Tai, Dombrovskis Negotiating Green Trade Approach

The two most important people in global trade, according to a conference moderator -- the U.S. trade representative and her EU counterpart -- presented a united front on the need for a new approach at the World Trade Organization, a new flavor of globalization, and their ambitions to work together on coordinating a standard for green trade and ways to confront distortive trade practices.

USTR Katherine Tai and European Commission Vice President Valdis Dombrovskis were joined by BMW Chairman Oliver Zipse to talk about shifts toward protectionism in trade at the Munich Security Conference Feb. 17.

Tai, Dombrovskis and Zipse all said an obsession with efficiency optimization is fading as new geopolitical realities require companies and countries to think about supply chain resilience and redundancy.

"The pandemic laid bare for us on a very basic level some of the significant vulnerabilities that we have in this version of globalization," Tai said, but no one thinks even a country as large as the U.S. can be fully self-sufficient.

Even as Zipse agreed supply chains are changing, he said it's not a time to decouple or try to localize entire supply chains. He said you can localize car assembly or advanced battery plants close to customers, but that BMW has 12,000 suppliers around the world, and at the level of raw materials or subcomponents, the supply chain is "completely globalized."

Tai said policymakers realized there is risk when critical elements of supply chains are located only in one region, and sometimes, only in one country.

She did not say so explicitly, but the Inflation Reduction Act's electric vehicle battery input restrictions, which have troubled the EU, were a response to politicians' concerns that an electrified transport system would leave the U.S. at China's mercy because of Chinese dominance in critical mineral refining and in EV battery manufacturing.

Dombrovskis said that the law has "discriminatory elements," such as domestic assembly and domestic content requirements for EVs.

Tai said, "We recognize European concerns," but noted that the content and assembly requirements are not limited to the U.S., but rather, the U.S., Canada and Mexico, which are linked in a free-trade agreement. Critical mineral sourcing is not limited to North America, but is supposed to be with FTA partners.

Tai -- and the Treasury Department, which will implement the tax credits -- noted that the IRA does not define "FTA," implying there may be room to include the EU there.

She said the U.S. is working on "building out those elements where there is space in the implementation to accommodate here, and going forward, the shared values and interests that the Europeans have."

Zipse, whose industry is at the heart of the disagreement, was sanguine about the IRA. (Tai teased him that his "beautiful cars" are too expensive to qualify for consumer tax credits). He said that China and the EU have long had industrial policy, and now the U.S. is joining in. He called it "fully understandable" that the U.S. would want to help clean industry to scale up, as a way of accelerating innovation.

He noted with appreciation that the Treasury Department has defined leased vehicles so that they don't have the same content or assembly restrictions. So, in his view, the IRA "is OK, it's not perfect."

Dombrovskis said during the panel that he was discussing the IRA -- among other things -- with Tai before their appearance, and he will be in Washington in two weeks to continue the talks.

Tai said the U.S. needs Europe's industry to succeed. "That has always been clear to us -- that is clear to us today," she said.

The moderator asked Tai about carbon border adjustment taxes, which have the potential to become an irritant between the EU and U.S., as the EU Carbon Border Adjustment Mechanism (CBAM) is based on foreign countries' price on carbon, and the U.S. does not have a national carbon price.

Tai said the U.S. agrees with the intellectual underpinnings of the CBAM, and acknowledged that while there are members of Congress considering carbon border adjustment taxes, "the EU is very far ahead in the CBAM. In terms of the cake that’s being baked, it is clearly in the oven and you can see it rising in the oven."

But she said the EU and U.S. goals for incentivizing green trade are "extremely similar," and pointed to negotiations on a global arrangement on steel and aluminum trade as a way to make sure access to the EU and U.S. markets can be a lever to get "the kind of trade we want." The global arrangement looks to consider both carbon intensity and distortive overproduction, and she added that the U.S. wants not just green trade, but also fair trade.

Dombrovskis said it's his goal to reach agreement on the steel and aluminum trade in 2023. In the USTR readout of Tai and Dombrovskis' discussion of that issue, it said: "Ambassador Tai noted the United States’ desire to make this a high ambition agreement that could fight the climate crisis and address non-market excess capacity to defend our workers, industries, and communities and preserve our critical steel and aluminum industries."

Tai told the audience to consider the progress the U.S. and EU have made in the last two years, such as a truce on a long-standing dispute over subsidies to Boeing and Airbus.

She said 2023 would be "a gangbuster year for us to accelerate our cooperation and coordination."