• United States – Countervailing Measures on Certain Hot-Rolled Carbon Steel Flat Products from India (DS436);
• India – Certain Measures Relating to Solar Cells and Solar Modules (DS456);
• United States – Certain Measures Relating to the Renewable Energy Sector (DS510);
• India – Export Related Measures (DS541);
• United States – Certain Measures on Steel and Aluminium Products (DS547); and
• India – Additional Duties on Certain Products from the United States (DS585).

While the United States made no additional concessions, India also agreed to remove retaliatory tariffs that it previously imposed on chickpeas, lentils, almonds, walnuts, apples, boric acid, and diagnostic reagents in response to former President Trump’s Section 232 duties on steel and aluminum.

In a release announcing the agreement, the Office of the U.S. Trade Representative stated that yesterday’s resolution “maintains the integrity of the U.S. Section 232 measures” and will “restore and expand market opportunities for U.S. agricultural producers and manufacturers.”

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 The EU has urged the U.S. to remove tariffs over EU subsidies to Airbus because it has repealed those programs, while the U.S. contends that since it has already removed the subsidies to Boeing, there is no legitimate basis for EU retaliation.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

In the many months of negotiations since March 2017, when the UK submitted its formal notice of intent to withdraw from the EU, the EU has steadfastly refused to engage in talks about the post-Brexit period until the terms of the so-called “divorce” were agreed and ratified – a goalpost yet to be reached. The UK and EU did move forward, however, on a plan to divvy up existing preferential tariff rate quotas between the UK and the remaining bloc of 27 EU Member States. Under the proposal agreed in August 2017, the UK would take over a portion of the EU quota commensurate to its average consumption over the most recent three-year period, thereby leaving WTO trading partners “no worse off” than before Brexit. Argentina, Brazil, Canada, New Zealand, Thailand, Uruguay, and the United States (US) immediately complained that split quotas did not provide the same market opportunities as the current single EU market. The countries claimed that such changes constitute more than a technical rectification, thus requiring consultation and consent from trading partners.

At last week’s WTO Goods Council, the number of countries expressing concerns about the proposed reallocation of the EU quotas rose to fifteen. Australia, Canada, the US, and others claim that losses from Brexit uncertainty are already being felt. As recompense for current commercial loss as well as future losses resulting from trade disruption and smaller markets, they seek concessions from the UK and the EU to provide improved access to both post-Brexit markets. Calling the proposal “unjustifiable,” the US asserts that trading partners are at risk of being crowded out and would suffer market access losses in both markets. The worry is that the EU will claim a large portion of the UK quota and vice versa. The proposal could have particularly harsh results for US exports of pork and wine.

How the conflict is resolved in the near term may depend on whether an alternative dispute resolution system comes to fruition when the WTO’s Appellate Body ceases to function on December 10, 2019. On that day, the Appellate Body will no longer have the three members necessary to review a case on appeal. With the US holding fast to its position that blocking Appellate Body nominations is the only way to bring about WTO reform, something will have to give. One alternative under consideration by the EU and Canada is an interim arbitration arrangement based closely on existing WTO rules. Another possibility would entail Members agreeing to accept the Panel’s decision at the outset of a dispute. With uncertainty piled on top of uncertainty, traders’ worries are not likely be lessened this holiday season.

The underlying dispute focused on three issues in U.S. antidumping proceedings: (1) the weighted average-to-transaction methodology applied by the U.S. Department of Commerce (the Department) in antidumping cases, including the use of zeroing; (2) the Department’s treatment of certain exporters in non-market economies (NMEs) as an NME-wide entity (the single rate presumption); and (3) the Department’s use of adverse facts available in determining dumping margins. The zeroing methodology has been the subject of numerous disputes at the WTO. While some have argued that the practice violates WTO rules, the U.S. has continued to defend it. Speaking in April, Ambassador Lighthizer stated “[t]he WTO rules do not prohibit ‘zeroing[.]’ The United States never agreed to any such rule in the WTO negotiations, and never would. WTO Appellate Body reports to the contrary are wrong. . .”

This award, which comes in the wake of last month’s $7.5 billion award in the U.S.-E.U. Aircraft dispute, is the third largest in WTO history. The $3.579 billion award is authorized on a per annum basis until the U.S. brings its law into compliance with its WTO obligations. The U.S. and China may also seek to resolve the dispute as part of the negotiations in the ongoing trade war.

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 SCM Agreement classifies subsidies under two categories: prohibited or actionable. Prohibited subsides include export subsidies—receipt of benefits is contingent, in whole or in part, upon export performance—and local content subsidies—receipt of benefits is contingent, whole or in part, upon the use of domestic over imported goods. In contrast, actionable subsidies are not prohibited but are subject to challenges if they adversely affect a WTO member. In the decision handed down Thursday, each of the subsidies was determined to be a prohibited export subsidy.

Based on its findings over the course of the proceeding, the WTO dispute panel concluded that the withdrawal of the aforementioned subsidies would require amendments to India’s Foreign Trade Policy, central government notifications, and operational procedures, actions that may also necessitate review by the Indian Parliament. As a result of these facts and a review of each level of government associated with the prohibited programs, the WTO dispute panel gave India: 90 days to withdraw DFIS; 120 days to withdraw the EOU and related sector-specific schemes, EPCG scheme, and MEIS; and 180 days to withdraw the SEZ schemes.

The full WTO dispute panel report can be read here.

In May 2016, China returned to the WTO to request consultations with the United States under Article 21.5 of the Dispute Settlement Understanding (DSU), which establishes procedures for when parties disagree about whether the losing party has implemented the DSB’s recommendations and rulings. Failed consultations led to the establishment of a compliance panel, which issued a decision in March 2018. Both China and the United States appealed to the WTO Appellate Body. In July 2019, the Appellate Body upheld the compliance panel’s determination that China failed to demonstrate the United States’ public bodies analysis was inconsistent with the DSB’s 2015 rulings and recommendations. The Appellate Body affirmed that “Article 1.1(a)(1) {of the WTO Subsidies and Countervailing Measures Agreement} does not prescribe a connection of a particular degree or nature that must necessarily be established between an identified government function and the particular financial contribution at issue” in order to consider the enterprise a public body. The Appellate Body also upheld the compliance panel’s finding that Commerce’s “public body determinations at issue were not based on an improper legal standard.” The Appellate Body, however, found against the United States on two issues. First, with respect to the benchmark issue, the Appellate Body upheld the compliance panel’s conclusion that the United States “failed to explain . . . how government intervention in the market resulted in domestic prices for the inputs at issue deviating from a market-determined price,” and that Commerce also “failed to consider price data on the record.” Second, with respect to certain de facto specificity findings, the Appellate Body upheld the compliance panel’s finding that Commerce’s revised specificity determinations did not comply with the Subsidies and Countervailing Measures Agreement’s requirement to “take account of the length of time during which the subsidy programme has been in operation.”

The Appellate Body’s compliance findings were adopted by the DSB at the latter’s August 15, 2019 meeting. In a statement at that meeting, the United States reiterated its substantive concerns with and objections to the case results and asserted that “China is using the WTO dispute settlement system to seek to evade the disciplines on subsidies that all WTO Members agreed to in the Subsidies Agreement. While the United States has been the responding Member in several disputes China has brought, China has been – and continues to be – the serial offender.”

Seizing on the compliance rulings in its favor, China now seeks compensation under Article 22 of the DSU, which allows a WTO member prevailing in a dispute to seek the temporary remedy of suspending concessions to the losing member in the event DSB recommendations and rulings are not implemented. To suspend concessions means to be relieved of the obligation to provide trade benefits under WTO rules to the other member. China’s specific request is to suspend concessions with respect to trade in goods, valued at $2.4 billion, on an annual basis.

Procedurally, the DSB will take up China’s request at its next meeting on October 28, 2019. Authorization is virtually automatic. The United States, however, may challenge the level of the remedy proposed by China, in which case an arbitration proceeding will determine “whether the level of such suspension is equivalent to the level of” China’s trade benefits nullified or impaired by the United States’ non-compliance. China’s move comes at the same time as the two governments separately reached a “Phase One” agreement intended to reduce trade tensions related to President Trump’s tariff actions under Section 301 of the Trade Act of 1974.

According to the United States, this lack of discipline has led to unpredictable and illogical results, with some of the world’s wealthiest and fastest developing (in terms of economic, social, and other indicators) – and often most trade-distorting – countries putting themselves as the same category as the WTO’s least-developed members in order to strategically or uniformly avoid additional commitments. Some of the examples cited by the United States of those WTO members seen to be unreasonably declaring themselves as developing include China, India, Singapore, Israel, Mexico, Turkey, Chile, Indonesia, South Africa, South Korea, the United Arab Emirates, and Qatar. As the United States explained in a WTO communication issued in February 2019:

Simply put, self-declaration has severely damaged the negotiating arm of the WTO by making differentiation among Members near impossible. By demanding the same flexibilities as much smaller, poorer Members, export powerhouses and other relatively advanced Members . . . create asymmetries that ensure that ambition levels in WTO negotiations remain far too weak to sustain viable outcomes. Members cannot find mutually agreeable trade-offs or build coalitions when significant players use self-declared development status to avoid making meaningful offers. Self-declaration also dilutes the benefit that the {least-developed countries} and other Members with specific needs tailored to the relevant discipline could enjoy if they were the only ones with the flexibility.

The United States’ February communication also proposed that the General Council adopt a new approach that would preclude special and differential treatment “in current and future WTO negotiations” for countries that fall into at least one of four categories: members of the Organization for Economic Cooperation and Development (OECD); one of the G20 countries; classified as “high income” by the World Bank; or account for “no less than 0.5 per cent of global merchandise trade (imports and exports).”

In July 2019, President Trump bolstered the U.S. Government position by requiring the Office of the U.S. Trade Representative (USTR) to secure changes to the current WTO developing country rules within 90 days. If progress was not made within that time, President Trump authorized USTR to “no longer treat as a developing country” any WTO member it views as “improperly declaring itself a developing country and inappropriately seeking the benefit of flexibilities in WTO rules and negotiations.” The memo also directed USTR not to support OECD membership of that same country.

Just before the October 16^th General Council meeting, India, China, and the WTO African Group preempted the anticipated discussion by issuing a statement in defense of the current system. The statement “reaffirmed” several special and differential treatment principles, including that “developing countries must be allowed to make their own assessments regarding their own developing country status.” The debate reached a peak, however, at the October 16^th meeting when U.S. Ambassador to the WTO, Dennis Shea, reiterated the United States position “that there is a group of self-declared developing country Members that are relatively advanced, wealthy, and influential and that should not have access to blanket special and differential treatment in current and future WTO negotiations.” He specifically identified China as a major perpetrator. While Ambassador Shea’s statement drew support from the EU, it drew the ire of both China and India, with India expressing concern that the actions outlined in President Trump’s July 2019 memo will cause special and differential treatment to “become extinct at the WTO.”

Without any specific outcome on this issue from the General Council meeting, it remains to be seen how USTR will implement the White House’s July directive. Developing country status does not affect tariff commitments, but could affect rights under current agreements and is likely to have the greatest impact in ongoing negotiations (such as the fisheries subsidies negotiation), where self-declared developing countries rely on such status to establish their commitments. The July memo instructs USTR to publish on its website a list of all self-declared developing countries that USTR believes no longer deserve such treatment for purposes of WTO rules and negotiations.

As retaliation, the U.S. will impose an additional 10 percent duty on airplanes from France, Germany, Spain, and the United Kingdom, as well as an additional 25 percent duty on certain goods including single malt Irish and Scotch whiskies, coffee from Germany, cheeses from several countries, and certain garments from the United Kingdom. The retaliatory tariffs will likely take effect on October 18, 2019 and will be “continually re-evaluate{d}. . . based on {U.S.} discussions with the EU.” In selecting the goods that will be affected by the retaliatory tariffs, the Office of the U.S. Trade Representative explained that the tariffs are intended to most heavily impact imports from France, Germany, Spain, and the United Kingdom, the Member States that provided Airbus with the disputed subsidies.

Meanwhile, tariff threats also loom over the U.S. in a parallel WTO case regarding the illegal subsidization of Boeing in the U.S. The global trade regulator is expected within six-to-eight months to authorize the EU to impose its own retaliatory tariffs on U.S. goods. In April, the EU published a preliminary list of U.S. products to be considered for countermeasures. Ahead of the WTO’s ruling on its case regarding the subsidization of Boeing, the EU might choose to revoke prior settlements with the U.S. in other WTO cases, which would effectively create tariffs on approximately $4 billion worth of U.S. imports into the EU.

Despite this, EU officials publicly claim to have little appetite for the mutual imposition of countermeasures, and emphasize that countermeasures strain transatlantic trade relations and inflict damage on citizens and businesses. The timing of the new tariffs is politically sensitive given the recent global imposition of national security tariffs by the U.S. on steel and aluminum, as well as the potential addition of global national security tariffs on automobiles and parts. Last June, the EU also imposed “rebalancing” tariffs on about $3 billion worth of U.S. steel, agricultural, and other products.

While EU countermeasures remain a possibility, EU Trade Commissioner Cecilia Malmström, accompanied by several other EU leaders, and U.S. Trade Representative Lighthizer have voiced their intent to reach a negotiated settlement in the aircraft cases. Malmström’s soon-to-be successor, Phil Hogan, also stated during his confirmation hearing on Monday at the European Parliament that he is committed to engage politically with the U.S. to resolve trade tensions.

While both the EU and the U.S. are open to negotiating a settlement of the long-standing aircraft disputes, the devil will likely be in the details. Malmström has voiced concern that the U.S. is unwilling to engage, and has not acted on a settlement proposed by the EU in July. Ambassador Lighthizer, however, is publicly open to “negotiations with the European Union aimed at resolving this issue in a way that will benefit American workers.”

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.

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.

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.

The dispute was brought by Ukraine in September 2016 after Russia imposed various restrictions preventing Ukraine from using Russian road and rail transit to trade goods destined for Kazakhstan, the Kyrgyz Republic, Mongolia, Tajikistan, Turkmenistan, and Uzbekistan. In defense, Russia claimed that its actions were not subject to WTO review because they constituted actions necessary to protect Russia’s “essential security interests” during an “emergency in international relations” between Russia and Ukraine. Actions taken by a WTO Member during a war or an emergency in international relations are excepted from WTO review pursuant to Article XXI of the General Agreements on Tariff and Trade 1994 (GATT). The Trump Administration has cited Article XXI as exempting from WTO jurisdiction its decision to impose duties on imports of steel and aluminum products pursuant to Section 232 of the Trade Expansion Act of 1962 (Section 232).

Article XXI is the so-called “security exemption” from certain WTO obligations. Article XXI(b)(iii) provides, among other things, that a party may take any action that it considers necessary to protect its essential security interests taken “in a time of war or other emergency in international relations.” According to Russia, Article XXI is a “self-judging” provision, meaning that a WTO Member may itself determine whether it has taken action to protect its essential security interests during an emergency in international relations, and a WTO panel may not second-guess or review that decision. In other words, Russia claimed that once it cited Article XXI as a basis for its actions, the WTO could no longer examine the challenge.

The panel held otherwise. First, the panel found that it possessed jurisdiction to review Ukraine’s challenges and Russia’s invocation of a defense pursuant to GATT Article XXI. It then examined what had transpired between Russian and Ukraine since 2014 to determine whether it constituted an “emergency in international relations.” The panel concluded that there was an emergency in international relations between the two countries because relations had deteriorated so badly that they were a concern to the international community, the situation was recognized by the UN General Assembly as an armed conflict, and a number of countries imposed sanctions against Russia in connection with the situation. Thus, after finding that the Article XXI security exemption was satisfied, the panel did not make any additional findings regarding Ukraine’s challenges. It made no recommendations for any further actions.

This decision has implications for the United States, as several foreign governments have challenged at the WTO the U.S.’s imposition of tariffs under Section 232. In response, the U.S. government has cited Article XXI, arguing that its Section 232 actions are unreviewable by the WTO. While WTO panel decisions are not supposed to be binding precedent, Friday’s panel decision in the Russia-Ukraine dispute is highly likely to be cited in the WTO disputes involving U.S. steel and aluminum Section 232 tariffs.

While Ukraine is quite likely to appeal the panel’s decision to the WTO’s Appellate Body, it is unclear whether such an appeal would result in timely resolution of the dispute. By the end of 2019, and unless new Members are appointed, the Appellate Body will not have enough Members to render decisions.

Ambassador Lighthizer answered questions on a number of topics relating to the WTO and, more generally, current U.S. trade policies:

WTO Reform Is the WTO still relevant? In short, yes. Lighthizer explained that much work is done at the WTO committee level, including interpreting agreements, solving and diffusing disagreements, and helping parties move toward consensus. The problem, according to Lighthizer, is that the dispute settlement system established under the 1994 agreements has morphed the WTO from a negotiating forum to a litigation forum. This results in WTO members disfavoring agreements for concessions and instead litigating at the Appellate Body level to achieve gains they otherwise would not be entitled to. The solution? Lighthizer favors engaging in negotiations with small groups of countries with commonalities who are willing to take on extra obligations – for example, in the digital trade space – and excluding other members from that process. He suggests that such a plurilateral approach will be more fruitful. Lighthizer confirmed he knows of no other way to push for WTO reform than to use the only leverage available to the United States by blocking the appointment of Appellate Body members. Absent new appointments, the Appellate Body will no longer function by the end of 2019 as it will not have enough members to render decisions.

Another widespread complaint about the current functioning of the WTO is the ability of members to self-declare themselves “developing” countries. Developing countries are exempt from certain WTO obligations and receive benefits that are not available to non-developing countries. Lighthizer explained that this is particularly problematic in the case of countries like China, Korea, and Saudi Arabia, that have become increasingly wealthy over the years yet continue to reap the benefits of their self-declared developing country status. USTR has proposed and garnered some support for proposals to address this problem, for example, disallowing a country to be designated as “developing” if it is in the OECD.

In response to a number of questions about the status of Section 232 tariffs on imports of steel and aluminum, Lighthizer stated that the tariffs are working and are necessary. There are no immediate plans to lift those tariffs, but Lighthizer confirmed they are a constant topic of discussion in the ongoing US-China negotiations and US-Canada-Mexico conversations as the push to complete USMCA continues.

China Issues regarding China were a significant focus of the senators’ questions. In response to concerns that China’s growth since 2001 (when it joined the WTO) has come at the expense of the United States and in violation of WTO agreements and rules, Lighthizer explained that the current US-China negotiations address China’s failure to abide by WTO obligations as well as overcapacity, currency manipulation, subsidies (both generally and to state-owned enterprises (SOEs), and more. Lighthizer explained further that the current structure of the agreement, which is 110 to 120 pages long, addresses technology transfer, IP protection, currency, market access, agriculture, non-tariff barriers, and enforcement of the agreement. Without question, he stated the agreement will include a commitment not to competitively devalue currency and will require increased transparency on the part of China. Lighthizer assured the Committee that enforceability is a critical aspect of the negotiations and the President will not OK an agreement absent strict enforcement provisions. Ambassador Lighthizer did not, however, provide an estimated date for when he anticipates negotiations to be completed. He further reported that China is pushing for removal of Section 301 tariffs and wants increased market access in certain sectors.

For more information on what to expect in 2019 on trade issues, check out our post reviewing the Administration’s 2019 trade policy agenda.

According to the Office of the U.S. Trade Representative (USTR), the trade policy agenda underscores three main points. First, the agenda notes that this Administration inherited a “deeply flawed global trading system” that it is striving to improve. The agenda calls out the primary targets of the Administration’s trade efforts to date: overhauling the North American Free Trade Agreement (NAFTA) into the United States-Mexico-Canada Agreement (USMCA), the overreach of the World Trade Organization’s (WTO) Appellate Body, and unfair trade practices from U.S. trading partners, such as China’s non-market policies.

Second, the Administration continues efforts to improve domestic trade policies to better serve U.S. workers. While the agenda reviews a number of the Administration’s recent achievements, it highlights that a primary goal of 2019 is to obtain Congressional approval of the USMCA, which the President has touted as better serving the interests of U.S. workers, farmers, and businesses than NAFTA. Trade issues with China are unsurprisingly a significant focus, with USTR highlighting its negotiations with China to eliminate a range of unfair trade policies and practices. The Administration’s concern that the WTO Appellate Body’s decisions are overreaching is well-known, and the agenda promises a commitment to WTO reform efforts.

Third, the Administration intends to pursue new trade deals and to continue its enforcement of current trade laws. Here, the Administration highlights its focus on efforts to preserve U.S. national security and national defense, a nod to its current use of Sections 232 and 301 to impose tariffs on a broad range of global imports. The agenda also notes USTR’s intent to pursue new trade deals with Japan, the European Union, and the United Kingdom, as well as to concentrate on trade and investment with Kenya.

In sum, the 2019 agenda focuses on the ongoing goals of the Administration to improve conditions for American workers, to strictly enforce U.S. trade laws, and to encourage U.S. economic growth. We continue to monitor the Administration’s efforts and initiatives as they unfold in 2019. Please contact the international trade group with any questions.

Agri-food business operators should roll out their contingency measures. Contingency planning for a “hard” Brexit includes making possible revisions to supply chains, buying-ahead, stockpiling, warehousing, relocating food production, transferring import function, re-labelling, obtaining relevant authorizations and certifications, and taking other practical measures to avoid business disruptions. Companies need to ensure proper controls are in place with regard to import and export regulations.

Agri-food businesses should be particularly attentive to several aspects of a hard Brexit. First, be mindful of the added costs of customs clearance and regulatory checks. Goods customs-cleared in the UK would no longer be able to circulate freely within the EU and would be subject to the EU common tariffs, processes and conformity assessment procedures upon exportation from the UK. The cost of new tariffs imposed on agri-food trade between the UK and the EU can be high, especially for some types of products. Fully processed food and drink products, for instance, attract higher tariff rates than semi-processed food and drink and primary products and raw materials. Certain agri-food products also are subject to “specific duties,” which are tariffs levied on the basis of a unit of measure, e.g. by weight or volume of the imported good. Products that attract both a category tariff and a specific duty tariff can have particularly steep duties. Regard need also be had to further costs resulting from customs declarations, compliance with EU Sanitary and Phytosanitary (SPS) requirements and food labelling regulations.

Second, delays at the EU-UK border. Delays are to be expected in a no-deal Brexit scenario due to customs formalities, physical and documentation inspections of food consignments, and a range of possible Brexit effects on cross-border transport systems e.g. air transport designation/traffic rights, since the UK would automatically cease to be covered by EU transport agreements. Agri-food companies should consider how these factors affect not only their operations, but also those of suppliers and/or distributors and related business risks.

Third, a hard Brexit has implications for access to talent, contractual and taxes. EU workers in the UK are not expected to receive any preferential treatment in a hard Brexit scenario, with a limited exception for temporary agricultural workers. Under the UK’s proposed post-Brexit immigration rules, it also will be very difficult for low-skilled workers to obtain visas. Similar rules would likely apply for UK migrants in the EU countries. Existing contracts also will need to be scrutinized with respect to customs considerations, continuity and performance. Regarding tax implications, the EU has several directives in place that reduce tax burdens within the single market, and while the UK has a number of double tax agreements to fall back on, these do not cover all types of taxes between taxpayers in the UK and the EU27.

Fourth, be mindful of the “WTO terms” the EU and the UK may fall back on in the event of a no-deal Brexit. The EU and the UK are currently in the process of disentangling their trade rules at the WTO to allow the UK to act independently on international trade. While the UK is a WTO member in its own right, its membership rights have not been set out distinctly from the EU, which also represents the UK at the WTO. On 24 July 2018, the UK submitted to WTO Members its draft schedule outlining the UK’s post-Brexit WTO market access commitments for goods, which largely replicates EU concessions and commitments. The draft schedule of commitments is considered approved under WTO rules if there are no objections from other WTO Members within three months. WTO Members - including the U.S., Canada, Australia, New Zealand - have already indicated that they disapprove of the terms of the divorce, however. WTO tariff-rate quotas (TRQs), which are proposed to be apportioned between the EU and the UK based on their respective market shares, are particularly controversial as agricultural suppliers have indicated that they would lose flexibility to switch agricultural exports between the UK and the rest of the EU. Their objections are likely to force the EU and the UK into wider negotiations. While the EU has agreed to negotiations on TRQs, this is not the case for the UK. In any event, to negotiate legally binding market access is a somewhat arbitrary exercise where there is uncertainty remaining about the shape of the future EU-UK trading relationship. Agri-food businesses should monitor developments at the WTO to understand what WTO terms will apply in case of a hard Brexit and in the meantime put contingency measures in place.

In its report, issued on June 28, 2018, the WTO panel concluded that Honduras, the Dominican Republic, Cuba, and Indonesia did not demonstrate that Australia’s plain packaging law and related regulations were inconsistent with the various WTO agreement provisions cited. Specifically, the plain packaging measures were not shown to be more restrictive than necessary to achieve a legitimate regulatory objective; to impede the registration, use, or enforcement of trademarks; to mislead with respect to or diminish geographical indications; or to devalue the Cuban Government Warranty Seal otherwise provided on Cuban-origin tobacco products.

Australia has defended the plain packaging requirements as an effort to prevent smoking. Hungary, Ireland, France, New Zealand, Norway, and the United Kingdom have implemented similar tobacco product packaging restrictions. Burkina Faso, Canada, Georgia, Romania, Slovenia, and Thailand have passed such laws, which have not yet been implemented. The complaining countries and industry members have pushed hard against plain packaging rules as an infringement on intellectual property rights and a dangerous precedent for banning branding on other consumer products in a manner that exceeds the public health benefit, if any.

Honduras has indicated that it intends to appeal the WTO panel decision on the basis of both legal and factual errors. While, under WTO dispute settlement rules, the WTO Appellate Body must rule on any appeal within 90 days, that deadline has not been met for several years. The current case backlog, the complexity of this particular dispute, and a stalled Appellate Body appointment process means that the dispute will likely take years to resolve.

Experts, however, are cautiously optimistic about the news and what it could mean for 2018. Last year, significant uncertainties about critical aspects of the global economy made it difficult to predict the track of trade growth. The WTO cited unpredictability with respect to government action on monetary, fiscal, and trade policy, and whether trade would be restricted in favor of attempts to address domestic wage stagnation and unemployment. Moreover, the process of establishing global value chains – spreading production processes around the world – is stabilizing. That process had been a key driver in boosting global trade flows out of economic crisis, but is naturally beginning to slow.

In the United States, political and economic analysts struggled early in 2017 to estimate the impact of President Trump’s decision to withdraw from the Trans-Pacific Partnership (TPP) negotiations and to renegotiate NAFTA. On one hand, those trade policy “shocks” have been countered by trade-promoting policies in other regions, including the recently finalized Comprehensive and Progressive Agreement for Trans-Pacific Partnership among the 11 remaining parties to the original TPP. Trade among the NAFTA countries continues to dominate regional trade arrangements in the world, second only to intra-European Union trade flows. And President Trump has started this year with strong messaging on the importance of international trade – downplaying the fear of trade wars and signaling an interest in rejoining the TPP. On the other hand, the world is watching as President Trump considers whether to impose what may be broad trade restrictions on imports of steel and aluminum products under Section 232 of the Trade Expansion Act of 1962.

Notwithstanding these developments, the better-than-expected growth in 2017 have given economists a reason to expect a high rate of growth to continue at least through 2018, spurred by strong investment spending, growing demand in the EU, and new trade agreements. The WTO had forecasted global trade expansion for 2017 of only 2.4%, with the actual results being far better. For 2018, the WTO predicts trade growth to “pick up slightly.” Although much depends on the impact of political decision-making, the trend suggests that trade flows will continue to be strong this year.