Recent Developments and the Future Outlook for the Ongoing US-EU Large Civil Aircraft Trade Dispute

Recent Developments and the Future Outlook for the Ongoing US-EU Large Civil Aircraft Trade Dispute

November 16, 2020, Covington Alert

Latest Developments

In the latest tit-for-tat action in a long-running trade dispute between the United States (“US”) and the European Union (“EU”), the EU announced that effective November 10, 2020 it would apply a 25% tariff on products found in 136 8-digit Harmonized Tariff Schedule (“HTS”) numbers ranging from vitamins to video game consoles. (The full list can be found here.) The EU is also imposing an additional 15% tariff on large civil aircraft covering five distinct 8-digit HTS numbers. The EU appears to be taking this step in order to achieve several objectives: (i) continue with the World Trade Organization (“WTO”)-sanctioned compensatory measures in the large civil aircraft trade dispute that dates back to 2004, (ii) put pressure on the current administration to drop tariffs that the US imposed in August 2020 on similar products, and (iii) create leverage to define the future US-EU trade negotiations and relationship under a Biden administration. In the short term, we believe that these tariffs will likely remain in place until the US and the EU have an opportunity to further develop and create a new trade relationship.

In the EU Commission’s Implementing Regulation 2020/1646, published on November 9, 2020 and effective November 10, 2020, the EU started to impose an additional 15% ad valorem duty rate on large civil aircraft (five 8-digit HTS numbers) and an additional ad valorem duty rate of 25% on a range of products including, but not limited to, vitamins, rum, vodka, cheese, tractors, luggage, and video game consoles. The list of products are set forth in two Annexes of the implementing regulations. It is reported that the recent imposition of these tariffs was meant to mirror the US tariffs that were imposed on EU products in August 2020, which were adopted in response to an ongoing trade dispute at the WTO addressing large civil aircraft subsidies with allegations of trade law violations on both sides.

Key Takeaways

• The recent tariffs imposed by the EU are the latest development in a tit-for-tat, drawn out trade dispute between the US and EU that precedes the Trump administration and dates back to 2004.
• The new tariffs will likely be used as negotiating leverage in a new trade relationship between the US and the EU under a Biden administration.
• Although the finer contours of the future US and EU relationship are not known at this time, we believe that a Biden administration will look to build a stronger relationship with the EU and eventually, the tariffs could be removed.

The US Dispute Regarding EU Subsidies for Large Civil Aircraft

The new EU tariffs that became effective on November 10 are the latest development in a case that dates back to October 2004, when the US requested WTO dispute settlement consultations with the European Communities (now known as the EU) specifically, France, Germany, Spain, and the United Kingdom. The dispute concerned subsidies granted by the EU for the large civil aircraft domestic industry. The US alleged that the subsidies were inconsistent with obligations under the General Agreement on Tariffs and Trade 1994 (“GATT 1994”) and the Agreement on Subsidies and Countervailing Measures (“SCM Agreement”).

Eventually, the WTO determined that the EU breached its obligations under the SCM Agreement with the subsidies it provided to large civil aircraft producers. As a result of this determination, the WTO’s Dispute Settlement Body (“DSB”) recommended that the EU bring the WTO-inconsistent measures into compliance with WTO rules by December 1, 2011. Although the EU asserted that it had implemented the DSB recommendations, the US claimed that the EU had failed to do so.

The US then requested authorization from the DSB to impose countermeasures commensurate with the adverse effects to US interests that resulted from the subsidies. The matter went to arbitration to assess the proper level of any US countermeasures. The US and the EU then entered into an agreement that suspended the arbitration until after the WTO determined whether the EU had implemented the DSB recommendations. Finally, on May 28, 2018, the WTO confirmed that there were EU subsidies on aircraft that continued to cause WTO-inconsistent adverse effects to US interests.[1] On October 2, 2019, the WTO concluded that the appropriate level of countermeasures was approximately $7.5 billion annually.

After a series of public notices and comments provided on a list of goods to be used for the countermeasures, the US issued a final list of products subject to additional tariffs to “enforce US rights” in the WTO dispute against the EU and certain EU Member States addressed to subsidies on large civil aircraft. Shortly thereafter, the WTO authorized the EU to impose countermeasures against the US in a separate dispute regarding large civil aircraft.

The EU Dispute Against the US Subsidies for Aircraft

The EU’s basis for imposing the most recent November 10, 2020 countermeasures against the US comes from dispute settlement proceedings brought by the EU at the WTO. These claims relate specifically to R&D funding provided by the US government and tax benefits received by the large civil aircraft industry from the state of Washington. On October 26, 2020, the WTO provided authorization for the EU to take countermeasures worth approximately $4 billion annually against the US subsidies for large civil aircraft. This authorization provides the basis for the recent tariffs imposed by the EU.

The Trump administration denied the legitimacy of the EU’s move, arguing that “[t]he WTO arbitrator explicitly did not take into consideration Washington State’s repeal of that tax provision on April 1 of this year, limiting its review to the impact during the 2012-15 period”. Senior EU officials, however, seem to view this as an opportunity to turn the page on this mutual dispute of more than a dozen years. EU Commission Vice-President and Commissioner for Trade Valdis Dombrovskis sought to “underline that we are not escalating anything, we are exercising our rights”. In a nod to the link between the two sets of large civil aircraft tariffs, he highlighted that “the US is applying their tariffs already for a year,” and – looking to the future – that the EU is “ready to withdraw or suspend our tariffs any time when the US is ready to do so, whether it be under the current or next administration.”

For the EU Commission and many of the EU Member States, hopes for opening a new chapter in US-EU trade relations are strong. Instead of the recent debates on tariffs, which in Brussels have been persistently perceived as issues of the past, they hope that the focus could now turn to more forward-looking areas of joint concern. There may be scope for a constructive and creative approach to many of the novel, challenging, and consequential issues touching directly on the architecture of economic globalization. Many in Brussels see such a new approach as replacing the transatlantic trade disputes of the past four years with a renewed consensus that could help drive shared trade and regulatory policy objectives beyond the North Atlantic.

The EU Trade Relationship in a Biden Administration

As President-elect Biden lines up his transition team, there are reports that a Biden administration will likely take steps to fulfill some of the hopes in Brussels, create a new partnership with the EU, and rebuild the relationship and coalition that was strained under the Trump administration. However, the finer contours and new priorities of that relationship have yet to be defined. The European Commission President Ursula von der Leyen was recently reported as stating:

“we know that we cannot turn the clock back. Not on trade, not on TTIP […]. And we cannot go back to the exact same agenda we had five years ago. We should not fall into that trap. We need a fresh approach. Because the world has changed and so have the United States and so has Europe.”

If you have any questions concerning the material discussed in this client alert, please contact the following members of our International Trade and Public Policy practices.

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