Do not underestimate the ‘mega-Brussels effect’ of EU-US co-ordination

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The writer is the chief executive of Lazard

In a world of tragic news, there is one unheralded bright spot: the US and the EU are poised to agree on a new sustainable steel and aluminium club. This imminent deal would not only avoid a potential rupture in the transatlantic alliance, but also point towards a new “mega-Brussels effect” which could be put to great use on climate, sanctions, technology, and other topics. 

The new agreement would co-ordinate EU and US tariffs on Chinese steel and aluminium and work towards a broader common approach on taxing carbon-intensive steel and aluminium imports. This may seem like back-page bureaucratic news, but the stakes are high. Steel and aluminium production represents approximately one-seventh of global carbon emissions. And absent a US-EU agreement, a self-imposed deadline of the end of October would have reintroduced Trump-era US tariffs on European imports. Europe would then have retaliated in kind. 

Such a spat would have inflamed recent economic irritants — namely green subsidies as part of the US Inflation Reduction Act — within the world’s most important alliance. Add to that the potentially contentious implementation of Europe’s Carbon Border Adjustment Mechanism — a carbon-linked tariff scheme that, if not aligned with Washington, could lead to European tariffs on a host of US products — and the alliance risked letting petty disagreements get in the way of broader objectives. 

Instead, the budding steel and aluminium club provides an important blueprint for greater collaboration between the US and EU as a single economic superbloc.

Much has been said about the “Brussels effect,” in which EU regulations at least partially set the agenda for global companies given the size and importance of the European market. But when the US and the EU act in concert, their impact is magnified. Together, the two regions represent 40 per cent of global GDP. As a result the “mega-Brussels effect” has real power to shape international behaviour.

Their joint leverage over companies located elsewhere in the world expands disproportionately relative to when they act alone — in part because the odds of finding a suitably attractive alternative market outside the bloc plummet sharply. Given this, the chances that other governments pay attention also increase substantially.

Myriad applications are possible. Washington and Brussels could extend green co-operation to other industries beyond steel and aluminium, creating a broader “climate club” that would impose tariffs on countries that aren’t doing enough to decarbonise, and incentivising companies elsewhere in the world to bend the curve on emissions.

They could more tightly integrate overlapping clean energy and semiconductor subsidies to increase their effectiveness. They could also co-operate more closely on IT standards, preventing a costly fracturing of the world into multiple technological groupings. In all of these areas, and more, a superbloc approach could power a global shift towards economic and regulatory progress.

The power of the expanded Brussels effect extends to foreign policy as well. Both the US and Europe are now committed to “de-risking” their relationship with China, with a focus on advanced technologies critical to national security. But their co-ordination has happened in fits and starts. The US made the mistake of moving too quickly on semiconductor export controls last year, without bringing along critical allies. Similarly, while Washington has recently announced a new screening mechanism for US investments into Chinese advanced technology, Europe lags behind.

Huawei’s recent release of an indigenously produced 7nm chip shows that China is advancing despite US controls. If America acts alone, the odds that technology “de-risking” succeeds on its own terms is low; if it collaborates with the EU, they are substantially higher. The same principle applies to support for Ukraine and now Israel — both nations which need the co-ordinated support of these two global powers.

As the saying goes: if you want to go fast, go alone; but if you want to go far, go together. US officials need to avoid further antagonising their European counterparts, who in turn need to realise that their global influence is dramatically expanded when they form a joint coalition with the Americans. The budding US-EU steel and aluminium agreement may not seem all that significant, but it could be an important step in the right direction.