to the WTO, for understandable reasons. As the world’s largest economy, the United States is relatively well-positioned to negotiate bilateral or plurilateral agreements with major trading partners. Most small and midsize countries, however, strongly benefit from a stable global trading system rather than having to negotiate hundreds of bespoke agreements. The WTO also offers smaller countries a set of rules they see as being a valuable check on both the protectionist actions of large countries and for smaller countries to manage trade among themselves. The WTO itself, meanwhile, requires consensus for major changes, making reform unlikely. Moreover, a U.S. withdrawal from the WTO would be costly. It would result in more than one hundred countries around the world having the right to impose higher tariffs on the United States. To avoid that outcome, the United States would have to negotiate an unmanageable number of new deals in a short time frame.

Unfortunately, there is no clear path forward to resolve global differences on the WTO, given differences of both interest and opinion between the United States and its partners. The simplest path is likely for the United States and China, or perhaps the G7 on one side and China on the other, to reach a kind of mutual detente in which WTO rules would not actually govern trade between them. In many ways, this scenario would simply codify and expand the existing de facto reality between Washington and Beijing, where both Trump’s 2018 tariffs on China and China’s retaliation violate WTO rules, but the two governments effectively have reached a mutual understanding on tariff rates that simply exist outside the WTO system. Over the longer term, however, the world may see global trade continue to move toward discrete blocs—and this trend is already well underway. But there is not yet any international consensus on what a vision for that future would look like.

Conclusion: Does Trade Policy Matter?

Of course, for many Americans, and many policymakers, a rational lesson of the past few years could be that American trade policy does not need a reboot. Supply chains are diversifying away from China, U.S. exports are up, and real wages for workers are rising. Even if allies and partners complain about the lack of new American trade deals, rising actual trade volumes and closer defense relationships, like the AUKUS nuclear submarine deal with Australia and the UK and closer U.S. military cooperation with the Philippines, help to strengthen geopolitical ties. And even policymakers who want to use trade deals to strengthen geopolitical relations have to acknowledge that the correlation between economic and geopolitical relations is far from perfect. After all, Russia invaded Ukraine in 2022 despite decades of European policy aimed at using trade to anchor Russia economically into the West. As Lighthizer told a House committee last year, the iconic rock band the Beatles taught him that “money can’t buy me love” and that he doubted that “transferring our wealth to these people is going to make them like us more.

The strongest argument for rebooting U.S. trade policy ultimately may not be geopolitics, nor even the economic argument that trade deals will help an already-strong U.S economy. Instead, the best argument is that trade is a key element of solving global challenges that affect us all, like the green energy transition and the risks of AI and the digital economy. For trade policy to advance those goals, and win the domestic support that will be needed to make them happen, it is time to develop a trade policy designed around them.

Peter E. Harrel is a nonresident fellow at the Carnegie Endowment for International Peace.

Harrell_US-Trade-Agenda

To read the full paper published by the Carnegie Endowment for International Peace, click here.

To read the full paper, click here.

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Designing a New Paradigm in Global Trade

How a successful Global Arrangement on Sustainable Steel and Aluminum could function while delivering maximum benefits to workers and the environment.

 
Introduction and summary

The Global Arrangement on Sustainable Steel and Aluminum (GASSA)—a proposed agreement to increase trade in steel and aluminum produced in a way that emits lower greenhouse gas emissions—may be the most ambitious trade initiative pursued by the Biden administration and offers a template to move beyond the traditional neoliberal approach to free trade. Much has been written on why GASSA would be a game-changer for U.S. trade policy, including by the authors of this report. To date, however, there has been little exploration of how GASSA, or an expanded GASSA-like arrangement that includes more trading partners, would work—until now.

This report describes key decision points and makes recommendations about implementing a trade arrangement that affords preferential market access on the basis of carbon intensity and creates a common approach to address nonmarket overcapacity. These include: 1) preconditions that members of the arrangement should commit to before joining, including respect for high standard labor rights, a coordinated strategy to addressing overcapacity, and a commitment to broad industrial decarbonization; 2) a tariff structure that advantages low-carbon steel and aluminum imported from like-minded partners over dirty imports from nonmarket economies such as China; 3) the use of benchmarks, which grow more ambitious over time, to assess what counts as “low-carbon”; and 4) reforms to the nation’s customs system so that U.S. officials can distinguish between low- and high-carbon goods at the border.

The United States has gone from a climate laggard to a climate leader in just a few short years. Key to unlocking this progress has been moving past a neoliberal approach that lets market actors decide where and how—and how dirty—to produce goods and services and moving toward using a green industrial policy that can restructure production at the speed and scale needed to meet the United States’ commitments under the Paris Agreement.

This new industrial strategy is being executed through several tracks. First, the Inflation Reduction Act and the CHIPS and Science Act channel grants, loans, and tax credits to bring online a new supply of clean energy and manufactures, from goods from semiconductors and electric vehicles to green hydrogen and low-carbon steel. Second, the Infrastructure Investment and Jobs Act creates demand for this new supply through public works programs using domestically produced, clean steel and other inputs. Third, an emerging international climate and trade strategy complements this domestic agenda by rewriting international rules that condition access to national markets on respecting the climate.

Among international climate strategies, GASSA is furthest along. Launched in October 2021 between the United States and the European Union, it would set up a trans-Atlantic arrangement that could eventually expand to a club of countries. Participating countries would agree to offer preferential market access based on carbon intensity, while also agreeing to joint actions to address the challenge of nonmarket practices in the steel and aluminum industries. The choice of these two metals is not accidental. They account for about 11 percent of global carbon dioxide emissions and nearly one-third of industrial emissions. Moreover, countries such as China have been flooding global markets with excess, dirty production, and as a result, the metals are already subject to extensive trade protection measures.

Although the United States, the European Union, and their industries share a common interest in greening and stabilizing steel and aluminum trade, progress on the negotiations has been frustratingly slow. The United States has made a number of proposals over two years of negotiations, but the European Union remained in a more passive and reactive mode. After missing a deadline in October 2023 for finishing these talks, both sides extended a relative “peace” on bilateral trade flows, allowing for more negotiation time.

The authors of this report have previously written about the historic opportunity that GASSA would present. To summarize, GASSA or a GASSA-like agreement would strengthen U.S.-EU coordination, helping to write the rules of 21st-century trade. However, no new timeline has been announced, and there are reasons to believe the European Union currently lacks sufficient motivation to come to a deal that meets the needs of the United States and of industries and workforces in both America and Europe.

While it is difficult to know exactly how the negotiations will unfold moving forward, the opportunity for the United States to create a new global trade paradigm that affords market access based on carbon-intensity and addresses nonmarket overcapacity is too important to abandon. The European Union’s Carbon Border Adjustment Mechanism (CBAM) essentially means that the European Union will continue to be important in discussions over any GASSA-like arrangement, but it may be unwilling to make the compromises necessary for a cooperative approach to decarbonizing the metals trade. For that reason, these twin objectives could very well become the basis of negotiations with other ambitious trading partners and—if successful—could become the organizing principle for a global system looking for a new means to organize and manage trade relations. Indeed, in remarks at Columbia University on April 16, Special Presidential Envoy for Climate John Podesta suggested precisely this kind of expanded approach, calling for discussions with U.S. “partners and allies around the world, from the UK to Australia to the EU.”

This strategy is particularly interesting, as it turns the traditional neoliberal approach to trade on its head. No longer would the United States or other developed economies offer market access on the promise, or in the hope, that eventually trade would lead to alignment on standards for workers or the environment. GASSA or a GASSA-like agreement, rather, would ensure that standards come first, as a prerequisite  before a trading partner would benefit from preferential market access. Such a structure may start with steel and aluminum, given the sector’s unique trade exposure, but could easily encourage decarbonization and high standards in other sectors as well. This idea shares a strong sentiment with the comments made by Brazilian Finance Minister Fernando Haddad at a recent meeting with his G20 counterparts, where he called for a “new globalization” based on social and environmental principles.

The steel and aluminum sectors offer a few major advantages as a starting point for this type of innovative approach to trade. First, steel and aluminum are already subject to extensive trade controls globally. Second, likely participants have established environmental regulatory systems, including protocols for carbon accounting, which may reduce the administrative burden needed to make a tariff based on carbon intensity successful; as Podesta noted, developing common approaches to these accounting problems should be a major object of international cooperation. Third, the global steel and aluminum industries have been particularly affected by China’s nonmarket overcapacity, putting producers in market-based, high-standard countries and their workers at a disadvantage that has resulted in job losses and a decline in international competitiveness.

In the United States, steel production is often far less carbon intensive than production in China. GASSA or a GASSA-like agreement would thus do more than provide an incentive for steel producers to decarbonize: It would turn a carbon advantage into a meaningful market advantage that could facilitate additional investment in U.S. steel capacity and create goods jobs. A similar dynamic exists elsewhere, including in the European Union, Canada, the United Kingdom, Japan, South Korea, and Brazil—all potential partners in the creation of a GASSA-like structure.

Thus, while it is possible to envision a GASSA-like structure for other sectors, this report focuses on the design choices needed to move a steel and aluminum trade regime forward, either with the European Union or with other negotiating partners. The goal is to highlight the policy options that negotiators must consider in order to reach an agreement that is maximally beneficial to steel and aluminum workers and the economic and national security of both the United States and its partners as well as focuses on the global effort to address climate change.

 
Prerequisites to joining the global arrangement

Prerequisites to joining a GASSA-like structure are central to ensuring that a global arrangement can fulfill its objectives of conditioning market access on participants meeting ambitious climate and labor standards, as well as addressing overcapacity in the industry. This can ensure that proper, coordinated actions are taken to address the nonmarket practices of others and can reduce the risk of resource shuffling, i.e., producers simply exporting their cleaner products and selling locally their dirtier products without any actual movement toward decarbonization. Prerequisite commitments can also be used to advance the values of global arrangement participants related to labor rights, broader climate cooperation, and support for shared research and development (R&D). At least four types of threshold commitments should be required for joining the arrangement.

Labor rights

Global arrangement participants should meet certain labor rights requirements in their steel and aluminum sectors that go beyond merely passing labor laws—particularly if markets with a history of lax enforcement are allowed to join. A high-standard commitment to worker health and safety, appropriate pay, and support for unionization and collective bargaining, for example, could all be included in a prerequisite commitment for participants of the global arrangement. The Facility-Specific Rapid Response Mechanism in the United States-Mexico-Canada Agreement has been a successful tool for policing compliance with these labor standards, and negotiators should consider including a similar mechanism in the global arrangement as well.

Industrial decarbonization

As noted above, a feature of GASSA or a GASSA-like structure is the flexibility participants would have to adopt different kinds of domestic decarbonization measures to improve on the EU CBAM. Some countries, such as the United States, may prefer an approach that focuses on regulatory standards and subsidies. Others, such as the European Union, may prefer systems that are more focused on taxation or carbon pricing. The prerequisite standards should be sensitive to the fact that different members may have different political and legal constraints in approaching domestic decarbonization.

At the same time, the resource shuffling problem is most effectively addressed if participants agree on some broad benchmarks for domestic decarbonization. These could be framed in terms of results rather than the adoption of specific domestic measures. Still, the benchmarks would ensure that carbon-intensive production cannot just continue to thrive via domestic consumption.

Likewise, the importance of subsidies to the green transition creates a potential conflict among nations. Existing trade rules allow—and in some cases domestic law may require—countries to impose additional duties called “trade remedies” on subsidized imports. Arrangement participants should agree not to impose new countervailing duties (CVD)—a type of trade remedy imposed on subsidized imports—on steel or aluminum imported from another participant’s market if a subsidy that would otherwise be subject to CVD protection was provided to facilitate the decarbonization of metals production in their home market and the subsidy was not contingent on export. Failing to do so could eliminate the market access for green metals that the arrangement seeks to create.

Finally, it may make sense for markets agreeing to join the global arrangement to also commit to continuous improvement to decarbonize their industrial sectors outside the steel and aluminum sectors. Possible commitments could include financial or investment pledges or specific decarbonization targets linked to a country’s climate commitments.

A strategic approach to overcapacity

Participants in the global arrangement should coordinate their responses to steel and aluminum overcapacity. This is different than how to handle steel produced by markets outside the global arrangement. There should be a coordinated approach to trade enforcement, ensuring that steel and aluminum produced using nonmarket, illegal, or unfair subsidies does not compete with steel produced by market-based suppliers. This could, for example, take the form of an additional common tariff or even a ban on steel or aluminum produced in nonmarket economies, effectively creating new export opportunities for low-carbon steel produced in fellow GASSA markets to replace dirtier steel produced in China.

R&D collaboration

Participants in the global arrangement could agree to collaborate on joint R&D projects related to the decarbonization of steel and aluminum production as well as a common approach to broad deployment of decarbonization techniques and technologies across GASSA markets. While it will be important to maintain a clear market advantage for firms willing to develop and invest in the decarbonization of their output, there may be situations where joint or collaborative R&D can help the entire industry become more sustainable. Negotiators should consider identifying such opportunities and ensure that global arrangement participants work together to leverage them to maximum effect.

 
Decision points within GASSA or GASSA-like trade regime

The second, and perhaps most complicated, type of design questions in the development of GASSA or a GASSA-like structure involve the mechanics of how a tariff regime would work for those countries that have agreed to the prerequisite commitments and joined the arrangement. These include the following questions.

Who should be invited to join?

Initial negotiations were bilateral between the United States and the European Union, but the United States should consider inviting others, including the United Kingdom, Canada, South Korea, Japan, Australia, Norway, and Brazil, to join the existing talks. Moreover, if the European Union remains reluctant to agree to such terms, the United States should begin talks on a GASSA-like agreement with one or more of these other potential partners, recognizing that any potential negotiating partner(s) must share a similar level of ambition toward climate, market principles, and core labor rights.

From an economic perspective, the more steel-producing (and steel-consuming) countries that join, the more market advantage that would be provided for lower-carbon steel and aluminum. However, negotiating the mechanics of a carbon-based trade regime with so many countries may force negotiators to lower their ambition to meet the needs of the “lowest common denominator.” Balancing ambition—and certainly, high standards for industrial decarbonization, labor rights, and dealing with overcapacity—with the desire for inclusivity will thus be critically important.

It will also be essential to consider when and how new partner countries could join. Ideally, the arrangement would be open to anyone willing to adopt the common tariff scheme and able to meet the prerequisite standards, but participants may want to impose additional requirements, such as the approval of the existing participants—a common requirement in trade agreements. Relatedly, negotiators must also consider how and when to enforce the terms of the arrangement against existing partner countries. Environmental treaties such as the Montreal Protocol contain compliance mechanisms that could provide a model, and participants may wish to consider even harsher sanctions, such as possible expulsion from the global arrangement for participants who persistently fail to meet their obligations.

What should the tariff structure be?

Negotiators should consider setting three tariff rates in order to balance simplicity and functionality with climate impact:

A tariff rate for steel and aluminum that is produced in a market that is part of the global arrangement and with a carbon intensity below a specific limit
A higher tariff rate for steel and aluminum produced in a market that is part of the global arrangement but with a carbon intensity that is above the limit
An even higher tariff rate that would presumptively apply to steel and aluminum produced in a country outside the global arrangement, regardless of its carbon intensity, unless nonparticipants could demonstrate that they have complied with the arrangement’s standards

For example, steel and aluminum imports that meet the conditions under the first rate could be tariffed at 0  percent. Steel and aluminum imports that meet the conditions under the second rate could be tariffed at 25 percent. And steel and aluminum imports that meet neither the first nor second rates could be tariffed at 75 percent, or even face an outright ban, unless the importer can verify that it meets some or all of the arrangement’s standards. A nonparticipant exporter could potentially be entitled to a tariff rate lower than that ordinarily charged under the third rate if the metal falls below a specific carbon-intensity threshold and the exporter can demonstrate full compliance with all the arrangement’s standards, including labor standards and treatment of imports from nonmarket economies.

Such a structure would ensure that joining the global arrangement—with its commitments related to labor rights, broad decarbonization, treatment of imports from nonmarket economies, and R&D cooperation—provides a country with advantages that could not be obtained simply by producing low-carbon steel without ensuring labor rights or addressing overcapacity. Dramatically simplifying the tariff structure within GASSA could also expand the domestic toolkit to ensure the industry does, in fact, decarbonize.

One alternative structure could have the tariff rate slide based on the carbon intensity of the product—essentially a common CBAM. Rather than have two different tariff rates, one for low-carbon steel and aluminum and another for high-carbon steel and aluminum, the structure would assign a tariff rate based on a set conversion factor relative to the amount of carbon in the piece of steel or aluminum. This would more easily align the carbon-based tariff to other carbon border adjustments but would likely run into implementation, transparency, and predictability issues. In addition, unless steel produced with less than a specific level of carbon were allowed to enter another partner’s market tariff-free, it would ensure that at least some tariff was assigned to every imported product, reducing the potential attractiveness of significantly investing in decarbonization—and likely limiting the attractiveness of joining the global arrangement for some potential participants. Indeed, the amount of paperwork involved with tracking and verifying precise carbon intensities, as well as trying to account for the interaction with nonparticipants’ CBAMs, is itself a substantial barrier to trade in green steel and aluminum—a criticism of the EU CBAM and a feature that could significantly weaken the incentives to invest in and trade green metals.

Another alternative would be to have a single tariff rate for participants of the global arrangement—likely zero—and a much higher rate for nonparticipants. This would maximize simplicity and could provide a further incentive for markets to join the arrangement. However, this approach might also offer too great an advantage for the dirtiest steel producers in markets that join the arrangement: They would be granted the same market advantage as less carbon-intensive producers in their same market. This problem could be solved by requiring each participant to adopt similar domestic carbon intensity standards for steel and aluminum production. But a benefit of the GASSA-like structure is that it allows participants some flexibility in how they approach domestic regulation of carbon. This is a significant difference from, and improvement over, the EU CBAM, which exempts only countries that adopt a domestic carbon pricing scheme linked to the European Union’s Emissions Trading System.

What separates high-carbon steel and aluminum?

Assuming a multitier tariff design outlined above, negotiators must choose the line that would separate the low and high tariff rates for steel and aluminum imported from other participants of the global arrangement—that is, the line between the first and second tariff rates detailed above. Several options exist, including a demarcation line based on the importing country’s average emissions in its steel and/or aluminum sector. This approach would ensure that the more a country’s steel and aluminum sector decarbonizes, the more trade protection it would receive. The challenge, however, is that such a system would be difficult to predict going forward, as the national average would change frequently, albeit hopefully always in a cleaner direction. This could slow investment and hamper the types of long-term procurement contracts common in the industry. It would also give the dirtiest steel producers in a market an advantage since they would benefit from the decarbonization investments of their competitors.

A second option would be to set the demarcation line based on the exporting markets’ carbon intensity, ensuring that only those companies that produce low-carbon steel relative to their domestic competitors would have access to the markets of other global arrangement participants. This may incentivize investment in multiple places simultaneously. The challenge, though, with this option is that a market with a higher-than-normal average carbon intensity could have its steel and aluminum advantaged in the market instead of lower-carbon steel produced in a fellow global arrangement participant where the national average is lower. Another concern is that this option could encourage creative resource shuffling without an overall decline in carbon intensity. Both options also involve participants having different demarcation lines, further complicating trade among participants and reducing the value of joining.

For this reason, a third option may be preferable: setting the demarcation line based purely on a particular carbon-intensity score. The benefit of this approach is that it provides long-term transparency; investors know that if they can produce steel and aluminum at a certain level, they will receive the market advantage that comes from being able to export duty-free into other global arrangement markets. It would also allow negotiators to set a carbon intensity demarcation line that decreases over time, driving continual investment in decarbonization, while dealing with issues of resource shuffling through the prerequisite commitments that partners would make to join the arrangement. While this could incentivize the carbon intensity of individual firms’ production to bunch at or near the demarcation line, the peg to a specific carbon score would ensure that the entire sector’s decarbonization efforts would at least be sufficient to achieve broader climate objectives. The line could be set to achieve the carbon emissions levels needed to meet a particular climate target—for example, 1.5 degrees Celsius. If negotiators ultimately choose this option, determining the appropriate carbon level and rate of decline will be extremely important, and likely quite contentious.

Moreover, negotiators should consider the practicality and expediency of developing different demarcation lines for steel produced from electric arc furnaces and blast furnaces. This bifurcation would create incentives to reduce emissions in blast furnace steel production—which will remain a significant component of American and global steel production for the foreseeable future—and avoid a scenario where GASSA creates a protected market for electric arc furnace-produced steel with little incentive for further decarbonization. By giving blast furnaces an incentive to decarbonize even if they cannot meet the same decarbonization standards as electric arc furnaces, this bifurcation would address the resource-shuffling problem in which blast furnace production is consumed domestically and not decarbonized. This sort of bifurcation is already happening at the federal level through the Biden administration’s new Buy Clean policy and is under consideration in Europe through the European Union’s CBAM. Notably, steel produced in the United States is far less carbon intensive than steel produced in China, regardless of the method used to make the steel. Chinese steel produced by the traditional blast furnace produces about 50 percent more emissions than steel made by a blast furnace in the United States. In contrast, steel produced by an electric arc furnace in China is roughly three times more carbon intensive than steel produced by similar processes in the United States.

Is there a limit on the amount of tariff-free steel and aluminum allowed to enter a market?

The current import regime negotiated by the United States with the European Union, Japan, the United Kingdom, and others allows for a tariff rate quota, above which imported steel is tariffed at 25 percent. A global arrangement structure could potentially cap the amount of low-carbon steel allowed to enter a domestic market tariff-free, creating a fourth tariff level for low-carbon steel exceeding a set amount. This fourth tariff rate would likely be below the tariff on high-carbon steel from global arrangement participants but still be assessed some level of tariff since it would exceed the cap allowed to be imported tariff-free. However, to promote design simplicity and provide a strong incentive to decarbonize, the authors support removing any import limit for low-carbon steel produced by a global arrangement partner.

How is carbon intensity measured?

Negotiators must decide whether the carbon-intensity score assigned to a piece of steel or aluminum includes Scope I, Scope II, and/or Scope III emissions. From a climate perspective, including all three makes the most sense. However, this raises considerable transparency, reporting, and verification challenges. Scope I emissions are the easiest to assess and will likely become required because of regulatory actions in most places. Scope II emissions are more challenging and likely not something that every steel and aluminum producer can accurately calculate at present, but they also account for a lot of the carbon advantage U.S. steel producers enjoy over others. And Scope III emissions may be even harder to calculate for most firms—and even harder to verify for everyone else. But without a process to estimate Scope III emissions, the threat of the global arrangement failing to accurately account for major sources of emissions is simply too high.

 

Scope I, II, and III emissions in the steel and aluminum sectors

Understanding the different types of emissions is important to assessing the carbon intensity of a particular product. In the steel and aluminum sectors, Scope I emissions refer to direct emissions produced in the production of a metal. This can be the result of running machines (blast furnaces, for example) as well as the electricity used to power facilities used in production. Scope II emissions are created by the production of energy that is purchased by a steel and aluminum manufacturer in its production. And Scope III emissions refer to those caused by a steel and aluminum company’s suppliers and customers, as well as the emissions caused in transporting component parts and materials to a production facility.

 

For this reason, the United States and the European Union—and others, if the global arrangement negotiations are expanded—should name a team of technical experts to develop a consistent, uniform, and mutually acceptable methodology for calculating the embedded emissions of a piece of steel or aluminum, as well as plans to educate steel producers and consumers on how to use the methodology. This will likely include using environmental product declarations or other commonly used reporting mechanisms.

One thing to note: It may be possible to evolve this part of the global arrangement over time if, for example, in the first years of the system, only Scope I emissions could be included. Eventually, the system could expand to include Scope II and Scope III emissions, perhaps providing global arrangement participants the opportunity to develop a consistent, transparent, and verifiable method for calculating the impact of these emissions on a product’s unique carbon-intensity score.

At what level is a steel or aluminum product assessed a carbon-intensity score?

Today, when a product shows up at a border, it is assessed a tariff based on its harmonized tariff schedule (HTS) code and its country of origin. HTS codes are harmonized globally at the six-digit level, meaning trade can flow relatively easily. But such a system of harmonized codes does not work for carbon intensity, so negotiators must agree on how to score a piece of steel or aluminum. In a perfect world, each piece of steel or aluminum would be assigned its own unique score, but this is challenging given the limitations of existing data. Nevertheless, working toward common standards for this type of product-specific carbon accounting should remain a goal for any government that wishes to join GASSA or a GASSA-like agreement.

An alternative might be to assign a piece of steel or aluminum a carbon score based solely on the market in which it was produced—essentially a national average. This would mean that a piece of steel produced in Canada would be assigned the Canadian carbon score. Canadian industry as a whole would have an incentive then to lower its overall emissions profile. Still, laggard firms would benefit the most from the decarbonization investments of their domestic competitors. This free-rider problem alone likely makes this approach unworkable in the absence of common domestic standards on decarbonization. Moreover, a national average would need to be regularly—likely annually—assessed and agreed to by other participants of the global arrangement. In addition to the free-rider problem, this approach could cause incessant bickering among global arrangement participants, as minor changes to a country’s national average could have important ramifications in the business environment—and, of course, each country’s government would strongly support its own domestic industry.

Another option would be to assess a carbon score based on the carbon emissions of the factory that created the piece of steel or aluminum. This would align better to the inclusion of Scope I, Scope II, and Scope III emissions, as Scope II and III emissions are often plant-specific, and would ensure that each company would benefit from its investments in decarbonization. However, if a plant significantly improved its carbon footprint, it might not enjoy the market advantage such an investment would entail until the next update to the plant’s carbon score. For instance, if plants were assigned a carbon score annually, an investment that is completed in January would wait another 11 months before it would be reflected in the import price of that company’s products.

 

Research underway into the emissions intensity of steel and aluminum production

The Environmental Protection Agency (EPA) already runs a Greenhouse Gas Reporting Program that collects and publishes emissions data from the metals sector, including steel and aluminum. The International Trade Commission (ITC) is currently investigating the greenhouse gas emissions intensity of steel and aluminum production in the United States, collecting both company- and facility-specific data. The results of the ITC investigation will supplement the data the EPA already collects to give the U.S. government an overall picture of the relationship between emissions in the steel and aluminum sectors and international trade flows.

 
 
When would the global arrangement take effect?

From a climate perspective, the faster a global arrangement system starts, the better. But it might be relevant to garner support for the arrangement to delay implementation to allow for decarbonization investments to come online.

Are there exclusions for products not made domestically?

Another decision point revolves around whether steel and aluminum products that are unavailable domestically should be subject to an exclusions process that would allow them to be imported duty-free into the market of a global arrangement member. From a climate perspective, this would create a significant loophole that could decrease the carbon impact of the global arrangement. But from a market, competitiveness, and political perspective, it may be necessary to continue offering tariff exclusions for those products not currently available in a country’s home market. If exclusions are offered, negotiators will need to determine whether the imported steel or aluminum must be from another global arrangement partner or from anyone. The preference would be the former, but it is possible that the product may not be available from any other global arrangement participant either, particularly if the arrangement is limited to only a few markets.

While not a large source of imported steel, negotiators may also consider providing some level of tariff-free exclusion for green steel produced in markets classified as a least developed country (LDC). Such an exclusion would be subject to a quantitative limit above which the standard GASSA tariffs would apply to avoid LDCs becoming pass-through jurisdictions for exporters from countries outside the arrangement seeking preferential access to GASSA markets. This could encourage broader investment in green steel production outside traditional markets, offering a pathway for LDCs to help shape the future of the steel industry more sustainably.

Is all steel and aluminum included?

The current HTS system includes 58 steel product categories, and the United States maintains roughly 800 10-digit import codes in the sector. Negotiators will need to determine whether the global arrangement should include all these unique products, or only imports in certain categories. Moreover, negotiators will need to consider whether downstream steel and aluminum products should be subject to similar carbon-based tariffs. Including all steel and aluminum products would be the most impactful from a climate perspective and would eliminate the need to negotiate along individual tariff lines or to parse finished goods into their component parts or materials, but it may make implementation unwieldy.

What is more, given the intricacies of different metals supply chains, it is important that GASSA participants agree that the preferential tariffs that apply to GASSA participants only apply to products melted and poured (in the case of steel) or smelted and cast (in the case of aluminum) in another GASSA participant’s territory. This would ensure that steel and aluminum produced in a nonmarket economy are not offered a backdoor to the advantageous terms offered by GASSA membership.

How can carbon-intensity scores be verified?

It is critical to the functioning of any economic system that the participants trust the information they receive from others. Suppose a steel or aluminum producer is selling to a buyer in another global arrangement market. In that case, the two sides must trust that the carbon score reported by the producer is valid, and thus their product will be assessed an import tariff at the appropriate rate. However, this variable—unlike the product’s HTS code and country of origin—is subject to change. Thus, a question arises about when the score changes and who verifies that it is correct. Is there an independent verifier, or will the participants themselves do the verification? Participants will also want to negotiate penalties for false, and possibly for mistaken, reporting.

How should revenue raised from carbon tariffs be used?

Currently, revenue generated by tariffs is deposited into the U.S. Treasury. However, revenue generated from GASSA or a GASSA-like structure does not necessarily need to be treated the same way, although this would likely require a legislative change. It could, for example, be invested in certain activities such as additional industrial decarbonization projects, R&D, and more. The tariff could be structured to use the revenue generated to supercharge industrial decarbonization efforts and to better prepare steel and aluminum producers within participants of the global arrangement to address competition from nonmarket practices elsewhere. Another option would be to use some of the revenue as foreign aid to countries that are primarily consumers of steel produced elsewhere but lacking an export interest. This could induce these countries to join the global arrangement and/or impose external barriers on dirty steel or aluminum imports. Expanding the global arrangement in this way would provide additional market opportunities for cleaner steel produced in the markets of global arrangement participants while also narrowing the range of markets importing dirty metals, helping to reduce the global price suppression that Chinese overcapacity has inflicted on the global steel and aluminum market.

What is the interaction between GASSA and the EU CBAM?

If the European Union is included in GASSA, negotiators must determine the interaction between GASSA and the EU CBAM. The EU CBAM is essentially a tariff based on carbon intensity on core industrial products, including steel and aluminum. It is a unilateral measure that exempts other countries only insofar as they adopt and link a domestic carbon pricing scheme to the European Union’s system. In this sense, the EU CBAM reflects an effort to get the rest of the world to adopt the European Union’s domestic decarbonization policies. Initial implementation has already begun, and the European Union is set to start collecting import fees in 2026.

If the European Union agreed to join and implement GASSA or GASSA-like structure, negotiators would need to work out whether that structure would replace the CBAM for steel and aluminum imports or be layered on top of it. If the latter, the European Union would need to ensure that low-carbon imports from the United States are not “double-tariffed” under GASSA and the CBAM and that U.S.-produced low-carbon steel and aluminum, and potentially metals produced by other GASSA partners, remain competitive in the EU domestic market relative to dirtier alternatives from within the European Union.

Simply put, failure to adequately address the interaction with the EU CBAM in a manner fair to U.S. steel and aluminum producers, and their workers, would call into question the viability of the European Union as a negotiating partner in developing a GASSA structure. At the same time, the European Union—long a leader in tackling climate change—has invested much political capital in building its CBAM. The European Union may hope that by 2025 or 2026, political and regulatory momentum—both in the European Union and in other countries eager to minimize the burden on their exports to the European Union—will make the CBAM and the associated domestic carbon pricing schemes the de facto global standard. For this reason, the United States should move quickly in discussions with other allies if the European Union continues to prove reluctant.

 
Design for maximum effect

Negotiators in the United States and like-minded countries should seize the opportunity to create a new precedent for climate-friendly trade cooperation. And more important than demonstrating conviction is getting these design choices right. Negotiators should assess how different policy choices will affect key outcomes. These outcomes include:

Overall carbon emissions of the steel and aluminum sector within global arrangement markets
Overall emissions of the steel and aluminum sector globally
Trade flows, since the changes in tariff rates would result in a changing of how steel and aluminum is imported and exported around the world
Steel production, including where production takes place and how it is produced—for example, blast furnaces or electric arc
Job creation and, to the extent possible, job creation by factory, state, and market

Understanding and messaging the impact of the policy choices that can improve these outcomes will be essential to maximizing the value of the carbon-based trade arrangement and to building the political support needed to ensure the arrangement endures into the future.

 
Conclusion

Rarely in international economic policy is an opportunity so clearly a win for the climate, workers, and foreign policy. Although the decision points are novel, they represent the cutting edge of trade policy. Put simply, GASSA portends a new way of thinking about global trade, one that more closely resembles the values of trading partners rather than simple efficiency at the expense of workers or the environment. It is a chance to set a crucial new precedent that the Biden administration and U.S. allies should seize.

 

To read the full report as it is published on the Center for American Progress’ website, click here.

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Rippling Out: Biden’s Tariffs on Chinese Electric Vehicles and Their Impact on Europe

On 14 May, United States President Joe Biden announced new tariffs on China under Section 301 of the Trade Act of 1974 (unfair trade). The additional tariffs – on top of earlier tariffs, including those imposed by President Trump – cover imports from China in several sectors, including semiconductors (tariff rises from 25 percent to 50 percent), solar cells (from 25 percent to 50 percent), electric vehicle batteries (from 7.5 percent to 25 percent) and electric vehicles (EVs; from 25 percent to 100 percent).

Most of these products are already subject to high duties or extensive trade-remedy measures, so the amount of imports from China covered by the new tariffs, including EVs, is small at $18 billion. In fact, the US imports essentially no EVs from China. However, it is a sector of great concern to the European Union, which in October 2023 opened an anti-subsidy investigation into Chinese EVs, which may trigger countervailing duties. The US move may therefore have implications for the pending EU decision on countervailing duties on China.

An extraordinary decision, driven by domestic politics

The US decision on Chinese EVs is extraordinary in four respects:

First, the 100 percent tariff is prohibitive. Ostensibly justified by China’s own subsidies, it would imply that half of the cost of Chinese EVs is paid for by government funds, far beyond the range of other estimates.
Second, unlike previous protection episodes, such as when the US was responding to the threat of Japanese car manufacturers, there are virtually no Chinese car imports today, and US manufacturers, especially General Motors, already have large footprints in China, whereas they were marginal in Japan. Though GM sales in China have declined recently, for more than a decade until 2023, China was a profit engine and the company’s top sales market.
Third, the EV tariffs depart from the US emphasis on national security to adopt anti-China measures (unless one believes that EVs are meandering Chinese spies), suggesting that all sectors are now in play.
Fourth, the measure runs counter to the Biden Administration’s green transition goals, which include large tax breaks for EVs, intended to lower the cost for consumers of green alternatives.

The decision on EVs and its timing are strictly political and reflect the extraordinary power of the United Auto Workers union in swing states in the run-up to the US presidential election. The decision is nevertheless a surprise in the light of recent efforts at China-US rapprochement, including exchanges at senior military level, and talks on AI and climate change. China will be affronted and many China-dependent US firms, which had hoped for tariff reductions, will be disappointed. The decision is, however, consistent with US Trade Representative Katherine Tai’s “Worker Centric” trade policy which claims to place workers’ interests ahead of those of firms.

Global impact

The immediate economic impact of the tariffs will be minimal at the macro level, whether on quantities, prices, or exchange rates; $18 billion is tiny relative to the size of the two economies, and even the $500 billion that China exported to the US in 2023. Even so, they will hurt some Chinese companies and US importers. The effect on US consumers and prices will be minimal and take the form of lost future opportunities rather than immediate cost, especially in relation to EVs.

China’s retaliation (it always retaliates) will be proportionate and limited. If the past is a guide, retaliation will affect mainly some US agricultural exports, which can be sourced easily elsewhere, and US exporters will be compensated for their losses in China. But even if the Chinese government does not retaliate against US car exports and investments in China (which it continues to court), the Chinese consumer is unlikely to respond well to America’s extreme measure on EVs when he or she chooses the next car to buy.

Perhaps more worrying is the further escalation of tensions with China that the tariffs represent – a dangerous trend with many repercussions. It may undermine any Chinese willingness to play a moderating influence on the war in Ukraine. The tariffs also quash any notion that the US intends to abide by World Trade Organisation rules. These two considerations, by themselves, increase policy uncertainty globally and are bound to have a dampening effect on international trade and investment.

The US approach diverges from that of the EU, which is building a case for countervailing duties under WTO rules. Although the outcome may also be new tariffs, in the EU there will have been due process based on evidence. But politically, prohibitive US tariffs place enormous pressure on the EU to apply its own. Even though there is no immediate threat of trade diversion, EU firms such as Stellantis, and unions that lobby for tariffs, will argue that Chinese EV exporters, cut off from the US market, will focus on the huge EU market instead. Though EU firms are still the largest exporters of EVs from China to the EU by a wide margin, the share of Chinese indigenous manufacturers is rising rapidly.

The adverse effect on trade relations of the new tariffs will extend beyond trade under the WTO to encompass trade under regional agreements. This is because US politicians are determined to avoid China-sourced products coming in through the back door – strict rules of origin are already there to prevent that – and to prevent the products of Chinese-invested companies from entering. In their view, even if batteries, EVs and semiconductors are manufactured by a Chinese-invested company in a US trading partner, and are entitled to tariff-free treatment under a regional agreement, they should be discouraged. This also applies to Chinese companies producing in the US. Mexico and Morocco are two examples of US regional trade agreement (RTA) partners that host Chinese manufacturers of batteries and soon of EVs, where frictions are bound to rise.

Even though the EU remains more open to Chinese producers on its territory than the US (eg BYD in Hungary, CATL in Germany and Hungary), it will face a similar challenge with its RTA partners if, as expected, it applies its own tariffs on Chinese EVs. These tensions among parties to RTAs, together with China’s retaliation against EU and US EV tariffs, is likely to mark this episode as a classic example of protectionist contagion.

A separation of Chinese and US value chains?

The EV value chain is destined to increase greatly in importance to mitigate climate change. From the standpoint of US industrial policy, a big question raised by the prohibitive tariffs on Chinese EVs and by the accompanying resistance against hosting Chinese producers is whether a US EV/battery value chain entirely separate from China is sustainable and realistic. The US is undoubtedly capable of developing such a chain, but can it do so at reasonable cost and without falling behind in quality and efficiency? On the answer to this question rests the calculation of long-term consumer losses from the tariffs against the counterfactual, the speed of the US green transition, the burden on government finance from the possibility of more subsidies, and even the solvency of US car companies.

Even a cursory examination of China’s current competitive advantage in EVs suggests that the answer to the question is no. China produces almost twice as many EVs as the EU and US combined, the share of EVs in new car registrations is rising rapidly, and it has reportedly moved ahead at the combined quality/price/technology frontier. The latest BYD Model, the Seagull, sells in China at slightly less than $10,000, and has been highlighted as an illustration of China’s competitiveness. Tesla founder Elon Musk has been openly pessimistic about the West’s ability to compete with Chinese cars.

China’s cost advantage arises from a combination of scale, advanced and lower-cost battery technology, availability of IT and AI expertise, lower labour costs, and intense competition in the Chinese market, with dozens of domestic and foreign producers active. Central and provincial government subsidies still play a role, and their extent is what the EU investigation will evaluate. The only available and presumably reliable numbers on subsidies received are those declared by Chinese publicly traded companies such as BYD, and are small relative to turnover or value added.

China’s EV exports increased by over 60 percent in 2023 to reach 1.2 million units, directed mainly at Europe, Mexico and several emerging markets in Asia. Since the biggest Chinese EV manufacturers and their battery suppliers have developed distinctive assets (brand, technology and design), they are new able to set up manufacturing and distribution channels overseas, in markets including Thailand, Indonesia, Australia, Morocco, Mexico and Hungary. Chinese EV manufacturers are also rapidly gaining market share in China, where competitors are increasingly struggling.

As EVs become even more established worldwide, the scale advantage of the most successful Chinese producers over US-based producers will only increase, as will their capacity to target individual markets with customized products on a common platform. Finally, it is important to note that the largest US car companies, Ford and General Motors, are not in the best shape to compete in the intensifying EV market. Standard and Poor’s rates Ford’s and GM’s long-term debt at BB+ and BBB respectively, just below and just above investment-grade. The market capitalisations of BYD and Xiaomi, the two largest Chinese EV producers, are $86 billion and $62 billion respectively, while those of GM and Ford are both around $50 billion.

The EU’s strategy

Should the EU adjust its policies in the light of the new Biden tariffs, and if so, how? Note that since there will be no surge of Chinese EVs diverted from the US market, it is not a given that the EU needs to alter its course.

The EU’s trade strategy on EVs must pursue six main objectives: 1) a fair deal for EU manufacturers insofar as they are affected by China’s subsidies in excess of subsidies they receive at home, and one that is in line with WTO rules; 2) stand up for the interests of EU car exporters and manufacturers in China, which are also recipients of various subsidies; 3) the long-run health and competitiveness of the EU car industry; 4) protect the interests of consumers, especially those with low incomes, who would benefit greatly from cheaper cars; 5) ensure the speed of the green transition; 6) maintain a cooperative and constructive relationship with China for both economic and geopolitical reasons. To progress towards all six objectives simultaneously is a challenge, but can be done:

The EU’s stated objective should be to arrive at competitive neutrality in the EV sector, enhancing and not preventing fair competition that will promote productivity growth and innovation. Accordingly, the countervailing duty margin on Chinese EVs should be computed objectively and realistically; it should be defined and documented in a way that is entirely robust to legal challenge at the WTO. It should also take account of subsidies at home to reduce the EU’s vulnerability to a Chinese counter: if the net subsidy is found to be zero, the countervailing duty margin should be zero, and the countervailing duty, if any, should be set at the minimum level consistent with the findings. The duty should be accompanied by a proposal to set up a China-EU working party with a mission to identify and monitor EV subsidies, and to reduce them with a view to eliminating the duty margin over a defined period.
To ensure the long-term vibrancy and competitiveness of its car industry, to safeguard the interests of its consumers, to sustain the green transition, and to maintain good relations with China, the EU should adopt an open-door policy on Chinese inward investment in its EV and battery sectors, while insisting on continued fair treatment of its firms that have already established footholds in the Chinese market. The EU may need to prepare, ultimately, to confront US restrictions on China-invested cars produced in Europe, such as Geely-owned Volvos.
It is possible that, once embarked on this course, the EU may nevertheless face an excessively rapid penetration of imported Chinese EVs sometime in the future. Should that happen, the EU may resort to a WTO-compatible safeguard measure. The advantage of the safeguard course is that the increase in tariffs would be time bound (three years). Safeguard tariffs must, however, apply to all imports, not only those from China.

Uri Dadush is a Non-resident fellow at Bruegel, based in Washington DC, and a Research Professor at the School of Public Policy at the University of Maryland where he teaches courses on trade policy and on macroeconomic analysis and policy.

To read the full analysis as published by the Bruegel, click here.

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Recommendation of the Council on Artificial Intelligence

Background Information

The Recommendation on Artificial Intelligence (AI) (hereafter the “Recommendation”) – the first intergovernmental standard on AI – was adopted by the OECD Council meeting at Ministerial level on 22 May 2019 on the proposal of the Digital Policy Committee (DPC, formerly the Committee on Digital Economy Policy, CDEP). The Recommendation aims to foster innovation and trust in AI by promoting the responsible stewardship of trustworthy AI while ensuring respect for human rights and democratic values. In June 2019, at the Osaka Summit, G20 Leaders welcomed the G20 AI Principles, drawn from the Recommendation.

The Recommendation was revised by the OECD Council on 8 November 2023 to update its definition of an “AI System”, in order to ensure the Recommendation continues to be technically accurate and reflect technological developments, including with respect to generative AI. On the basis of the 2024 Report to Council on its implementation, dissemination and continued relevance, the Recommendation was revised by the OECD Council meeting at Ministerial level on 3 May 2024 to reflect technological and policy developments, including with respect to generative AI, and to further facilitate its implementation.

The OECD’s work on Artificial Intelligence

Artificial Intelligence (AI) is a general-purpose technology that has the potential to: improve the welfare and well-being of people, contribute to positive sustainable global economic activity, increase innovation and productivity, and help respond to key global challenges. It is deployed in many sectors ranging from production, education, finance and transport to healthcare and security.

Alongside benefits, AI also raises challenges for our societies and economies, notably regarding economic shifts and inequalities, competition, transitions in the labour market, and implications for democracy and human rights.

The OECD has undertaken empirical and policy activities on AI in support of the policy debate since 2016, starting with a Technology Foresight Forum on AI that year, followed by an international conference on AI: Intelligent Machines, Smart Policies in 2017. The Organisation also conducted analytical and measurement work that provides an overview of the AI technical landscape, maps economic and social impacts of AI technologies and their applications, identifies major policy considerations, and describes AI initiatives from governments and other stakeholders at national and international levels.

This work has demonstrated the need to shape a stable policy environment at the international level to foster trust in and adoption of AI in society. Against this background, the OECD Council adopted, on the proposal of DPC, a Recommendation to promote a human-centred approach to trustworthy AI, that fosters research, preserves economic incentives to innovate, and applies to all stakeholders.

An inclusive and participatory process for developing the Recommendation

The development of the Recommendation was participatory in nature, incorporating input from a broad range of sources throughout the process. In May 2018, the DPC agreed to form an expert group to scope principles to foster trust in and adoption of AI, with a view to developing a draft Recommendation in the course of 2019. The informal AI Group of experts at the OECD was subsequently established, comprising over 50 experts from different disciplines and different sectors (government, industry, civil society, trade unions, the technical community and academia). Between September 2018 and February 2019 the group held four meetings. The work benefited from the diligence, engagement and substantive contributions of the experts participating in the group, as well as from their multi-stakeholder and multidisciplinary backgrounds.

Drawing on the final output document of the informal group, a draft Recommendation was developed in the DPC and with the consultation of other relevant OECD bodies and approved in a special meeting on 14-15 March 2019. The OECD Council adopted the Recommendation at its meeting at Ministerial level on 22-23 May 2019.

Scope of the Recommendation

Complementing existing OECD standards already relevant to AI – such as those on privacy and data protection, digital security risk management, and responsible business conduct – the Recommendation focuses on policy issues that are specific to AI and strives to set a standard that is implementable and flexible enough to stand the test of time in a rapidly evolving field. The Recommendation contains five high-level values-based principles and five recommendations for national policies and international co-operation. It also proposes a common understanding of key terms, such as “AI system”, “AI system lifecycle”, and “AI actors”, for the purposes of the Recommendation.

More specifically, the Recommendation includes two substantive sections:

Principles for responsible stewardship of trustworthy AI: the first section sets out five complementary principles relevant to all stakeholders: i) inclusive growth, sustainable development and well-being; ii) respect for the rule of law, human rights and democratic values, including fairness and privacy; iii) transparency and explainability; iv) robustness, security and safety; and v) accountability. This section further calls on AI actors to promote and implement these principles according to their roles.
National policies and international co-operation for trustworthy AI: consistent with the five aforementioned principles, the second section provides five recommendations to Members and non-Members having adhered to the Recommendation (hereafter the “Adherents”) to implement in their national policies and international co-operation: i) investing in AI research and development; ii) fostering an inclusive AI-enabling ecosystem; iii) shaping an enabling interoperable governance and policy environment for AI; iv) building human capacity and preparing for labour market transformation; and v) international co-operation for trustworthy AI.

2023 and 2024 Revisions of the Recommendation

In 2023, a window of opportunity was identified to maintain the relevance of the Recommendation by updating its definition of an “AI System”, and the DPC approved a draft revised definition in a joint session of the Committee and its Working Party on AI Governance (AIGO) on 16 October 2023. The OECD Council adopted the revised definition of “AI System” at its meeting on 8 November 2023. The update of the definition included edits aimed at:

clarifying the objectives of an AI system (which may be explicit or implicit);
underscoring the role of input which may be provided by humans or machines;
clarifying that the Recommendation applies to generative AI systems, which produce “content”;
substituting the word “real” with “physical” for clarity and alignment with other international processes;
reflecting the fact that some AI systems can continue to evolve after their design and deployment.

In line with the conclusions of the 2024 Report to Council, the Recommendation was further revised at the 2024 Meeting of the Council at Ministerial level to maintain its continued relevance and facilitate its implementation five years after its adoption. Specific updates aimed at:

reflecting the growing importance of addressing misinformation and disinformation, and safeguarding information integrity in the context of generative AI;
addressing uses outside of intended purpose, intentional misuse, or unintentional misuse;
clarifying the information AI actors should provide regarding AI systems to ensure transparency and responsible disclosure;
addressing safety concerns, so that if AI systems risk causing undue harm or exhibit undesired behaviour, they can be overridden, repaired, and/or decommissioned safely by human interaction;
emphasising responsible business conduct throughout the AI system lifecycle, involving co- operation with suppliers of AI knowledge and AI resources, AI system users, and other stakeholders,
underscoring the need for jurisdictions to work together to promote interoperable governance and policy environments for AI, against the increase in AI policy initiatives worldwide, and
introducing an explicit reference to environmental sustainability, of which the importance has grown considerably since the adoption of the Recommendation in 2019.

Furthermore, some of the headings of the principles and recommendations were expanded for clarity, and the text on traceability and risk management was further elaborated and moved to the “Accountability” principle as the most appropriate principle for these concepts.

Implementation

The Recommendation instructs the DPC to report to the Council on its implementation, dissemination and continued relevance five years after its adoption and regularly thereafter.

2024 Report to Council

The DPC, through AIGO, developed a report to the Council on the implementation, dissemination and continued relevance of the Recommendation five years after its implementation, and proposed draft revisions drawing from its conclusions.

The 2024 Report concluded that the Recommendation provides a significant and useful international reference in national AI policymaking. The Recommendation is being implemented by its Adherents, is widely disseminated, and remains fully relevant, including as a solid framework to analyse technology evolutions such as those related to generative AI.

However, the 2024 Report found that updates were needed to clarify the substance of some of the Recommendation’s provisions, facilitate implementation, increase relevance, and ensure the Recommendation reflects important technological developments, including with respect to generative AI.

Further work to support the implementation of the Recommendation

In addition to reporting to the Council on the implementation of the Recommendation, the DPC is also instructed to continue its work on AI, building on this Recommendation, and taking into account work in other international fora, such as UNESCO, the European Union, the Council of Europe and the initiative to build an International Panel on AI.

In order to support implementation of the Recommendation, the Council instructed the DPC to develop practical guidance for implementation, to provide a forum for exchanging information on AI policy and activities, and to foster multi-stakeholder and interdisciplinary dialogue.

To provide an inclusive forum for exchanging information on AI policy and activities, and to foster multi-stakeholder and interdisciplinary dialogue, the OECD launched i) the AI Policy Observatory (OECD.AI) as well as ii) the informal OECD Network of Experts on AI (ONE AI) in February 2020.

OECD.AI is an inclusive hub for public policy on AI that aims to help countries encourage, nurture and monitor the responsible development of trustworthy artificial intelligence systems for the benefit of society. It combines resources from across the OECD with those of partners from all stakeholder groups to provide multidisciplinary, evidence-based policy analysis on AI. The Observatory includes a live database of AI strategies, policies and initiatives that countries and other stakeholders can share and update, enabling the comparison of their key elements in an interactive manner. It is continuously updated with AI metrics, measurements, policies and good practices that lead to further updates in the practical guidance for implementation.

OECD-LEGAL-0449-en

 

To read the recommendations as published by the OECD, please click here.

To read the full document, please click here.

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Ain’t No Duty High Enough

The European Commission is likely to impose countervailing duties on imports of electric vehicles (EV) from China in the coming months to head off the risk of subsidized cars damaging Europe’s auto industry. We expect the Commission to impose duties in the 15-30% range. But even if the duties come in at the higher end of this range, some China-based producers will still be able to generate comfortable profit margins on the cars they export to Europe because of the substantial cost advantages they enjoy. Duties in the 40-50% range—arguably even higher for vertically integrated manufacturers like BYD—would probably be necessary to make the European market unattractive for Chinese EV exporters. As countervailing duties at this level are unlikely, policymakers in Brussels may decide to turn to non-traditional tools to shield the European auto industry, including restrictions based on environmental or national security-related factors.

The EU’s anti-subsidy probe

In the biggest EU trade case against China ever, the Commission initiated an anti-subsidy investigation into EV imports from China in October 2023. Should it determine that China-based producers have benefited from subsidies in ways that harm EU-based manufacturers, it could place provisional countervailing duties on China-origin EV imports anytime from now until July 3, and final duties by early November. In March 2024, the Commission asked European customs authorities to track imports of EVs from China, a signal that it could impose provisional duties in the near future.

The EV probe stands out for several reasons. First, the Commission initiated the investigation ex officio, without a formal complaint from industry, which is a rarity in such cases. Second, there is a divide within Europe’s car industry—which accounts for 7% of the EU’s GDP and 8.5% of its manufacturing employment—on the desirability of the probe. German carmakers, which are heavily reliant on the Chinese market, oppose it out of fear that Beijing could retaliate against them, while French counterparts, which are far less exposed to China, support it. Third, the probe is based on the threat that cheap EV imports from China could cause damage to European manufacturers in the future, rather than an assessment that this damage is already taking place. Finally, the probe is perhaps the most political case of its kind in recent memory. Commission President Ursula von der Leyen chose to announce it in her annual state of the union speech last September. And the Commission has focused its investigation on three China-based carmakers—BYD, Geely, and SAIC—rather than western carmakers like Tesla, which exports more EVs from China to the EU than any other producer.

EU imports of EVs from China ballooned from $1.6 billion in 2020 to $11.5 billion in 2023, accounting for 37% of all EV imports in the bloc. While the market share of China-produced EV models in the European market has only increased slightly to 19%, the share of Chinese and Chinese-owned brands has increased substantially in the last two years. This suggests that Chinese companies are gaining momentum in the European market. BYD has said that it is aiming to secure a 5% share of EV sales in Europe by 2026 and to be among the top five automotive companies in Europe in the medium term.

Based on an analysis of previous instances of countervailing duties (CVDs) imposed by the EU on Chinese imports and on conversations with experts, we expect the Commission to consider duties on Chinese EVs in the 15-30% range. This is based on the following factors:

The average of the highest duty level imposed in previous anti-subsidy cases against China stands at 24.4%. In rare instances, CVDs have been as high as 40-50%, however these were concentrated on industries with a high degree of direct state-ownership, such as steel, and focused on non-cooperating Chinese entities. In contrast, the EV sector is primarily privately owned in China.
The three companies (BYD, Geely, and SAIC) that the Commission has chosen to focus on in its investigation have signaled their willingness to cooperate. This means that they are providing information to the Commission. For non-cooperating firms the Commission estimates duties based on public information, which in the past has resulted in higher duties.

The Commission will calculate individual duties for BYD, Geely, and SAIC, while other exporters such as Tesla will receive a duty based on the weighted average of the duties imposed on the Chinese brands that the Commission deems to have cooperated. Theoretically, the Commission could also opt to impose other remedies, for instance a minimum import price or fixed price, but given the highly complex nature of modern EVs, this is an unlikely and unpractical prospect.

Price analysis of China-based exporters

Currently, the electric vehicle markets in Europe and China are characterized by major price discrepancies which have encouraged producers to export their cars from China to Europe. Intense competition in a saturated Chinese market has led to a price war there and forced manufacturers to boost efficiencies in the pursuit of ever-lower production costs. Volkswagen’s ID.4 model, for example, sells for nearly 50% more in Europe than it does in China. For Chinese producers like BYD, the price gulf is even larger, as they try to compensate for the profit squeeze in China by charging higher prices for their products in the EU. But with exports picking up, some of these price differences are likely to erode over time. Increasingly, Chinese and foreign manufacturers are taking advantage of China’s cheaper labor and energy prices, its more developed battery ecosystem and government subsidies to produce in China for the European and third markets.

Should the EU impose countervailing duties on Chinese EV imports, it would seriously affect incentives for China-based producers to export to Europe. Our price analysis reveals that exports to the EU by China-based producers are very profitable. BYD makes around €14,300 in profit on each SEAL U model sold in the EU, compared to €1,300 on units sold in China. This means that BYD earns €13,000 more on every Seal U model sold in the EU (the “EU premium”). Our analysis is based on the suggested retail prices (MSRPs) of the various manufacturers in China and Germany, and calculates profits after shipping, tariffs, distribution and VAT.

It should be noted that BYD’s relatively low sales numbers in Europe suggest that the prices it is charging in the European market may be too high, especially in light of the fact that it is still a relatively unknown brand. With such a high EU premium, however, the company has ample space to adjust pricing.

In order to substantially reduce the incentive for BYD to export models like the SEAL U to the EU, duties would need to be set at a level that erases the €13,000 premium that the company currently enjoys in Europe. This would bring profit margins in the EU in line with those that BYD enjoys in China. In reality, this is not the goal of the anti-subsidy investigation. It is not meant to render EVs produced in China and sold on the EU market unprofitable, but rather determine whether China’s export competitiveness is based on subsidies. Even if duties were set at a high enough level to erase the EU premium, BYD might decide that exporting to Europe makes sense, given slowing demand and competitive pressures in the Chinese market. One cannot dismiss the possibility that Chinese EV producers would be willing to forgo profits in the short-term and sell at a loss in order to gain market share in the world’s second biggest EV market.

A 30% duty imposed on BYD for the Seal U would fall far short of leveling the playing field between the EU and China as far as the company’s profits on the car are concerned. According to our calculations, a 30% duty would still leave the company with a 15% (€4,700) EU premium in relation to its China profits, meaning that exports to Europe would remain highly attractive. Moreover, duties at this level would provide BYD with space to lower its prices in order to gain market share in Europe. Our analysis of several other models sold in China and Germany indicates that even after a 30% duty, many Chinese EV models would still enjoy a strong EU profit premium.

In short, much steeper duties of around 45%, or even 55% for fiercely competitive producers like BYD, would probably be necessary in order to render exports to the European market unappealing on commercial grounds.

Duties at the 15-30% level could, however, wipe out the business model for foreign players like BMW or Tesla, which are using China as a base for exporting to Europe. For BMW’s iX3 SUV, for example, the EU premium (after accounting for related costs such as shipping) is only 9%, meaning that if duties are above 9%, the company would make less money on sales in Europe than in China. This also means that duties set at the higher end of our range could undermine plans by companies such as BMW, Honda and Volkswagen to expand the use of China as an export hub for the EU market going forward.

The price gap between foreign and Chinese producers is likely due to two main factors: Chinese producers receive more subsidies than foreign producers, although both benefit from Chinese government support, and Chinese companies are more vertically integrated and can procure products at lower prices than their foreign competitors.

Chinese producers will likely need to export

While duties would make exporting to the EU less attractive, several factors suggest that China’s EV export push will continue to gain momentum in the coming years:

Slowing growth and tighter profit margins at home: While China’s new energy vehicle (NEV) market has expanded rapidly, with sales surging by 97% in 2022 and 38% in 2023, growth is expected to decelerate significantly due to the higher base and China’s economic slowdown. Cui Dongshu, the Secretary General of China’s passenger vehicle association, forecasts that NEV sales growth will drop to 22% in 2024. Moreover, intense competition has led to a price war, resulting in profit margins in the auto sector plummeting from 8.7% in 2015 to 4.3% in 2023. Both of these trends are making exports much more appealing to China-based producers.

New production capacity coming online: Bolstered by robust profits and government backing, Chinese EV manufacturers have made substantial investments in new production facilities. This additional capacity will hit the market soon. BYD’s new plants illustrate this: By 2026, BYD’s production capacity in China will reach 6.55 million EVs up from 2.9 million at the end of 2023. To fully utilize all this capacity BYD would need to more than double its domestic EV sales—a challenging feat given the anticipated slowdown in China’s overall EV sales. Even to maintain capacity utilization at 80%, BYD would need to increase domestic sales by 81% by 2026.

New shipping capacity coming online: China’s EV exports have been hindered by a scarcity of affordable car shipping vessels. In 2023, charter prices for such carriers skyrocketed by 700% compared to 2019, exacerbated by Houthi attacks in the Red Sea, further straining shipping capacity and inflating costs. However, Chinese carmakers and shipping companies have responded by placing orders for numerous new ships. Based on these orders, they will have capacity to ship an estimated 560,000 cars annually to Europe in 2025, based on six trips a year (in 2023 the EU imported 472,000 EVs from China). Capacity could surge to as much as 1.7 million cars in 2026. In the unlikely case that all ships were used for transporting cars to Europe, the volumes exported from China would likely be enough to capture 50% of the EU’s EV market. Notably, the decision to purchase rather than rent car-carrying ships underscores the long-term goal of Chinese EV producers to export large quantities of cars.

Lack of other attractive export markets: The EU, the world’s second biggest EV market, is likely to remain the primary destination for China-made EVs. With its plans for a de facto ban on internal combustion engine (ICE) vehicles from 2035, and various support mechanisms in place, the EU presents a highly attractive market—especially compared to the US, which already has high tariffs on Chinese EVs in place and is planning further measures to restrict Chinese carmakers. Exports to other markets will be challenging for other reasons: either they are smaller, lag behind in EV adoption or will be served by local production, often because of local content requirements (ASEAN, Brazil, India and Mexico).

Ambitious targets for the European market: BYD has set an ambitious goal to capture a 5% market share in Europe even before its Hungary plant commences operations in 2026. This would entail selling approximately 130,000 EVs in Europe in 2025, a massive increase from the 16,000 sold in 2023. Looking ahead to 2030, the company aims to account for 10% of Europe’s EV market, corresponding to an estimated 920,000 vehicles, with a portion produced in its Hungary plant and the majority likely imported from China. These targets are consistent with those communicated by Shenzhen’s municipal government, where BYD is headquartered. The city wants to increase NEV exports from 71,000 in 2023 (January to November) to 400,000 in 2024 and to 600,000 in 2025. It released a 24-point plan to achieve these goals in November 2023. Similarly, SAIC-owned MG, having sold nearly 232,000 vehicles in Europe last year, plans to sell more than 300,000 cars this year.

EU officials might consider additional tools

If duties fail to slow Chinese exporters, at a time when China continues to incentivize firms to export, the Commission may feel the need to explore alternative measures. Competition Commissioner Margrethe Vestager floated this idea in a speech at Princeton University in April, calling for the introduction of “trustworthiness” criteria at G7 level based on factors like environmental footprint, labor rights, cybersecurity, and data security. A range of options are on the table:

Cybersecurity: The EU could attempt to tighten cybersecurity requirements to restrict market access for Chinese EV producers. Similar to the 5G Toolbox it published in January 2020, the EU could establish policy guidelines for member states that designate Chinese EVs as a cybersecurity risk due to the integration of cameras and sensors in cars and Beijing’s close oversight of China-based producers. Although most EVs will be privately purchased, member states could also decide to include “trustworthiness” criteria in public tender documents.

This approach would, however, face numerous obstacles, as the uneven implementation of the 5G Toolbox illustrates. National security remains primarily a member state prerogative, and convincing all members that Chinese EVs pose a national security risk will be challenging, particularly as some fear retaliation against their own products in China. A fragmented solution that restricts Chinese EVs in some countries but not others, would be problematic given the Schengen Zone’s open borders. Unlike 5G, where the costs to replace untrusted equipment would be shouldered by telecommunications operators, cybersecurity-related restrictions on connected vehicles would directly affect consumers.

Moreover, the notion that cybersecurity measures would serve as a panacea is tempered by the availability of Chinese smartphones in the EU, which arguably pose a greater risk but enjoy substantial market share with Xiaomi and Huawei ranking as the third and fourth biggest smartphone brands in 2023. While some member states, such as Belgium and Lithuania, have expressed cybersecurity-related concerns about Chinese phones, others disagree. With the automotive industry, the economic stakes are considerably higher.

Conditioning EV purchasing subsidies: Many European member states offer purchasing incentives to spur the adoption of electric vehicles. Member states could follow the lead of France and tweak regulations to restrict Chinese-made EVs based on sustainability criteria. This would place Chinese EVs at a severe competitive disadvantage. However, member states would have to act fast as most subsidy schemes are already on their way to being phased out. Additionally, if countries use environmental standards to penalize Chinese exporters as France is doing, Chinese companies could limit the damage by decarbonizing their production.

Forced labor regulation: A new EU measure banning products made with forced labor could be used to restrict the import of Made in China EVs. A recent report by Human Rights Watch found that many big OEMs including BYD, Tesla and Volkswagen could be procuring aluminum produced with forced labor. US authorities recently impounded cars produced by Volkswagen Group over allegations that they violated the Uyghur Forced Labor Prevention Act. The long lead time that is foreseen for implementation of the EU’s forced labor ban illustrates the limits of using this tool as a near- or medium-term solution for restricting imports.

Reviewing subsidies in procurement and investments: The EU’s new foreign subsidy regulation facilitates the review of large procurement contracts exceeding €250 million. However, it’s unlikely that many EV contracts will surpass this threshold. For instance, BYD secured a contract in December to supply 640 EVs for Austria’s federal government, likely for around €20 million considering MSRPs. Still, the use of EU funds, like REPowerEU, to support BYD in Hungary has prompted concerns that could lead to policy adjustments going forward.

Scaling back Europe’s EV ambitions: In 2022, the EU effectively instituted an internal combustion engine ban by implementing progressively stricter fleet emission targets, compelling manufacturers to elevate the proportion of EVs or incur penalties. Nonetheless, confronted with the considerable expenses associated with the EV transition and the surge in Chinese competition, certain segments of the European automotive industry and conservative parties across Europe have voiced opposition to the target. A review of the 2035 target, slated for 2026, presents an opportunity to recalibrate objectives, potentially buying ICE-focused European incumbents time and curbing the competitiveness of Chinese EV producers.

A more drastic review of WTO rules: In her Princeton speech in April 2024, Vestager voiced the view that the EU needs a more comprehensive approach to tackling Chinese distortions. One such way would be to raise tariffs on China across the board. This is highly unlikely for now, but could gain momentum if the US moves first. The Select Committee on China in the House of Representatives has called for the removal of Permanent Normal Trade Relations status for China, which would increase tariffs for Chinese goods across the board.

What to watch

We expect the Commission to place provisional duties on Chinese EV imports by early July. Going ahead we are also watching for:

Member state pushback: Before the imposition of final duties (by early November 2024) EU member states could try to block the EU’s case in the Trade Defence Instruments Committee. This would require a qualified majority of member states to vote against duties, something that has never been achieved before in an EU anti-subsidy investigation. German politicians and carmakers have signaled that they do not support the case. France, on the other hand, has made clear that it sees the need for EU action. Whether Berlin would risk a fight over the EV case is unclear. But we have seen Germany’s divided coalition government stand in the way of EU measures that were well advanced in recent months, notably refusing to support sustainability due diligence legislation.

Chinese retaliation: In January 2024, China launched an anti-dumping probe into brandy imports from the EU. The move was widely seen as a retaliatory move aimed at France, which was a vocal supporter of the EU’s trade case against Chinese EV imports. Should the EU impose duties, China is likely to do the same on brandy imports. It could also take other steps, for example responding in kind against EU automakers, tightening the regulatory screws on other European companies with a presence in China, or restricting the supply of critical minerals to Europe’s fledgling battery sector. Beijing, which is keen to avoid a tit-for-tat trade conflict with Europe that could further impeded its access to the European market, may wait until final duties are imposed before responding.

Following up with an anti-dumping probe: The EU chose to launch an anti-subsidy investigation into EVs rather than opt for an anti-dumping probe, which would have allowed it to impose higher tariffs. The decision to go down this path was likely driven by the fact that anti-dumping cases have a higher burden of proof and because Chinese producers have not priced their products extremely cheaply in Europe. Should Chinese EV exporters absorb the countervailing duties and subsequently lower their prices to gain market share in the EU, the Commission could follow up with an anti-dumping case at some point in the future.

Chinese EV sales figures in Europe: In recent months, Chinese EV exports to the EU have declined against a backdrop of high shipping costs, policy uncertainty, and major changes to EV purchasing subsidies in France and Germany. A continued decline in Chinese EV sales could reduce the political momentum for additional policy measures beyond the EV duties that are expected before the summer. A renewed surge of Chinese EV exports, by contrast, would increase the likelihood that new tools, including the measures floated by Vestager in her April speech, would be considered.

Chinese EV investment: In contrast to the US, the EU has remained open to Chinese investments in the EV sector. In December 2023, BYD announced plans to build a factory in Hungary. In April 2024, Chery signed a JV deal with Spanish EV Motors to produce cars in Catalonia. Were more Chinese brands to announce plans to invest in local production facilities in Europe, this could alleviate pressures in the bilateral trade relationship. It is also possible, however, that Chinese brands could come under scrutiny if they are producing cars that undercut European rivals. This could trigger cases under the EU’s Foreign Subsidies Regulation. Chinese brands could also face a backlash within Europe if their production facilities remain concentrated in China-friendly countries like Hungary, the country that has attracted the majority of EV-related investments by Chinese firms so far.

Aint-No-Duty-High-Enough

To read the full report as published by the Rhodium Group, click here.

To read the full report, click here.

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Ambassador Katherine Tai’s Testimonies on the President’s 2024 Trade Policy Agenda

Hearing on the Biden Administration’s 2024 Trade Agenda with U.S. Trade Representative Katherine Tai Ron Wyden Chairs Senate Finance Committee On Review Of The Biden Administration’s Trade Policy

On April 16 and 17, U.S. Trade Representative Katherine Tai testified before the House Committee on Ways and Means and Senate Committee on Finance where she spoke about President Biden’s 2024 Trade Policy Agenda.

Video 1: U.S. Trade Representative Katherine Tai testifies before the House Committee on Ways and Means.

To watch the full hearing, please click here.

Video 2: U.S. Trade Representative Katherine Tai testifies before the Senate Committee on Finance.

To watch the full hearing, please click here.

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