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Turbulence Across the Pond: United States and EU Trade Tariff Threats Over Subsidies

In Short

The Situation: The U.S. government proposed a preliminary list of European goods potentially subject to additional tariffs under Section 301 of the Trade Act of 1974 ("Section 301"). Also, the European Union ("EU") proposed a preliminary list of U.S. goods potentially subject to additional tariffs.

The Result: The United States and the EU have not yet determined the level of the increase (if any) in the rate of tariffs on such goods, and the preliminary list is subject to input by stakeholders, which could result in changes to the list. The total value of the countermeasures is subject to arbitration at the World Trade Organization ("WTO") and can therefore still change.

Looking Ahead: Interested parties should consider advancing their interests through the notice-and-comment process made available by the U.S. government and the public consultation opened by the EU and assessing their options if those efforts are not successful.

On April 8, 2019, the United States Trade Representative ("USTR") initiated an investigation under Section 301 to enforce U.S. rights in the WTO dispute against the EU regarding EU subsidies on large civil aircraft. The USTR proposed the imposition of additional tariffs on a variety of EU goods. On April 17, 2019, the EU published a list of U.S. goods that it is considering to subject to additional import duties under Regulation (EU) No 654/2014 to enforce the EU's rights in the WTO dispute against the United States regarding U.S. subsidies on large civil aircraft. The European Commission has started a process of public consultation, inviting stakeholders to comment on the proposed list.

The U.S. move evidences the Trump administration's continued willingness to use tariffs to counteract trade practices of U.S. trading partners it identifies as adversely affecting U.S. commerce. The Trump administration recently used Section 301 to impose additional 10 to 25 percent tariffs on three sets of Chinese-origin products, which we have previously detailed here and here. The strong reaction by the EU shows that it is willing to take similar actions to enforce its rights further to the culmination of the WTO proceedings, especially in the face of additional tariffs being imposed on EU goods.

Background

The U.S. Section 301 investigation and the EU's public consultation take place against the larger backdrop of prolonged litigation before the WTO. In 2004, the United States challenged the EU's and EU member states' provision of subsidy packages for large civil aircraft before the WTO Dispute Settlement Body. In 2005, a similar dispute was brought by the EU in relation to subsidies granted by the United States for large civil aircraft.

The WTO found that both the United States and the EU had provided certain subsidies that were not in line with their respective WTO obligations. Despite certain steps that were taken by the United States and the EU, both requested the establishment of a compliance panel in relation to the respective disputes in 2012, arguing that the other had not complied with the findings of the WTO. This culminated in Appellate Body reports finding that there were still some concerns regarding the implementation by the EU and the United States of the WTO's findings.

Countermeasures would typically consist of the imposition of additional import duties on products originating in the territory of the other party. The exact level of those countermeasures will be determined by the Arbitrator in pending WTO proceedings. The USTR estimates the harm from the EU subsidies at $11 billion in trade each year, and the EU from its side has estimated the damage from the U.S. subsidies to be up to $12 billion.

U.S. Preliminary Section 301 List of EU Goods

The preliminary Section 301 list contains 317 tariff subheadings and nine Harmonized Tariff Schedule statistical reporting numbers. The USTR reported that the value of the preliminary list is approximately $21 billion in terms of the estimated import trade value for calendar year 2018.

Section 1 of the preliminary list applies to all products originating from Germany, France, the United Kingdom, and Spain and specifically targets aircraft and aircraft parts. Section 2 applies to all 28 member states of the EU and is much broader in scope, encompassing a wide variety of cheese and other dairy and seafood products, as well as assorted fruits, jams, water, and wines. Additionally, Section 2 covers various yarns, carpets, synthetic fibers, polyesters, clothing articles, and assorted glassware and metals.

The USTR intimated that it would consider imposing additional ad valorem duties "up to 100 percent on products of the EU or certain member states" for products qualifying under an enumerated tariff subheading contained on the preliminary list. The final list of products subject to increased duties will take into account the report of the arbitrator on the appropriate level of countermeasures to be authorized by the WTO, which the USTR anticipates will be issued in the summer of 2019.

Given: (i) USTR's estimate of $11 billion in harm; and (ii) that the preliminary list covers approximately $21 billion in imports annually, it is possible that the USTR may remove products from the preliminary list in connection with the notice-and-comment process to get closer to the $11 billion number. Alternatively, it is possible that the tariffs imposed on products on the preliminary list are closer to 50 percent instead of 100 percent.

EU Preliminary List of U.S. Goods

The preliminary list of the EU contains a wide variety of products, including aircrafts, tractors, chemicals, agri-food products, suitcases, and bags. The total imports into the EU of the proposed products that originate in the United States amounts to approximately $20 billion.

The European Commission is considering imposing increased customs duties. Some of these products may be subjected to additional ad valorem duties of up to 100 percent when imported into the EU and originating in the United States. The exact level of the countermeasures will depend on the arbitrator's decision, but it is likely to be less than the $12 billion initially proposed by the EU.

The European Commission can remove products from the list, further to the decision of the arbitrator on the appropriate level and/or the public consultation it is currently carrying out.

U.S. Public Notice-and-Comment Process

There will be a public notice-and-comment process pursuant to which interested persons may provide comments with respect to the USTR's determination and proposed action, including:

  • The specific products to be subject to increased duties, including whether products listed in the preliminary list should be retained or removed, or whether products not currently on the list should be added;
  • The level of the increase, if any, in the rate of duty;
  • The appropriate aggregate level of trade to be covered by additional duties; and
  • Whether increased duties on particular products might have an adverse effect upon U.S. stakeholders, including small businesses and consumers.

The relevant dates are as follows:

  • May 6: Deadline for requests to appear at the hearing, which must include a summary of testimony.
  • May 15: Public hearing.
  • May 29: Deadline for submitting written comments, which include post-hearing rebuttal comments.

The docket number is USTR-2019-0003, and comments can be submitted via www.regulations.gov. We will continue to monitor developments associated with these potential tariffs and countermeasures.

EU Public Consultation

Regulation (EU) No 654/2014 lays down the procedures in the field of the common commercial policy in order to ensure the exercise of EU rights under international trade rules, in particular those established under the auspices of the WTO. This Regulation requires the European Commission to seek information and views regarding the EU's economic interests in specific goods or services or in specific sectors. The European Commission has also committed to undertake extensive consultations with a view to ensuring that all relevant interests are duly taken into account. Through those consultations, the European Commission expects to receive input from private stakeholders affected by possible commercial policy measures to be adopted by the EU.

Therefore, the European Commission is now seeking input from private stakeholders who may be affected by such increased duties. Private stakeholders are invited to complete the information gathering form made available by the European Commission and submit it at the latest by May 31, 2019, 12:00 a.m. (UTC +01:00). The European Commission is obliged to take the input received into account. The European Commission has stated that, to receive full consideration, written comments should be as detailed as possible and include supporting documents. The comments should be submitted by email to TRADE-REG-654-2014-INFOGATHERING@ec.europa.eu.

The European Commission is expected to revise its list of products further to the input received and the arbitrator's decision. An implementing act imposing countermeasures can only be adopted if it is approved by the Commission on the exercise of the Union's rights under international trade rules, which is composed of representatives of all EU member states.

Three Key Takeaways

  1. Many companies will be impacted by the additional tariffs if eventually imposed, including small businesses and consumers. Therefore, stakeholders should consider engaging in the U.S. notice-and-comment process and/or the EU public consultation.
  2. Stakeholders should also monitor the U.S. docket for comments from other parties that could potentially impact their interests.
  3. The additional U.S. tariffs on imports from the EU could be in place as soon as the summer of 2019. The additional EU tariffs on imports from the United States are only expected at a later stage

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