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3 July 2020

 

As trade barriers and trade measures increase, an EU report shows that protectionism has become “ingrained” in global trade

On 18 June 2020, the European Commission (hereinafter, Commission) published the Report from the Commission to the Parliament and the Council on Trade and Investment Barriers for the period of 1 January to 31 December 2019. The report underlines that trade-restrictive actions by partner countries show “worrying structural change” and that protectionism did not only continue raising, but had become “structurally ingrained” in global trade. At the same time, open trade flows are key to ensure a global recovery following the effects of the Covid-19 pandemic.

The EU’s Trade Barriers Report

In 2007, the EU set up the Market Access Partnership to structure and improve the cooperation between the Commission, EU Member States, and EU businesses. The Market Access Advisory Committee (MAAC) and sectorial Market Access Working Groups (MAWGs) meet on a monthly basis in Brussels, while regular meetings of the Market Access Teams (MATs) or EU Trade Counsellors’ meetings take place in third countries. Through this partnership, the EU aims at identifying trade barriers faced by EU businesses, which are then reported and assessed in the EU’s annual Trade and Investment Barriers Report (hereinafter, TIBR). Importantly, the reported trade barriers are notified by businesses and can then be addressed bilaterally between the EU and the third countries’ authorities.

The previous report for 2018, published in 2019, had identified 45 new trade barriers in countries outside of the EU. For 2018, the overall total number of trade barriers amounted to a record high of 425 measures in 59 different countries (see Trade Perspectives, Issue No 13 of 28 June 2019). The most recent edition of the TIBR identifies 43 new trade barriers put in place in 2019 in countries outside of the EU. The overall total number of trade barriers now stands at 438 measures in 58 different countries.

The first part of the TIBR provides an analysis of the overall trade barriers registered in the EU’s Market Access Database, organised on the basis of the respective country, the type of barrier, and the concerned sector. In 2019, the top five countries with the highest number of barriers have remained the same vis-à-vis 2018. The TIBR lists 38 trade barriers for China, followed by Russia with 31 trade barriers in place, followed by Indonesia with 25 and the US with 24. India and Turkey share at the fifth position with 23 trade barriers. Other countries appearing on the list are Brazil (19), South Korea (19), Australia (14), Algeria (12), Thailand (12), Mexico (11), Egypt (10) and Malaysia (10). The further 190 trade barriers are distributed among the remaining 45 countries.

Overall, the TIBR notes that, compared to 2018, border measures have become more numerous and stand at 229 trade barriers, while the ‘behind the border’ measures amount to 188. ‘Behind the border’ measures are domestic restrictions related to services, investments, government procurement, intellectual property rights or unjustified technical barriers to trade that affect trade in goods. The report states that this change “is a sign that partners are resorting to a wider panoply of types of barrier to achieve protectionist goals”. China has been the country imposing the highest number of measures in 2019, followed by countries in the Mediterranean and Middle East region. The two latter regions account for almost EUR 28.5 billion out of the EUR 35.1 billion of export affected by new barriers.

New trade barriers

The second part of the TIBR provides a more detailed analysis of the new barriers added in 2019. It focuses on the trading partners for which four or more new barriers were recorded in 2019 and which correspond to the largest share of the potentially affected EU trade flows.   43 of the 438 trade barriers were added to the list during the course of 2019, mainly due to new measures in Saudi Arabia (5), Lebanon (5), China (4), and Albania (3). The TIBR points out that, in 2019, sanitary and phytosanitary (SPS) measures alone represented one third of all new trade barriers.

According to the TIBR, of the four new barriers recorded for China, three new barriers concerned the high-tech industries, which could have an economic impact of EUR 15 billion on EU-China trade. While the majority of the new trade barriers by China concerned the services sector, in Lebanon and Saudi Arabia the trade barriers focussed on goods. The situation in Algeria, which is linked to the EU under the EU-Algeria Association Agreement, continues to be increasingly worrisome for EU businesses. In 2018, Algeria introduced a temporary import ban on 877 products, a measure that was amended in 2019. Additionally, Algeria significantly increased customs duties on a list of 129 tariff lines and introduced, in January 2019, a ‘special custom surcharge’ for a wide range of goods (between 30% and 200% of the value of the goods).

Tarde barriers resolved

The third section of the TIBR identifies the tools used in the EU’s Market Access Strategy to address the identified trade barriers and reviews the 40 trade barriers that were successfully resolved in 2019. EU exports concerned by those measures are worth at least EUR 19.4 billion. In 2019, Saudi Arabia removed five barriers, followed by Egypt, Singapore, and Russia that eliminated three trade barriers each. Australia, Canada, China, Japan, South Korea, Mexico, Ecuador, and United Arab Emirates removed each two barriers. The TIBR notes that, in 2019, significant progress was achieved in removing agro-food barriers. At the same time, measures that typically apply to industrial sectors or services proved more challenging to resolve. This is the case in sectors, such as high tech, where there was only one measure removed.

EU trade relationships with the US

Finally, the TIBR provides, for the first time, a dedicated section focussing on the US. In 2019, tensions between the EU and the US significantly increased, in particular following the imposition of tariffs on USD 7.5 billion of EU goods after the WTO ruled in favour of the US in the European Communities and Certain Member States — Measures Affecting Trade in Large Civil Aircraft (hereinafter, Airbus case). The additional tariffs imposed by the US cover a wide range of products, including tariffs of 25% ad valorem, and apply to a large number of agricultural products from all EU Member States.

Additionally, the pressure on transatlantic trade, due to the imposition of tariffs by the US in June 2018 on EU steel and aluminium on alleged national security grounds, continues. The EU adopted rebalancing tariffs on US exports to the EU, which it has offered to withdraw as soon as the US lifts its tariffs. In January 2020, the US expanded the steel and aluminium tariffs to certain derivative products. The EU reacted in April 2020 by imposing further rebalancing measures on three US products, namely, certain types of lighters, plastic fittings for furniture and coachwork, and playing cards.

Tensions between the EU and the US continue to increase and the TIBR refers, inter alia, to: 1) The implementing rules for the Base Erosion and Anti-abuse Tax (BEAT) and the Deduction for Foreign Derived Intangible Income (FDII); 2) The rule published by the US Department of Commerce (DOC) on 3 February 2020, stipulating that the DOC may treat a foreign country’s currency undervaluation as a countervailable subsidy; and 3) The investigation launched by the US on the French digital service tax under Section 301 of the Trade Agreements Act of 1974.

A shift of paradigm?

The TIBR concludes that the findings point to a “paradigm shift, with protectionism becoming ingrained in trade relations, barriers affecting sectors at the heart of the EU’s technological sovereignty, increasing challenges in addressing industrial and services barriers, and barriers spreading across specific regions in a sort of contagion effect”. Highly integrated global supply chains make businesses increasingly dependent on seamless trade, but as the EU’s TIBR shows, trade is no longer as seamless as it could and should be, in particular if international trade disciplines were respected.

Businesses must monitor any development that could affect their supply chains, as trade measures, such as additional tariffs or new restrictive or discriminatory non-tariff measures, could disrupt trade flows and prove very costly. At the same time, if timely and properly addressed with the competent authorities, who may be unaware of the implications for certain sectors, such negative implications can often be avoided or mitigated.

 

The US ‘carousel’ keeps turning, while the EU still awaits the WTO arbitrator’s decision on countermeasures in the Boeing case

On 26 June 2020, the Office of the US Trade Representative (hereinafter, USTR) published in the US Federal Register its Review of Action: Enforcement of U.S. WTO Rights in Large Civil Aircraft Dispute (hereinafter, Review of Action). With this notice, the USTR opened a period of public consultation to extend or amend the list of products subject to additional tariffs for the enforcement of US rights in the case of European Communities and Certain Member States — Measures Affecting Trade in Large Civil Aircraft (hereinafter, Airbus dispute). A multitude of products, such as Irish Whiskey, Italian pasta, French Roquefort and German knives could soon be subject to additional tariffs. At the same time, the EU is also preparing to take action once the World Trade Organization’s (hereinafter, WTO) arbitrator issues the final decision on the amount of damages that the EU can claim from the US in the parallel case United States — Measures Affecting Trade in Large Civil Aircraft — Second Complaint (hereinafter, Boeing dispute). However, this decision has now been delayed to the Autumn of this year.

Enforcement of US rights in the Airbus dispute

On 9 October 2019, the USTR published its ‘Notice of Determination and Action Pursuant to Section 301: Enforcement of U.S. WTO Rights in Large Civil Aircraft Dispute’, which provided the initial definitive list of products in the US Federal Register subject of additional tariffs. The additional tariffs apply since 18 October 2019 and amount to an additional 25% ad valorem, except for new airplanes and other new aircraft from France, Germany, Spain, or the UK, for which an additional duty of 10% ad valorem applies. The additional tariffs of 25% ad valorem apply to a large number of agricultural products from all EU Member States. On 18 October 2019, the USTR published ‘Technical Adjustments to Section 301 Action: Enforcement of U.S. WTO Rights in Large Civil Aircraft Dispute’, correcting a number of references (see Trade Perspectives, Issue No 19 of 18 October 2019).

On 12 December 2019, the USTR published the first ‘Review of Action: Enforcement of U.S. WTO Rights in Large Civil Aircraft Dispute’ in the US Federal Register, which invited interested stakeholders to submit their comments on the issue. On 14 February 2020, the USTR published the ‘Notice of Modification of Section 301 Action: Enforcement of U.S.WTO Rights in Large Civil Aircraft Dispute’ (hereinafter, Notice), amending certain aspects of the first Notice, which had entered into force in October 2019. The amendments include an increase from 10% to 15% ad valorem for new airplanes and other new aircraft (other than military aircraft) and the introduction of a 25% ad valorem tariff for “butchers’ or kitchen chopping or mincing knives (o/than cleavers w/their handles)” originating in France and Germany. This was the first review by the US of the list of products subject to additional tariffs. On the basis of US legislation, further reviews of the additional tariffs are to be completed every 180 days following the first review, which took place 120 days after the first list of additional tariffs was implemented.

Review of action

With respect to the additional tariffs imposed following the decision by the WTO arbitrator, the USTR stated, in October 2019, that it had “the authority to increase the tariffs at any time, or change the products affected”, including “the authority to apply a 100 percent tariff on affected products”. The USTR’s intention to revisit and revise the list of goods that are subject to additional duties is known as ‘carousel retaliation’, referring to a regular rotation of goods subject to tariffs, which is designed to penalise different sectors and to put pressure on several key constituencies, so as to trigger their political and commercial actions within the incompliant WTO Member (in this case, the EU) and ultimately achieve compliance.

The legal basis of the USTR’s authority to revise a retaliation list is found in Section 306 Monitoring of Foreign Compliance of the Trade Act of 1974. In particular, Section 306(2)(B) on the ‘Revision of Retaliation List and Action’ states that, “except as provided in clause (ii), in the event that the United States initiates a retaliation list or takes any other action described in section 301(c)(1)(A) or (B) against the goods of a foreign country or countries (…) the Trade Representative shall periodically revise the list or action to affect other goods of the country or countries that have failed to implement the recommendation”.

On 26 June 2020, the USTR announced the second ‘Review of Action’ regarding the countermeasures under which the US Administration is again evaluating the products subject to increase tariffs in the context of the Airbus dispute. A public consultation was launched on 26 June and will last until 26 July 2020. With the notification document, the USTR published three annexes: Annex I is the list of products currently subject to additional tariffs; Annex II is the list of products already considered before, but that at the end were not subjected to additional tariffs; and Annex III is a new list of products, including 30 new products to be considered for additional tariffs, such as olives, chocolates, coffee, sugar confectionary, and trucks. The products in Annex II, which are now being considered again, include Irish Whiskey, French Roquefort cheese, pork, pasta, jam, frozen ham, apples and pears pastes, juices, wine and sparkling wines, coffee, biscuits and waffles, as well as virgin olive oil. While Annex II refers to products from any EU Member State, Annex III only concerns products originating in France, Germany, Spain, or the UK.

Following the announcement of this most recent ‘Review of Action’ by the US, the EU stated that the ’Revision of Action’ notice created “uncertainty for companies and inflicts unnecessary economic damage on both sides of the Atlantic”. Some industries also expressed their concerns regarding the possibility of new tariffs. The Distilled Spirits Council of the US stated that “EU and US distilled spirits companies have suffered enough as a result of this trade war”.

Additionally, it is concerned that this latest review would only lead to more escalation. The Scotch Whisky Association also pointed out that “the 25% tariff already imposed by the US on single malt Scotch whisky and Scotch whisky liqueurs has already done significant damage” and that, since the application of the additional tariff in October 2019, exports of Scotch Whisky to the US had decreased by more than 25%.

The parallel Boeing dispute

The EU is currently also pursuing a decision by a WTO arbitrator regarding the parallel Boeing dispute and noted its expectation that the same principles applied by the arbitrator in the Airbus dispute would be applied in the Boeing dispute. At the meeting of the WTO Dispute Settlement Body on 14 October 2019, the EU pointed out that, in the Boeing dispute initiated by the EU, it “had obtained findings” that the US was “out of compliance with respect to both Washington State tax subsidies and FSC tax breaks”.

While the additional tariffs imposed by the US onto EU products continue harming traders and consumers from both sides of the Atlantic, the EU has already prepared a list of possible products from the US that could be subject to its additional tariffs. The EU is waiting for the WTO decision on the amount of damages that it can claim from the US. The provisional list was published by the Commission in 2019. The WTO decision was originally expected for Spring 2020, but has now reportedly been delayed to at least September 2020.

Next steps

The changes on the basis of the previous review by the US entered into force on 21 February 2020. Therefore, the new changes should take effect in mid-August, 180 days from 21 February 2020. The EU has expressed several times its willingness to negotiate with the US and to make concrete proposals that would allow both parties to restore free trade. However, until now, the US has not shown any interest in engaging in negotiations with the EU. This may change once the WTO arbitrator in the parallel ‘Boeing dispute’ will serve the EU its ‘retaliatory cards’.

Businesses on both sides of the Atlantic should closely monitor the developments related to these two disputes, which may significantly affect their trade and supply chains. Businesses should also start assessing the possible impact that the likely upcoming EU ‘retaliatory duties’ on US products will have on their products and put in place the necessary measures and advocacy initiatives to minimise it.

 

Farm-to-Fork Strategy: European Commission publishes its Roadmap for an Evaluation of the EU’s Directive on the Sustainable Use of Pesticides

On 2 June 2020, the European Commission (hereinafter, Commission) launched a consultation on a Roadmap for the evaluation of the existing EU legislation on the sustainable use of pesticides, which was published together with an Inception Impact Assessment for the possible revision of this legislation. Current EU rules on the sustainable use of pesticides aim at protecting human health and the environment from the possible risks and impacts of pesticides, encouraging the reduction of pesticides through integrated pest management solutions and alternatives to chemical pesticides. The Commission’s initiative intends to review to what extent these objectives have been met and whether there are options for further reducing pesticide use to achieve the objectives of the Farm-to-Fork Strategy (see Trade Perspectives, Issue No. 10 of 22 May 2020), responding to the commitment undertaken as part of the European Green Deal, adopted on 11 December 2019, to reduce the use and risk of chemical pesticides and to address important public concerns.

The Sustainable Use of Pesticides Directive aims at reducing the risks of the use of pesticides

Pesticides (or, more technically, plant protection products) are used against plant pests, plant diseases, and for weed control mainly in agriculture, but also in forestry and green urban areas. Since pesticides can have harmful effects on the environment and on human health, they are strictly regulated at EU level and their use is a societal concern. Directive 2009/128/EC of the European Parliament and of the Council of 21 October 2009 establishing a framework for Community action to achieve the sustainable use of pesticides (hereinafter, the Sustainable Use of Pesticides Directive or SUP Directive) was adopted with the aim of reducing the risk and impact of the use of pesticides on human health and the environment. ‘Integrated pest management’ is defined in the SUP Directive as “careful consideration of all available plant protection methods and subsequent integration of appropriate measures that discourage the development of populations of harmful organisms and keep the use of plant protection products and other forms of intervention to levels that are economically and ecologically justified and reduce or minimise risks to human health and the environment” and emphasises “the growth of a healthy crop with the least possible disruption to agro-ecosystems and encourages natural pest control mechanisms”.

Similar to other “low-pesticide input pest management practices”, such as organic farming, the integrated pest management concept of the SUP Directive includes actions like crop rotation, pest monitoring and adoption of non-chemical pest control techniques and less hazardous pesticides. The SUP Directive covers the use of pesticides, complementing Regulation (EC) No 1107/2009 of the European Parliament and of the Council of 21 October 2009 concerning the placing of plant protection products on the market, Regulation (EC) No 396/2005 of the European Parliament and of the Council of 23 February 2005 on maximum residue levels of pesticides in or on food and feed of plant and animal origin and Regulation (EC) No 1185/2009 of the European Parliament and of the Council of 25 November 2009 concerning statistics on pesticides.

The European Green Deal and the Farm-to-Fork Strategy

As part of the European Green Deal, the Commission’s Farm-to-Fork Strategy highlights the need for shifting to fair, healthy, and environmentally-friendly food systems, while also stressing the importance of improving the position of farmers, who are important in managing the transition, in the value chain. The Farm-to-Fork Strategy proposes the reduction of the overall use of chemical pesticides by 50% by 2030. The SUP Directive is seen as a crucial tool to achieve the targets outlined in the Farm-to-Fork Strategy and, as such, the Commission intends to strengthen it. The Commission’s initiative will be driven by the following objectives: 1) Reduce the use and risk of pesticides containing more hazardous active substances; 2) Increase the uptake of less hazardous and non-chemical alternatives for pest control; 3) Improve the implementation, application and enforcement of the SUP Directive across all EU Member States; and 4) Improve the availability of monitoring data (e.g., on the implementation and application of the SUP Directive and health and environmental aspects).

Weaknesses in the implementation, application, and enforcement of the SUP Directive

The European Parliament’s report on the implementation of the SUP Directive, a recent report of the European Court of Auditors, and reports by the Commission itself, point at weaknesses in the implementation, application and enforcement of the SUP Directive and at a failure to sufficiently achieve its overall objectives. In addition, there is growing societal concern related to the use of pesticides. The Commission is, therefore, evaluating the SUP Directive and assessing the impacts of possible future measures intended to significantly reduce the use and risk of chemical pesticides.

The Commission states that it was launching the revision of the SUP Directive to address the key problem of the limited effectiveness of the SUP Directive in reducing pesticide use and potential risks to human health and the environment across EU Member States. Available data show that sales of pesticides in the EU have remained more or less stable since 2011 and that there has been a low-uptake of non-chemical pesticides. This may be due to their limited availability, low effectiveness, or a lack of incentives or pressure on pesticide users to adopt such alternative techniques. There are indications that the use of chemical pesticides, as it currently stands, is contributing to an increasing trend of biodiversity loss and to water and soil pollution across the EU.

There are plenty of possible causes for the limited effectiveness of the SUP Directive, according to the Commission, including: 1) The implementation, application and enforcement of the SUP Directive has been insufficient and uneven across EU Member States, in particular, regarding the application and enforcement of integrated pest management to promote low pesticide-input pest management and prioritise the use of non-chemical methods; 2) National Action Plans adopted and implemented by the EU Member States under the SUP Directive are often insufficient and do not establish quantitative objectives, targets, measures and timetables; 3) The absence of EU requirements for pesticide users to keep records of integrated pest management actions; 4) Pesticide users may lack knowledge and advice on the risks and benefits of chemical pesticide use, for example on the detailed risk profiles of different pesticides; 5) Limited availability of less hazardous and non-chemical pesticides compared to other more hazardous categories; and 6) Limited incentives for pesticide users to switch to alternative pest control methods or low-risk pesticides (where available) under the EU Common Agricultural Policy, but also through price drivers in the food production and distribution chain and consumer demand.

The Commission notes that crop yields and quality may be affected by the use (or non-use) of pesticides. Due to the weak and uneven implementation, application and enforcement of the SUP Directive, producers may be subject to more or less stringent rules on pesticides or inconsistent application in the EU Member States, which may in turn affect the cost of food production. Producers in one EU Member State may therefore benefit from a competitive price advantage compared to producers in other EU Member States, resulting in unfair market competition for foods in the EU.

Possible consequences and options

The Roadmap lists a number of elements to be covered by policy options, such as legally binding targets (for the EU and for EU Member States) to reduce the use and risk of synthetic chemical pesticides, as announced in the Farm-to-Fork Strategy, as well as promoting the use of new technologies and alternative techniques to reduce the use and risk of chemical pesticides and better achieve the objectives of the SUP Directive, especially to address possible current barriers to the use of new technologies, such as drones and biological alternatives to chemical pesticides.

From an economic point of view, the Commission believes that the more sustainable and reduced use of pesticides would provide an opportunity to contribute to transforming EU agriculture into a modern, resource-efficient, resilient and diversified sector, in line with the aims of the European Green Deal. A reduction in the use of pesticides could result in an increase in products produced under organic farming conditions and, thereby, address the growing demand of consumers for these products. Stricter rules on the distribution and use of pesticides could in turn affect crop yield and food production in the EU (with the associated possible trade implications), and have implications for rural communities, producers and distributors of pesticides, manufacturers of pesticide application equipment, and other related products. The Commission believes that complying with the Farm-to-Fork Strategy’s targets to reduce the use of and risks from chemical pesticides could actually lower costs for farmers, as pesticides represent a significant expense, but may increase the overall cost of food production (including to consumers), if alternative methods prove to negatively affect agricultural yields and production quality.

There are fears expressed by the agricultural sector in the EU that strict requirements on pesticides would not apply to imported products, which may be produced in (comparatively speaking) environmentally worse, but more commercially competitive, conditions. In this context, the Commission announced that the possible impacts of a change in farming and food production costs on the competitiveness of EU producers, as regards food imports from outside the EU, would be framed within the European Green Deal’s commitment that imported food that does not comply with relevant EU environmental standards is not allowed on EU markets. While understandable, this latter principle and objective may be difficult to reconcile with existing WTO rules and will likely lead to several WTO disputes.

Stakeholders, like public authorities, businesses, civil society organisations and the public have the opportunity to give feedback on the evaluation Roadmap and Inception Impact Assessment for the planned evaluation and potential revision of the SUP Directive until 7 August 2020. The Commission will then summarise the feedback received in a synopsis report. A public consultation is currently foreseen for the fourth quarter of 2020, while the adoption of the revised Directive is tentatively planned for the first quarter of 2022.

 

Recently Adopted EU Legislation

Trade and Customs Law

 

Food and Agricultural Law

 

Trade Remedies

 

Ignacio Carreño, Tobias Dolle, Lourdes Medina Perez and Paolo R. Vergano contributed to this issue.

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