November 3, 2021 US and EU agree to end steel and aluminum tariffs and cooperate to address carbon intensity Executive summary On 31 October 2021, United States (US) President Joe Biden and European Commission President Ursula von der Leyen announced that the US and the European Union (EU) have reached an interim arrangement regarding a dispute over imports of EU-origin steel and aluminum into the US.1 The arrangement will eliminate US punitive duties imposed on EU-origin steel and aluminum under Section 232 of the Trade Expansion Act of 1962 and instead, implement a tariff rate quota (TRQ), set to be effective on 1 January 2022.2 Presently, there is a 25% tariff levied on certain US products imported into the EU, such as bourbon and motorcycles. Although there is no deadline set, the EU will work to remove these tariffs. As a result of the agreement, the anticipated doubling of these punitive rates will no longer go into effect on 1 December 2021. The formal announcement and agreement reached comes as part of a carbon-based sectoral arrangement with goals of limiting carbon overproduction and fostering US production. Detailed discussion Background The Office of the US Trade Representative (USTR) released a notice, in addition to detailed documents, discussing the agreed US-EU cooperation. These documents also included general principles and plans for the implementation of a tariff-rate quota (TRQ). Foremost, the US will remove tariffs on EU steel and aluminum products under Section 232. These tariffs will be replaced with a TRQ under Section 232, which will allow for a certain quota of historically-based volumes of EU steel and aluminum products to enter the US duty free. The US will replace the existing 25% tariff on EU steel products and 10% percent tariff on EU aluminum under Section 232 with this TRQ system. For EU steel, the annual import volume under the TRQ is set at 3.3 MMT covering 54 product categories, which will be allocated by EU Member States considering a 2015--2017 historical period. This will exclude certain derivative articles previously not subject to section 232.The TRQ will only cover steel imports which are "melted and poured" in the EU and supported by documentation specific US requirements. The TRQ will be calculated annually based on US demand and administered quarterly with an allowance of certain roll over volumes. Importantly, the US will still retain its exclusions process under Section 232 for EU-origin steel products and will not attribute excluded products into the TRQ. Applications for exclusions will be extended until US fiscal year 2021. Exclusions which have been utilized within the US fiscal year 2021 will be extended for two calendar years without reapplication until 31 December 2021. For EU aluminum imports, annual import volumes are set at 18 thousand metric tons (TMT) for unwrought aluminum, and 366 TMT for semi-finished (wrought) aluminum within 14 categories. The US will also retain the Section 232 exclusion process for aluminum products. Certain derivatives of aluminum products will still not be subject to Section 232 as the aluminum TRQ will be calculated annually and administered on a semiannual basis, with a limitation that more than 60% of the TRQ can be filed within the first half of a year. Importantly, as of 31 October 2021, importers must provide a Certificate of Analysis for each aluminum product imported into the US. In June 2018, the EU introduced retaliatory tariff measures on US exports imposing a 25% tariff on certain US exports. A doubling of these EU tariffs was set to take effect on 1 June 2021 but was delayed to 1 December 2021 with hopes that the parties could come to an agreement. As part of this agreement, the EU will suspend the additional duties imposed on US goods and forgo any tariff increases.3 The EU has stated that this suspension is based on future actions of the US in removing EU-origin steel and aluminum tariffs pursuant to this agreement. However, the EU provided that EU-origin steel safeguard measures which expire on 30 June 2024 will stay in effect. These safeguard measures were implemented to protect the EU steel industry in reaction to US' use of Section 232. Additionally, both the US and the EU will suspend disputes initiated against each other at the World Trade Organization by 5 November 2021.4 For matters that are currently before panels, the parties have agreed to settle these disputes through arbitration with further details to be released in December 2021. This statement comes after continued efforts of the US and EU to overcome disputes involving civil aircrafts. Previously, on 15 June 2021, the US and EU announced 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.5 The US and EU also announced that they will cooperate in trade remedies and will meet regularly to address non-market excess capacity within the steel and aluminum sectors. As part of this cooperation, the US and EU agreed to negotiate steel and aluminum arrangements to restore market-oriented conditions and help limit carbon emissions. To facilitate these arrangements, the US and EU agreed to form a "technical working group" to assist with the negotiations. This focus on carbon emissions demonstrates the continued efforts of US and EU to limit imports of high-carbon steel from China on environmental grounds and to protect domestic industries. While not expressly announced with the present US-EU agreement, the US is also reportedly in discussions with the UK and Japan on similar arrangements, but no timeline on those discussions is available at this time. Actions for business Importers should leverage data analytics to determine specific impacts of products in comparison to the 2015 to 2017 historical timeframe for the anticipated TRQ framework for planning purposes and to understand potential tariff exposure. Companies should also assess specific products for potential considerations as eligible for exclusions as such excluded products will not count toward the TRQ framework. US distributors should be aware of the removal of Section 232 tariffs and its impact on transfer prices regarding the purchase of EU-origin steel and aluminum. Reporting any transfer pricing adjustments to US Customs especially when duties are present for only a portion of the year may require actions to be taken in advance of importations. As US Customs have 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 importers of US goods subject to this dispute should also remain attentive to continued negotiations by reviewing future purchases and forecasts of goods with the understanding that these additional duties will be removed. __________________________________________ For additional information with respect to this Alert, please contact the following: Ernst & Young LLP (United States), Global Trade
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