The EU added 87 new entities to its export controls covering dual-use goods and technology, as well as goods and technology which might contribute to the technological enhancement of Russia’s defense and security sector. For the first time, the EU is covering entities that are not just registered Russia or Iran, but also other jurisdictions, i.e., Armenia, Hong Kong, Syria, the United Arab Emirates, and Uzbekistan.

The EU also intends to deploy a new anti-circumvention tool to restrict the sale, supply, transfer, or export of specified sanctioned goods and technology to third countries that pose a high risk of circumvention. This tool would be employed as a “last resort” where other measures and outreach have proven insufficient. Moreover, the EU enhanced its anti-circumvention measures related to transportation, including denying access to vessels which manipulate or turn off their tracking system when transporting Russian oil subject to the oil import ban or G7 price cap.

This package contains a number of other new and notable measures, including:

• A requirement that all EU importers prove that their imports of iron and steel from third countries do not have any Russian inputs;
• An expansion of the luxury goods ban to include yachts and exports of all new and second-hand luxury cars above a certain engine size; and
• A full ban on certain types of machinery components.

Finally, the EU identified a list of economically critical goods (chemicals, machinery, electronics, maritime, and optics/related instruments) that businesses and third countries should be especially vigilant about in transactions.

The fourth ministerial meeting covered a wide range of topics that focused on countering obstacles to the G7’s international rules-based system, including, among other things, diversifying supply chains, sanctions coordination, investment screening, and addressing emerging technologies such as quantum. Below is a select outline of the TTC’s outcomes and what to look for from the U.S. and EU going forward.

Cooperation on export controls and sanctions. Following Russia’s invasion of Ukraine, the U.S. and EU developed chains of communication to ensure that measures put in place to punish Russia for its actions were watertight. In particular, both the Treasury Department’s Office of Foreign Assets Control and the Commerce Department’s Bureau of Industry and Security have issued statements outlining the cooperation between the U.S. agencies and their European counterparts.

The TTC seeks to grow this cooperation through the consistent exchange of information on the application of controls as well as working to address enforcement and circumvention risks. Indeed, the U.S. and EU are coordinating with third countries to counter evasion of export restrictions on sensitive items and are conducting capacity building projects to enable third countries’ authorities to target export control evasion and circumvention more effectively.

Additionally, the TTC is working towards simplifying re-export procedures for exporters and developing a common understanding of how U.S. and EU export regulations are applied on both sides of the Atlantic. To that end, the U.S. and EU are also enhancing their technical consultation on regulatory developments.

Inbound investment screening. Last year, the U.S. announced measures aimed at strengthening its inbound investment screening mechanism, the Committee on Foreign Investment in the United States (“CFIUS”). The TTC recognizes the importance of CFIUS and similar EU mechanisms in flagging national security risks related to specific sensitive technologies and critical infrastructure. The TTC resolved to enhance U.S. and EU cooperation on inbound screening.

Outbound investment screening. Earlier this year, the U.S. took initial steps to “address the national security threats emanating from outbound investments from the United States in certain sectors critical for U.S. national security” and identify “the resources that would be required to establish and implement” such a screening program. The EU is also looking at developing a similar screening process for outbound investments. At the ministerial, the TTC recognized that addressing outbound investment concerns could be important to complement existing tools of controls on exports and inbound investments, and to that end, the TTC will be working on a coordinated response to outbound investment concerns pertaining to national security.

Semiconductors. One of the TTC’s overarching goals is securing supply chains for equitable use, which especially includes semiconductors as a critical technology. To that end, the TTC has developed an early warning mechanism for disruptions in the semiconductor supply chain. The TTC is also mindful of the competing U.S. CHIPS and Science Act and the European Chips Act. To prevent a “race to the bottom,” the TTC has put in place a consultation process to facilitate communication that will prevent further subsidy escalations.

Quantum technology. The TTC, recognizing the complex and fast-paced nature of the advancement of quantum technology, has established a joint Task Force to address open questions on science and technology cooperation in quantum technologies. The Task Force will be responsible for ensuring collaboration in research & development, the identification of critical components, standardization, defining benchmarking of quantum computers, and export control related issues for this technology.

Critical minerals. The TTC emphasized the need for the U.S. and EU to work together on supply chains for critical minerals, metals, and material inputs. The U.S. and EU are both reliant on imports, often from limited sources. This reliance leaves the countries vulnerable to disruptions such as geopolitical shocks and natural disasters. The TTC will be prioritizing securing the critical mineral supply chain going forward.

What’s Next?

The U.S. and EU, despite recent irritants regarding subsidies in the aforementioned CHIPS and Science Act and the European Chips Act, will continue to develop their policy coordination and implementation on amicable terms. The transatlantic economic relationship still has a lot of room to grow with a laser focus on boxing out countries that are looking to circumvent the G7’s international framework. While there may be challenges in implementing some of the outcomes of the TTC’s meeting, the U.S. and EU will likely be able to contain any potential setbacks through constructive dialogues established by the TTC.

Export Restrictions

The EU measures seek to further degrade Russian military and defense capabilities by expanding the category of items subject to export restrictions, including additional less sensitive industrial and technology items. The following categories of items were added to Annex XXIII, subjecting them to EU restrictions:

• Items supporting Russian industry, including coke and semi-coke of coal;
• Electrical components used in the manufacture of Russian weaponry;
• Technical items used in Russia’s aviation sector;
• Certain chemical items; and
• Certain small arms and their essential components, and other goods that could be used for torture or capital punishment, as set out under the EU Anti-Torture regulation.

Import Restrictions

The EU expanded import bans on Russian goods to include a number of new items, subject to certain wind-down exceptions and other carve outs:

• Finished and semi-finished steel products (subject to a transition period for certain products);
• Machinery and appliances;
• Plastics;
• Vehicles;
• Textiles;
• Footwear
• Leather;
• Ceramics;
• Certain chemical products; and
• Non-gold jewelry

The ban extends to goods that originate in Russia or have been exported from Russia, as well as to certain steel products that have been further processed in third countries.

Price Cap on Russian Oil

In addition to the EU ban on Russian oil imports, today’s measure seeks to further curtail Russian energy revenues by introducing the beginning stages of a price cap on Russian oil to third countries. The price cap mechanism will function as an exemption to the prohibition on the provision of maritime transport services to third countries of crude oil and certain petroleum products that are purchased at or below a pre-established price agreed upon by a coalition of States.

The effective date for the price cap with respect to Russian crude oil is December 5, 2022, while the effective date with respect to refined petroleum products is February 5, 2023, after further decision from the Council.

Kherson, and Zaporizhzhia Oblasts

Yesterday’s measure expands the geographical scope of the EU restrictions on dealings with non-government controlled areas of Ukraine to include the non-government controlled areas of Ukraine in the oblasts of Kherson and Zaporizhzhia. These restrictions include a wide range of activities, including a ban on imports from the covered regions into the European Union, a ban on investment and acquisitions of real property, and a ban on the provision of tourism services, among other measures.

Service Ban

The European Union imposed restrictions on the direct and indirect provision of several types of services to the Government of Russia or legal persons, entities, and bodies established in Russia:

• Non-contentious legal advisory services;
• Information technology services; and
• Architectural and engineering services.

The Regulations contain carve-outs for the provision of services provided for the exclusive use of companies owned or controlled by EU Member States, country members of the European Union Economic Area, Switzerland, or listed partner countries, including the United States. For contracts concluded before the effective date, the prohibition will not apply to the provision of services strictly necessary for the termination of non-compliant contracts by January 8, 2023. The EU also expanded the ban on crypto-wallet services, irrespective of the amount of the wallet, eliminating the previous €10,000 limit.

Asset Freeze & SOE Restrictions

Also included in yesterday’s package are restrictions targeting Russian officials and elites. Targets include:

• Those involved in the illegal annexation of Ukraine territory;
• Parties operating in, and companies supporting, Russia’s defense and security sector;
• High ranking military officials; and
• Those involved in disseminating misinformation.

All funds and economic resources belonging to designated individuals and entities shall be frozen under EU law, and those subject to EU jurisdiction are forbidden from making funds directly or indirectly available to designated targets.

The EU also expanded the ban on dealings with Russian state owned enterprises (SOEs) to include the Russian Maritime Register, subject to wind down and other exceptions. The expanded rules also prohibit EU nationals from holding posts in the governing bodies of sanctioned SOEs in Annex XIX.

Other Measures & Exceptions

Other restrictions imposed yesterday included a broadening of criteria to allow for the imposition of sanctions on those facilitating the circumvention of EU sanctions. This latest package also includes several exceptions, including those designed to facilitate the provision of humanitarian assistance, transactions necessary to promote nuclear safety and security, and certain wind down activities.

While the U.S. and the EU have indicated general support for a settlement of the 16-year aircraft dispute, the two sides continue to disagree on settlement terms. The EU has urged the U.S. to remove tariffs over EU subsidies to Airbus because it has repealed those programs, while the U.S. contends that since it has already removed the subsidies to Boeing, there is no legitimate basis for EU retaliation. It seems unlikely the parties will reach a settlement by the November 10, 2020 deadline. The EU has stated that it will move forward with the tariffs if there is no settlement by November 10, 2020.

President Trump has warned that the U.S. will strike harder should the EU impose tariffs. The U.S. to date has not applied the maximum tariff level in the $7.5 billion damages award against the EU from the WTO in 2019. Instead, the U.S. has imposed 15% tariffs on Airbus aircraft and 25% levies on various other European exports such as French wine, Scotch whisky and Spanish olives. The U.S. could raise these import taxes to 100%, which would effectively bar many of these European products from entering the U.S. market.

It is widely anticipated that the updated list of U.S. goods subject to the new EU retaliatory tariffs will be based on the EU’s preliminary April 2019 list, which identified U.S. products under consideration for the application of additional tariffs. Products of note on the April 2019 list include: fresh and frozen fish of a variety of species; fresh and dried fruits and vegetables, sugar, cocoa powder and chocolate, nuts and seeds, orange juice and grapefruit juice, wine and alcohol, polymers, suitcases and handbags, shovel loaders and tractors, and video game consuls.

While any listed product may be subject to additional tariffs, the EU may not apply tariffs exceeding the approved level of countermeasures, totaling just under $4 billion.

Kelley Drye continues to monitor developments related to this case, including the publication of a final updated list. If you are interested in receiving updates or have any questions, please contact: Jennifer McCadney.

It also announced it would make minor modifications to 25% tariffs imposed on cheese, wine, Irish and Scotch whisky, and other non-aircraft products from the EU, namely adding a 25% tax on French and German butcher and kitchen knives and dropping prune juice from the list of taxed items. While the move is hard-hitting, particularly for European aircraft, EU officials had feared more drastic measures in an increasingly fraught trade relationship with the U.S.

Background

Potential for Escalation

Impact on EU-US Trade Agreement

However, some EU countries disagree on linking agricultural concessions to a wider EU-U.S. deal and are highly reticent to wade in the politically sensitive waters of farm goods, food standards and genetically modified crops. The European Commission has sought to reassure EU Member States that agricultural concessions would remain minor and include only non-controversial sanitary and phytosanitary standards. On the other hand, minor concessions are unlikely to cut it for the U.S. It is, for instance, calling on Brussels to soften limits on pesticides residues, to which the EU is purposely taking a stricter approach, also increasingly working towards phasing out pesticides in favor of non-chemical alternatives.

Next Steps

Election front-runners, the Conservatives and Labour Parties, which recent polls projected to have 41 and 29 percent of the votes respectively, both have been reticent to support the use of cannabis-based products. The Liberal Democrats, with less than 15 percent of the projected votes, and the Greens with even less, both support liberalization. As recently as this summer, however, a cross-party group of Members of the UK Parliament returned from a study visit in Canada prepared to vote against party lines. As the UK potentially moves toward under a revitalized Conservative government to seal a deal with the EU before 31 January 2020 predicate to embarking on a process of resetting its rules as an independent nation, there is plenty of opportunity for change. The UK re-branding undoubtedly will seek to build on its reputation for excellence in research and development in the life sciences sector, including its extensive expertise in clinical studies of potential new treatments. The future may well include a significant increase in clinical research on cannabis products.

On 11 November 2019, the UK’s National Institute for Health and Care Excellence (NICE) published guidance that clears the way for two cannabis-based medicines to be used within the UK’s National Health System (NHS). NICE reversed the position it took in draft guidance in August when it questioned the efficacy GW Pharma’s Epidiolex despite the European Medicines Agency approving it in September for the entire EU market. NICE also overcame its hesitancy concerning the pricing of Epidiolex as well as Sativex, another GW Pharma product, approved for medicinal use in the UK in 2010 but which NICE had rejected earlier this year as not cost-effective. Subsequent work between NICE and GW Pharma on economic modelling as well as public consultations paved the way for the change in position.

Medical cannabis was legalised in the UK in November 2018 under certain conditions. NICE’s guidance enables, for the first time, NHS specialists to prescribe cannabis-based products for patients across England. Epidiolex, a purified cannabidiol (CBD) solution, is used to treat seizures in children with Lennos Gastaut or Dravat syndromes while Sativex, which contains equal portions CBD and tetrahydocannabinol (THC), treats spasticity related to multiple sclerosis. Sativex will be available only when other treatments have failed and where local NHS authorities agree to cover costs for a four week period. Continuation of the treatment by prescription from a general practitioner is possible where symptoms improve by at least twenty percent during the trial period.

NICE’s recommendation on Sativex was welcomed by the MS (multiple sclerosis) Trust. Similarly, Epilepsy Action considers the recommendation on Epidiolex to be an important step forward but calls for more research on the use of medicines containing THC for epilepsy patients. The patient advocacy group End our Pain, which last spring brought families of patients with epilepsy to the offices of more than 80 Members of the UK Parliament, has criticized the NICE guidance for not also recommending medicines with THC for NHS use in treating symptoms of epilepsy.

Whomever ends up in office to guide the UK through the coming rocky steps can expect to hear plenty more from constituents about the potential benefits of cannabis-based products and the need for regulatory reform.

The existing gulf between the U.S. and EU on pesticides regulation underscores a widely disparate policy approach. While the EU espouses the so-called precautionary principle for approving pesticides and setting maximum residue levels (MRLs) - thus taking protective action where scientific evidence is inconclusive but there is a presumption of risk to human or animal health or the environment -, science-based proof of harm has to be demonstrated for regulatory action to be taken in the U.S. Whereas the EU further maintains it is necessary to apply the precautionary principle to protect consumer health and the environment, it has been the object of strong pushback from the U.S., among other countries, for being trade inhibiting.

Accordingly, in a submission to the World Trade Organization (WTO) Council for Trade in Goods on 4 July 2019, the U.S. and 14 other countries (Brazil, Australia, Canada, Malaysia, Costa Rica, Peru, Colombia, Paraguay, Ecuador, Guatemala, Honduras, Dominican Republic, Nicaragua, Panama, and Uruguay) called on the EU to re-evaluate its approach to product approvals which “unnecessarily and inappropriately” restrict trade and to “use internationally accepted methods” of setting pesticide residue tolerances. The precautionary principle also recently has come under fire by Brazil within the context of the EU-Mercosur trade deal, with President of Brazil Jair Bolsonaro threatening to challenge EU at the WTO if the principle is used for “protectionist” purposes. Brazil is the world's largest user of pesticides and Bolsonaro, within the first 100 days of becoming President, authorized the registration of 152 previously banned pesticides, many of which are banned in the EU. In the meantime, Brazil and the U.S. have strengthened trade ties, with a free trade agreement reportedly in the pipeline.

The executive arm of the EU currently is undertaking a fitness check of regulations relating to pesticides approval and maximum allowed levels for pesticide residues which could lead to new or updated legislation. It is expected that the fitness check will reaffirm the EU’s commitment to the precautionary principle, focusing efforts on how to improve implementation of the legislation and addressing any gaps and administrative burdens. The new EU Commissioners, i.e. heads of the EU’s executive arm, taking office before the end of the year also have suggested they will take measures to bolster health and environmental protection measures, including by stimulating the take-up of low-risk and non-chemical alternatives, in particular those of biological origin, and reducing bureaucracy for these to be brought to the market quicker. EU’s trade policy further will be focused on protecting the environment by spreading environmentally friendly goods and incentivizing trade partners to implement measures to protect the environment and combat climate change.

In light of these developments, the regulatory gap on pesticides is set to widen. As new measures on pesticides can have profound impacts on global agricultural production and trade in key products, companies will have their eyes peeled on the European and American policy spaces. Increased regulatory divergence on pesticides also likely will flare up existing transatlantic trade sensitivities, which have long been strained over dissimilar food standards, and could become a point of tension in any post-Brexit UK-U.S. trade talks.

The EU-Canada interim appeal arbitration arrangement is grounded in Article 25 of the WTO’s Understanding on Rules and Procedures Governing the Settlement of Disputes (DSU), which contains rules for resolving disputes arising under WTO agreements. Article 25 DSU provides for “expeditious arbitration within the WTO as an alternative means of dispute settlement […] of certain disputes that concern issues that are clearly defined by both parties.” Under Article 25 DSU, parties agree in advance the procedures to be followed. The EU-Canada interim appeal arbitration arrangement thus provides in disputes between Canada and the EU for either party to appeal WTO panel reports to three arbitrators, which are chosen by the WTO’s Director-General from a pool of available former Appellate Body judges. The arrangement further specifies that the arbitration be governed by the provisions of the DSU and other rules and procedures applicable to WTO Appellate Review, and that a single arbitration panel should be formed to hear appeals filed by other WTO members on the same matter. Finally, the EU-Canada appeal arbitration procedure applies only if, and so long as, the WTO Appellate Body is unable to hear appeals.

The EU and Canada’s preferred course would be to unblock the WTO Appellate Body selection process. Work on WTO reforms to this end is ongoing. Reform leading to the re-establishment of the dispute settlement system remains critical in light of the fact that the U.S. might boycott any Article 25 DSU arbitration procedure. Furthermore, buy-in to the EU-Canada approach by other WTO members is uncertain. By activating the provision in Article 25 DSU, the EU and Canada nevertheless offer a way for WTO members to work around the impasse over WTO Appellate Body nominations. The two countries’ interim appeal arbitration arrangement can serve as template for similar arrangements, including a plurilateral arbitration agreement, should the WTO’s Appellate Body’s seats become vacant later this year.

Should negotiations fail in the short term, however, prospects for the new Commission may be better under the leadership of Ursula von der Leyen. Commission President-elect von der Leyen was elected in a vote in Parliament on 16 July following her nomination by the EU Council. Her next task is to select a team of Commissioners which must be approved by Parliament and the Council. The new European Commission will take office on 1 November 2019.

Commission President-elect von der Leyen is considered a staunch “transatlantist” whose agenda includes crafting a trade agreement with the U.S. Von der Leyen’s Commission will put forward a “strong, open and fair trade” plan and aim to reinforce a “balanced and mutually beneficial trading partnership” with the U.S. Further, von der Leyen has cultivated important relationships with politicians and business leaders in the U.S., which may facilitate trade discussions. A former German Defense Minister, she champions the EU’s development of its own security and defense forces and sharing more of the burden and expenses with the U.S. over NATO. This may bode well for the Trump Administration and heighten EU influence and stature in the U.S.

Von der Leyen’s background, policies and leadership selection of the new Commission may indeed give her leverage to strike a deal with the U.S. and it appears that she will be better positioned than her predecessors to bring a deal to fruition. Undoubtedly, the divergence between EU and U.S. climate policies, her proposed regulation of U.S. tech companies operating in the EU, and conflicting strategies concerning Brexit and Iran, will create some challenges. Nevertheless, improvements in trade relations between the two blocks may be just around the corner and that can only increase the chances of a deal.

The European Commission characterises the accord as its most lucrative to date, saving businesses about 4 billion euros ($4.55 billion) in tariffs on exports, quadruple the amount achieved on its trade deal with Japan. For Mercosur, this would be its first deep trade agreement, which could spur economic growth in the region and strengthen Mercosur’s ability to compete in international markets. The Commission therefore has been quick to defend the deal, highlighting that it includes strong provisions on environmental protection and promotes sustainable development, notably by insisting that both parties maintain commitments and engagement under the Paris climate change agreement. EU Agriculture Commissioner Phil Hogan has been particularly vocal in support of the deal, underscoring that while including some trade-offs, it opens up new markets for EU agricultural producers and protects European food standards. While Irish Prime Minister Leo Varadkar has stated that he would not vote for the deal if it runs contrary to Ireland’s interests, Varadkar recently agreed to Hogan staying on in the next European Commission term, thereby positioning him to continue his strong advocacy in support of the agreement.

EU parliamentarians, several EU Member States and lobby groups, on the other hand, have decried the EU-Mercosur agreement as being detrimental for the environment, food safety and the EU’s agricultural sector. Surrounded by protesting Irish farmers, on 11 July, the Irish Parliament rejected the deal in a symbolic vote, citing as the main reason its damaging impact on Ireland’s beef industry. French and Polish Agriculture Ministers also oppose the agreement. Leading EU farming trade bodies issued a joint statement when the deal was announced, denouncing it as creating unfair competition and jeopardizing European agricultural production model through lack of parity in production standards. Earlier this week, farmers used tractors to block roads in Brussels to express their opposition.

The agreement proposes to remove duties on 91 percent of EU exports to Mercosur and liberalize 92 percent of Mercosur exports to the EU over a transition period of up to 10 years for most products. For more sensitive products not fully liberalized, partial liberalization commitments such as tariff-rate quotas will apply. The EU will gain greater market access for key manufacturing export interest products, some of which face high tariffs, such as cars and parts (35 percent), chemicals (18 percent) and machinery (14 to 20 percent), as well as important concessions for European agricultural products like wine (27 percent), dairy (28 percent) and confectionery (20 percent). Mercosur countries also will protect 355 European food products from imitation via geographical indications. Mercosur will benefit from EU’s elimination of tariffs for 82 percent of agri-food imports, including for fruits, instant coffee and orange juice, with the remaining agricultural imports given improved access via tariff-rate quotas, e.g. for poultry, beef, pig meet, ethanol, and sugar. Businesses, moreover, will enjoy greater access to services and government procurement markets in both blocs.

The backlash concerning the EU-Mercosur deal highlights the challenges for the European Commission to push through trade deals once finalized. While the Commission has exclusive competence to negotiate trade agreements on behalf of the EU, their ratification falls to other political actors which may be more reluctant to accept a trade deal unpopular among supporters. In this regard, “EU-only” agreements, which include only provisions falling under exclusive EU competence, require consent by the European Parliament. “Mixed” competence agreements, which cover areas of shared and concurrent EU and EU Member State competence, will enter into force only if also approved in line with EU Member State national ratification procedures. This could require approval by up to 40 regional and national parliaments. The Commission can propose that accord provisions falling within the EU’s exclusive competence (e.g. trade) be applied provisionally while the ratification process is pending. This requires approval by the Council and ratification by the European Parliament. The Commission also can opt to draft two independent texts with different ratification procedures, effectively dividing up the EU-only and mixed competence provisions, to facilitate entry into force of trade arrangements in bilateral agreements as it did in the recent EU trade deals with Japan and Singapore.

Until the final text of the EU-Mercosur trade deal is available, and the Commission has indicated its position on competence, it is not possible to make a definitive statement regarding the agreement’s ratification procedure or timeline. A preliminary analysis of its content, however, suggests that the agreement falls under mixed competence, as it contains elements of political cooperation which are the exclusive competence of EU Member States. Companies already can begin analysing potential impacts of the EU-Mercosur trade agreement on their businesses and consider engagement with the EU institutions to advance and protect interests. Kelley Drye has a strong track record in representing clients’ interests before the EU institutions and in providing legal and practical advice on EU procedures and trade agreements. Please contact either of the authors for more information.

In the notice initiating that investigation, USTR proposed imposing additional ad valorem duties of up to 100 percent on certain imports from the EU. USTR also provided a list of proposed tariff headings covering an estimated $21 billion in trade value that might be subject to increased duties.

In May, USTR solicited comments and held a hearing concerning the list of products to be subject to retaliatory duties and the level of duties to be applied, among other issues. A number of commenters urged USTR to consider retaliatory duties on additional products not included on the April 12 list.

Pursuant to these comments, USTR has proposed a second list of products covering an estimated trade value of $4 billion. The new list covers a variety of food items, including meats, cheeses, olives, fruits, coffee, pasta, waffles, and whiskey. It also covers certain chemicals, including ammonia, urea, as well as metals, including ferrovandium, cast iron pipes and tubes, copper and copper based alloys.

USTR is again seeking public comment concerning the new list of products, the level of ad valorem duties that should be applied, and whether duties on products covered by the new list might have an adverse effect upon U.S. stakeholders. The notice, which will be published in the Federal Register in the coming days, provides the following deadlines:

• Requests to appear at an August 5, 2019 public hearing, as well as a summary of the testimony must be submitted by July 24, 2019;
• Written comments are due on August 5, 2019;
• The public hearing will be held on August 5, 2019 at U.S. International Trade Commission in Washington, DC; and
• Post-hearing rebuttal comments are due on August 12, 2019.

In an attempt to create a majority in the UK Parliament to ratify the withdrawal agreement she negotiated with the EU, Prime Minister May intended to made certain concessions. Among them was the idea of negotiating a new and separate customs union with the EU that would take effect when the UK is no longer part of the EU internal market. The Brexit Party rejects this proposal and it may not be tenable for the next Conservative Party leader. Nevertheless, pressure to avoid a hemorrhaging hard Brexit, may yet result in further consideration of a separate customs union with the EU. It is useful then to consider what a customs union without single market access and EU membership might look like and how it could affect business.

The main arguments for an EU-UK customs union are that it guarantees reciprocal tariff- and quota-free access for goods, as well as avoids customs and rules of origin checks and costs. This would significantly reduce red tape for companies and helps to keep supply chains intact. Whether this would be possible from a position outside the EU internal market is questionable. The EU would most likely require single market membership to ensure regulatory alignment to rule out border checks between the UK and the EU.

Even if possible to negotiate a separate EU-UK customs union as a third country outside the internal market, there are potential drawbacks. First, an EU-UK post-Brexit customs union is unlikely to be as far-reaching as the internal EU customs union, which covers all goods. The EU-Turkey customs union, for instance, covers trade in industrial goods but not most agricultural products, steel and coal products, public procurement, and services. Thus, depending on the nature of any future EU-UK customs union, some goods might not be covered and would be traded between the EU and the UK on WTO terms, which involve higher tariffs. The EU and UK could negotiate separate bilateral preferential agreements in those areas not covered by a customs union, e.g. services, but this could take several years of negotiation and businesses in the meantime would lack visibility on what might be agreed at the political level. Additionally, a customs union does not guarantee frictionless trade as it is the UK’s current membership of the single market which ensures harmonization of safety and quality standards and avoids delays due to border checks. Businesses should therefore be prepared for some trade disruption even in an EU-UK customs union scenario.

Second, as the UK leaves the EU, it will no longer be able to participate as a Member State in free trade agreements (FTAs) between the EU and third countries. This is significant as the EU has in place, or is negotiating, trade agreements with several global economic heavyweights, including Japan, Canada, Singapore, MERCOSUR, Mexico, and Australia. Benefits granted through EU-third country FTAs, including duty-free access to EU partner markets, will not automatically apply to the UK. The UK would need to negotiate its own trade agreements with third countries to gain preferential access to their respective markets post-Brexit. Depending on the terms of any EU-UK customs union, states may lack incentive to strike wide-ranging individual trade deals with the UK. Businesses may accordingly need to consider disruptions to their market access and supply chains even if a post-Brexit EU-UK customs union is agreed.

Third, under any EU-UK customs union, the UK would be required to apply the bloc’s external tariffs and, so, would not be able to formulate independent trade policy. This is significant because goods from EU trading partners would be able to flow freely into the UK via an EU-UK customs union after entering the EU at reduced or zero tariff rates under EU trade deals. Reciprocal rights would not automatically apply for UK exports to the same countries, however, putting UK businesses at a disadvantage in relation to EU and EU partner country companies. If the UK also has little to offer potential trade partners on the goods side in terms of trade concessions, bilateral UK-third country trade deals may be limited in scope and the UK likely would have reduced bargaining power in negotiations even if it is an attractive market, i.e. with a highly developed and regulated economy. Additionally, an EU-UK customs union for the UK likely would involve significant regulatory alignment with the EU without direct participation in its decision-making mechanisms on trade policy, which again could undermine the UK’s bargaining power in any future trade negotiations. It nevertheless could be argued that the UK remains a prized market and that it has sufficient economic clout to negotiate lucrative trade deals with third countries e.g. on services, regulatory barriers to trade in goods, public procurement, data, and intellectual property.

Should the UK decide that it is in its interest to have a separate custom union with the EU, this would be done as part of future negotiations with the EU. The EU has been crystal clear that the withdrawal agreement already negotiated with May’s Government is not open for re-consideration. Whether or not it wishes to pursue a UK-EU customs union in future, the UK will crash out of the EU on WTO terms on 31 October 2019 unless the UK Parliament ratifies the withdrawal agreement or the EU grants it more time to do so. At this stage, each of these contingencies could not be more uncertain.

The U.S. and EU retaliatory measures follow the long running dispute over the respective subsidies to Boeing and Airbus. Both parties are awaiting WTO decisions on the dispute settlement proceedings before the measures will go into effect and will determine the permissible level of damages. The U.S. valuation decision is expected this summer and the EU decision by May 2020. The U.S. list is expected to cover $11 billion worth of goods.

These recent retaliatory tariffs emerge amid growing trade tensions between the two blocks as they initiate negotiations for a transatlantic trade agreement. However, EU Trade Commissioner Cecilia Malmstrom stated that “I still believe that dialogue is what should prevail between important partners such as the EU and the US….”

On April 15, 2019, the EU agreed to launch trade negotiations with the U.S. on the condition that the U.S. does not impose new tariffs on EU good and that the U.S. agrees to remove existing steel and aluminum tariffs. The EU has adopted negotiating mandates for the talks, but agricultural products have been excluded. The EU, which considers this issue a red line, stated that “agriculture will certainly not be part of these negotiations.”

That said, with the exception of France (and an abstention from Belgium), the EU Member States expressed their support for a trade agreement with the U.S. Germany, particularly, champions a trade deal, due to its substantial car and car part exports industry. France, on the other hand, opposes negotiations with the U.S. in light of President Donald Trump’s announcement to withdraw the U.S. from the Paris Climate Agreement.

On the U.S. side, Senate Finance Committee Chairman Chuck Grassley (R-Iowa) stated that the U.S. cannot proceed unless agriculture is part of the talks. Clearly, the situation is fluid and is creating uncertainty for importers of EU products into the U.S. and exporters of U.S. products into the EU.

The Trump administration has not yet announced the additional duty rates. This latest trade action, announced on April 8, 2019, is pursuant to Section 301 of the Trade Act of 1974, the same provision used in 2018 for the 10-25% additional tariffs on $250 billion of Chinese products imported into the U.S.

The administration will be holding a public hearing on the proposed list of products at the International Trade Commission in Washington, DC. on May 15, 2019. Requests to appear must be submitted by May 6, 2019. Written comments may also be submitted by May 28, 2019.

The trade dispute dates back to a 2004 U.S. challenge in the World Trade Organization (WTO) to EU subsidies of Airbus which had “adverse effects” on the U.S. According to the USTR, the final list of products will be announced and go into effect this summer once the WTO issues its final findings on the dispute settlement proceedings. According to the USTR, once in place, the tariffs will be applied until the EU removes the Airbus subsidies.

Agricultural would almost certainly be included in a comprehensive trade deal, as increased access to UK markets will be among the top U.S. objectives. Key to the success of future negotiations will be agreement on food standards. The EU, and thus the UK (for the time being), has different – and sometimes stricter – rules on food production and consumption than the U.S. and bans imports that do not conform to EU rules. Reportedly, the U.S. wants to create a joint agricultural science committee to decide on standards for goods traded between the UK and the U.S. as part of an agreement.

At the same time confidence-building was taking place in Washington, however, a political row developed back in the UK over the safety of potential food imports from the U.S. under a new trade agreement. Civil society organizations are raising concerns about food safety for UK citizens and the increased difficulty of exporting UK products to the EU if lower standards were to be adopted by the UK. UK producers also are balking at the prospect of competing with products they claim are processed or developed using unsafe methods. Lower standards, they argue, will lead to lower prices and increased competition, both at the expense of UK consumer safety. While so-called “chlorinated chicken” and hormone-treated beef are the headline-grabbing issues, different U.S. and EU rules on a range of issues including animal transport, minimum space requirements for farm livestock, food labeling, genetically modified foods, and the use of pesticides are likely to challenge negotiators on both sides of the Atlantic. Others see an opportunity for the UK to align its standards with science-based – as opposed to precautionary – principles, in the hopes of avoiding the problems that were faced during negotiations on standards in the now sidelined U.S.-EU Transatlantic Trade and Investment Partnership talks.

Trade Secretary Fox dismissed the outcry on chicken and beef as an obsession of the media and a mere detail in what would be lengthy potential trade negotiations. On the other hand, UK Environment Secretary Michael Gove responded that the UK would not enter into a trade agreement with the U.S. if it means lowering the UK’s environmental standards. As with many Brexit-related issues, how far the UK can and will go in a prospective free trade deal with the U.S. and other potential trading partners could depend on the nature of the future UK-EU relationship. Despite clear EU resistance, the UK will attempt to force a discussion of components of that future relationship as early as the end of August when Brexit negotiations resume in Brussels.

Noise from the UK suggests a strong belief that the UK can leave the EU but maintain trading privileges, including tariff-free and frictionless trade. Not so, says EU Chief Brexit Negotiator Michel Barnier. Barnier has made clear that the UK cannot have its desired legal autonomy without the free movement of EU citizens and the jurisdiction of the European Court of Justice and at the same time continue to enjoy access to the EU market and customs union privileges. Without access to the market and customs union, the UK faces tariffs and customs formalities that mean time and money for UK businesses and exporters. With access to the market and customs privileges, the UK cannot negotiate trade deals with other countries.

Only so many options exist for the future relationship of the UK with the EU. The so-called “Norway” option would mean continuing access to the EU market but without any say by the UK in the applicable rules and would entail customs procedures. The alternative “Turkey” option would mean a customs agreement but with controls to ensure compliance of goods and services with EU rules. In both cases, the UK would get less than it enjoys today and would not achieve its desired regulatory autonomy; moreover, the UK would remain blocked from negotiating free trade arrangements with other countries.

If initial negotiations on the rights of EU citizens, the UK’s financial obligations, and the complex Irish border issue go well, the EU and UK could be discussing the terms of their future relationship as early as the fall of this year. That may be a big “if”.