Executive Summary

• On October 3, the U.S. announced that it will be imposing additional tariffs of 25 percent on more than 150 goods imported from 28-member countries of the European Union and an additional 10 percent tariff on new aircraft from France, Germany, Spain, and the U.K. effective from October 18.

• The announcement comes after a World Trade Organization (WTO) arbiter determined that the U.S. may impose up to USD 7.5 billion (EUR 6.83 billion) annually in countermeasures against the E.U. following their failure to comply with a previous ruling against subsidies that it provided to E.U. aircraft manufacturer Airbus. The E.U. is filing its own retaliatory case at the WTO against U.S. aircraft manufacturer Boeing over alleged illegal subsidies, but a final decision is not expected until the spring of 2020.  

• The E.U. has previously stated that it will take countermeasures against the U.S. if it cannot reach a negotiated agreement with the U.S. ahead of the October 18 tariff deadline. Should the E.U. decide to follow through, Brussels has already prepared a preliminary list of retaliatory tariffs that could hit USD 20 billion (EUR 18.2 billion) of up to 100 percent on U.S. imports from the food and agriculture, vehicles and auto parts, plastics, machinery, and chemicals sectors.

• The latest trade escalation comes as E.U. member states brace for multiple trade conflicts with the U.S. in addition to the dispute over aircraft subsidies such as the U.S. Section 301 investigation on France’s Digital Services Tax (DST), Nordstream 2 gas pipeline, and a pending decision on whether the U.S. will impose 25 percent tariffs on European auto and car parts imports on national security grounds under Section 232 of the Trade Expansion Act of 1962.

Background

The U.S. announced on October 3 that it will be imposing additional tariffs of 25 percent on more than 150 goods imported from European Union countries and an additional 10 percent tariff on new aircraft from France, Germany, Spain, and the United Kingdom effective from October 18. 

The decision comes after the World Trade Organization (WTO) arbiter determined that Washington may impose up to USD 7.5 billion (EUR 6.83 billion) annually in countermeasures against the E.U. following its failure to fully comply with a previous WTO ruling against subsidies that it provided to E.U. aircraft manufacturer Airbus. While U.S. trade officials stated that their preference was for a negotiated solution, the Office of the U.S. Trade Representative (USTR) has reiterated that U.S. tariffs would not be lifted until the E.U. ends its “harmful subsidies”.

Products subject to an additional 25 percent tariffs include whiskies; clothing products such as sweaters, swimwear, and suits (U.K.); industrial tools such as axes, metal cutting shears, pipe cutters, and screwdrivers (Germany); printed books, lithographs and pictures, and self-propelled machinery (Germany or U.K.); liqueurs and cordials (Germany, Ireland, Italy, Spain or the U.K.); and certain food and agricultural goods from most E.U. member countries. The U.S. is also reportedly considering “carousel” retaliation that could enable it to regularly shift around the targeted E.U. goods subject to tariffs. 

In response, the E.U. has drafted a retaliatory tariff list on USD 20 billion (EUR 18.2 billion) worth of U.S. imports which could impact chemicals, food and agriculture, machinery and other manufacturing industries if enacted. The E.U. is also filing its own separate retaliatory case at the WTO against U.S. aircraft manufacturer Boeing over alleged illegal subsidies of USD 19.1 billion (EUR 17.3 billion) but a final decision is not expected until the spring of 2020.  

Sectoral Impact

U.S. tariffs

The U.S. tariffs on up to USD 7.5 billion worth of E.U. imports are divided into 15 sections and countries impacted (see Appendix 1). The latest round of tariffs primarily covers food and agriculture items (Parts 2-10, 12 and 14), but also targets airplanes (Part 1) and industrial tools (Part 11) and machinery (Part 13). 

For Part 1, airplanes imported from France, Germany, Spain, or the U.K. are subject to 10 percent tariffs. For Part 11, various industrial goods and intermediary parts from Germany will be subject to 25 percent tariffs which include screwdrivers, base metal blades and tweezers, pipe cutters, pliers, and metal-cutting shears. For Part 13, notable products from Germany or the U.K. that will be subject to import duties of 25 percent include electromechanical tools and self-propelled machinery.

The U.S. has specifically imposed aircraft tariffs to target the four countries that were offering illegal subsidies to Airbus, while imposing tariffs on other E.U. member states in hopes of applying pressure to convince the bloc to persuade Germany, Spain, France, and the U.K. of dropping such subsidies. Airplane and aircraft parts manufacturers in France (43.6 percent) and Germany (20.7 percent) would arguably be the most impacted by the tariffs given that the two countries combined made up for almost two-thirds of the U.S.’ total imports in 2018. However, for Airbus, parts and components used at its new final assembly plant in Mobile, Alabama will not be subject to tariffs, meaning that aircraft parts such as semi-finished fuselages and wings are exempted. 

The brunt of the tariffs is instead likely to be felt by U.S. airlines who have voiced serious concerns about having to absorb additional costs and that new orders of planes from the E.U. that are liable to the tariff may have to be delayed. For instance, Delta Airlines has called the tariffs “an unfair tax on U.S. consumers and companies” given that U.S. carriers are already under contract for purchase of Airbus aircraft and that imposing tariffs would not force Airbus to lose sales.

E.U. retaliatory tariffs

While some E.U. officials have stressed that Brussels will not immediately retaliate against U.S. tariffs, the E.U. already published on April 17 its own proposed tariff list targeting USD 20 billion (EUR 18.2 billion) of U.S. imports of up to 100 percent (see Appendix 2) should the U.S. decide to impose tariffs. The majority of the proposed tariffs target food and agriculture products, but also hit a wide-range manufacturing products such as vehicles and auto parts (28 items), plastics (22), machinery (7), pharmaceutical (5), and aircraft (3) through the form of helicopters. 

As of this writing, the E.U. is continuing to call for negotiations on a settlement for the Airbus and Boeing cases in a bid to avoid U.S. tariffs. Incoming E.U. Trade Commissioner Ursula von der Leyen is reportedly seeking to improve Brussels’ enforcement regulations to use sanctions in the event that the U.S. is successful in blocking the WTO’s dispute settlement process by blocking the appointment of judges. 

Outlook and Recommendations

The latest trade escalation comes as E.U. member states brace for multiple trade conflicts with the U.S. in addition to the dispute over aircraft subsidies such as the U.S. Section 301 investigation on France’s Digital Services Tax (DST), Nordstream 2 gas pipeline, and a pending decision on whether the U.S. will impose 25 percent tariffs on European auto and car parts imports on national security grounds under Section 232 of the Trade Expansion Act of 1962.

The renewed emphasis from U.S. to address long-standing trade conflict with the E.U. comes as the Trump administration continues to lock horns with China, India, Japan, Mexico, and Turkey on similar disputes. The E.U. may expect the Trump administration will have less room to maneuver when it gets closer to the 2020 U.S. Presidential Election and could risk facing voter backlash if the E.U. were to retaliate by targeting U.S. agricultural exports.

Everstream Analytics has outlined a series of recommendations that supply chain professionals can consider to help mitigate the impact of the ongoing U.S.-E.U. trade conflict:

• Anticipate further escalations: As with other trade conflicts under the Trump administration, there is reasonable evidence to suggest that the dispute could be prolonged particularly if the E.U. decides to impose retaliatory tariffs on U.S. imports. Customers based in the U.S. should prepare by assessing the potential items that could be subject to future E.U. tariffs and monitor any potential tariff exclusion processes from the U.S. side for tariffs imposed on E.U. goods. 

• Identify alternative suppliers: Manufacturers with deep supply chain networks in both the U.S. and E.U. should determine whether it will be necessary to identify alternative suppliers to navigate the changes in the trade conflict. Companies should consider the cost of inventory, logistics cost, tax implications, and other various risks associated with switching to another supplier. 

• Ensure sufficient visibility across the supply chain: Customers should work to mitigate potential disruptions by ensuring end-to-end visibility across the supply chain by mapping their supplier and shipping locations. This would allow for risk assessments of which sub-tier suppliers may be hit by the tariffs in terms of product flow, geographical, and financial stress.

U.S. – E.U. Trade Dispute Timeline

2020   Spring: Arbitration decision expected from the World Trade Organization (WTO) on whether U.S. aircraft manufacturer Boeing benefited from illegal U.S. government subsidies.    2019   November 13: The earliest day in which the U.S. can decide whether it will impose Section 232 tariffs on E.U. auto imports on national security grounds.  October 18: USTR announces U.S. tariffs on USD 7.5 billion worth of E.U. imports set to come into effect.   October 2: WTO announces that the U.S. could impose USD 7.5 billion worth of tariffs on E.U. goods in response to illegal subsidies to European aircraft manufacturer Airbus after a fifteen-year trade litigation dispute.     August 2: U.S. and E.U. sign deal to boost U.S. beef exports to the E.U.   July 10: U.S. initiates Section 301 investigation on France in retaliation against Digital Services Tax (DST). The U.S. claims that the DST will disproportionately hit leading U.S. technology companies such as Google, Facebook, Apple, and Amazon.    July 5: USTR publishes a second preliminary list of E.U. products with a value of USD 4 billion (EUR 3.5 billion) to which additional duties may be applied.    May 17: U.S. President Donald Trump announces that the U.S. will delay its decision for 180 days on whether to “limit or restrict” imported cars and auto parts from the E.U. and Japan under Section 232 of the Trade Expansion Act of 1962.   April 17: E.U. announces it may retaliate with tariffs of around USD 22 billion (EUR 20 billion) of U.S. exports in response to ‘unlawful’ subsidies to U.S. aircraft manufacturer Boeing.    April 8: USTR publishes a first preliminary list of EU products work around USD 21 billion (EUR 19.1 billion) to which additional duties may be applied.   2018 July 1: The E.U. warns that nearly USD 300 billion (EUR 267 billion) of U.S. exports could be hit by retaliatory tariffs if the Trump administration were to impose auto tariffs.    June 22: The E.U. imposes import duties of 25 percent on USD 2.8 billon (EUR 2.5 billion) worth of imports from the U.S. in retaliation against tariffs on E.U. steel and aluminum. U.S. products that were targeted by the E.U. include Harley-Davidson motorcycles as well as steel and aluminum.    June 1: The E.U. fails to reach an agreement with the U.S. on permanent exemptions from steel and aluminum tariffs.    May 22: U.S. Department of Commerce investigates whether imports of cars, including trucks and car parts, threaten national security.    March 23: U.S. imposes global tariffs of 25 percent on imported steel and 10 percent on imported aluminum on national security grounds.   2017 April 20: U.S. announced investigation into whether steel and aluminum imports from the E.U. and other countries compromise national security.

Appendix

PART	TARIFF RATE	COUNTRIES IMPACTED	NOTABLE PRODUCTS
1	10	France, Germany, Spain, United Kingdom	New airplanes and other aircraft
2	25	Austria, Belgium, Bulgaria, Croatia, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden, United Kingdom	Processed cheeses, yogurt, clams, oranges
3	25	Germany, Spain, United Kingdom	Olive oil, whey protein, frozen meats
4	25	Austria, Belgium, Bulgaria, Croatia, Cyprus, Czech Republic, Denmark, Estonia, Finland, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, Netherlands, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden, United Kingdom	Yogurt, butter, juice, pork sausages
5	25	Austria, Belgium, Bulgaria, Croatia, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, Netherlands, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden, United Kingdom	Butter, prepared or preserved pork
6	25	Austria, Belgium, Bulgaria, Croatia, Cyprus, Czech Republic, Denmark, Estonia, Finland, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden, United Kingdom	Cheddar cheese, mussels, pear juice
7	25	Austria, Belgium, Bulgaria, Croatia, Cyprus, Czech Republic, Denmark, Estonia, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, Netherlands, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden, United Kingdom	Swiss cheese
8	25	Austria, Belgium, Croatia, Cyprus, Czech Republic, Denmark, Estonia, Finland, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden, United Kingdom	Pecorino cheese
9	25	Austria, Belgium, Bulgaria, Croatia, Cyprus, Czech Republic, Denmark, Estonia, Finland, Germany, Greece, Hungary, Ireland, Italy, Latvia, Luxembourg, Malta, Netherlands, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden, United Kingdom	Cheeses
10	25	France, Germany, Spain, United Kingdom	Olives, wine
11	25	Germany	Axes, base metal tweezers, pipe cutters, parts of hand-directed or hand-controlled machinery
12	25	Austria, Belgium, Bulgaria, Croatia, Cyprus, Czech Republic, Estonia, Finland, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, Netherlands, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden, United Kingdom	Pork
13	25	Germany, United Kingdom	Electromechanical tools, self-propelled machinery
14	25	Germany, Ireland, Italy, Spain, United Kingdom	Liquers and cordials
15	25	United Kingdom	Sweaters, outerwear, suits, blankets, bed linen

HS CODE (2-Digit)	SECTOR	NUMBER OF ITEMS	NOTABLE PRODUCTS
27	Mineral fuels	2	Coal
29	Organic chemicals	5	Heterocyclic compounds, chlroprothixene, sulphonamides
30	Pharmaceutical products	5	Gauzes, bandages, adhesive dressings, wadding
32	Tanning/dyeing extracts	1	Synthetic organic pigments
33	Essential oils/cosmetic	15	Terpenic oils, essential oils
35	Albuminoidal substances	16	Gelatin, starches
38	Miscellaneous chemical products	4	Fatty alcohols, supported catalysts with precious metals
39	Plastics	22	Polyethylene, non-cellular polyethylene film for semiconductors and printed circuits, laminated amino-resins
84	Machinery	7	Parts for internal combustion piston engines, excavators, shovel loaders
87	Vehicles	28	Road and agricultural tractors, brakes, motorcycle parts (such as mufflers, exhaust pipes, frames, spokes), bicycle parts
88	Aircraft	3	Helicopters