June 16, 2021
US-EU announce Joint Cooperative Framework for Large Civil Aircraft; Suspend punitive tariffs on wide range of products for five-year period
On 15 June 2021, the United States (US) Trade Representative (USTR) and European Union (EU), in a joint statement, announced a cooperative framework to address the 17-year large civil aircraft dispute. The statement pronounced that both sides would suspend all existing punitive tariffs imposed in relation to the large civil aircraft subsidies for a period of five years.1
The five-year suspension follows a joint announcement in March 2021 to postpone punitive measures for four months, which was designed to provide additional time for ongoing negotiations and set to expire on 11 July 2021. The new agreement for the five-year suspension will now go into effect on 11 July 2021 and will relieve punitive tariffs of 15 to 25% levied under Section 301 of the Trade Act of 1974 (Section 301) on EU-origin products.
The long-standing dispute between the EU and US surrounding civil aircraft subsidies reached a turning point in May 2018 following a formal challenge by the US, which resulted in a determination by the World Trade Organization (WTO) that subsidies provided to non-US aircraft manufacturers were inconsistent with the EU's obligations under the General Agreement on Tariffs and Trade (GATT). The WTO Appellate Body authorized the US to take countermeasures on EU exports worth up to US$7.5 billion.
As a result of the WTO decision, the US imposed punitive tariffs on specific goods originating in the United Kingdom (UK) and/or EU Member States under Section 301 in October of 2019. The list of products subject to US tariffs has been altered and expanded over time, and has included punitive tariffs of 15% on certain civil aircrafts and civil aircraft parts, as well as 25% punitive tariffs on goods such as cheese, spirits and apparel of UK- and EU-origin.
In October 2020, the WTO authorized the EU to take similar countermeasures of up to US$4 billion on US exports due to US subsidies provided to large civil aircraft producers being inconsistent with US GATT obligations. In November 2020, the EU imposed punitive tariffs on civil aircrafts and an array of other targeted US-origin goods.
The impacts of these actions by both sides resulted in increased Trans-Atlantic tensions, which began to ease following President Joe Biden's Administration's focus on reshaping trade relations. In March 2021, the USTR published successive joint statements with the UK and EU suspending punitive tariffs for a period of four months. The suspensions became effective on 4 March and on 11 March for the UK and EU, respectively, with the intent of the suspension to allow for additional time for both sides to negotiate a joint resolution that would aim to permanently resolve the dispute.
On 15 June 2021, the USTR published a Joint US-EU Statement announcing that the parties had reached an agreement on a cooperative framework to address the large civil aircraft disputes and suspending all tariffs related to the dispute for a period of five-years. The cooperative framework establishes a Working Group on large civil aircraft with the goal of analyzing and overcoming any disagreements that may arise between both sides. In addition, the Working Group will cooperate jointly to confront threats from non-market economies to their large civil aircraft industries. The joint US and EU annex on cooperation on non-market economies includes specific areas of cooperation including information sharing, inward investments, outward investments and joint analysis of non-market practices. In the announcements, the USTR characterized the breakthrough agreement as a step towards resolving the complex dispute and realigning with EU counterparts to confront joint threats to their respective industries from competing non-market practices.
It should be noted current understanding of the Agreement is that it applies to US-EU trade, however, a similar outcome for the US-UK portion of the dispute is expected. Additionally, the parties will endeavor to work towards further efforts for reforming the WTO to address trade issues for the future.
Actions for businesses
Companies with US and EU and/or UK trade operations, and particularly those importing UK- and EU-origin goods into the US, should closely monitor trade negotiations between the respective countries as they evolve over the five-year suspension period.
US distributors who purchase EU-origin goods from related parties which have been subject to Section 301 duties will likely have transfer prices impacted by the suspension of Section 301 duties. Along with the strategic importance of aligning the income tax and customs approaches, mechanics for reporting any transfer pricing adjustments to US Customs should also be reviewed. This process may be particularly complex when duties are present for only a portion of the year, and in many cases, actions need to be taken in advance of importations. US Customs has very specific rules for reporting adjustments to prices made after importation, such as transfer pricing adjustments. These rules require that the importer take specific actions before importation of goods for which prices may be adjusted, including adding customs-specific language to transfer pricing policies.
EU distributors of US goods subject to the punitive tariffs will face similar transfer pricing challenges in their jurisdictions. Rules for reporting transfer pricing adjustments vary among EU Member States. This highlights the need for careful planning to manage volatile supply chain costs like the punitive tariffs in each jurisdiction of operations.
For additional information with respect to this Alert, please contact the following:
Ernst & Young LLP (United States), Global Trade