Vulcan Insight

US upholds tariffs on European goods in long-running state aid dispute

14 August 2020

In a blow to transatlantic trade this week, the United States announced it will maintain a 15% tariff on aircraft and 25% tariff on other European goods, despite efforts by the European Union to resolve a long-running dispute over state aid subsidies. The US will not, however, impose a threatened increase in tariffs on new European products, ahead of expected EU retaliatory tariffs on American goods this Autumn.

Following a landmark ruling by the World Trade Organisation (WTO) in October 2019, certain EU products exported to the US have been met with duties worth $7.5 billion (€6.3 billion). The United States Trade Representative (USTR) imposed an initial 10% tariff on Airbus aircraft, which was subsequently increased to 15% in March. A 25% tariff on other European goods includes duties on a number of food and alcohol products, which includes Irish butter, cheese, pork, whiskey and liqueurs.

Justifying the decision to uphold these measures on Wednesday, USTR Robert Lighthizer concluded “the EU and member states have not taken the actions necessary to come into compliance with WTO decisions.” The EU has recently affirmed it is now compliant with the WTO ruling, having pushed an agreement between Airbus and the French and Spanish governments to raise interest rates on state aid funds.

The Trump administration did not follow through on a threat to ramp up the rate of existing tariffs to 100%, nor to extend the scope to $3.1 billion (€2.6 billion) of new European exports, such as beer, spirits or chocolate. The European Commission in turn welcomed the decision “not to exacerbate the ongoing dispute.”

Wednesday’s announcement was otherwise notable for removing duties on particular goods from the United Kingdom, which is currently pursuing its own bilateral trade agreement with the United States, while substituting an equivalent amount of new duties on products from France and Germany.

This week represents the latest twist in a 16-year trade dispute over state subsidies that may soon escalate to unprecedented levels. As early as next month, the EU is expected to win WTO approval to apply its own retaliatory tariffs on imports from the US, in a separate case challenging American subsidies for Boeing. The WTO has not verified a claim from the US in May that it had eliminated subsidies to Boeing via a state preferential tax scheme alleged to have disadvantaged Airbus.

The United States’ decision to hold off on new tariffs prior to the upcoming WTO ruling nevertheless indicates some recognition on both sides that a mutual interest resolution needs to be found before tit-for-tat tariffs spiral out of control. In Wednesday’s announcement, USTR Lighthizer spoke of “a new process with the EU in an effort to reach an agreement”, while the Commission reacted by recognising “the current economic slowdown, specifically its impact on the air travel and aircraft sectors, provide a particular urgency” to ending the dispute.

With businesses on both sides of the Atlantic dreading further escalation, the USTR will reassess the list of goods again in six months, after the WTO ruling on Boeing and November’s Presidential Election. While President Trump has employed trade sanctions more aggressively than any recent President under an ‘America First’ agenda, the EU should not expect an alternate administration led by Joe Biden to relent in the international dispute on account of domestic partisan politics.