These negotiations are playing out against the backdrop of American and European efforts to decarbonize their heavy industries to achieve net-zero climate targets by midcentury, as well as long-standing problems of excess capacity in global steel and aluminum markets. Steel and steel products have some of the highest embedded carbon content of all traded goods, and the iron and steel industry produces nearly one-third of global emissions from industry. Aluminum, meanwhile, is energy and carbon intensive and is consequential to global greenhouse gas emissions, albeit on a comparatively smaller scale.

Yet recent reporting reflects that GASSA negotiations have stalled on account of different U.S. and EU approaches to linking market access to the carbon intensity of traded goods, which may result in the deal being indefinitely shelved. This would be an immense missed opportunity. GASSA, if concluded in a way that links market access to carbon intensity, would mark a paradigm shift in the organization of cross-border commerce, one in which like-minded democracies use trade—and the institutions that facilitate and govern it—as a tool to address shared problems. Furthermore, by laying the groundwork for a transatlantic climate bloc, the deal would strengthen other U.S.-EU partnerships aimed at confronting some of the major global challenges of the 21st century—above all, climate change, but also the influence of authoritarian states in the international system and the need to recalibrate the global economy in a way that better serves the interests of workers and the planet.

This issue brief offers an overview of GASSA, explains why it matters, and examines challenges to its implementation. It assesses that a strong agreement would both constitute a major step forward in aligning trade with climate action and offer a productive mechanism for countering abuses of the global trading system by nonmarket economies while strengthening transatlantic relations. Finally, it recommends that if GASSA cannot move forward in a timely fashion, the United States should seek similar partnerships with other high-ambition steel- and aluminum-producing nations.

Background to the deal

In 2018, the Trump administration imposed tariffs of 25 percent on European steel products and 10 percent on European aluminum products under Section 232 of the Trade Expansion Act of 1962. The Trump administration justified the tariffs—which covered most U.S. trading partners—on national security grounds, provoking a sharp reaction in most European capitals, given that the United States and most European states are bonded together through the NATO alliance to ensure each other’s security. As a result of the tariffs, alongside a broader drop in demand relating to the COVID-19 pandemic, EU exports to the United States in steel and aluminum, worth about $7 billion, declined more than 50 percent between 2018 and 2020. Although the effects of the tariffs on the U.S. steel market are contested, some respected economists have concluded that they did not meaningfully affect domestic steel prices and coincided with an improved economic outlook for the U.S. steel industry.

As a “rebalancing,” or retaliatory, measure, the European Union imposed a range of duties on various U.S. products, including steel products but also motorcycles, bourbon, and other trade-exposed goods. Both the United States and the European Union initiated disputes at the World Trade Organization (WTO) over the other side’s tariffs. While steel tariffs addressed legitimate concerns the U.S. steel industry had over steel overproduction—concerns that European producers shared, ironically—they nonetheless were a major thorn in U.S.-EU relations, and the EU has pressed the new administration to reverse the tariffs since President Joe Biden came into office.

In October 2021, on the eve of the 26th U.N. Climate Change Conference in Glasgow, American officials announced they would exempt imports of European steel and aluminum from the Section 232 tariffs up to a certain volume through the end of 2023, beyond which the tariffs would remain in effect. In return, the European Union agreed to suspend its countervailing tariffs on a range of U.S. products and refrain from imposing additional tariffs that were set to go into effect on December 1, 2021. According to a joint statement released at the time of the announcement, this suspension would create space for the two sides to agree to negotiate “future arrangements” to address both “non-market excess capacity” and the “carbon intensity” of the steel and aluminum industries. In addition, both sides agreed to drop WTO disputes they had filed against one another concerning their reciprocal tariffs. And in a somewhat unusual move, they agreed to transfer those cases to arbitration panels, as permitted under WTO rules, based on the understanding that arbitration would only go forward if the arrangements contemplated in the deal were to fail.

In a separate, unilateral statement, the European Union asserted that it considers the residual tariffs on European steel and aluminum retained by the United States under the agreement to be “incompatible with World Trade Organization rules,” although there is no indication Brussels intends to challenge those tariffs before the WTO. Notably, although the European Union suspended its dispute relating to the Section 232 tariffs, other non-EU countries—Switzerland, Norway, China, and Turkey—pursued claims against them before a WTO adjudicative panel and obtained a finding that the tariffs were incompatible with WTO rules.

What GASSA would do

The “future arrangements” contemplated in the 2021 joint statement included, most significantly, measures that “restrict market access”—by imposing tariffs or other barriers to import—for economies that either contribute to global steel and aluminum oversupply or that do not meet certain emissions thresholds in their steel and aluminum production. In other words, this agreement could lead to the United States and the European Union coordinating efforts to impose costs on high-polluting steel and aluminum producers.

In addition, the two sides agreed to “refrain from non-market practices that contribute to carbon-intensive, non-market oriented capacity,” as well as ensure their domestic policies support these goals. Finally, they agreed to consult on government investment in decarbonization and “screen inward investments from non-market-oriented actors”—which, as discussed below, refers to nonmarket practices and actors, including Chinese steel producers. When the United States and the European Union came to agreement, they set a goal of concluding the negotiations in two years, by October 2024, and noted that the agreement could be expanded to include “like-minded economies.” This means that once the United States and the European Union reach an agreement, other allies could sign on, potentially making this the basis for a global agreement consisting of a large portion of the global economy.

Why GASSA matters

GASSA would be more narrowly focused than a conventional free trade agreement. But from an economic and climate perspective, the scope of the deal would nonetheless be substantial: Steel is one of the most used products in the world as well as one of the most widely traded commodities, both in finished products and as a component of other goods. There are few sectors of the global economy untouched by steel production, which is used in everything from cars, buildings, and appliances to wind turbines, nails, and screws. The annual value of global steel products has been estimated to be as high as $2.5 trillion, about one-quarter to one-third of which can be attributed to exported goods. Aluminum is likewise one of the most traded commodities in the world and a key component of many finished goods.

From the perspective of addressing climate change, the deal is even more consequential: The iron and steel industry accounts for about 11 percent of global CO2 emissions and nearly one-third of industrial emissions. Notably, the United States and European Union are the second- and third-largest import markets for steel—after China, which is both the largest importer and the largest exporter of steel—and are also major exporters. Aluminum, meanwhile, accounts for about 3 percent of global CO2 emissions.

American and European steel manufacturing is less carbon intensive than that of many other countries with major steel industries, particularly China and India, because of greater prevalence of low-carbon manufacturing methods, a greener electric grid, and greater efficiency in traditional blast-furnace production methods. Inflation Reduction Act and EU Green Deal Industrial Plan investments in steel decarbonization and related technologies such as green hydrogen mean that the carbon gap in steel and aluminum is poised to widen substantially in the coming decade. In contrast, the Chinese steel sector recently invested $100 billion in coal-fired steel production—the most carbon-intensive steel production method by a considerable margin.

By tying market access to sectoral manufacturing practices, GASSA has the power to shape production standards beyond the American and European markets. Specifically, by raising market barriers on imports of carbon-intensive steel and aluminum and creating a free-trade area for lower-carbon versions of those commodities, the deal creates incentives for other steel- and aluminum-exporting countries to pivot to greener production methods. The arrangement would also safeguard the livelihoods of American and European steelworkers by advantaging their lower-carbon steel vs. more-carbon-intensive steel produced in other regions. In this sense, GASSA could substantially reshape supply chains and significantly contribute to industrial decarbonization on a global scale. It would also be a boon to domestic industrial decarbonization efforts by rewarding domestic greenhouse gas emission improvements in the steel and aluminum sectors with access to a protected market.

Just as importantly, GASSA would mark a fundamental shift in understandings of how global trade should function that have persisted since the end of the Cold War. In particular, a strong GASSA arrangement would signal alignment between the world’s two largest free-market economies on two pressing issues: responding to the climate crisis and managing China’s role in the global economy. In addition, the deal offers a crucial opportunity for leading democracies to influence global trade rules and institutions with a view toward a more sustainable, fit-for-purpose global trade system. As an additional benefit, GASSA has the potential to strengthen transatlantic cooperation on a broad range of issues at a time when solidarity between democracies is more important than ever.

A long-overdue alignment of trade with climate action

Multilateral and plurilateral trade arrangements have, to date, done little to nothing to address the climate crisis. Arguably, they have contributed to it by lowering the barriers to carbon leakage—the shifting of production to regions with lower climate standards—through investor-state dispute resolution mechanisms, which favor corporate interests, and tariff reductions on high-emission products. No trade agreement involving major economies has sought to account for the carbon content of traded goods.

The European Union recently introduced a Carbon Border Adjustment Mechanism (CBAM), which imposes a fee on imported goods based on the carbon intensity of their production. Comparable legislation has been introduced by both Republican and Democratic legislators in the U.S. Congress. Both the EU CBAM and possible U.S. carbon tariffs are watershed developments in the sense that they reflect a shift toward internalizing negative externalities—that is, costs to society not reflected in the price of traded goods. Yet these measures are the product of a unilateral legislative process and have not been designed with a view toward compatibility with each other or with other economic and regulatory systems. As a result, they leave on the table the multiplying effects of aligning the combined market power of the two largest free-market economies, which together can act with far greater effect to influence global standards and production methods.

By contrast, GASSA may resemble a sector-specific version of what economists describe as a “climate club”—that is, a preferential trade arrangement between countries in which enhanced market access (or exclusion from market barriers) is linked to a common or harmonized set of emission reduction policies. A key feature of climate clubs is that countries inside the club will move toward freer trade between themselves. But countries that do not meet the club’s climate standards are subject to less favorable trade terms than countries within it. Here, again, China—whose steel has a carbon footprint that is nearly two times greater, on average, than U.S. steel and is widely exported to both the American and European markets—is the third party that stands to be most affected by the deal. But other countries with highly carbon-intensive steel industries, such as Russia and India, would also be affected absent significant measures to decarbonize their industries.

Notably, the disparity between U.S. and Chinese steel emission intensities differs by production method. Chinese steel produced by the traditional blast oxygen furnace (BOF) method—the most carbon-intensive method—produces about 50 percent more emissions than U.S. BOF steel. Meanwhile, Chinese steel produced using an electric arc furnace (EAF), a more recent manufacturing method that is less carbon intensive than BOF, is about three times more carbon intensive than U.S. EAF steel.

A new approach to managing the economic rise of China—and other authoritarian, nonmarket states

Although China is not mentioned by name in the joint statement released in 2021, it remains the elephant in the room. The joint statement’s repeated references to “non-market excess capacity” and the need to ensure “market-oriented conditions” clearly allude to Chinese steel production, which has surged from 15 percent to about half of global production since 2000. There are long-standing transatlantic concerns that the Chinese economic system of state capitalism has conferred unfair advantages to Chinese business and resulted in overproduction of key commodities—above all, steel—driving down global prices and harming domestic industry. Most notably, in 2018, the United States circulated a detailed memorandum to all WTO members concerning China’s “trade-disruptive economic model,” assessing that a variety of “non-market” practices—such as “massive, market-distorting subsidies,” foreign investment restrictions, and state-controlled financial institutions—had given Chinese manufacturing an unfair trade advantage to the detriment of market economies.

Although the European Union has been less vocal in challenging the Chinese economic model on a general level, it has repeatedly expressed frustration over Chinese steel overproduction and trade-distorting subsidies, most recently regarding subsidies to Chinese electric vehicles.

In this sense, GASSA would represent the first coordinated multilateral effort to address China’s integration into global markets without directly engaging Beijing or invoking WTO dispute resolution measures. It would also reflect a new approach to promoting Chinese climate ambition, in which direct engagement with Chinese authorities is supplemented by market-shaping policies that create economic and reputational incentives for Chinese manufacturers to decarbonize. Such an approach would reinforce unilateral measures to promote decarbonization of carbon-intensive sectors such as carbon tariffs, green procurement standards, and subsidies to clean industry.

China, of course, is not the only nonmarket state with a major role in the global economy. Russia, which the United States recently assessed to be a nonmarket economy, also produces considerable volumes of steel and aluminum, and steel production is expanding in a number of nondemocratic states in the Middle East and Southeast Asia, with a record of trade-distorting practices. As with China, GASSA would protect U.S. and EU industries from being undercut by steel and aluminum produced cheaply or in excessive quantities by these countries as a result of carbon-intensive manufacturing, exploitative labor conditions, or other unpriced externalities and social harms. In this sense, GASSA could be an important first step in reversing what U.S. Trade Representative Katherine Tai has described as a “race to the bottom” in the organization of the global economy, “where exploitation is rewarded and high standards are abandoned in order to compete and survive.”

A catalyst for remaking the global trade system

In recent years, the WTO and globalization itself have come under unprecedented pressure to remain relevant in an international environment defined by the U.S.-China geopolitical rivalry, supply chain disruptions, and the emergence of climate action as an urgent priority in the international agenda. As observed by current WTO Director-General Ngozi Okonjo-Iweala:

“A series of shocks in the space of 15 years—first the global financial crisis, then the COVID-19 pandemic, and now the war in Ukraine—have created an alternative narrative about globalization. Far from making countries economically stronger, this new line of thinking goes, globalization exposes them to excessive risks. Economic interdependence is no longer seen as a virtue; it is seen as a vice. The new mantra is that what countries need is not interdependence but independence, with integration limited at best to a small circle of friendly nations.”

Whether this accurately describes the position of the United States or another major economic power is up for debate, but there is little question that current U.S. trade policy is grounded in the assessment that economic integration cannot proceed on the neoliberal terms envisioned by the late 20th century architects of the WTO system.

On the one hand, GASSA can be seen as affirming the WTO’s continued relevance in managing trade relations between sovereign economies. The provisional lifting of steel and aluminum tariffs under the 2021 U.S.-EU agreement, with recourse to WTO arbitration should negotiations fail, could buttress the WTO system by using the WTO’s own procedures to resolve a dispute that would otherwise have languished under the organization’s currently inoperative dispute resolution mechanism. Even so, some analysts and senior European officials have expressed reservations that GASSA could, depending on its design, be incompatible with WTO rules. Although the WTO system has long tolerated plurilateral free trade agreements, in which participating countries reciprocally reduce trade barriers for one another, the same cannot be said for agreements to increase trade barriers on third-party countries; such arrangements could be read to run afoul of the WTO’s “most-favoured-nation” principle, which requires treating imports from all WTO members equally.

Yet such concerns are not reason to avoid moving forward with GASSA. The urgency of the climate crisis militates against an excessively cautious, self-limiting approach to the design of trade arrangements, and there is a case to be made that GASSA is a permitted trade measure under WTO rules. Ultimately, the trade system must be responsive to the broader policy context in which it operates and current public priorities—most notably the need for alignment with the global commitment to reduce greenhouse gas emissions. Given the outsize role the United States and European Union play in global trade, GASSA may prove to be a vehicle for reappraising WTO rules to better align with climate action.

In this respect, GASSA could have the surprising consequence of galvanizing a long-overdue conversation about overhaul of the global trade system. In particular, GASSA would add further ballast to an emerging trade reform agenda that recognizes that the WTO and the global trade system more broadly must move beyond their current focus on clearing barriers to trade—what U.S. Trade Representative Tai has called a system that encourages “low cost at any cost—and be regeared to promote specific kinds of economic activity that carry positive environmental and social benefits—for example, trade in low-carbon goods and goods that can support a green transition, such as inputs into EVs, photovoltaic solar panels, and wind turbines. If landed, GASSA would mark a major pivot toward what national security adviser Jake Sullivan has called the “new Washington consensus,” which rejects reflexive lowering of trade barriers and seeks alignment of trade policy and trade institutions with climate action, equitable economic growth, and resilient supply chains that avoid excessive dependence on any one country for strategically important goods. Sullivan has identified WTO reform as one element of this new approach to international economics.

A special economic relationship between democracies

GASSA negotiations began in earnest in November 2021, in the first year of the Biden administration. It is not surprising that the administration’s first major move in trade policy was with the European Union. U.S. trade officials have stated their desire to deepen economic ties with existing economic partners and allies and to use trade as a tool to strengthen global democracy.

GASSA would create a new set of economic relationships among the world’s two largest democratic economies, organized around a novel set of trade policy propositions. In other words, it could presage a long-term trend in the global trading system in which trade arrangements and the cross-border investment and supply chain cohere more closely with shared values among trading partners, rather than the narrow notions of economic efficiency that have created economic interdependence between the economies of democracies and authoritarian regimes such as China and Russia.

Of particular note, once established, GASSA could be broadened to one or more democracies in the Global South, such as Brazil, with requisite investment in lowering carbon intensity and (where needed) strengthening of core labor rights. In addition to the climate benefits, this would help address concerns that linking market access to climate ambition is a form of “green protectionism” designed to disadvantage developing countries.

A much-needed step forward in transatlantic relations

Despite a long history of security cooperation and shared democratic values, economic cooperation between the United States and the European Union has been a recurring source of tension and even conflict. During the Obama administration, negotiations over the Transatlantic Trade and Investment Partnership floundered and were eventually abandoned. And during the Trump administration, Brussels was blindsided with tariffs on national security grounds, which antagonized European leaders and prevented more constructive discussions over collaborating to address a range of economic challenges, including China’s unfair trade practices. More recently, provisions of the Inflation Reduction Act linking tax credits to domestic content incentives and providing direct subsidies for domestic production provoked anger and accusations of protectionism and trade discrimination from European officials, which in turn led the United States and European Union to begin negotiating a one-off agreement that would make European firms eligible for some of the disputed credits.

Given this history, GASSA represents a much-needed step forward in U.S.-EU economic relations, as it not only turns a page on past acrimony but also opens a pathway for U.S.-EU cooperation in other critical areas of the relationship, such as digital regulation, investment screening, and technology standards. Moreover, the agreement may serve as a template for trade clubs organized around standards other than climate—for example, labor standards—and facilitate coordination between Brussels and Washington in how they engage the Global South on economic issues. In short, GASSA should be viewed as a key building block in the construction of a durable U.S.-EU economic partnership, one that will prove vital in combating climate change, calibrating economic relations with China in a way that balances fair competition with the need to derisk key sectors, and ensuring that democracies are able to set the global rules of the road on technology and trade.

Conclusion

The particulars of any GASSA arrangement—provided it has tangible, market-shaping effects—are ultimately less important than the crucial precedent a deal would set in demonstrating that like-minded democracies can work constructively within the global trading system to condition market access on carbon intensity, all while managing the distorting practices of nonmarket economies. At a moment when climate change, the lingering aftershocks of the COVID-19 pandemic and Russia’s invasion of Ukraine, and a deepening U.S.-China rivalry have placed unprecedented strain on the post-Cold War consensus on globalization and regulation of cross-border trade, GASSA offers a potential path forward: a new approach to economic relations capable of meeting the challenges of the 21st century head on. However, for this new approach to succeed, leaders in both Washington and Brussels must be willing to set their differences aside and use their immense market power to guide the global economy toward a more sustainable, resilient future.

Given the urgency of the climate crisis, U.S. officials should also consider allowing the two-year tariff rate quota—which partially lifted the Trump-era Section 232 tariffs on European steel—to expire, if the European Union is unwilling to agree to a sufficiently ambitious global arrangement. This effort should include a firm implementation plan that sends a strong signal to industry that the future of steel and aluminum trade will be marked by clear carbon intensity-based tariffs.

In addition, U.S. officials should strongly consider pursuing a GASSA-like arrangement with other democratic trading partners with high levels of climate ambition—such as Canada, Norway, and Australia—while seeking to conclude negotiations with the European Union. As the world’s foremost economic power, currently led by an administration committed to climate leadership and democratic values, the United States is uniquely capable of providing proof of concept of a new model of trade policy that supports a just transition to a decarbonized global economy.

To read the full issue brief, click here.

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For Southeast Asia, growth prospects look comparatively better against the global backdrop at 4.6% as forecast by the Asian Development Bank (ADB). This was a slight downgrade from earlier predictions, due to lower export growth and a deceleration of industrial activity. Regional growth has been anchored by domestic demand and services, and the recovery of tourism activities. The need to fully leverage the region’s growth momentum amidst economic uncertainty and rising geopolitical risks was aptly highlighted by Indonesia’s ASEAN Chairmanship theme, ASEAN Matters: Epicentrum of Growth. The conclusion of the 43rd ASEAN Summit and Related Summits in September was once again a testament of Indonesia’s leadership, with over 90 documents issued and concrete deliverables announced throughout the three-day meetings that include several dialogue partners. Now that it has passed the baton to Laos, our Analysis contributors assess Indonesia’s Chairmanship and whether it has lived up to expectations.

Although it was unable to move the needle on the Myanmar crisis and the South China Sea, Jakarta managed to reaffirm ASEAN Leaders’ commitment to strengthen economic resilience. Among the Summit’s key economic outcomes were the launch of the Digital Economic Framework Agreement (DEFA) negotiations and the adoption of the ASEAN Blue Economy Framework. These outcomes embrace the region’s new growth drivers in an inclusive and sustainable way. With this in mind, this issue casts a Spotlight on the region’s many different emerging economic drivers. Our contributors look at potential growth engines in the region, from the quest for an ASEAN single QR payments network to the rise of unicorns, and the role of innovation in advancing digital health. Looking at external partners, regional experts examine how the Indo-Pacific Economic Framework for Prosperity (IPEF), the European Green Deal, and the Korea-ASEAN Solidarity Initiative can help unlock new economic and development pathways.

Beyond the economy, the region is facing another momentous development with several Southeast Asian countries undergoing leadership transitions. To help make sense of this changing political landscape and what it means for regional cooperation, ASEANFocus convened a roundtable featuring views from experts on seven ASEAN countries, namely Cambodia, Indonesia, Malaysia, the Philippines, Thailand, Singapore, and Vietnam.

To read the full report, click here.

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Their vision is right, but it is highly contested — in part by authoritarian governments seeking to restore or strengthen controls over their publics (or even, at least in part, other countries’ publics), and in part by often friendly countries mistakenly believing that their own technological leadership might depend on diminishing that of the U.S. tech industry. The administration can help achieve its vision, and in doing so contribute to the realization of the Declaration’s vision, through four steps: 

1. An idealistic and ambitious approach in the 15-country “Indo-Pacific Economic Framework” (IPEF), that provides a future vision more attractive than authoritarian alternatives resting on free flows of data, opposition to forced localization of server and data, strong consumer protection, non-discriminatory regulation, anti-spam and anti-disinformation policies, cyber-security, and broad-based growth through encouragement for open electronic commerce.

2. A strong response in the U.S.-EU Trade and Technology Council (TTC) to European Union attempts to create discriminatory regulations and taxes targeting American technologies and firms.

3. Defense of U.S. values in the U.N., WTO, and other venues against “digital sovereignty” campaigns by China and others that endanger the internet’s multi-stakeholder governance, normalize large-scale censorship and firewalling, and generally place the political fears and policy goals of authoritarian government above the liberties of individuals.

4. Supporting responsible governance of technology and politely but firmly pushing back on attempts either at home or internationally to demonize technological innovation and American success.

Ed Gresser is Vice President and Director for Trade and Global Markets at Progressive Policy Institute (PPI).

To read the full summary, please click here.

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Armed with massive subsidies and tariffs, the US and EU are leading this trend towards protectionism. This may change the global trade system as we know it.

Avantika Goswami, the writer of the DTE report and programme manager for climate change at the New Delhi-based think tank Centre for Science and Environment (CSE), said:

In the race to build low-carbon economies, countries are introducing policies to speed up the transition from fossil fuels, promote manufacturing of clean energy technologies and decarbonise industries. On the face of it, this race appears to be part of the global effort to cut greenhouse gas emissions. But they have also sparked fears of trade wars, as governments on the pretext of climate action try to reshore green industries and dominate the global supply chain of goods and technologies essential to avert a climate catastrophe.

CSE, which helps publish DTE, recently organised an international webinar on the subject, which was addressed by Rob Davies, former minister of trade and industry in South Africa; Paul Butarbutar, executive director, Indonesia Centre for Renewable Energy Studies; Katie Gallogly-Swan, economic affairs officer, UNCTAD; Apratim Sahay, senior policy manager, Green New Deal Network; Sunita Narain, director general, CSE and editor of DTE; and Goswami.

A new trade order

In August 2022, the US passed the Inflation Reduction Act (IRA) — a bill offering about $370 billion in subsidies, mainly through tax credits over 10 years, for renewable energy, electric vehicles, energy-efficient appliances, carbon capture and storage and clean hydrogen.

This has rankled other green technology manufacturing powers like the EU, South Korea and Japan, which fear that their companies may jump ship and expand business in North America.

“Developing countries like India cannot match the IRA’s scale of subsidies. If we take the example of electric vehicles (EVs) in our country, there are three incentive schemes that are offered — the Faster Adoption and Manufacturing of Electric Vehicles (FAME II) with an outlay of Rs 10,000 crore; and two Production-Linked Incentive (PLI) schemes of Rs25,398 crore (automotive sector including EVs) and Rs 18,100 crore (battery storage), respectively,” Goswami said.

There is also the question of access to critical minerals. Prices of minerals in the global market are set by the big players.

China is the biggest buyer today. Once the US enters this race for its own domestic manufacturing on a large scale, India will have to aggressively scale up its EV production to command prices on its own terms.

CSE experts suggest that India should focus on the EV sectors in which it has a ready domestic market — two-wheelers and three-wheelers, which constitute 63 per cent and 34 per cent of the domestic EV market.

It can also become a hub for recycling of spent batteries, which will enable it to recover the processed critical minerals that it is currently lacking. 

In December 2022, the EU reached a provisional agreement on a Carbon Border Adjustment Mechanism (CBAM) — a tax on imports of goods like steel and aluminium from countries with lax emission reduction rules.

The CBAM has been criticised by BRICS countries, and India’s finance minister has warned the country’s firms to reset themselves and be ready for “tariff walls coming up newly in the name of climate change”.

According to UNCTAD (United Nations Conference on Trade and Development), if applied at $44 per tonne, a CBAM will reduce global carbon emissions by not more than 0.1 per cent — but it will have an adverse distributional impact because it will decrease global real income by US $3.4 billion, with developed countries’ incomes rising by US $2.5 billion while developing countries’ incomes fall by US $ 5.9 billion. Other developed countries like the UK may follow suit and implement a carbon border tax.

When faced with the CBAM, developing countries need access to finance and technology to decarbonise their manufacturing sector so that export competitiveness is maintained.

For India, the EU is its third largest trading partner — the DTE report points out that India’s iron and steel and aluminium sectors would be the most exposed to CBAM, albeit to a lesser extent than other countries. India does not have one domestic carbon price – but it has an upcoming domestic carbon market, a national NDC and net zero target, and voluntary climate targets by industrial firms.

Whether or not this patchwork of market-based schemes and climate signals will create a case for Indian industry to avoid the tariff burden from CBAM is yet to be seen, Goswami said.

“A CBAM is directly attacking the market access of developing countries; and it could be expanded to all exports eventually. African countries are emitting the least, and the gain from imposing this tax on them would be minimal in terms of carbon emission reduction. We need to respond to these measures,” Davies said at the webinar.

As per UNCTAD, “policies like IRA and CBAM point to a missing developmental dimension in trade commitments, combined with growing evidence that industrialised economies are outsourcing pollution at the same time as they avail themselves of industrial policy tools to bolster their dominance within emerging green industries.”

Industrialisation has enabled sustained productivity growth in the EU and US, but industrial development has been an uphill battle for developing countries, in part due to trade agreements designed to constrain their policy space.

WTO — heavily influenced by developed countries — treats subsidies, tariffs and export bans as “trade distorting”. Thus, current trade rules prevent developing countries from using local content and technology transfer requirements,or tools like government procurement to stimulate domestic industries.

Now that rich countries are increasingly embracing industrial policy to ensure their economic resilience, it is difficult for them to prevent developing countries from implementing similar policies.

Katie Gallogly-Swan of UNCTAD echoed these sentiments expressed in DTE: “We need to reframe the trade rules for a time of climate change and address the long-standing concerns of developing countries. We need to strengthen the core principles of ‘special and differential treatment’ at WTO and ‘common but differentiated responsibilities’ in the UNFCCC process. A more positive agenda would support developing countries’ priorities, additional financing, green technology transfers, capacity building supporting environmentally sustainable economic diversification, and adequate policy and fiscal space to support their own integrated policies to advance towards their climate and developmental goals.”

Sunita Narain from CSE said: “We should look at what rules will work for us best (the developing world), and work for us in a climate-constrained world. We need to make sure we can combat emissions, and at the same time, have economic growth. In doing so, maybe for the first time we will end up making a trade deal which does not work against the environment, but for it; a deal that works for people.”

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Global trade will continue to face multiple challenges in 2023 as inflation and high interest rates, debt distress and geopolitical frictions weigh on many economies. The downside risks to the global economy and international trade are significant, ranging from an escalation of Russia’s war on Ukraine to deepening tensions between the US and China.

‘Reglobalization’ – rather than deglobalization – best describes the current pattern of economic integration and fracturing across different economies and sectors. Globalization is far from finished, but will increasingly emphasize greater regional links and the formation of economic blocs for sensitive and strategically important sectors. Comprehensive decoupling from China is neither achievable nor desirable for the G7 and like-minded partners.

The supply-chain disruptions of 2020–22 will continue to ease. Given that extreme weather events are the biggest threat to global production networks, supply-chain resilience and diversification efforts will persist, with added impetus to act on ‘greening’ trade.

The future of trade is closely linked to the transition to green and digital economies. As climate ambitions and technological leadership are intertwined with industrial policy objectives, concerns about unfair trade practices and protectionism are coming to a head not just as regards China, but also among the US, the EU and like-minded partners.

With major breakthroughs at the World Trade Organization unlikely in 2023, limited progress can be expected in some bilateral, regional and sectoral agreements. Meanwhile, efforts to avoid further trade fragmentation will progress more readily under Japan’s G7 presidency than under India’s G20 presidency.

Introduction

This briefing paper analyses the outlook for global trade in 2023, and examines the structural forces shaping global trade and globalization more broadly.

It argues that ‘reglobalization’ – rather than deglobalization – best describes the current and likely future pattern of economic integration and fracturing across different economies and sectors. Trade policy has an important role to play in underpinning the positive aspects of a reglobalized world and in balancing geopolitical competition and cooperation, not just through coordinated efforts to strengthen supply-chain resilience, but also in harnessing the twin transitions to green and digital economies.

The paper draws on insights from expert roundtable discussions and a high-level speaker series under the umbrella of the Chatham House Global Trade Policy Forum. It is the first of a new annual series that will highlight some of the major global trade trends and prospects for the year(s) ahead.

Marianne Schneider-Petsinger is a senior research fellow in the Global Economy and Finance Programme at Chatham House, responsible for analysis at the nexus of political and economic issues. Before joining Chatham House in 2016, she managed the Transatlantic Consumer Dialogue, an international membership body representing consumer organizations in the EU and the US. She also worked for a think-tank on transatlantic affairs in the US, and for the Thuringian Ministry of Economic Affairs in Germany.

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The global race to lead the production of these cleantech, as well as raw materials that go into them, has been unfolding for a few years now. Europe has secured much commitment and investment in the area of electric cars (EV) and batteries already. Dozens of billions have poured into scaling EV manufacturing and batteries. Over half of all lithium-ion batteries on the EU market in 2022 were produced in Europe, with the continent projected to become the world’s second biggest battery cell manufacturer by the end of the decade. 

But the US Inflation Reduction Act (IRA), launched in August 2022, has changed the rules of the industrial game and might make companies re-prioritise the current announcements in Europe towards the US. For EVs and batteries, the risk is that the projects – and therefore Europe’s ambition – gets delayed. For critical metals and their processing, where Europe is only starting to catch up, the risk is that investments would simply go elsewhere. In just a few months since the launch of the US IRA, investments into battery factories, new mines and electric vehicles have mushroomed in North America. This is in response to the requirement that 40% of battery metals need to come from the US and half of all battery components made in North America from 2024 for the full EV tax credit to apply. The battery supply chain of an electric car will receive up to USD 50 of subsidy per each kWh of battery, or over a third of the total battery costs today. 

So far Europe has one of the most ambitious climate regulations in the world. The next step now is to beef it up with a robust industrial muscle to ensure we capture parts of the growing value chain for our jobs and economic resilience. 

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Here in America, real average weekly earnings of all U.S. workers fell 3.1 percent in 2022. A central policy challenge in the year ahead is not just creating jobs. It is creating good jobs, i.e., jobs with high and rising incomes.

How to meet this challenge? Just before the winter holidays, the U.S. Bureau of Economic Analysis released new data that show the way forward. In 2020, a certain set of U.S. companies employed 28.4 million workers in America at an average annual compensation of $84,925—about 20 percent higher than the average for the rest of the U.S. private sector.

Which companies? The U.S. parents of U.S.-headquartered multinational companies. U.S. multinationals have long been among America’s strongest firms. Although they comprise far less than 1 percent of U.S. companies, in 2020 their U.S. parents accounted for 23.1 percent of all private-sector jobs, 38.5 percent of investment in plant and equipment, 46.4 percent of exports of goods, and a remarkable 72 percent of business spending on research and development.

Despite the common allegation that multinationals simply “export jobs” out of America, research consistently shows that expansion abroad by these firms has tended to complement—not substitute for—their U.S. operations. More investment and employment abroad have tended to create more American investment and jobs as well. From 1988 to 2020, employment in foreign affiliates of U.S. multinationals rose from 4.8 million to 14 million. Over that same period, employment in U.S. parents rose from 17.7 million to 28.4 million—a slightly larger increase at home than abroad.

Thanks to all their global dynamism, for decades U.S. multinationals have driven an outsized share of U.S. productivity growth, the foundation of rising standards of living for everyone. They accounted for about 40 percent of the increase in U.S. business labor productivity since 1990. For workers, the bottom line of all this is high and rising incomes. Globally connected jobs tend to pay more because global engagement fosters—and is fostered by—innovation and growth.

There is vast potential for creating more good jobs in America that are connected to the world. From 2000 to 2020, U.S. output expanded by $10 trillion—but over that generation the rest of the world grew by over $40 trillion, such that by 2020 America’s share of global output had fallen to just 24.8 percent, down from about 30 percent in 2000. Growth in labor forces and productivity around the world has boosted the purchasing power of millions of companies and billions of consumers. U.S. multinational companies have harnessed this growth through their exports from America and, even more, through the local sales of their foreign affiliates. And in the postpandemic years ahead, forecasts of continued faster growth in the rest of the world mean even greater potential for U.S. multinationals to build more jobs and opportunity in America connected to that global growth.

But realizing this potential is not a foregone conclusion, because global growth has also spawned new competitors for U.S. multinationals. The McKinsey Global Institute recently documented and analyzed the world’s “superstar” companies that generate the largest economic profits thanks to features including high productivity. From 1995 to 2016, the U.S. share of global superstar companies fell from nearly 50 percent to 38 percent. Particularly ascendant are superstars from fast-growing Asian countries, including China, India, and South Korea. There is no guarantee that past global strength of U.S. multinationals will be prologue.

And unfortunately, the sobering reality is that the United States has become largely adrift in its policy engagement with the global economy. America’s many post–World War II decades of liberalizing trade, investment, and immigration—all to the benefit of American companies, as well as to the American economy overall—have largely stalled out.

Consider trade. America has stopped pursuing new trade agreements and instead has launched and maintained a trade war. From 2010 to 2020, the United States implemented just four new free-trade agreements—three of which (Colombia, Peru, and South Korea) had been negotiated and ratified before 2010, and the fourth of which, the USMCA, was largely refining the NAFTA that had been negotiated decades earlier. Meanwhile, so many other nations have maintained and even accelerated their efforts at trade liberalization. Free-trade agreements that exclude the United States are agreements that impede the growth of U.S. companies both abroad and at home.

To support American workers, the White House and the new Congress need to turn their attention away from pandemic ad hockery. High-productivity, high-wage jobs tend to be global jobs. We should recommit to investing in creating them.

Matthew J. Slaughter is the Paul Danos Dean of the Tuck School of Business at Dartmouth, where in addition he is the Earl C. Daum 1924 Professor of International Business.

Matthew Rees is the founder of Geonomica, an editorial consulting firm that has worked with clients across a number of industries, and a senior fellow at Tuck’s Center for Business, Government & Society.

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Furthermore, more recent developments, and in particular the U.S.-China Economic and Trade Agreement concluded in February 2020, require attention as their protectionist nature can be regarded as a factor limiting the further development of China-U.S. trade relations. This could also affect their WTO trade partners. These historical as well as more recent events set the stage for viewing the effects of COVID-19 on China-U.S. trade relations. 

This chapter, both in its theoretical and empirical layers, mainly applies the analyticaldescriptive method, but also uses the normative when the author shares his conclusions and opinions. Comparative analysis was used in commenting on the historical path of China’s development, its long term economic relations with the U.S. economy and their implications for the global economy. This was done bearing in mind political factors and the changing geopolitical environment. 

The focus of the analytical section is predominantly on trade in goods, as this plays a key role in the build-up of China’s export surplus, which consequently leads to a widening of the international payment disequilibrium. Therefore, the bilateral trade balance and the factors shaping it in the long term are analysed. It is argued that its growing imbalance in favour of China has substantially contributed to international imbalances of payments and consequently to the P.R.C.-USA trade war. 

While theoretically and methodologically the chapter is located in the area of international economics, application of an interdisciplinary approach and analysing how changing patterns of global political relations increasingly affect international economic relations is the key contribution of this chapter. In this context, the author builds on prior research on the opening mechanism of the Chinese economy, the specifics of its market transformation, theoretical and practical aspects of international payment imbalances as well as factors and determinants of China-U.S. economic relations within the changing pattern of the world economy and global political environment.

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Semiconductors, since they became commercialized in the 1970s, have had a special place in the global economy. Semiconductors made possible the dawning and growth of the information age. The two leading producers in that timeframe were Japan and the United States. They fueled Japan’s pre-eminence in consumer electronics. They were the foundation of Silicon Valley. Chips are high-value, low-weight, and bulk products that can travel physically across borders with ease. Trade in semiconductors was an imperative for both countries. While that period was an era characterized by trade friction between the United States and Japan, and semiconductor trade was no exception, nevertheless, the first joint public policy initiative by the governments of Japan and the United States at the request of their respective industries, was to remove all tariffs on semiconductors through a trilateral agreement.1 It was applied on an MFN basis.

The most important part of this story, however, as carried forward into the present, is the fact that the U.S. and Japan found common ground in an arrangement for semiconductors reached in Vancouver, Canada, in August 1996. The agreement was unprecedented in format. It envisaged the creation of two parallel venues, intergovernmental meetings (GAMS) and an industry council (ultimately, the WSC). Representatives of the European Commission,2 suspicious of what the US and Japan might agree to, were nearby in another hotel. To allay their concerns, I kept them currently informed.

I and my counterpart, the counsel for the Japanese industry, jointly drafted a charter for the industry council. I proposed a series of purposes, which were debated by the two associations and adopted. It was contemplated from the outset that other regions would join. This was not an arrangement for special status for either Japanese or American producers. It was to be inclusive and nondiscriminatory. The price for entry into membership was according duty-free trade to semiconductors. Market forces and fair trade were to determine competitive outcomes. The foundational principle was that “The competitiveness of companies and their products, not the intervention of governments and authorities, should be the principal determinant of industrial success and international trade.”

The European Electronic Component Manufacturers Association (EECA) and the Korea Semiconductor Industry Association (KSIA) became formal participants at a meeting in Hawaii in April 1997. The venue was then named the World Semiconductor Council, consisting of CEOs of semiconductor companies in the four regions, and staffed by a group of mid-level company executives, meeting three times a year in a configuration known as the Joint Steering Committee (JSTC).

Meetings of the WSC followed annually, with hosting shared on a rotating basis. The next meeting was in Carlsbad, California. At the Fiugi (Italy) meeting in 1999, the Charter was updated and Chinese Taipei became a member. The officials representing the five parties, the three governments (U.S, Japan, Korea) and two authorities (EU Commission and Chinese Taipei), present at a subsequent 1999 meeting in Brussels issued a new Joint Statement as their operational intergovernmental agreement.

A major objective of the WSC was to bring China into the Council, as it was a major market for chips and aspired to become a major producer as well. China joined the WSC in 2006 in San Francisco, and the same year joined the GAMS.3 The way had been smoothed five years earlier by China acceding to the WTO and the ITA at the same time. The industry also succeeded in 2006 in obtaining an agreement of the six GAMS members to eliminate the tariffs on multi-chip packages (MCPs) on an MFN basis.4

The WSC, with the support of the GAMS, worked for the expansion of duty-free treatment of later generations of chips in the Information Technology Agreement (ITA 2). The Council also addressed common issues to improve the environmental impact of semiconductor production, fought counterfeiting, supported customs facilitation efforts, and worked for the removal of other barriers, including when they took the form of regulations applicable to encryption. Antitrust rules were strictly adhered to, starting with the earliest meeting of the Japanese and American industry CEOs, when Bob Galvin, CEO of Motorola, had the former dean of the University of Chicago School of Law sit in on the meetings. 

The GAMS/WSC/JSTC structure has been maintained by generations of officials and industry executives. It is a one-of-a-kind structure, never replicated for other industries, designed to foster international cooperation in support of an industry critical to all six regions and globally.

During the last decade, JSTC and WSC’s attention turned as well to subsidies, known in group discussions as “regional support”. Government support in terms of financial outlays was not a major part of the competitive picture during when the GAMS and WSC were formed. There was no mention made of the subject in the WSC Charter. Subsidies for industries engaged in the use of emerging technologies were not unknown or by any means confined to this sector. As an example, a report on Conflict and Cooperation in National Competition for High-Technology Industry was issued the same year at the Vancouver meeting jointly by the U.S. National Academies, the Hamburg Institute for Economic Research and the Kiel Institute for World Economics recommended that it was inadvisable to have all R&D subsidies free from disciplines, without regard to whether the support was for basic or applied research.5 I chaired the U.S. delegation that prepared the report.

Subsidies are a particularly difficult issue to address in trade policy, as they are generally considered a matter of domestic policy, within the sovereignty of trading countries. There are also serious definitional as well as measurement problems. The JSTC was attempting, for their industrial sector, to begin fill a hole in the disciplines of the international trading system through which subsidies poured in copious quantities.

To read the full paper, please click here. 

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