BRUSSELS — The next big transatlantic trade fight is primed to explode.

Negotiators from Brussels and Washington are scrambling to solve a five-year dispute over steel and aluminum dating back to former U.S. President Donald Trump’s decision to slap tariffs on European imports. They have until October to get a deal but are still so far apart that European officials now fear the chances of an agreement are slim. 

Without a deal, both sides could reimpose billions of dollars worth of trade tariffs on each other’s goods — potentially spreading well beyond steel to hit products including French wines, U.S. rum, vodka and denim jeans.

While U.S. negotiators are still hopeful that an agreement can be reached in time, the political fallout of failure for President Joe Biden would be serious, with U.S. exports facing a hit just ahead of his potential re-election battle in 2024. More broadly, another breakdown in trade relations between Europe and the United States would heap further pressure on a relationship that is already under strain from Biden’s green subsidies package for American industries.  

With a more assertive China threatening to disrupt supply lines, and Russia’s war in Ukraine straining global commerce, the last thing world trade needs is a new crisis between major Western allies. Six EU officials briefed on the talks worry that’s exactly what will happen. 

“The start positions are just too far away,” said one of the officials, who asked to remain anonymous to discuss sensitive matters. “The huge concessions that would have to be made are politically not realistic in that timeframe.”

The transatlantic disagreement is a hangover from the days of Trump, who imposed tariffs on €6.4 billion worth of European steel and exports in 2018. The tariffs were extra sensitive because Trump had imposed them on grounds of national security. 

After he came to power, Biden agreed to a temporary cessation of hostilities rather than a complete end to the dispute. His aim was for negotiators to work jointly on making steel production greener and fighting global overcapacity. The unofficial U.S. goal is also to squeeze Beijing’s dumping of Chinese steel, which is made with far more coal-fired power. 

But unless a new deal is struck by October, the risk is that tariffs return. A summit between Biden and EU leaders has now been penciled in for October, potentially to coincide with the final leg of talks on the dispute.

China hawks

Officials in Brussels see the ongoing negotiations as just another push from the U.S. to force them into taking a harder line against China. “The language just seems written to tackle one country specifically,” said one of the European officials.

Discussions only recently picked up pace through the exchange of a U.S. concept paper and then an EU response. Those texts showed how far apart the two sides are on key issues, the officials said.

Washington wants to impose tariffs on imported steel or aluminum products, which would increase progressively based on how carbon-intensive the manufacturing process is, according to the proposal seen by POLITICO. Countries that join the agreement, which would be open to nations outside the EU, would face lower tariffs, or none at all, compared to those that do not. 

The EU’s response — also seen by POLITICO — does not include any form of tariffs, according to the officials. Brussels fears the American plan for tariffs goes against the rules of the World Trade Organization, which is a no-go for the EU.

But a senior Biden administration official, who spoke on the condition of anonymity to discuss ongoing negotiations, told POLITICO that tariffs should not be off the table. 

“That’s a pretty powerful tool for driving the market both to reduce carbon intensity as well as to reset the playing field to counteract non-market practices and excess capacity,” the U.S. official said. “What we’ve been trying to understand and respond to, in part, is what are those reasons that the EU has to have concerns about a tariff-type structure.”

Karl Tachelet, deputy director general of European steel association Eurofer, said: “We haven’t seen any real ambition or vision to use this as an opportunity to tackle excess capacity or decarbonization. So it can only lead to a clash of views.”

Americans don’t see it that way.

“The U.S. and the EU share a commitment to tackling the dual threat of non-market excess capacity and the climate crisis, and the Biden administration is committed to developing a high-ambition framework that accomplishes those objectives for our workers and these critical industries,” said Adam Hodge, spokesperson for the Office of the U.S. Trade Representative.

But the senior Biden administration official argued that the EU proposal lacks ambition. It makes “tweaks around the margin” without actually attacking “the fundamental problem” that the two sides agreed to address when they called their truce. 

“Our concern with the EU’s paper is that it doesn’t really change the dynamic of trade,” the U.S. official said.

“If we’re going to change the course of the impact of non-market excess capacity on market economies like the U.S. and EU, as well as really thinking about how can we use trade as a tool to drive decarbonization, we need to produce something that’s different and more ambitious,” the official added.

Several officials said Washington is also seeking an exemption from the EU’s carbon border tax, which imposes a tax on some imported goods to make sure European businesses are not undercut by cheaper products made in countries with weaker environmental rules.

Such an exemption for the U.S. is another no-go for Brussels. A European Commission spokesperson said giving the U.S. a pass on the carbon border tax would constitute a breach of WTO rules and “cannot be compared with” the U.S. steel and aluminum measures. 

Another European concern is that the U.S. wouldn’t scrap the possibility of re-imposing tariffs on the EU, even though the WTO branded them as illegal. Under Trump, Brussels argued only a complete withdrawal of the tariffs would satisfy the EU, contending the duties were an illegal slap in the face of an ally. 

The senior U.S. official said that using national security to justify the tariffs — a rationale that would surely draw opposition in Brussels — “hasn’t been a part of our conversation with the EU to date.” But the Biden administration’s concept paper wasn’t written with WTO compliance top of mind, the official added. 

Landing zone

Brussels and Washington are now negotiating to find a landing zone. 

“Both sides are coming from two different positions on this,” said one of the European officials, while stressing that “there is a mutual interest to find a solution.”

Others were more pessimistic. Either way, a Plan B is taking shape in the background. Several of the European officials stressed the EU and the U.S. can also buy more time by prolonging the current ceasefire. “The deadline is always flexible,” said Uri Dadush, a Washington-based fellow at the Bruegel think tank. “Both sides can easily agree to extend.”

Steven Overly reported from Washington. Sarah Anne Aarup and Camille Gijs contributed reporting from Brussels.