Opening Salvos: The Proposed Tariffs

On June 26, 2020, the U.S. Trade Representative (USTR) published a notice that it is considering new tariffs on exports such as olives, coffee, beer, gin, and trucks coming into the United States from France, Germany, Spain, and the United Kingdom.[1] The list of potential targets also includes various types of bread, pastries, cakes, and other baked products. That new list of goods may face duties of up to 100%, potentially doubling the price of certain goods. [2] The announcement caused European stocks to fall, particularly for shares of beverage companies, luxury goods companies, and truck makers.

If the measure goes into effect, it may effect $3.1 billion dollars’ worth of imports[3] and threaten to exacerbate trade tensions that have been steadily on the rise following a series of tariffs that the administration imposed this year on EU goods. Those previous tariffs were imposed in retaliation for EU measures to increase digital taxation that could potentially American firms like Facebook, Amazon, and Google.

A Devious Weapon: “Carousel Retaliation”

The U.S. may apply its new tariffs in a shifting spread across industries, moving the tariffs from one product group to another in order to cause disruption and uncertainty across business and supply chains,[4] a strategy known as “carousel retaliation.” That strategy is not unique to Europe, as the administration has also discussed increased tariffs on China[5], Canada[6], India, South Korea, and at least 27 other countries.[7]

The War Map: Larger Trade Context

Your bread, wine, and gin may be pricier because of airplanes. For years the United States and EU countries have sparred before the World Trade Organization over prohibited U.S. subsidies to Boeing and prohibited EU subsidies to Airbus.

In December 2019 the WTO found that Germany, France, Spain and the U.K. continued to provide prohibited subsidies to Airbus and authorized the United States to impose retaliatory tariffs.[8] At the same time, the WTO is considering whether EU member states may impose tariffs on $11.2 billion worth of U.S. goods in retaliation for illegal U.S. subsidies to Boeing.[9]

This dispute is not solely the work of Trump administration; it has been ongoing for the past 14 years, even in the midst of previous negotiations between the two parties for a trade and investment partnership.[10] What makes this situation unique is the contentious nature of the trade discussions, additional issues surrounding digital taxation and the global pandemic which threatens both economies.

According to EU Trade Commissioner Phil Hogan, the US has stepped back from settlement talks in recent weeks, which may prompt the EU to move forward with their own punitive measures.[11] Over the course of the year, the increased tit-for-tat by each party has only made the relationship more contentious, as evidenced by the fact that the U.S. pulled out of discussions on taxing the digital economy. That caused EU officials to threaten an even more aggressive stance on national and EU-wide digital levies, which experts warn would only draw further ire from the United States, leaving both parties in a continuing spiral of escalation. [12]

Collateral Damage: The Effects on Your Business

Trade experts fear the escalation could lead to an all-out trade war which, with the damaging strategy of carousel retaliation, would injure all parties’ economies at a time when they have already been laid low by the effects of COVID-19. The USTR announcement also comes on the heels of the European Union announcing potential bans[13] on American citizens from travel to the European Union, due to the U.S. government’s failure to adequately contain the spread of COVID-19, and the U.S. announcement of increased restrictions on the issuance and entry of immigrant visas for workers entry into the United States, despite objections by major tech companies and other American businesses.[14] Despite this, the European Commission is still optimistic about the prospects of a global discussion involving the United States.[15]

A number of American companies have pushed back against the proposed tariffs. Following the announcement by USTR this week, the Distilled Spirits Council issued a statement condemning the actions, which they feel will have a negative impact on the distilled spirits sector, American companies, and hospitality jobs which have been particularly effected in the wake of COVID-19.[16]

Experts estimate that, so far, increased tariffs have caused at least $1.7 trillion in U.S. company stock prices.[17] Although those studies were also conducted in the backdrop of a global pandemic, experts agree that increased volatility in the market serves little benefit in the current economic climate.

For now, it remains to be seen how the tariffs will be applied. From June 26, 2020-July 26, 2020, the USTR will be taking comments regarding the review of this action. If you would like additional guidance on submitting comments to this notice, contact the trade team at Sheppard Mullin.