In this report you can find two feature articles: one article looks at a tumultuous period in EU-U.S. trading relations and the way forward and the second feature examines the agreement in the EU to update and modernize the reduced VAT rates rules.
The fall and partial rise of US-EU trading relations
Despite recent challenges, the EU-US trading relationship is underpinned by deeply integrated economies. The European Commission website describes this relationship as defining world trade and contributing as much as 40% to the world’s GDP. While Europe and the US are both modern developed economies, competition for global market share, as well as societal changes (brought about by an increase in globalisation) has influenced trade policy. This was particularly evident during the Trump Administration.
This article tracks the challenging period that we appear to be emerging from and looks towards what is hoped will be a détente in trade tensions between the two trading powerhouses on either side of the Atlantic.
Large aircraft case
For the past 17 years, the EU and the US have been embroiled in a dispute over government aid provided to Airbus and Boeing, respectively.
The origin of the dispute was an allegation made by the US that several countries (i.e., France, Germany, Spain and the UK) were providing unfair state assistance to Airbus. At the same time, Airbus also alleged that US state and federal government subsidies, channelled mostly through NASA and the Department of Defence, were unfairly benefitting the American aviation company. Initial efforts to defuse this issue failed and the issue became more acrimonious.
In May 2005, both the US and the EU filed cases against each other at the World Trade Organization (WTO). In March and September 2010, the WTO found that both the EU and the US had been providing unfair government assistance to Airbus and Boeing, respectively, and ordered the government subsidies to be repaid.
By 2012, this dispute was still rumbling on. Both parties accused the other of not complying with the WTO rulings. The EU escalated matters by requesting that the WTO approve the implementation of USD 12 billion in punitive tariffs per year on US imports, which equated to the amount the EU alleged the US subsidies to Boeing cost the EU economy annually. The WTO eventually authorised the implementation of USD 4 billion worth of tariffs on goods imported from the US
Similarly, in 2016, the WTO found that the EU had not remedied the harm to Boeing from illegal subsidies, resulting in the US requesting approval from the WTO to apply punitive tariffs on imports from the EU to the tune of USD 10 – USD 15 billion. The WTO eventually authorised the implementation of USD 7.5 billion in punitive tariffs on the importation of EU-origin goods.
This trade dispute has had many far-reaching consequences, not least of which is the implementation of tariffs on goods completely unrelated to aircraft. For example, as part of the US punitive trade measures, extra import duties had to be paid on cheese, olives and whiskey, in addition to the tariffs on aircraft.
Meanwhile in October 2020, the WTO granted Brussels permission to apply the USD 4 billion in punitive tariffs to US imports. Despite an offer from the EU not to apply these additional tariffs to US goods on the condition that the US withdraw its sanctions, the US decided to increase the pressure on the EU by applying duties to aircraft parts and sparkling wines from France and Germany.
It was clear that a new direction had to be found to resolve this protracted dispute. The US presidential election in November 2020 may have played a key role in the resolution to the dispute. The Trump Administration had maintained a robust “America First” approach to its dealings with its trade partners. When President Biden took office in January 2021, he set out his ambition to return to a more multilateral approach to US foreign and trade policy, which began to manifest itself in a more conciliatory trade policy approach being taken by the US with its traditional allies. This may have been an acknowledgement of the requirement to address the trade practices from China, a key rival to the US
Following its exit from the EU, the UK and the US agreed to suspend the tariffs applied as a result of the large aircraft issue to allow space to agree on a resolution to the dispute. The EU and the US then followed suit at a summit in June 2021 and agreed to suspend the tariffs for five years to allow a permanent solution to be found.
The Trump Years
Donald Trump campaigned for president on an “America First” platform. While campaigning around America’s “rust belt,” he observed economic and societal decline that was blamed on globalisation. Trump promised to bring back traditional industries to US blue collar workers that would, in turn, reverse the years of stagnation in large areas of the country. This electoral strategy paid off when he won the key swing steel-producing states of Ohio and Pennsylvania.
It soon became clear that the Trump Administration disliked imbalanced trade positions when the US operated a deficit. As part of a highly-developed economy with a massive services sector, then-President Trump took the position that the US was “losing” even if this was only part of the story.
As part of the America First philosophy, the Trump Administration began to withdraw from multilateral international organisations. In particular, the Administration blocked appointments to the WTO appellate body, which had the effect of preventing the WTO from playing a meaningful role in resolving international trade issues. The effective neutralisation of the WTO paved the way for the Trump Administration to increase pressure on China to revise its non-market approach to trade and to seek support from its traditional allies in this pursuit.
In March 2018, Trump announced the imposition of a 25% tariff on steel imports and a 10% tariff on aluminium on imports from every country in the world except for a few, e.g., Argentina, Australia and South Korea. The EU was initially excluded from these tariffs but soon the tariffs were extended to the EU.
The imposition of the tariffs was taken citing section 232 of the US Trade Expansion Act of 1962 as the legal basis, which authorises the US Secretary of Commerce to conduct comprehensive investigations to determine the effects of imports of any article on the national security of the US Specifically, the Presidential proclamation accompanying the “national security tariffs” stated that “The Secretary found and advised me of his opinion that steel articles are being imported into the United States in such quantities and under such circumstances as to threaten to impair the national security of the United States.”
The EU responded to the implementation of duties on imports of aluminium and steel and the threat of further tariffs on the EU car imports into the US by imposing retaliatory duties of up to 25% on iconic American products, such as bourbon whiskey, Harley Davidson motorcycles and denim jeans.
In real terms, the consequence of this trade dispute created problems for traders on both sides of the Atlantic. For example, in Ireland, med-tech businesses that used a specific grade of steel from the US were faced with a 25% customs duty on the importation of this raw material. This caused a re-orientation of supply chains and expensive re-validation of materials to comply with manufacturing specifications. Similarly, in the US, exports of bourbon whiskey to Europe collapsed.
In the first days of the Biden Administration, President Biden brought the US back into many multilateral international organisations and agreements that his predecessor had left. He resolved to repair relationships with “friendly” nations that had been alienated by Trump’s policies.
Although many of the Trump era tariffs are still in place, dialogue has been underway to calm the troubled waters of EU-US trading relations.
Trade and Technology Council
In his first foreign policy address in February 2021, President Biden announced that “America is back, diplomacy is back.”
From a trade perspective, prospects for a significant de-escalation of tensions with the EU looked promising when Brussels announced that tariffs on the imports of steel and aluminium would be suspended for five months to allow talks to proceed.
A joint statement was released at an EU-US summit in June 2021, in which both sides agreed to establish the Trade and Technology Council (TTC) where more intensive discussions on the steel and aluminium issue would take place.
Ten TTC Working Groups were set up to focus on technical standards, climate and green technology, secure supply chains, information and communications technology and services (ICTS) security and competitiveness, data governance and tech platform regulation, misuse of technology that threatens security and human rights, export controls, investment screening, promoting small and medium-size enterprises access to and use of digital technologies, and global trade challenges.
The inaugural meeting of the TTC was held on 29 September. In the immediate aftermath of the meeting, the reaction from both sides was largely very positive. However, the question of tariffs on steel and aluminium was said to have cast a shadow on proceedings as there was no breakthrough on this issue.
The “realpolitik” of the steel and aluminium issue is that both the EU and US are keen to prevent what they call “global over-production,” i.e., they want to protect their indigenous metals industries from cheap imports. The regions in the US where steel is produced are large voter bases for Donald Trump and considering how tight the Presidential election was in 2020, the Biden White House will want to demonstrate to US steel workers they will be protected on his watch.
Upon the conclusion of the talks at the TTC meeting, EU Commissioner Dombrovskis noted that time was ticking and that a solution needed to be found before the beginning of November. This would allow time for the Commission to go through its internal procedures to prevent the automatic re-implementation of tariffs on 1 December 2021.
G20 Rome
On 29 October 2021, following discussions on the margins of the G20 meeting in Rome, President Biden and European Commission President, Ursula von der Leyen, announced that the US and the EU had agreed on a deal to ease the tariffs on steel and aluminium trade and launched cooperation on a Global Arrangement on Sustainable Steel and Aluminium that would address many issues related to steel production around the world, in particular, environmental sustainability concerns around high carbon intensity steel manufacture and the overcapacity in global production.
Following the TTC meeting, reports began to appear on the websites of many news agencies that the 25% tariff on steel and 10% tariff on aluminium will actually remain in place, but the EU steel will have access to the US market via a Tariff Rate Quota (TRQ) (predicted to be 4.4 m tonnes per year) effective from 1 January 2022.
Access of EU steel to the US market is conditional. EU steel entering the US under the TRQ must be melted and poured in the EU. The “melted and poured” criterion is an industry-specific rule of origin and is aimed at preventing cheaper Chinese steel imports that may have been subject to minimal operations in the EU.
Many US trade bodies and companies have commented on this development and welcomed the fact that the 25% tariff rate was maintained. They commented that there was still an overproduction of steel globally and without the section 232 tariffs, cheaply-produced steel would be dumped on the US market, which would adversely affect the US steel industry and the livelihoods of thousands of US workers.
On the EU side, the retaliatory tariffs introduced in the wake of the US Section 232 measures will be suspended (see Commission Implementing Regulation (EU) 2021/2083),and this will come as a relief to many US exporters. DISCUS (Distilled Spirits Council of the United States) hailed this announcement and stated its ambition to rebuild its EU market share, which had collapsed by 37% as a result of the EU countermeasures.
In a tweet on 31 October, EU Commissioner Dombrovskis signalled that the deal struck between the EU and the US is not an “end destination” and that in the next few years, both sides would “work on a global steel and aluminium arrangement to remove (section) 232 tariffs for good, tackle overcapacity and support a more sustainable sector.”
After a period of strained EU-US relations, recent developments are to be welcomed. It is also a pragmatic step for western democracies to cooperate on this matter not only for environmental and capacity reasons, but also to counterbalance the growing assertiveness of China on the global stage to impose its non-market economic policies and practices.
The United Kingdom
The resolution of the EU-US trade tensions has left open an obvious question: what about the UK? When the US applied the trade measures against the EU, the UK was an EU member state. The UK left the EU as from 2020, which means that the settlement negotiated between the European Commission and the US regarding aluminium and steel does not apply to the UK. This is a potentially serious situation for British aluminium and steel exporters, since as from 1 January 2022, it will be at a serious disadvantage relative to its EU competitors exporting to the US So why are the US tariffs on British aluminium and steel still in place?
The reasons for this are as much political as they are economic.
The Financial Times media reported that the US, which invested considerable political capital in the Northern Ireland peace settlement (i.e., the Good Friday Agreement) is concerned by British threats to trigger article 16 of the Northern Ireland Protocol (NIP). The NIP was part of the withdrawal agreement, which provided for the orderly departure of the UK from the EU. The US is concerned that by triggering article 16, the Good Friday Agreement could potentially be undermined, which could have the effect of re-igniting simmering tensions in Northern Ireland. It should be noted that the UK government has described the link between steel and aluminium tariffs and the threat to activate article 16 of the NIP as a “false narrative” and has stated that the issues in question are not related.
Currently, the UK and US are engaging on the matter. In early December, the UK secretary for International Trade travelled to Washington to discuss this issue with her US counterpart. Clearly frustrated by the lack of progress, the UK secretary has threatened the US with countervailing measures on a range of US origin goods, such as bourbon whiskey, electric motors and orange juice.
Both sides will meet again in early in 2022 to try to resolve the matter.
Reduced VAT rate rules updated
On 7 December 2021, the EU Council reached an agreement on a proposal for updating the EU rules on reduced VAT rates. The new rules reflect the current needs of EU member states and the EU’s policy objectives, which have changed since the nearly 30-year old current rules were introduced. The changes focus on sustainability and digitalization and will level the playing field between EU member states and give them more flexibility and discretion to apply reduced and zero rates. The rules also phase out preferential treatment for goods that harm the environment.
Updated VAT rates
Current rules provide for a standard VAT rate of least 15% that applies to most supplies of goods and services. However, EU member states may apply one or two reduced VAT rates of at least 5% to products and services listed in Annex III of the EU VAT Directive. There also are “special rates,” whereby member states are permitted to depart from the normal rules due to transitional measures or derogations or they may apply a reduced VAT rate to products and/or services that are not listed in Annex III. The derogations and exemptions have resulted in a veritable patchwork of rates across the EU and unequal treatment between the member states that are permitted to apply special rates and those that are not.
The agreed upon rules are designed to eliminate some of the reduced rates and ensure that all EU member states are treated equally. Under the revised rules, member states will continue to apply a standard rate of VAT of at least 15%, and certain reduced/super reduced rates that historically were available only to some member states generally will be available to all member states. Member states may continue to apply one or two reduced VAT rates of at least 5% to goods and services in up to 24 categories listed in an updated Annex III. They also will be allowed to apply one reduced rate of less than 5% and a zero rate to up to seven categories of products and services listed in the Annex.
Member states that were applying reduced, super reduced or zero rates on items other than those mentioned above on 1 January 2021 may continue to do so in certain situations. However, those member states must provide information about the reduced/zero rates to the VAT Committee, after which other EU member states also will be allowed to apply reduced, super reduced or zero rates to the same products and services if certain requirements are met. EU member states that applied reduced VAT rates lower than 12% or zero rates on 1 January 2021 to products or services that are not listed in Annex III (and that are outside the scope of the transitional arrangements provided by the agreed proposal) may continue to apply those reduced or zero rates until 1 January 2032 or until a definitive VAT system for international trade takes effect, whichever is earlier.
Sustainability
An important concept in the new rules concerns sustainability. The idea is that products and services that contribute to the achievement of environmental or sustainability objectives should be taxed at a lower rate to encourage their purchase and use; conversely, products that pollute the environment and do not contribute to these objectives should not benefit from a reduced rate. The Council agreed to phase out reduced VAT rates or exemptions on fossil fuels and other goods with a similar impact on greenhouse gas emissions. Thus, it will not be possible to apply a reduced VAT rate (or a zero rate) to fossil fuels, peat and firewood as from 1 January 2030, and as from 1 January 2032, it will not be possible to apply a reduced rate (or zero rate) to chemical pesticides and fertilizers. However, a reduced VAT rate or zero rate may be applied to the supply of solar panels and their installation on private homes and public and other buildings used for activities of general interest.
Digitalization
As a result of the digital transformation of the economy, certain products provided by digital means are taxed differently than products provided by physical means. For example, in the case of theatre performances, EU member states currently may not apply a reduced VAT rate to online performances, whereas a reduced rate can be applied to live performances. The new rules will allow member states to apply the reduced rate to the live streaming of events (e.g., shows, theatre performances, circus performances and concerts), webcasting of radio or television programs via the internet, streaming of sporting events and online sports lessons, and the provision of internet access. (The option to apply the reduced VAT rate to books, magazines and newspapers already has been extended to digital versions.)
The rules governing the place of supply of services will be amended in certain circumstances to ensure taxation in the country of consumption.
The reduced rate on streaming events and online sports classes and the revised place of supply rules will apply as from 1 January 2025.
Next steps
The agreed upon rules now will be sent to the European Parliament for consultation on a final text by March 2022, and once the member states formally adopt the proposal, the legislation will become effective 20 days after publication in the EU official journal.