How Three Trade Wars with Europe Impact Beverage Alcohol

Sovos
November 30, 2021

By Robert M. Tobiassen*

As I write this, we honored soldiers and veterans last month on November 11, Veterans Day in the United States and Armistice Day in much of Europe. It is fitting to focus on another type of devastating conflict—the trade war. First and foremost, however, please do not interpret this comparison to minimize the real pain to families of the soldiers who died in military service and all of the civilian casualties that come with military war. 

Trade wars resemble military wars—they are easy to start and very hard to end; they reflect the personalities of the Heads of State involved; like a military arsenal they are equipped with many tools such as tariffs and quotas that are flexible tools that may be removed, revised, or enhanced quickly at any time; they can devastate an internal economy and employees similar to the bombing of a factory; there are always people who are collateral damage in both military and trade wars; allies may turn against allies depending on the winning direction of the wars; and like the United Nations (UN) is asked to mediate a peace in a military or civil war, the World Trade Organization (WTO) may be asked to resolve a trade war through the dispute settlement procedures. 

Ambassador Robert Lighthizer, former United States Trade Representative (USTR) representing President Trump and Ambassador Katherine Tai, present USTR representing President Biden, are the two “generals,” with a Lt. General role held by Secretary of Commerce Gina Raimondo. The three trade wars are Airbus/Boeing under the WTO Agreements, Digital Services Taxes (DST) under Section 301 of the Trade Act of 1974, and Steel and Aluminum tariffs under Section 232 of the Trade Expansion Act of 1962 (also known as “national security” tariffs). Three very different legal authorities but, in reality, all wars are fought in like ways, regardless of the underlying cause of the war.[1] 

Many people on both sides of the Atlantic Ocean are breathing some relief right now with the various resolutions of these three trade disputes. Yet all three are really armistices, the cessation of hostilities, and not permanent treaties of peace. They rest on foundations of good faith, assumptions, and adoption of collateral arrangements. Most people fail to recognize that these are temporary solutions that kicked the can down the road. Short-term, this feels successful, while long-term the final chapters are still unwritten. 

So, let’s look at what happened and what may happen in each trade dispute moving forward.

Airbus/Boeing 

Essentially, this trade dispute arose from government subsidies to Airbus by member states of the EU and to Boeing by Washington State to subsidize the development costs of newly designed civil airplanes. Overly simplified, France, Germany, Spain, and the United Kingdom gave “loans” to Airbus to develop new aircraft models and pay off the loans with proceeds from the sales of the aircraft. If the new aircraft was not profitable, the loans would never be paid, thus, a subsidy. For Boeing, Washington State provided state tax advantages. 

After many years of negotiations between the U.S. and the EU, each entity initiated dispute settlement proceedings at the WTO asserting each party was acting inconsistent with its obligations under WTO agreements (The federal government is obligated to ensure the states do not act inconsistent with U.S. trade obligations). WTO proceedings spanned from 2004 to 2019, with the final decisions that both the U.S. and EU were in violation.

The U.S. was authorized to impose retaliatory tariffs (“additional duties”) on $7.5 billion in volume of trade in goods from the EU. The tariff rate could be 1% or 100%. For example, suppose the base year is 2018, and the U.S. imported $1 billion of still wine from France. The volume of trade is the $1 billion and the U.S. could impose the 25% tariff or a 50% tariff, and it could adjust these percentages up and down. The $7.5 billion figure is not the dollar amount of tariffs to be collected. Customs and Border Protection (CBP) has assessed $1,119,778,631 in Airbus duties.

USTR published two potential tariff lists of proposed EU goods for public comment and hearing and then published a final list of tariffed goods by the subheadings of the U.S.’s Harmonized Tariff Schedule. For enforcement purposes by CBP, the tariffed goods must be identified by these subheadings. The final list must be reviewed by USTR periodically (first at 120 days and then every 180 days). USTR may increase or decrease the tariff rate percentages and may delete or add a good, provided the added good was subject to public comments earlier. The retaliatory tariffs remain in place until both parties agree to a settlement that removes the improper trade practice, in this case the subsidies.

The EU was authorized by the WTO in Boeing to impose retaliatory tariffs on $3.9 billion in volume of trade. The EU also had a public comment opportunity before imposing the actual tariffs. 

Ambassador Lighthizer was unable to negotiate a settlement and, at one point, wanted the EU to pay compensation to the U.S. in addition to removing the subsidies. As a departing volley, Ambassador (“General”) Lighthizer imposed additional tariffs on France and Germany that were effective on January 12, 2021, eight days before he left office. 

Ambassador Tai was confirmed in March 2021 and announced a settlement “cooperative framework” on June 17, 2021 that resulted in a five-year suspension of both the Airbus and Boeing tariffs. A parallel settlement was reached with the UK, following Brexit.  

Succinctly, the cooperative framework adopts principles that (1) future funding of R&D for civil aircraft development will be on “market terms” and carried out in an “open and transparent process…in a way that would [not] cause negative effects to the other side” and (2) cooperate in ways to address non-market economies (i.e., China) that are funding their domestic civil aircraft industry that would lead to undercutting the sustainability of the U.S. and EU civil aircraft industries. A working group is created to monitor implementation. 

Clearly, this is not a peace treaty but a “principled understanding” with a high level of ambiguity. My sense is that it will hold for the five-year suspension unless France or Germany pushes the edges on future Airbus funding so far that Ambassador Tai would have to terminate the suspension, which would then undercut her so far successful efforts to rebuild the U.S. trade relationship with the EU and start cooperation to address non-market economies. France is rightly upset about the Australia-U.K.-U.S. (AUKUS) nuclear submarine deal, and in January 2022, France assumes the six-month rotating Presidency of the Council of Europe (the senior decision-making body in the EU structure), and President Macron faces a reelection campaign in Spring 2022. All three could adversely impact U.S. relationships with France. Finally, within the five-year suspension, there is some hope that the WTO will be reformed in a way that it can negotiate agreements on issues such as state subsidies for all WTO Members, including China, to adhere. 

Bottom line, we are in a holding pattern and not a peace agreement.  

Digital services taxes

Starting with France and eventually extending to Austria, Czech Republic, EU Commission level, India, Indonesia, Italy, Spain, Turkey and the UK, Ambassador Lighthizer opened Section 301 investigations on the Digital Services Tax (DST) imposed by each of the countries and commission asserting the DSTs targeted large U.S. companies and therefore discriminated against the U.S.. Retaliatory tariffs were imposed against French products but immediately suspended and USTR under Ambassador Tai has either closed investigation against certain countries or suspended the investigations and findings against other countries. I label this as a “unilateral Section 301” because there is no third-party arbitrator sanctioning the tariff action like the WTO in the Airbus matter. 

Essentially, the USTR asserted that the DSTs (1) discriminated against U.S. companies and (2) were inconsistent with the established norms of international taxation, which are founded on physical presence in a country and calculated on income and not revenue generated in the taxing country. 

The armistice here results from a multilateral negotiation at the Organization for Economic Cooperation and Development (OECD), a 38-country member entity with five key partner countries, for a new global framework for imposing taxes on companies doing international business. The OECD players represent approximately 80% of all global trade and investment. An agreed upon framework was announced in July 2021. These longstanding negotiations were relied on by USTR for suspension of the French DST tariffs and the USTR actions on the other DST countries. USTR is reaching agreement with various countries on the interim status of enacted DSTs pending implementation of the OECD framework.

Bottom line, this cease fire will hold as long as the U.S., EU member states, and other key economies make good faith efforts and hopefully succeed to enact the enabling domestic legislation required for the new framework. It behooves countries to act in a very transparent and open way about these efforts being undertaken. A peace agreement will be reached only when key countries have enacted the domestic legislation. Unfortunately, given the political divisions in your nation’s capital right now, political will and consensus here seems distant. 

Steel and aluminum

Acting on a recommendation by the Secretary of Commerce, in March 2018 the Administration imposed by proclamation tariffs of 25% on steel and 10% on aluminum imported from any country except Canada and Mexico (which were in pending negotiations with the U.S.) under Section 232 that authorizes trade remedies whenever imports of a good are of such magnitude that they threaten U.S. “national security.” The Department of Commerce (DOC) is the lead agency here and works in consultation with the Secretary of the Treasury and USTR, among other Executive Branch components. 

The rationale here is the large volume of imported steel and aluminum results in diminished domestic capacity to produce steel and aluminum in a free trade market competition. These tariffs increased the price of steel and aluminum to make U.S. producers competitive. “National security” was invoked because the U.S. needs domestic sources of steel and aluminum in the time of war. Nevertheless, the EU took great umbrage to the notion that it was a threat to the U.S. national security, particularly in light of the NATO partnership. In turn, it imposed retaliatory tariffs against the U.S. and, in particular, against U.S. whiskies exported to the EU (including the UK). 

This trade war is more challenging to end than the two previous ones discussed because the real party of interest is China and China is not at the negotiating table. China produces between 56 and 60% of the world’s supply of steel. Simply imposing the Section 232 tariffs on China is not effective because steel can be exported to third countries and processed so there is no agreed upon objective test to establish the true origin of the steel (kind of like a problem with transfers of bulk wine). So, the U.S. has taken a “managed trade” approach here and not a “free trade” one.   

On October 31, 2021, the Secretary of Commerce and USTR announced a framework on the steel and aluminum tariffs with the EU under which tariff free entry of steel and aluminum is permitted at “historic levels.” This is a “tariff rate quota.” Any quantities above these levels would be tariffed. Presentation is everything. The framework highlights with greater text the agreement between the U.S. and EU to address the high level of emissions created in steel and aluminum production. 

Bottom line, while not highlighted much, the EU views the framework as a temporary one to last two years. This type of voluntary quota may not be WTO consistent. Also, the European Commission must decide how to allocate the “historic levels” among the member states producing steel for export. So, no signed peace agreement yet, although on November 28, 2021, Ambassador Tai and Commerce Secretary Gina Raimondo published an op-ed touting the framework understanding

Where do we go from here?

During the past eight months, Ambassador Tai has performed miraculous steps in rebuilding trade relations with the traditional European trade partners of the United States. Ultimate success is contingent on good faith efforts by both sides of the Atlantic Ocean to fill in the gaps in the armistice documents and reach a peace agreement. These frameworks create a warmer relationship but one that is still fragile. The EU is balancing trade interests with the U.S. in conjunction with trade interests with China and Russia. The U.S. is doing the same in balancing its trade policies with China, as well as implementing the USMCA with Canada and Mexico. Simply put, there are a lot of moving parts here and, like a Rube Goldberg contraption, you do not always know how a piece will fall. 

You may be asking yourself, why is the President leading here and where is Congress? The Constitution vest powers to make treaties, appoint U.S. ambassadors, and receive ambassadors from other Nations in the Executive Branch. Many foreign policy powers are implied from these short sections. For example, the power to receive Ambassadors implies the power to recognize nations. This is why President Truman could recognize the State of Israel only 11 minutes after it was established in May 1948. Congress has the power to regulate commerce with foreign nations and used this power to enact statutes giving greater trade authority to the Executive Branch. Recent wide-sweeping trade wars have raised the debate on whether Congress should pull back some of those statutory powers but that is a question for another blog.

The significant point here is that the final chapters on the Airbus/Boeing, DST, and steel and aluminum trade wars have not been written. The various timeframes explained above mean that final resolutions are years away. Thus, different occupants of the White House going forward will write, and perhaps rewrite, the final chapters. Recall, the World War I Armistice was signed on November 11, 1918, but the Treaty of Versailles ending the War was not signed until June 28, 1919. For the current trade wars, eight months will not cut it. But how long will cut it remains unclear.   

[1] Other U.S. trade laws authorize unilateral sanctions such as Section 201 of the Trade Act of 1974, to allow U.S. industry to grow and adjust to being competitive and the International Economic Emergency Powers Act (1977) that President Trump threatened to use against Mexico if the latter did not undertake steps to mitigate the immigrants coming to the U.S. southern border. Neither of these legal authorities are examined here.

* Robert M. Tobiassen is the President of the National Association of Beverage Importers, Inc. (NABI), Washington, DC, since October 2018. Prior to that appointment, he was the Principal at Tobiassen Consulting Plus Solutions LLC, after a 34-year Federal service career with regulatory, taxation and administrative and judicial enforcement experience with the domestic and global alcohol industry and served in the career Senior Executive Service (SES) as Chief Counsel, Alcohol and Tobacco Tax and Trade Bureau (TTB), Department of the Treasury.

Mr. Tobiassen holds a B.A. in Political Science with distinction from the University of California, Berkeley, a J.D. from the Lewis and Clark College, Portland, Oregon where he served on law review, and a LL.M. in Taxation from the Georgetown University Law Center, Washington, DC. Among other awards, Mr. Tobiassen received the 2003 Presidential Rank Award for Meritorious SES Executives and the 2012 Distinguished Service Award from the Secretary of the Treasury. 

The views expressed in this article are Mr. Tobiassen’s views and do not reflect those of NABI. For more information about NABI and membership options, please visit our website at bevimporters.org 

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Sovos is a leading global provider of software that safeguards businesses from the burden and risk of modern transactional taxes. As VAT and sales and use tax go digital, businesses face increased risks, costs and complexity. The Sovos Intelligent Compliance Cloud is the first complete solution for modern tax, giving businesses a global solution for tax determination, e-invoicing compliance and tax reporting. Sovos supports more than 7,000 customers, including half of the Fortune 500, and integrates with a wide variety of business applications. The company has offices throughout North America, Latin America and Europe. Sovos is owned by London-based Hg. For more information visit www.sovos.com and follow us on LinkedIn and Twitter.
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