EU Customs and Trade Agreements

The 116th Congress begins on January 3, 2019. Based on projections from yesterday’s midterms, Democrats will control the House of Representatives by a narrow margin, while Republicans will expand their hold on the Senate. The changes to Congress are likely to shape trade policy through 2019, but much will depend on how House Democrats use their new majority, and whether trade is a priority issue or whether it will be overtaken by domestic issues.

Companies will have to carefully navigate the new political environment in order to advance their policy objectives. In addition to accounting for the hard-nosed approach to trade taken by the current administration, an effective policy engagement strategy will have to account for the new political dynamics created by newly empowered House Democrats and a potentially polarized Congress. Companies should be prepared to intervene on issues that are likely to come up in 2019, including: ratification of the U.S.-Mexico-Canada Trade Agreement (USMCA); trade negotiations with the EU, Japan, and the UK; and the ongoing U.S. tariff interventions on China and for sensitive sectors.

Below is our best forecast for the makeup of the trade- and foreign affairs-related committees for the 116th Congress, and their voting record on key pieces of trade legislation:

 

NAFTA
(1994)

China PNTR
(2000)

U.S.-Colombia FTA  (2012)

Korea-U.S.-FTA (2012)

TPA**
(2015)

House Ways and Means
Chair: Richard Neal (D-Massachusetts)

Nay

Yea

Nay

Yea

Nay

Ranking Member: Kevin Brady (R-Texas)

N/A

Yea

Yea

Yea

Yea

House Foreign Affairs
Chair: Eliot Engel (D-New York)

Nay

Nay

Yea

Nay

Nay

Ranking Member: Michael McCaul (R-Texas) OR

N/A

N/A

Yea

Yea

Yea

Joe Wilson (R-South Carolina)

N/A

N/A

Yea

Nay

Yea

Senate Finance
Chair: Chuck Grassley (R-Iowa) OR

Yea

Yea

Yea

Yea

Yea

Mike Crapo (R-Idaho)

Nay (as House member)

Yea

Yea

Yea

Yea

Ranking Member: Ron Wyden (D-Oregon)

Yea

Yea

Yea

Yea

Yea

Senate Foreign Relations
Chair: Jim Risch (R-Idaho)

N/A

N/A

Yea

Yea

Yea

Ranking Member: Bob Menendez (D-New Jersey)

Nay

Nay

Nay

Yea

Nay

* China Permanent Normal Trade Relations
** Trade Promotion Authority

We expect the following impacts on 2019 U.S. trade priorities:

Impact on U.S.-Mexico-Canada Trade Agreement (USMCA)

The new USMCA is expected to be signed at the end of this month. USMCA would have likely passed in a Republican-held Congress on a bumpy but ultimately consistent trajectory. It will still likely enjoy broad backing in the Republican Senate. With Democrats now in control the House, there may be some new challenges to ratification.

Some of the new provisions in USMCA give cover for Democratic support—including the new wage-based rule of origin for autos and new enforceable labor rules, along with the weakening of investor-state dispute settlement. The Advisory Committee for Trade Policy and Negotiations (ACTPN), which includes the leaders of United Steelworkers and the International Brotherhood of Teamsters, last week expressed unanimous support for the agreement. But these changes still might not be enough to gain wide Democratic support. The Labor Advisory Committee for Trade Policy and Negotiations (LAC) noted several reservations on the agreement. Major environmental groups are also already preparing for a major advocacy campaign against USMCA. We expect House Democrats to seek additional concessions from the administration, particularly on the enforceability of the new labor provisions, on the environment, or possibly in the area of intellectual property protections.

If USMCA is signed on November 30, the U.S. International Trade Commission (USITC) would have to publish a study on its probable economic impacts by March 15, 2019, according to Trade Promotion Authority (TPA) procedures. The agreement could theoretically be voted on at any point after publication of the report, but difficulties in assembling the needed votes for implementing legislation would likely delay the process. The Trump Administration may still attempt to withdraw from the existing NAFTA as a tactic to force Congress to pass USMCA. It remains unclear how House Democrats or Senate Republicans would react to such a threat. The role of the business community will be key. The White House would look to U.S. business, including agribusiness, to generate bipartisan support for the agreement.

Impact on Future U.S. FTAs: U.S.-Japan, U.S.-EU, U.S.-UK

The U.S. Trade Representative (USTR) notified Congress on October 16 of its intention to begin negotiations for trade agreements with Japan, the EU, and the UK. The earliest that formal negotiations for the Japan and EU agreements could start is January 14, while negotiations with the UK would have to wait until after Brexit on March 29. USTR’s negotiating objectives for these agreements could be published in December or later.

For the new Congress, the Republican majority in the Senate and Democratic majority in the House will have differing sets of concerns for the new negotiations. Senate Republicans will seek many of the outcomes they sought in the NAFTA renegotiation. The Democratic House leadership is likely to call for new measures on labor and the environment, intellectual property, and/or dispute settlement. Some of these, such as opposition to investor-state dispute statement, would resonate with USTR Lighthizer and the White House, though it’s not clear how far the administration would move in the Democrats’ direction on labor or environmental issues. Consideration of the USMCA will be an early test on issues of concern to Democrats that will have implications for other agreements.

USTR is seeking short-term delivery of less controversial outcomes on regulatory alignment and other limited market access issues (such as an enlarged quota for high-quality beef and sales of U.S. soybeans) as part of an early harvest for negotiations with the EU, while with Japan the immediate priorities appear to be focused on market access for autos and agriculture.  Such priorities are not likely to require Congressional ratification and so will be less affected by the changes in Congress.

Impact on Section 301 tariffs

President Trump is expected to meet with President Xi at the G20 Summit in Argentina on November 30- December 1. While the White House has downplayed expectations for the meeting, others see the possibility of beginning a meaningful U.S.-China dialogue and perhaps moderating or delaying additional tariff actions. If no accommodation or way forward is reached, the U.S. has indicated it will increase existing tariffs on certain goods from 10 percent to 25 percent in January, with some reports that the U.S. could also impose new tariffs on nearly all remaining Chinese imports. China would likely respond in kind to any new tariffs.

The new Congress is not likely to change the direction of the U.S. economic relationship with China, although the plight of U.S. farmers facing their worst economic year in a long time might have some effect in pushing individual Members of Congress to seek a moderate course. We expect Republicans in the Senate will continue to have concerns on the impacts of China’s retaliation on the broader economy, but still be reluctant to contradict the administration’s approach. The Democratic-controlled House may be more enthusiastic in supporting tariffs overall and could give the Trump Administration cover to take a harder line if circumstances warrant, although may push back where there are specific constituent impacts. In fact, if the Trump Administration reaches a deal with China at the end of November (or anytime afterward), incoming House Democrats could use their newfound leverage to criticize the administration’s efforts and seek to outflank the administration on China issues. China policy is certain to figure in both parties’ presidential election campaigns as the 2020 presidential election begins to take shape during 2019.

While the current approach broadly to China is likely to continue, there may be enough bipartisan support for the new Congress to continue pushing the administration for a product-exclusion process for the 10 percent tranche of tariffs announced last September.

Impact on Section 232 tariffs

The Trump Administration has implemented tariffs on all imports of steel and aluminum, subject to certain country-specific exceptions. Negotiations for some country-specific exclusions could continue through 2019 (e.g., for Canada, Mexico, Japan, or the EU). In addition, the Trump Administration is considering implementation of tariffs on imports of autos and auto parts.

Changes to the control of Congress are not likely to affect the ongoing Section 232 tariffs related to steel and aluminum. House Democrats and Senate Republicans are likely to take positions on the Section 232 tariffs based on the economic impact for their district or state. Members from steel-heavy districts and states will continue to be supportive of the tariffs, while those from districts and states suffering from negative economic consequences because of retaliation or increased downstream costs are more likely to oppose.

Unless the Trump Administration imposes additional tariffs, we would not expect the new Congress to pass legislation designed to restrict the president’s Section 232 authority, as introduced by Senator Bob Corker (R-Tennessee) in the Senate and Representative Mike Gallagher (R-Wisconsin) in the House earlier this summer. That legislation did not have the votes to pass at the time, and the new Democratic majority in the House is not likely to increase the chances of passage.

In the area of the administration’s potential imposition Section 232 tariffs on autos and auto parts, the economic consequences of the tariffs and any resultant retaliation from other countries are likely to be broad. We would continue to expect a significant degree of bipartisan Congressional opposition to new Section 232 tariffs on autos.

Interaction between International Trade and Domestic Issues

Domestic factors are likely to dominate in shaping international trade and economic policy over the course of the new Congress and the remainder of President Trump’s term. Emerging issues, including renewed interest in comprehensive U.S. federal privacy legislation, could influence future U.S. trade-related rules (e.g., on cross-border data flows) as well as set policy models that other governments could replicate.

While the Trump Administration may be keen to pivot to international issues given its lack of a Congressional majority at home, its ability to negotiate and conclude agreements on multiple fronts could be complicated as it seeks to manage an increased array of investigations and oversight by the Congress. Add to this the inevitable turnover of Cabinet members and White House and Executive Branch staff changes that will occur after the mid-terms, and the administration may see a temporary hiatus in undertaking new policy initiatives, including on trade.

Furthermore, the upcoming presidential campaign could set the stage for an intra-party debate among Democrats on whether to take an even more hawkish approach on trade issues than the current administration; stay the current course; or return to a more centrist policy as was ultimately adopted by the Obama Administration while in office.

On April 19, Crowell & Moring’s International Trade Attorneys hosted a webinar on “Trade in 2018 – What’s Ahead?”

Please click here to register and view the webinar on demand.

Summary

From the Section 232 national security tariffs on steel and aluminum imports to the ongoing NAFTA re-negotiation, the Trump administration is seeking to implement significant changes in international trade policy and enforcement. Economic sanctions on Russia continue to expand, the future is far from clear regarding Iran, and perhaps North Korea is coming into focus. A new Asia trade agreement without the United States, and a bumpy road ahead for Brexit all make for uncertainty and the need for enhanced trade risk management. Join us as we identify the international trade risks and opportunities likely to continue and grow in 2018.

Our Crowell & Moring team discussed predictions for the remainder of the year, with cross-border insights from our practitioners in the U.S., London, and Brussels. Topics included likely trends and issues in the U.S. and EU including:

  • Trade policy developments: Section 232, NAFTA renegotiation, and trade remedies
  • Sanctions in Year Two of the Trump Administration: Russia, Iran, North Korea, and beyond
  • Anti-money laundering (AML) and beneficial ownership
  • Supply chain risk management: blockchain, forced labor, the U.K. Modern Slavery Act, and GDPR
  • Europe: Brexit, the EU’s 4th AML Directive, and the EU/U.K. AML enforcement
  • CFIUS: how significant is the new legislation?
  • Export controls: Wither reform?
  • Import and customs

In the context of the negotiations on the terms of the transition period during which the U.K. will remain bound by EU rules following its official exit, the applicability and enforcement of international trade agreements between the EU and third countries is an important question. Although the U.K. would remain bound by the terms of the free trade agreements (FTA) concluded by the EU, the major trading partners with which these FTAs have been concluded would not necessarily be bound to respect the terms of the agreements in relation to the U.K.

Certain trading partners including Canada and Japan appear determined to follow a more conciliatory approach, emphasizing the desirability of preserving a degree of predictability in their trade relations with the U.K. Japanese officials have mentioned the onerous nature of renegotiating existing trading terms with the U.K., while Canadian officials refer to the fact that the FTA with the EU (CETA) has been concluded and entered into force so recently.

However, other trading partners including Chile and South Korea have suggested they might seek to condition the extension of their FTAs’ applicability to the U.K. during the transition period. South Korea in particular appears to see two opportunities to extract concessions from the U.K. to remedy the trade deficit it has maintained with the U.K. in recent years. The first opportunity would arise in the context of agreeing to the transition period, and the second in the subsequent negotiation of bilateral trade terms with the U.K. to apply after the transition period.

As a result, in an attempt to protect FTAs from renegotiation, the EU and U.K. will likely agree on a declaration confirming the continued applicability of these FTAs to the U.K. during the transition period.

Because the U.K. will require its own customs laws following its exit from the European Union, the U.K. Government has issued a White Paper outlining the options for the customs policy to be pursued by the U.K. from March 2019 onwards. In the context of the ongoing withdrawal negotiations with the EU and in view of the new Customs Bill’s passage, the U.K. Government is now following through on an important commitment made in the White Paper to engage with stakeholders and receive their comments.

Please click here for more information.

On December 20, 2017, the Court of Justice of the European Union (CJEU) decided that a company may not use transaction value for customs valuation purposes when a transfer price consisted of both an amount initially invoiced and declared, and a flat-rate adjustment made after the end of the accounting period.

The Community Customs Code (CCC) and its related jurisprudence provides that customs value must be determined primarily according to the transaction value method, with the price actually paid or payable for the goods to be adjusted where necessary to avoid establishing an arbitrary or fictitious customs value. The CJEU found that uncertainty regarding future adjustments at the end of the accounting period made it impossible for the transfer price to be used as the transaction value for imports into the EU.

Please click here for more on this decision, as well as a discussion on how the U.S. continues to allow importers to use the transaction value method of appraisement.

Unlike the NAFTA negotiations, discussions to modernize the Global Agreement between the EU and Mexico are proceeding steadily, such that the parties are still adhering to their objective of reaching an agreement in principle by the end of 2017. A fifth round of negotiations took place in Brussels at the end of September, followed by an important intercessional meeting in mid-October. A sixth round of negotiations is scheduled for the end of November in Mexico.

The parties report achieving progress in the areas of customs and trade facilitation, rules of origin, good regulatory practice, technical barriers to trade, digital trade, and investment. However, further work remains in the thornier areas of public procurement, dispute settlement, geographical indications, and the sectoral annexes for automobiles, pharmaceuticals, and wines.

The Global Agreement’s trade pillars, which entered into force in 2000 for goods and 2001 for services, preceded by a number of years the Commission’s drive to conclude trade agreements that are more ambitious in scope to address, for example, regulatory barriers to trade, sustainable development, government procurement, and intellectual property rights. The legal underpinnings of the important EU-Mexico trade relationship were therefore due for an update.

As it has come to coincide with the review of the North American Free Trade Agreement over the past year, the renegotiation of the Global Agreement between the EU and Mexico is marked by a sense of relative urgency. While the EU maintains a tough line on key negotiating positions including trade in services and government procurement, ultimate agreement with the EU will help Mexico secure one of its major trade relationships.

For more information, contact: Charles De Jager

Recent Trends Following Entry into Force of Union Customs Code (UCC)

Under EU customs law, economic operators can obtain reimbursement or remission of customs duties, broadly speaking, in three different situations:

  • Where the customs authorities committed an error which could not be detected by the importer acting in good faith.
  • Where the customs duties were not legally owed, or to use the Union Customs Code’s approach, where customs duties have been paid in excess.
  • Where it would be unjust that the importer bears the burden of customs duties. In such cases, based on equity, the importer must be in a so-called “special situation.”

The above conditions, albeit with a different wording, were already present in the previously applicable Community Customs Code. They have been widened by the administrative practice of the European Commission deciding such cases, as well as by the case law of the Court of Justice of the European Union (CJEU). The latter took the view that importers could use such provisions to obtain before the national customs authorities of the EU member states reimbursement of antidumping duties that were not legally due by arguing before customs and the judicial authorities that the underlying antidumping regulation at issue was defective.

Reimbursements have also been granted as a consequence of a review of the tariff classification of the product, as well as in cases where incorrect certificates of preferential origin were issued by third countries’ authorities or accepted by the EU customs authorities. The provisions on reimbursement add to the ones related to appeals and litigation with customs, thereby establishing a so-called “double avenue approach”: on the one hand companies can use all available appellate procedures against customs while, on the other hand, and at the same time, they can file a request for repayment and remission of duties.

The Union Customs Code has streamlined the above procedures by establishing a three-year deadline from importation (or from the further initiation of audit action by customs) to file reimbursement or remission requests.

The ruling of the CJEU on 18 January 2017 in Case C-365/15, Wortmann KG Internationale Schuhproduktionen, is of particular importance in this context. The ruling provides that where customs duties, including antidumping duties, are collected by the customs authorities of the EU member states in breach of EU law, there is an obligation on such authorities not only to reimburse such duties, but also to reimburse them with interest running from the date of payment of duties to customs by the parties involved.

Although a strict literal interpretation of both the former provisions in force and of those of the UCC would call for an outcome opposite to the above-mentioned judgment concerning interest, the CJEU’s reasoning based on general principles of EU law allowed for importers fully to recover interest.

The above demonstrates that EU customs law must be read and interpreted in light of general EU law. It also evidences that there are great opportunities for companies under the UCC provisions on repayment and remission of duties. Unfortunately, companies do not yet rely upon these provisions as they should.

For more information, contact: Jeff Snyder, John Brew, Charles De Jager

Prepared as part of our occasional collaboration with Laura Beretta and Davide Rovetta, Grayston & Co., Brussels.

Following the initiation of the EU-Singapore Free Trade Agreement (EUSFTA), the European Commission sought an Opinion from the Court of Justice of the European Union (CJEU) on the allocation of competence between the EU and its Member States regarding the Agreement. The EUSFTA provides that it is to be concluded as an agreement between the EU and Singapore without the Member States’ participation. However, in her recently published Opinion, CJEU Advocate General Eleanor Sharpston concluded that the EUSFTA can only be concluded by the European Union and the Member States acting jointly.

AG Sharpston reviewed the areas of the agreement for which the EU enjoys exclusive external competence and those for which it shares external competence with the Member States. Among the latter areas are certain transport services and related government procurement, the non-commercial aspects of intellectual property rights, fundamental labor and environmental standards, and dispute settlement, mediation and transparency mechanisms applicable in the areas of shared competence. Because these parts of the EUSFTA do not fall within the EU’s exclusive competence, AG Sharpston concluded that the Agreement cannot be concluded without the Member States’ participation. She further concluded that the EU has no external competence to agree to be bound by the part of the Agreement terminating bilateral agreements between certain Member States and Singapore.

In accordance with CJEU procedures, the Opinion of the Advocate General is delivered ahead of the CJEU’s decision, which is expected later in 2017 and is likely to follow largely AG Sharpston’s Opinion. A more detailed review of the issues will be provided in a future issue on the basis of the CJEU’s decision. The ultimate decision of the CJEU may have a significant impact on the EU’s ability in the future to conclude comprehensive free trade agreements with third countries.

For more information, contact: John Brew, Charles De Jager