The EU institutions made progress on “anti-coercion”, the “trade defence” legislation par excellence. Meanwhile, Japan and the US found a deal on critical minerals – much like the one the EU is trying to strike. We also take a look across the Channel, where the UK takes inspiration from the EU’s CBAM to counter the US green subsidies, and we reflect on trade implications of the Net-Zero Industry Act.
One Big Thing.
US and Japan agree on EV materials: a playbook for the EU?
There’s life after the IRA. The US and Japan found a deal that will mitigate the notorious “buy American” provisions contained in the US green subsidies. The two countries will allow tariff-free trade of lithium, cobalt, manganese, nickel and graphite. The IRA provides tax credits for purchases of EVs, but only if their inputs come from North America or a country that shares a trade agreement with the US. This deal, meanwhile, is enough to qualify Tokyo as the latter, much to the relief of Japanese industry.
Zoom In: Even a “mini deal” on critical minerals with a certain country would make its products eligible for the US tax credits. This was confirmed by the long-awaited US guidelines, published on March 31.
Zoom Out: This IRA-mitigation exercise could be useful for the EU, which is desperate to convince the US to extend its green subsidies to EU manufacturers and is engaging in similar negotiations.
The Next: However, some Congress democrats have already voiced protests, saying the guidelines would “water down” the very purpose of the IRA: pushing green investments in a “buy American” way. At the same time, EU countries want their say on a hypothetical FTA. A thin line for the European Commission to walk in resolving this trade dispute.
Second in line.
A green light for red lights
Member States and European Parliament made significant progress on the negotiations on the anti-coercion instrument (ACI) last week. A formal deal is now closer, even though the Swedish Presidency wasn’t enthusiastic about the legislation, considering it as obstructing their pro-trade agenda. Recall that the impetus for this legislative proposal came after trade tensions between Lithuania and China, when Taiwan opened a de-facto embassy in Vilnius in November 2021. Ancient history, right? Here we are, full circle, with the Council and the Parliament agreeing to measures to react to cases of economic coercion, such as by adopting increased duties, import and export licenses, or restrictions on public procurement and services. The exact range of countermeasures was indeed the main contentious point in the negotiations, together with the balance of power between EU governments and the Commission.
A green light for the EU to become more assertive on the global stage. But this begs the broader question: is it a red light for EU trade with China? If you listen to von der Leyen… Yes… and no. In the famous speech last week, she questioned China’s status as a developing nation, a label with far-reaching trade implications. She also stated that the now-frozen EU-China deal on investments (the Comprehensive Agreement on Investment), should be “reassessed” – something for everyone. With the Council to determine what constitutes economic coercion against EU Member States viable for the ACI, strategic unity on trade and China is increasingly important.
China on CBAM: not so fast!
China is preparing its counterattack to the EU’s beloved climate trade legislation: the Carbon Border Adjustment Mechanism. The regulation will charge a duty to companies importing carbon-intensive products from countries that don’t have carbon-pricing legislations in place. Several export-oriented countries with lower environmental standards will be impacted, with China on the front line. On March 15, Beijing asked the EU to justify its initiative at the WTO, arguing non-compliance with multilateral trade rules. More formally, China asked for discussions on the trade implications of new environmental measures being adopted globally, beginning with CBAM. The EU might have to defend its legislation at the next WTO Trade and Environment committee in June. It could be the first of several rounds in a new trade dispute.
Carbon Border Friendship Mechanism
The enemy of my enemy is my friend: in this case, the IRA rollercoaster is bringing the EU and UK closer together under the CBAM umbrella. The levy-to-be is one of many green announcements by the British government recently. Just like its EU equivalent, the UK CBAM will target carbon-intensive imports with a tax to address “carbon leakage”, a process through which businesses set up shop in countries with lax environmental laws to reduce costs. The UK’s journey towards CBAM has been cautious due to the numerous global trade deals it has had to negotiate since Brexit – accounting for sensibilities of third-country and domestic critics of “green protectionism”. The silver lining could be the positive impact on industries like British steel (currently struggling against less environment-friendly competitors) and the potential improvement of EU-UK ties. As for next steps, lovers and haters alike are free to share their thoughts through a consultation on carbon leakage in the next 12 weeks.
The EU confirms palm and soy biofuels: trade vs environment?
The interinstitutional agreement on the Renewable Energy Directive (RED) has finally excluded the European Parliament’s position to phase out palm and soy biofuels. This will disappoint environmental activists, who recently criticised the Commission for opposing such ban. One reason for that might be to avoid WTO controversies. In 2019, the EU had agreed to phase out palm oil by 2030 by publishing RED II’s definition of sustainable crop-based biofuels according to low or high risks of indirect land use change (iLUC risk factors). As a result, Malaysia and Indonesia presented WTO lawsuits against the EU, which are still ongoing. The decision was particularly harmful to these countries, who are top world producers of palm oil and highly dependent on the EU market. Now, four years later, it seems the Commission fears that further limitation on biofuels could face similar backlash. Indeed, this is what the Commission said to Member States’ energy diplomats, according to a leaked note in February. In the eye of the storm are talks between the EU and Mercosur, which include an agreement that would reduce Argentina’s export duties on soy and soy biodiesel, currently a $1.8 billion a year worth of exports of soy biodiesel to the EU. However, environmental activists are hopeful that the last word has not yet been said on the future of biofuels in the EU and key points for the Mercosur agreement.
Net-Zero Industry and Critical Raw Materials: more trade than you think
Everybody in Brussels is now talking about the Commission’s new plans for the green transition: the Net Zero Industry Act and the Critical Raw Materials Act. Besides their importance in terms of climate regulations, these proposals have big geopolitical and trade aspects, as also debated by trade MEPs on March 21. First of all, the two legislations are the reaction to the US green subsidies under the IRA. The EU is now trying to trim red tape for environmental projects in order to keep up in the race for green technologies. The big question was whether the EU would have responded with “buy European” provisions, possibly privileging European companies in public procurement. This possibility seems now much smaller than foreshadowed in previous discussions, as the goal seem mostly to reduce dependencies on China. However, the legislative process is only at the beginning, and a push for protectionism might resurface. A topic worth following, as the Commission tries to strike a balance between autonomous production and international partnerships, particularly for the supply of necessary minerals.
We spoke more about the external dimensions of the EU’s initiatives with our SEC colleagues in London.
On our radar.
12 April I European Parliamentary Research Service is hosting a policy roundtable discussing the hottest EU-China agenda points for the coming decade – expect a whole lot of IR theory talk.
26 April I At its next meeting, INTA will debate on trade with Latin America, legislation on forced labour and the implementation of the post-Brexit agreement
27 March I Sweden and Brussels bubble finest gather to ideate a “competitive Europe” and Swedish Presidency’s role in creating it, with geostrategic challenges, trade and digital cooperation in focus
28 April I CETA Regulatory Cooperation Forum reconvenes for the fifth annual stakeholders debrief to discuss – you guessed it – CETA.
What we’re reading.
AmCham held a media briefing on the Foreign Subsidies Regulation. 12 organisations representing a broad array of industries from Europe and leading trade partners expressed their concerns on this key trade defence legislation: it might impact your business too (a recap here).
Lucian Cernat, Head of Unit at DG TRADE, shared some data on the 30th anniversary of the Single Market. In the past decade, intra-EU trade has grown much more than extra-EU. Yet, a lot still has to be done to connect EU countries, particularly regarding trade in services.
Still in the mood for EU’s China policy? Janne Leino of Adenauer Stiftung commented on VDL’s speech.
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