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February 18, 2020
US Trade Representative announces new tariffs on EU-origin goods
On 14 February 2020, the United States (US) Trade Representative (USTR) published a notification announcing modifications to punitive tariffs on European Union (EU)1-origin goods currently assessed under Section 301 of the Trade Act of 1974 regarding the EU’s subsidies provided to civil aircraft manufacturers.2
The revisions include the increase in the duty rate for aircrafts from 10% to 15%, effective 18 March 2020, as well as the removal and addition of certain items, or rotation of items, subject to 25% punitive tariffs, effective 5 March 2020.
The next anticipated benchmark in this dispute is the expected World Trade Organization (WTO) penalties phase against US subsidies for Boeing that will allow the EU to apply punitive tariffs to some value of US exports to the EU. It is unclear if that event will provide the incentive for both sides to eventually come to the negotiating table to address both parties’ subsidies, rather than resorting to punitive tariffs.
The US has historically taken the position that the EU countries, and specifically four of its Member States (France, Germany, Spain and the United Kingdom (UK)), have unfairly subsidized non-US aircraft manufacturers to an extent that was damaging to the US and its economy. Following unsuccessful discussions with the EU to cease subsidization, the US submitted a formal challenge to the WTO on EU subsidies provided to large civil aircraft in 2004.
The WTO determined that the assistance provided to non-US aircraft manufacturers was inconsistent with the EU’s obligations under the General Agreement on Tariffs and Trade (GATT). The EU subsequently moved to adjust some subsidies, however, in May 2018 the WTO concluded these measures were inadequate. This result permitted the US to initiate the process to apply countermeasures.
In October 2019, the WTO Arbitrator issued its report regarding the appropriate value of acceptable countermeasures that the US could impose on the EU for providing subsidies to non-US aircraft manufacturers. The WTO arbitrators determined that the US was entitled to impose tariffs on US$7.53 billion of EU-origin goods.4
Following the issuance of the WTO Arbitrator’s decision, the USTR announced countermeasure duties on certain EU products. These included 10% punitive tariffs on aircrafts and 25% punitive tariffs on items such as cheese, spirits and clothing with an effective date of 18 October 2019 (See EY Global Tax Alert, WTO rules on US complaint regarding EU civil aircraft subsidies; US announces countermeasure duties on certain EU products and also takes further actions on China origin goods, dated 3 October 2019).
On 2 December 2019, the USTR published an announcement stating that in light of a recent WTO compliance panel decision finding that the EU’s changes to its subsidies launched on large civil aircrafts were insufficient to bring the Member States into compliance with WTO rules, the USTR would review current punitive tariffs and consider the addition of new products to be subject to increased duty rates of up to 100%, as well as potentially increasing the duty rates of goods currently subject to punitive tariffs up to 100%.5
Following the announcement the USTR collected public comments regarding the proposed review. Subsequently, on 14 February 2020, the USTR announced modifications to the list of EU-origin goods subject to punitive tariffs.
The most notable modification to the original action is an increase of punitive duties imposed on aircrafts from France, Germany, Spain or the UK imported under Harmonized Tariff Schedule of the US (HTSUS) 8802.40.00 from 10% to 15%, beginning 18 March 2020. The full product description in the notice is as follows:
While the USTR did not increase the amount of the existing tariffs on other products, it did rotate the items covered. Specifically, the USTR removed the following product from the 25% tariff list, effective 5 March 2020:
and added the following product, subject to 25% punitive tariffs, effective 5 March 2020:
It should be noted that all other items previously subject to the 18 October 2019 punitive tariffs will continue to be subject to the tariffs until otherwise noted by the USTR.
Actions for business
Companies that import EU-origin goods that are currently subject to punitive duties should closely monitor the progression of actions and plan accordingly for any further rotation of items, including negotiations between the US and the EU, or any EU-retaliatory actions.
Immediate actions companies can consider are:
Additionally, US distributors who purchase from related parties will almost certainly have transfer prices impacted by the imposition of 301 duties. Along with the strategic importance of mitigating duty impact while 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.
For additional information with respect to this Alert, please contact the following:
Ernst & Young LLP (United States), Global Trade