The key findings of the report are as follows: (1) notwithstanding some noticeable impact of the USMCA on the U.S. economy and U.S. competitiveness, it is too early to understand the full extent of the effect of the agreement; (2) the automotive ROOs appear to have increased costs as well as the U.S. share of USMCA production; (3) there is a sharp increase in investment in electric vehicles (EVs) and the industry shift to EV production will likely require changes to, or the continued monitoring of, the USMCA automotive ROOs to ensure they remain relevant; and (4) additional technological changes may also impact the relevancy of the USMCA automotive ROOs.

Background

The USMCA entered into force on July 1, 2020, and replaced the North American Free Trade Agreement (NAFTA). Over the past three years, the agreement has presented some opportunities and challenges for the United States and its main trading partners. Some of the biggest challenges pertain to the treatment of automotive goods under the agreement.

Under the USMCA, an originating good is one that meets the rules of origin set forth in General Note 11 of the Harmonized Tariff Schedule of the United States (HTSUS) and all other requirements of the agreement. An additional set of rules applies to automotive goods (specifically, passenger motor vehicles, light and heavy trucks, and certain automotive parts). Specifically, automotive goods must meet four additional ROOs: (1) regional value content (RVC) requirements; (2) North American steel and aluminum procurement requirements; (3) labor value content requirements; and (4) core parts requirements.

Pursuant to section 202A(g)(2) of the USMCA Implementation Act, the ITC is required to provide five biennial reports to the President, the House Committee on Ways and Means, and the Senate Committee on Finance, regarding (1) the economic impact of the automotive ROOs; (2) the operation of the automotive ROOs and their effects on the competitiveness of the United States; (3) whether the automotive ROOs are relevant in light of technological changes in the United States; and (4) any other matters the ITC considers relevant to the economic impact of the rules.

This is the first of five biennial reports on the economic impact of the USMCA automotive ROOs. The next report, due in 2025, has the same reporting requirements but will present updated data and information about the industries through December 31, 2024. Each subsequent report will report on the same topics and two new years of data and information.

ITC Findings

Economic Impact of the USMCA Automotive ROOs and Their Effects on U.S. Competitiveness

While the full impact of the USMCA will not be apparent until the agreement is fully implemented, in 2027 or later, the ITC has found that the economy-wide effects of the ROOs were marginal in the first two and a half years after the USMCA entered into force. According to the report, vehicle manufacturers and suppliers explain that the ROOs have increased costs at multiple stages of the supply chain, but that they have also increased the U.S. share of USMCA vehicle and parts production. The COVID-19 pandemic and global supply chain disruptions had a major impact on U.S. automotive production and trade. Consequently, there is no clear picture of the effect of the USMCA’s entry into force on U.S. competitiveness.

One potential indication of increased U.S. competitiveness is that the United States’ share of USMCA light vehicle production, as well as light vehicle and parts exports as a share of global exports, increased slightly after the agreement’s entry into force. U.S. light vehicle production as a share of USMCA production increased from 64.8 percent in 2018 to 68.1 percent in 2022. U.S. light vehicle exports as a share of global light vehicle exports increased from 6.6 percent in 2018 to 7.7 percent in 2022. U.S. automotive parts exports as a share of global parts exports also increased from 8.1 percent of global exports in 2018 to 8.4 percent in 2022.

Employment and investment data also indicate some changes in competitiveness. Investments in Canada and the United States have reportedly increased sharply, with most of the new investments going into EVs and EV batteries. The surge in investment in EVs is thought be in response to an increase in consumer demand, therefore, the extent to which these changes can be attributed to the ROOs remains unclear.

Technological Changes Impacting the Relevance of the USMCA Automotive ROOs

Because the agreement is in its early years of implementation, the overall impact of any technological changes is limited. According to the report, two recent technological changes in the U.S. automotive industry have created divergences in the tariff treatment of similar goods in the USMCA automotive ROOs. The first change pertains to the growth in production of electric and hybrid pickup trucks. Currently, the USMCA automotive ROOs do not categorize EV and hybrid pickup trucks as light trucks. Unlike other trucks, EV and hybrid pickup trucks are classified under HTSUS subheading 8704.90, which covers all trucks not classified elsewhere in heading 8704. Vehicles under 8704.90 are categorized as “heavy trucks” under the USMCA automotive ROOs. This difference in classification means that a different set of product-specific ROOs applies to EV and hybrid trucks. Until recently, sales of EV and hybrid trucks were really low or nonexistent. However, the increasing demand for EV and hybrid trucks means that the disparate treatment of these vehicles will have important practical implications. The report addresses several other instances of classification divergence that do not result in different tariff treatment for similar goods to demonstrate where Harmonized System (HS) classifications have changed since the USMCA entered into force.

The second technological change involves a new production process for aluminum vehicle bodies. Currently, the USMCA automotive ROOs do not allow for cast aluminum bodies to qualify as originating via the same product-specific ROOs as stamped aluminum bodies. The difference in treatment between stamped and cast aluminum body parts is due to the tariff shift rules for aluminum components. Under the USMCA, non-originating aluminum may be considered originating if the aluminum is subjected to a manufacturing process in a USMCA country that results in certain tariff shifts. For example, an aluminum product, such as an ingot, may be deemed originating if it is subjected to a manufacturing process such that it transforms into another intermediary aluminum product (classified under a different HS heading from the original product). However, the process of casting aluminum products, unlike the stamping process, does not produce an intermediary aluminum product. This allows for stamped body parts to qualify as originating more easily than cast body parts.

In addition to tariff classifications, the report addresses input from various stakeholders on proposed changes to the automotive ROOs. According to the report, some stakeholders believe that the industry-wide shift to EVs and hybrid vehicles merits changes to, or the continued monitoring of, the USMCA automotive ROOs to ensure that they remain relevant. Some stakeholders have proposed additions to the ROOs parts lists that they believe would better account for the increasing share of EVs in the U.S. market. The International Union, United Automobile, and Aerospace and Agricultural Implement Workers of America (UAW) have proposed adding EV components and EV battery components to the core parts list of the USMCA automotive ROOs. The list proposed by the UAW includes automotive-grade semiconductors, electric motors and electric drivetrains, non-lithium-ion batteries, charge ports and charging stations, various battery components (cathodes, anodes, separators, casings), and various critical minerals (cobalt, nickel, manganese, graphite, silicone). Other stakeholders stated that EV technologies are already addressed by the ROOs and that because the technology is still evolving and industry investments and changes are ongoing, any proposed changes are premature.

Finally, the report addresses additional ongoing technological changes in the U.S. automotive industry that may impact the relevancy of the USMCA automotive ROOs. One such change is with respect to the increasing value of nontraditional automotive inputs relative to the value of the final vehicle and how this might impact the RVC calculations for the larger vehicle components being produced with a growing share of nontraditional parts. The value of nontraditional automotive inputs (i.e., semiconductors and sensors) is rising both in an absolute sense as well as relative to traditional automotive inputs. Some in the automotive industry believe the rising value of nontraditional automotive inputs merits changes to the ROOs because electronic components typically originate from Asia. One industry proposal addressing this issue involves adding certain electronic components, such as automotive-grade semiconductors and sensors, to the USMCA automotive core parts list to incentivize USMCA-originating electronic supply chains. Core parts must satisfy the higher 75 percent originating content requirement to qualify for preferential treatment.

Another technological change relates to the lack of recycling-specific automotive ROOs. According to the report, the “current treatment of recycled battery materials under the USMCA automotive ROOs may pose challenges to emerging supply chains because of a lack of recycling-specific provisions in the ROOs.” Currently, for example, the determination of whether a battery made using recycled materials qualifies as originating under the USMCA relies on the same ROOs applied to the original battery, i.e., whether the recycled cells were created within the USMCA region.

Tags: ITC, Rules of Origin, USMCA

The Inflation Reduction Act of 2022 (“IRA”) overhauled a tax credit for purchasing EVs and introduced certain sourcing requirements for EV components. The goal of the IRA is to encourage companies to develop new supply chains for critical minerals such as lithium, graphite, cobalt, and nickel outside of China. Currently, the majority of lithium is produced in China, Australia, and Chile. China is also the world’s largest producer of graphite.

Under the IRA, consumers can get a tax credit of up to $7,500 for qualifying vehicles. In order to qualify, a certain percentage of the EV battery needs to be built in North America, and much of the critical minerals in a vehicle’s battery must be sourced from the United States or a country that has a “free trade agreement” with the United States.

Because the United States does not have traditional free trade agreements with many of its allies, including Japan, the European Union, and the United Kingdom, the Biden Administration is pursuing limited trade deals such as the one signed with Japan. Among other things, the United States and Japan have agreed not to levy export duties on critical minerals and to coordinate labor standards in producing minerals. The United States is currently negotiating similar agreements with the European Union and the United Kingdom.

Efforts to reach these deals with U.S. allies has raised the question of whether such narrow agreements will meet the definition of “free trade agreement” under the IRA. While the provision of the IRA that requires vehicles to be assembled in North America went into effect immediately when the IRA was signed in August 2022, the battery sourcing provisions were left to be decided by the Treasury Department. On March 31, 2023,Treasury issued long-awaited proposed guidance on the critical mineral sourcing requirements for the EV tax credit under the IRA. According to the guidance, to meet the critical mineral requirement, the applicable percentage of the value of the critical minerals contained in the battery must be extracted or processed in the United States or with a country with which the United States has a “free trade agreement,” or be recycled in North America. The qualifying critical minerals sourcing requirement will increase from 40 percent in 2023 to 80 percent by 2027.

Importantly, the guidance includes a set of principles to identify countries with which the United States has a free trade agreement in place, since the term is not defined in statute. According to the Treasury Department’s proposed definition, “free trade agreement” as used in the IRA could include newly negotiated limited agreements, such as the deal reached with Japan, to ensure that minerals from these trading partners will meet the sourcing requirement for the tax credit. Treasury’s guidance also specifically lists the following countries as already having a free trade agreement with the United States: Australia, Bahrain, Canada, Chile, Colombia, Costa Rica, Dominican Republic, El Salvador, Guatemala, Honduras, Israel, Jordan, Korea, Mexico, Morocco, Nicaragua, Oman, Panama, Peru, and Singapore.

The guidance also sets forth applicable percentages for the value of the battery components that must be manufactured or assembled in North America for the vehicle to qualify for tax credits under the IRA, ranging from 50 percent in 2023 to 100 percent by 2029. The four-step process for determining the value of the battery components includes: (1) identifying the batter components that are manufactured or assembled in North America; (2) determining the incremental value of each battery component, including North American battery components; (3) determining the total incremental value of battery components; and (4) calculating the qualifying battery component content by dividing the total incremental value of North American battery components by the total incremental value of all battery components.

Further, beginning in 2024, an eligible vehicle may not contain battery components that are manufactured by a foreign entity of concern, and beginning in 2025, an eligible vehicle may not contain any critical minerals that were extracted, processed, or recycled by a foreign entity of concern. Treasury intends toprovide further guidance on this particular provision.

The guidance will be published in the Federal Register on April 17, 2023, and vehicles placed in service on or after April 18, 2023, will be subject to the critical mineral and battery component requirements in the rule. The Treasury Department and the Internal Revenue Service (“IRS”) will consider public comments, due by June 16, 2023, before issuing a final rule.

• Expand domestic preference procurement policies applicable to federal financial assistance programs for public works infrastructure;
• Increase the domestic component content requirements of products and construction materials sold to the Federal Government under the Buy American Act; and
• Provide transparency into governmental contracting decisions related to domestic sourcing.

BACKGROUND

The IIJA contains approximately $550 billion in new infrastructure spending over current spending levels and covers roads and bridges, public transit, rail, safety and research programs that are typically included in five-year surface transportation reauthorizations. Additionally, the five-year bill makes major investments in drinking and wastewater infrastructure; ports and airports; broadband; grid security; and clean energy programs (e.g., electric vehicle infrastructure and carbon capture). The bill also includes major domestic procurement ("Buy America") requirements for infrastructure materials.

“BUILD AMERICA, BUY AMERICA"

In summary, the BABA would bar the award of federal financial assistance for infrastructure unless all of the iron, steel and manufactured products and construction materials used in the project are produced in the United States.[1]

Waivers traditionally available under existing Buy America laws are authorized under the BABA where (1) applying the Buy America requirement would be inconsistent with the public interest; (2) where the iron, steel, manufactured products and construction material is not produced in the United States in sufficient and reasonably available quantities or of a satisfactory quality; and (3) where inclusion of the domestic products or construction materials will increase the cost of the overall project by more than 25 percent. In addition, Congress directs that the BABA be applied in a manner consistent with U.S. trade agreement obligations related to government procurement.

Robust Origin Standards

The BABA imposes robust origin standards for the products and construction materials acquired for federally-assisted infrastructure projects. The bill defines “produced in the United States” to mean, “in the case of iron or steel products, that all manufacturing processes, from the initial melting stage through the application of coatings, occurred in the United States.” Similar origin standards for iron and steel are currently imposed by regulation and agency guidance to federal-aid subject to existing Buy America laws, including those applicable to certain federal-aid transportation infrastructure programs as well as federal-aid clean and drinking water infrastructure programs.

The BABA will impose Buy America requirements on nonferrous construction materials – a break in precedent from existing Buy America laws applicable only to iron and steel. It identifies common construction materials as nonferrous metals, plastic and polymer-based products, glass (including optic fiber), lumber, and drywall. The BABA directs the imposition of similarly significant “all manufacturing processes” origin standards for non-ferrous construction materials. The OMB is required by the BABA to issue standards that define “all manufacturing processes” for construction materials.

Relative to the origin standard for manufactured products, the BABA is more explicit. Manufactured products will be deemed produced in the United States if: (1) the product was manufactured in the United States; and (2) the cost of the product’s components mined, produced or manufactured in the United States exceeds 55 percent of the total cost of the product’s components. This origin standard is consistent with the recently revised origin standard for domestic end products and construction materials under the federal BAA, but not reflective of changes to the BAA’s origin standard imposed by another section of the IIJA.

Rapid Timeline for Implementation

The BABA imposes a rapid timeline for implementation.

Upon enactment: The Office of Management and Budget (OMB) is directed to issue guidance to Federal agencies to assist in identifying programs that have “deficient” Buy America coverage and to issue guidance to assist Federal agencies in applying new domestic content preferences.

The BABA deems as deficient those programs that are not currently subject to Buy America requirements at all, are subject to limited Buy America requirements, the scope of which does not include iron, steel, manufactured products and construction materials, or are subject to Buy America requirements that have been waived by generally-applicable and longstanding waivers. For example the Buy America requirement imposed by 23 U.S.C. § 313 is limited in application by the Agency’s implementation policy to iron and steel only. The Federal Highway Administration has estimated that the ferrous inputs account for less than 5 percent of the cost of a federally-aided highway project.

Within 60 Days of Enactment: Federal agencies will be required to submit to the OMB and appropriate congressional committees a report that identifies each Federal financial assistance program for infrastructure administered by the agency, identify the Buy America-type requirements applied thereto, if any, and assess the applicability of any existing domestic content procurement preference, including its purpose, scope, applicability and any exceptions or waivers of the requirement. The agency report must identify the deficient programs not subject to domestic procurement preferences required by the BABA.

Within 180 Days of Enactment: Federal agencies must begin applying Buy America preferences meeting the scope of products required by the BABA. By this time, OMB must issue standards satisfying the “all manufacturing processes” origin standard required by the BABA for “construction materials.”

“MAKE IT IN AMERICA”

Specifically, the “Make it in America” section of the BABA provides statutory authority for the establishment of the new Made in America Office within the OMB. It also includes language aimed at reducing the use of waivers and strengthened application of the BAA, which as noted above, applies to direct procurement by Federal agencies.

The BABA directs the Made in America Office to promulgate guidance to Federal agencies aimed at standardizing and simplifying how agencies comply with the BAA. The guidance is to include the criteria agencies utilize to grant “public interest” and “non-availability” waivers of the BAA, providing some framework to what has traditionally been very murky process. In the context of non-availability waivers the BABA identifies appropriate considerations contracting officers should base waiver determinations upon, including anticipated project delays as well as lack of substitutable articles, materials and supplies.

Similarly, the BABA directs agencies to avoid issuing public interest waivers that would result in decreased employment in the United States both among the entities that produce the product or construction material or that would result in a contract award that would decrease domestic employment. It will also require for the first time that Federal agencies consider whether the cost advantage of a foreign product is the result of unfair trade practices such as dumping or subsidization.

Notably, the “Make it in America” section of the BABA includes a sense of Congress that BAA’s domestic component content standard should be amended by the Federal Acquisition Regulatory Council (FAR Council) upward from 55 percent currently to 75 percent. This sense of Congress is consistent with both the directives of EO 14005 and proposed changes to the Federal Acquisition Regulations (FAR) included in a notice of proposed rulemaking (NPRM) issued by the FAR Council in July of 2021. The July NPRM proposed graduated increases to the BAA’s component content standard from 55 percent currently to 75% over five years with a fallback mechanism at prior lower percentage standards in the event of no qualifying offers meeting the higher component content standards. The sense of Congress in the BABA also endorsed a fallback mechanism in the event of no qualifying offers. The BABA directs the FAR Council to amend the Part 25 of the FAR to provide a definition for an “end product manufactured in the United States,” which the FAR Council is poised to do with the current rulemaking.

TRADE AGREEMENT OBLIGATIONS PRESERVED; DIRECTED TO BE REVIEWED

Notably, the IIJA directs an assessment of the impacts of all United States free trade agreements, the World Trade Organization’s Government Procurement Agreement and federal permitting processes on the operation of Buy American laws. The required report is to be made public. While the assessment does not direct a change in policy, it could spur the Administration to reconsider how it interprets limitations on the scope of parties’ obligations embodied in these agreement texts as well as its construction and reliance on delineated reservations to its market access obligations under these agreements.

BUYAMERICA.GOV

Notably, the Director of the Made in America Office at OMB issued late last month a memorandum for senior federal procurement officials that provides specific guidance to Federal executive branch agencies on the use of a digital waiver portal to submit proposed waivers to the Made in America Office and posted on a new dedicated website MadeInAmerica.gov.

CONSIDERATIONS FOR MANUFACTURERS

Manufacturers of nonferrous products used in public works infrastructure projects are likely unfamiliar with the Buy America requirements applicable to certain federal-aid infrastructure programs. Federal agencies subject to existing Buy America laws applicable to iron and steel have, over the last nearly 40 years, adopted consistent standards construing “all manufacturing processes” that require the initial melting stage of steelmaking to occur in the United States. Manufacturers of nonferrous construction materials should take note of this precedent and consider what a comparably inclusive origin standard would look like for their industry sector.

Manufacturers should also assess how the BABA’s waiver transparency requirements and supplier scouting programs may be leveraged to identify gaps in domestic sourcing and inform capital investment planning.

[1] The BABA defines infrastructure as: roads, highways, and bridges; public transportation; dams, ports, harbors, and other maritime facilities; intercity passenger and freight railroads; freight and intermodal facilities; airports; water systems, including drinking water and wastewater systems; electrical transmission facilities and systems; utilities; broadband infrastructure; and buildings and real property.

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

The United States will restore India’s benefits under the Generalized System of Preferences (“GSP”) as part of the deal. The GSP program eliminates duties on a range of products for certain developing countries designated by the United States. President Trump removed India from the program in June 2019, citing various trade barriers and market access issues faced by U.S. companies in India. India’s benefits under the program are valued at $6.4 billion.

Also as part of the deal, India will (1) remove price controls on medical devices, including heart stents and knee implants, (2) improve market access for agriculture and dairy products, and (3) add intellectual property protections. The agricultural products benefiting from greater market access include almonds, cherries, pork, hay, and dried grains. The benefits accruing to the United States from these commitments will match the $6.4 billion benefit India would gain under the GSP program.

Both sides hope to incorporate tariff reductions, which could include reductions for duties on U.S. information and communication technology goods and Harley-Davidson motorcycles. It is unclear at this point if U.S. duties on Indian steel and aluminum under Section 232 will be affected.

Although this pact is relatively limited in scope, it represents the first step towards a more comprehensive trade agreement between the two nations.

The Agreement

The agreement has eight chapters, including chapters on (1) intellectual property, (2) technology transfer, (3) agriculture, (4) financial services, (5) macroeconomic policies and exchange rate matters and transparency, (6) expanding trade, and (7) bilateral evaluation and dispute resolution.

As part of the agreement, the United States has already postponed a 15 percent tariff that was scheduled to be imposed December 15th on $160 billion of Chinese imports. The United States has also agreed to reduce tariffs on an additional $120 billion of Chinese imports from 15 percent to 7.5 percent. The reduction is set to take place February 14, 2020, according to a draft Federal Register notice from the United States Trade Representative. The agreement commits China to increase purchases of U.S. goods and services by $200 billion over 2017 levels. This includes $77 billion in manufactured goods, $32 billion in agricultural goods, $52 billion in energy, and $37 billion in services over the next two years. All purchases will be at market prices, and market conditions will dictate the timing of purchases.

The intellectual property chapter covers trade secrets, pharmaceuticals, patents, trademarks, geographical indications, and the enforcement of pirated and counterfeit goods. Specifically, it expands the scope of trade secret misappropriation liability, shifts the burden of proof requirements in civil cases, and adds criminal penalties for willful misappropriation. It also creates a mechanism to resolve pharmaceutical patent disputes early in the process and extends the effective patent term of patents experiencing delays in the Chinese approval process. The agreement requires that China increase its civil and criminal penalties to levels sufficient to deter intellectual property violations.

The technology transfer chapter covers various practices the United States determined to be unreasonable or discriminatory. China has agreed to end the practice of forcing foreign companies to transfer their technologies to Chinese firms as a condition for obtaining market access and administrative approvals. The chapter requires China to enforce its technology transfer laws in an impartial, fair, transparent, and non-discriminatory manner. China must publish the rules of procedure, provide parties adequate notice, allow parties to review evidence and respond, and allow parties to have legal counsel for the proceedings.

The agriculture chapter covers structural barriers to trade separate from China’s increased purchase obligations. The provisions should increase U.S. food, agriculture, and seafood exports and market access. The provisions aim to increase American farm and fishery income and promote job growth nationwide. The deal removes barriers for U.S. beef, pork, poultry, processed meat, rice, seafood, and pet food, among others.

The financial services chapter allows U.S. financial service providers to compete fairly and expand in the Chinese market. The chapter covers a broad range of financial services including banking, insurance, securities, and credit rating services, easing restrictions U.S. firms currently face in China. The provisions of this chapter also require China to eliminate foreign equity limits for securities companies, fund management companies, and U.S. life, health, and pension insurance providers.

The macroeconomic policies and exchange rate matters and transparency (currency) chapter requires both parties to refrain from competitive devaluations and targeting exchange rates for competitive reasons. The chapter also reaffirms the parties’ commitments to disclose relevant data publicly and refers conflicts on these issues to the dispute resolution system. The United States removed China’s currency manipulator designation earlier this week.

The agreement also includes a chapter on dispute resolution. Enforcement has always been problematic in agreements between the United States and China. The chapter creates a Trade Framework Group to discuss high-level implementation issues and a Bilateral Evaluation and Dispute Resolution Office in each country to deal with low-level implementation issues and settle disputes. The dispute resolution process begins with the complaining party launching an appeal. Designated officials from the opposing party’s Bilateral Evaluation and Dispute Resolution Office then assess the appeal. If those officials cannot resolve the issue, the appeal escalates to the Deputy United States Trade Representative and the designated Vice Minister, and then to the United States Trade Representative and the designated Chinese Vice Premier. If they cannot resolve the dispute, the complaining party can suspend obligations under the agreement or adopt a proportionate remedial measure. If the suspension or remedial measure was made in good faith, retaliation is not allowed. The parties may withdraw from the agreement if they believe the action is taken in bad faith.

Next Steps

While the agreement is a step in the right direction, the trade war is far from over. According to President Trump, the “phase one” agreement only covers about half of the relevant issues both sides wish to see addressed. Many of the “phase two” issues are more complex and controversial. These issues include Chinese government subsidies, intellectual property theft, state control of the Chinese market, and discrimination against foreign firms. In the meantime, U.S. tariffs will remain in place on approximately $370 billion of Chinese goods. Both sides will be extremely reluctant to give ground on many of these issues without gaining significant benefits.

“Phase two” negotiations are set to begin shortly now that “phase one” has concluded. The President noted, however, that the United States and China would not complete the agreement before the upcoming November election.

The success of “phase two” will depend in part on how the United States and China implement the “phase one” agreement. If both countries keep up their end of the bargain and the enforcement provisions effectively resolve any disputes, negotiations will likely continue in earnest. If the parties ignore their commitments and the dispute resolution process proves toothless, the chances of concluding a comprehensive “phase two” agreement will diminish significantly.

There are also concerns that some of China’s commitments are infeasible. The commitment to purchase an additional $32 billion in agricultural products, for example, represents a massive increase over the highest level of trade between the United States and China. China’s ability to purchase such a large amount of agricultural products is uncertain. To do so, China would likely have to divert imports from current sources, distorting trade worldwide. The language of the agreement seems to contemplate this. It notes that Chinese purchases are subject to market conditions and WTO rules. It also notes that the United States must ensure that it will make available enough goods and services to allow China to meet its purchase obligations. This suggests that parties may view these amounts as ambitious targets, not ironclad purchase commitments.

The other purchase requirements also raise questions about implementation including questions such as how much, to whom and when? Many details need to be addressed before progress on “phase two” can be expected.

With the “phase one” agreement complete, tensions should ease for now. This first step towards ending the trade war is an important one, but implementation will be the true judge of its success.

As part of the agreement, the United States indefinitely postponed a 15 percent tariff that was scheduled to be imposed December 15^th on $160 billion of Chinese imports. The United States also expects to reduce tariffs on an additional $120 billion of Chinese imports from 15 percent to 7.5 percent. Over the next two years, China has agreed to increase purchases of U.S. goods and services by $200 billion over 2017 levels, including $40 to $50 billion annually in agricultural products.

Additionally, the deal will cover intellectual property, technology transfer, agriculture (structural barriers), financial services, and dispute resolution, according to the Fact Sheet released by USTR. The intellectual property chapter will address longstanding issues such as trade secrets and pharmaceutical intellectual property protections. The financial services chapter should allow U.S. financial service firms to compete more effectively in the Chinese market.

The technology transfer chapter will include “binding and enforceable obligations,” with China agreeing to end its controversial practice of forcing foreign companies to transfer their technologies to Chinese firms as a condition for obtaining market access. China has also commit to “provide transparency, fairness, and due process in administrative proceedings and to have technology transfer and licensing take place on market terms.” The technology transfer chapter is notable because earlier reports indicated that it would not be included in the deal.

The agreement also contains a dispute resolution chapter. Enforceability is a longstanding issue in previous agreements between the United States and China. This chapter will provide both sides with a mechanism to ensure the implementation of and compliance with the agreement. It will also allow both sides to take “proportionate responsive actions” when deemed appropriate. While specific procedures have not been released, the inclusion of a dispute resolution chapter will go a long way towards quelling the fears of some that China will not follow through on its obligations.

With the revisions in these areas included in the updated USMCA, Democrats have expressed support for the agreement. Indications are that it will be put up for a vote in Congress in the near future. USMCA will replace the North American Free Trade Agreement (“NAFTA”) that was implemented by the three governments in 1994.

Check back here for updates on USMCA, including an analysis of the revised USMCA once the text is released.

This news follows comments made last week by Chinese Ministry of Commerce spokesperson Gao Feng, who told the press that China and the United States have agreed to reduce tariffs over time if they are able to finalize a “phase one” agreement. “In the past two weeks, the lead negotiators from both sides have had serious and constructive discussions on resolving various core concerns appropriately. Both sides have agreed to cancel additional tariffs in different phases, as both sides make progress in their negotiations,” said Feng, according to Reuters.

The two countries would reduce tariffs over time, although the extent of the reductions will depend on what is included in the ultimate agreement. The United States could potentially cancel the tariffs scheduled to be imposed on December 15 as part of the agreement. Given the Administration’s willingness to use tariffs as leverage to achieve its broader trade goals, which tariffs would be reduced and by how much is largely uncertain. President Trump also noted in his remarks that he would substantially increase tariffs if the two countries were unable to reach a deal.

Both comments suggest that China and the United States are still in the process of “papering” the handshake deal reached last month between President Trump and President Xi Jinping. The agreement, originally blogged here, centers on a commitment by China to purchase up to $50 billion of U.S. agricultural products in return for the suspension of planned U.S. tariff increases on $250 billion in Chinese goods.

Both sides had hoped to finalize the agreement at the Asia-Pacific Economic Cooperation summit in Chile this month, but Chile called off the event due to ongoing protests in the country. A new venue has proven elusive. President Trump suggested Iowa, but China is unlikely to agree to a location in the heartland of the United States. An administration official said that London is a possibility, after the NATO summit in December.

The deal is agreed to in principle, but subject to “getting everything papered.” Other aspects of the deal include technology transfer, financial services, and intellectual property. Without any documentation or draft text it remains unclear what exactly these additional provision will entail.

The agreement has had the effect of reducing tensions between the two countries. With President Trump facing an election in 2020 and China under scrutiny for its slowing economy, traction on the trade front, limited as it may be, may be seen as politically necessary by President Trump and Chinese President Xi Jinping. That said, there are virtually no details available on what is in the agreement, and how or whether the Chinese would implement any changes in their domestic law. Indeed, it was the unwillingness of hard line officials in China to commit to certain changes in law that derailed a draft agreement a few months ago. Skeptics on the U.S. side are wondering as well whether the written agreement will be much more than a commitment to purchase more farm goods, leaving the hardest issues to be resolved at a later point.

Absent from the agreement is any change regarding the Trump Administration’s treatment of Huawei, which USTR Lighthizer stated was a “separate process,” or a decision to rescind the tariff increases currently scheduled for mid-December. Treasury Secretary Steven Mnuchin said Monday that he expects the tariffs to be imposed if there is no agreement at that point.

President Trump estimates this “phase one” agreement will be papered in the next four or five weeks.

The two agreements signed Monday formalized earlier agreements between President Trump and Japanese Prime Minster Abe, which were reached a few weeks ago. Initialdetails of the agreements were covered in an earlier post on this blog in late September. The text of the agreements, as well as side letters on interactive computer services, alcoholic beverages, beef, rice, safeguards, skimmed milk powder, and whey, were also released Monday.

The Digital Trade Agreement includes many provisions similar to those included in the USMCA Digital Trade Chapter. Provisions eliminating discriminatory treatment of digital products, preventing future customs duties on electronic transmissions, validating the use of electronic signatures, and providing protections to online consumers and personal information appear in both the Digital Trade Agreement and the USMCA.

For information and communication technology (ICT) goods that use cryptography, neither party shall require a manufactureror supplier of a good, as a condition for sale, distribution, import, or use of an ICT good, to “transfer or provide access to any proprietary information relating to cryptography, including by disclosing a particular technology or production process.” This language is also found in Annex 12-C of the USMCA.

The agreements signal a growing economic partnership between the United States and Japan, and the two countries have committed to continue negotiating in the coming months with the hopes of concluding a comprehensive agreement.

Digital trade has been another area of focus in the U.S.-Japan trade negotiations. In this initial deal, the two countries have agreed not to impose customs duties on digital products transmitted electronically such as videos, music, e-books, software, and games, and to ensure non-discriminatory treatment for digital products. The deal will also lower trade barriers for data transfers.

Although there was no specific mention of how the deal would impact the President’s past comments on imposing tariffs on imports of Japanese cars under Section 232 of the Trade Expansion Act of 1962, the joint statement provided that neither country will impose any further tariffs that would go against the spirit of the agreement.

In 2018, Japan was the United States’ fourth largest trading partner. Trade negotiations for a bilateral agreement between the two nations began back in April of 2019. The joint statement released by the United States and Japan stated that the two countries are aiming to complete trade talks in the next four months.

On the U.S. side, there is strong political support by the Trump Administration and some Members of Congress for a U.S.-UK trading alliance. Several steps already have been taken to strengthen the Anglo-American trading relationship and mitigate negative impacts of Brexit. In February this year, a U.S.-UK Mutual Recognition Agreement (MRA) was concluded, which rolls over relevant aspects of the existing U.S.-EU MRA, covering electromagnetic compatibility, telecommunication equipment and good manufacturing practice of pharmaceuticals. U.S.-UK agreements on derivatives and insurance also have been agreed. These would take effect immediately after the UK exits the EU in an EU-UK “no deal” Brexit scenario or at the end of a transition period in a “deal” scenario. UK-U.S. preliminary talks on a bilateral free trade agreement (FTA) spanning the last two years, however, have failed to show any meaningful progress and are considered to be deadlocked. Should the UK leave the EU without a deal at the end of October, World Trade Organization (WTO) terms would govern U.S.-UK trade until such time as a trade deal is agreed.

Much hinges on the UK’s post-Brexit trading relationship with the EU, which still remains a priority for the UK. As Boris Johnson pursues hardline rhetoric on Brexit, insisting both that the current EU-UK deal needs to be renegotiated - which EU leaders reject - and that the UK will leave the EU on the scheduled date of 31 October 2019, with or without a deal, it is difficult to predict how the UK-EU trading relationship will unfold in the coming months. As of now, however, the EU is the UK’s largest trading partner: total UK trade in goods and services with EU countries in 2017 was 788 billion dollars, whereas two-way trade between the UK and the U.S. in the same year totalled about one third this amount, at 236 billion dollars. Boris Johnson, who is previously reported to have said that the “massive opportunity” of a U.S. trade deal only is possible if the UK escapes the “lunar pull of Brussels,” would be most likely to seek a loose, Canada-style trade deal with the EU, which might be limited in some respects, e.g. as is the case for services in the EU-Canada trade deal, but would eliminate most tariffs and leave the UK substantial regulatory freedom. Given the protracted nature of trade talks (i.e. seven years for the EU-Canada deal), however, Johnson will be pressured to negotiate a transition period with the EU, during which the UK will be able to negotiate, but not enter into, its own trade agreements.

If Johnson secures a withdrawal deal with the EU and a transition period is in place following Brexit, the key question will be whether an alternative arrangement has been reached on the Irish border issue, which now provides for a “temporary,” yet indefinite, EU-UK customs union. If the UK were to participate in the customs union, U.S.-UK negotiating flexibility would be restricted and trade talks limited to areas outside of the scope of the customs union, for instance, regulatory cooperation, services, public procurement, intellectual property, and digital trade. If an alternative arrangement has been reached on the Irish border issue which takes the UK out of the EU customs union, the UK would be free to negotiate trade deals and would regain full independence over its trade policy at the end of any Brexit transition period. The UK also would take back control over its national trade policy at once in a no deal Brexit scenario, in which case it would be free to negotiate and enter into FTAs with the U.S. and other countries.

For Johnson, embarking on U.S.-UK trade negotiations from a position of strength will be key from a political standpoint, but raises the question of both sides’ negotiating flexibility. Faced with significant pressures at home not to concede to U.S. trade demands, as laid down this February in the U.S. Trade Representative’s U.S.-UK FTA negotiating objectives, Johnson may be persuaded to exempt certain areas from trade talks - prompting Washington to come back to the negotiating table with more limited trade concessions. A major sticking point for the UK is the U.S.’ bid to incorporate into any bilateral FTA market access for U.S. agricultural goods. Boris Johnson already has stated: “I don’t want us to do any deal with the U.S. which in any way jeopardizes our animal welfare standards or our food hygiene standards.” Conversely, it is in the U.S.’ interest for the UK to accept its food and farming standards, and to shift away from the EU’s interpretation of sanitary and phytosanitary standards and technical barriers to trade. With the EU system criticized strongly in the U.S. as being inconsistent with WTO rules and unfairly distorting agricultural markets to the detriment of U.S. farmers, UK regulatory harmonization with the EU in this area could substantially curtail prospects for an ambitious U.S.-UK FTA. At the same time, the opposite would risk frictionless UK-EU trade post-Brexit, including with respect to regulatory checks between the Northern Ireland and the Republic of Ireland. The question as to whether service contracts with the UK’s National Health Service should be included in U.S. trade talks further promises to be thorny. Johnson also supports the implementation of a new UK tax on digital services, which has sparked stiff opposition from U.S. authorities and might create some challenges.

A quick post-Brexit U.S.-UK trade deal moreover is complicated by the fact that the U.S. federal government shares competence to regulate over specific trade-related areas with state and local authorities, making certain sectors such as financial services and public procurement difficult to negotiate. As highlighted by UK Trade Secretary Liam Fox, Brexit also falls “very close to the American pre-election year, where it’s quite hard to get things through Congress.” On the UK side, the UK Department for International Trade will continue to have many overlapping priorities, including to negotiate its WTO schedule of commitments on goods, services and agriculture, and taking steps to pursue new trade deals and roll over existing EU trade deals with third countries. The UK trade department may also soon be facing U.S. retaliatory tariffs on up to 25 billion dollars of EU products over a long-running transatlantic subsidy dispute between airliners Boeing Co. and Airbus SE.

Political and other developments further could impact both sides’ plans for an ambitious trade deal. London may pursue trade talks with China as part of plans for a “Global Britain,” which could be a deal-breaker for the U.S. for several reasons. On other international foreign policy issues, such as climate change and sanctions on Iran, Johnson will need to make decisions early on regarding whether to maintain the UK’s current policy, which is closer to Brussels than to Washington, or deepen U.S.-UK political ties by edging closer to the U.S. On this point, Johnson’s choice for a new UK Ambassador to the U.S. will likely be a strong indicator of his political agenda, including on Brexit. In sum, a quick post-Brexit U.S.-UK trade deal is improbable; however, a Johnson premiership may yet inject new momentum into the process depending on how he will position himself on the above issues. Furthermore, if a single comprehensive U.S.-UK trade deal proves challenging, the UK’s new leader could opt for a less ambitious target of a series of sector-specific deals.

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.

The deal does not impose quotas – which the United States had sought – but does requires the parties to develop and implement surge-monitoring procedures. In the case of a surge “beyond historic volumes of trade over a period of time,” the exporting country faces the risk of reimposed tariffs. In monitoring surges, however, steel that is “melted and poured in North America” may be separately counted.

The deal also requires Canada and Mexico to adopt anti-circumvention enforcement measures to avoid transshipment of non-Canadian and non-Mexican steel and aluminum across their borders.

Eliminating the Section 232 tariffs for Canada and Mexico removes a major hurdle to Congressional approval of the U.S.-Mexico-Canada Agreement (USMCA). Senator Grassley (R-IA), chairman of the Senate Finance Committee (with jurisdiction over international trade issues), has repeatedly tied ratification of USMCA to lifting the tariffs for Canada and Mexico.

The announcement comes in response to a Department of Commerce investigation initiated a year ago under Section 232 of the Trade Expansion Act of 1962. The Department submitted its statutorily-required report to the President on February 17, 2019, concluding that imports of automobiles and certain automobile parts threaten to impair the national security of the United States. Specifically, the Department highlighted the importance of domestic R&D expenditures and innovation in ensuring “long-term automotive technology superiority” that is critical to the defense industry.

The President’s proclamation highlighted a near-doubling of automobile imports into the United States from 1985 to 2017 and the declining share of the U.S. automobile market held by American-owned producers during the same time period (now 22% vs. 67% in 1985). Additionally, the proclamation cites the difficulty of U.S. producers to export as a result of protected foreign markets – specifically in the European Union and Japan.

In directing the trade negotiations, the proclamation specifically mentions the European Union, Japan and “any other country the Trade Representative deems appropriate.” The President highlighted the potential benefits of the renegotiated United States-Korea agreement and the new United States-Mexico-Canada Agreement (USMCA) in addressing the national security threat.

Under the statute, a decision was required by the President within 90 days of receiving the Department of Commerce report. The decision to enter into trade negotiations was one option. Alternatively, in concurring with the Department’s findings, the President could have announced more immediate action to adjust imports (e.g., tariffs or quotas), or could have asked for additional analysis or review.

If agreements are not reached by November 13, 2019, the President will determine whether and what further action needs to be taken to address the national security threat.

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.

Two months ago, both the EU and the United States released their respective negotiating directives that highlight a disagreement over whether to include agriculture within the scope of any trade talks. While the European Commission intends to limit negotiations to industrial goods and conformity assessment, the United States is pushing for a more far-reaching trade deal that also covers agricultural goods. The EU also wants to include discussions regarding automotive products within the scope of any trade negotiations on industrial goods, which it argues is required under World Trade Organization (WTO) rules on preferential trade agreements (i.e., these must cover “substantially all trade” between members). Malmström is likely to also seek clarification on whether the Trump Administration intends to impose tariffs on certain EU automotive products. If it does, the EU has indicated the possibility that it will suspend any trade talks and retaliate. If the two sides can find common ground on these issues, however, the European Commission has stated that it hopes to conclude trade talks with the U.S. by November 2019.

The EU proposal for trade talks with the United States on industrial goods (excluding agricultural products) specifies as goal to eliminate “all duties for industrial goods on a reciprocal basis,” as well as taxes, fees, charges on exports, quantitative restrictions, or authorization requirements on exports, and the reconciliation of EU and U.S. approaches to rules of origin. The EU’s objective on reciprocal EU-U.S. conformity assessment commitments involves streamlined processes that ensure compliance of products with both EU and U.S. technical regulations. Because mutual recognition of conformity assessment results typically is negotiated on a sectoral basis, separate talks for each industry sector (for example machinery, electrical and electronic sectors) are likely.

Transatlantic trade in industrial goods are already subject to generally low tariffs, the simple average applied MFN tariff rates on non-agricultural products are 4.2 percent for goods entering the EU and at 3.1 percent for the United States. EU-U.S. trade in industrial goods has steadily increased over the past ten years. Currently, the United States is the primary export destination of EU exports and the second largest exporter of industrial goods to the EU, after China. According to the European Commission’s analysis, the elimination of tariffs on industrial goods would lead to a 10 percent increase of EU exports to the United States and a 13 percent increase of U.S. exports to the EU.

EU and U.S. companies also stand to benefit from reciprocal commitments on conformity assessment because the mutual recognition of inspection, testing, and certification requirements reduces costs and facilitates market access on both sides of the Atlantic. The possibility of reciprocal EU-U.S. recognition of conformity assessment results currently exists under a mutual recognition agreement (“MRA”) concluded between the EU and the United States in 1998, but the MRA covers only six product sectors: telecommunications; electromagnetic compatibility; electrical safety; recreational craft; medical devices; and pharmaceutical good manufacturing practices. Moreover, the MRA is only operational in a few of the sectors covered (namely, telecommunications, electromagnetic compatibility and marine equipment), with recent efforts to implement its sectoral annex on pharmaceutical good manufacturing practices.

The European Commission desire to proceeding quickly with EU-U.S. trade talks will certainly depend on the impact of last week’s talks in Washington. The European Parliament also is expected to vote in plenary regarding its position on future EU-U.S. trade talks. Notably, last month the European Parliament’s Trade Committee endorsed the European Commission’s mandate to start limited EU-U.S. trade talks subject to certain conditions. This includes, most notably, the lifting of U.S. tariffs on EU aluminium and steel, the suspension of trade talks if the United States levies additional tariffs on EU goods, the exclusion of agriculture from the scope of trade negotiations, and added clarity on how rules of origin will be handled during the trade negotiations.

Some key takeaways from the Ambassador’s testimony are:

1. The negotiations are concerned with settling the section 301 tariffs, which were first imposed in July 2018.

2. An agreement, if reached, would be a binding executive agreement and would not be submitted to Congress for approval.

3. Any agreement will be enforced through a unique mechanism that will require continued and sustained interactions between U.S. and Chinese trade negotiators at three levels to address issues of concern as they arise:

o Monthly meetings will take place at the office director level;

o Quarterly meetings will take place at the Vice-Ministerial level; and

o Bi-annual meetings will take place at the Ministerial level.

5. Currency manipulation has been a central topic in the negotiations.

6. There has been no agreement to remove the current 10% tariff on $200 billion of Chinese goods, but this is a negotiating objective of the Chinese Government.

7. If the List 3 Section 301 tariffs are indeed raised to 25%, an exclusion process will be established.

8. The Ambassador sees these negotiations as “turning a corner” in the U.S.-China trade relationship, but acknowledges that significant work remains to address U.S. concerns.

Ambassador Lighthizer’s testimony can be characterized as tempered optimism that an enforceable agreement can be completed. He cautioned, however, that even with an agreement the 10% tariffs on List 3 items may not be removed.

Return back to the Trade Monitor for updates on further developments in these negotiations as well as tariffs on List 3 items.