US Secretary of State Mike Pompeo recently met with UK PM Boris Johnson and Foreign Secretary Dominic Raab to discuss, among other things the possibilities for the UK-US FTA. While it is generally agreed that the likelihood of a deal before the US election is small, this is not fatal to the ultimate deal. The key is for the UK and US to demonstrate substantial momentum towards a deal.
There is one obvious area where early harvest measures could be profitable and that is with respect to extracting the UK from the net of US retaliatory tariffs for EU trade violations. Since the scope of EU WTO violations looks likely to increase, so the possibility of US retaliatory tariffs will increase. As the UK left the EU in January, 2020, it is vital that the UK and US agree how to pull the UK out of the ambit of these tariffs, recognising that the UK is no longer involved in EU decision-making nor do its industries have any impact on its internal political processes.
Competere has just released a report on retaliatory tariffs which shows how early harvest measures could resolve this dispute.
Retaliatory Tariffs in Boeing-Airbus
The Boeing-Airbus dispute is a long running dispute about large scale commercial aircraft. Boeing and Airbus are two of the world’s largest large-scale commercial aircraft manufacturers. Both companies have complained over many years about the subsidies that both receive. The most recent WTO panel has found that both companies have benefited from illegal subsidies which must be removed in order for the US and EU to be WTO-compliant. Both the US and EU have alleged that neither party is complying with the ruling and both seek to suspend concessions as they are entitled to do under the WTO framework.
The Boeing-Airbus dispute has the potential to damage global trade in all sorts of unrelated areas. The retaliatory tariffs of both sides affect completely unrelated businesses who suffer tariffs, and market share losses for reasons wholly outside their control.
At the same time, the UK and US are negotiating a free trade agreement (FTA) at the precise moment of the UK’s entrance onto the global trade policy stage for the first time in forty years. This represents a significant opportunity for both parties. Negotiating such an agreement will involve overcoming some difficult issues such as agriculture, standards and the UK’s digital services tax, but it is equally important that neither party’s asks fall into an “unreasonable” bucket. The UK should not be asking for tariff discrimination on the basis of process or production method, just as the US needs to rein in the impact of the Boeing-Airbus dispute on UK businesses as a strong indication that they are now treating the UK differently from the EU. Indeed, the UK left the EU on 31 January 2020.
US Retaliatory Tariffs
US retaliatory tariffs are used when the US has won a WTO case and the losing Member is deemed not to have brought itself into compliance. The purpose of retaliatory tariffs is usually to apply political pressure to the losing Member to force them into making the necessary changes to bring themselves into compliance. Historically, the US has targeted key industries that are thought to have political sway. For example, scotch whisky has been targeted in the past because it is perceived to be a politically powerful industry.
However, the UK has left the EU, and the transition period expires on Dec 31, 2020. The EU has made it very clear that it is not interested in prosecuting the interests of UK companies in its trade policy from now on. There is therefore no political capital to be drawn from pursuing UK companies using a punitive tariff as there would have been in the past.
Indeed, from a US objectives perspective, it is counterproductive to waste political leverage on UK industries as the political pain would be more effectively introduced on EU member state firms who might have more political power with the European Commission.
Damage to UK Businesses
The UK spirits industry (especially Scotch whisky) has been one sector that has been substantially impacted by US retaliatory tariffs since October 2019. Specifically, Single Malt Scotch whiskies and liqueurs from the UK have been subject to a 25% tariff into the US as a result of the dispute. This has led to a 25% fall in Scotch whisky exports to the US in the first six months since the decision and is causing lasting damage to the broader sector, which has been compounded by the economic impact of COVID-19.
The US Trade Representative (USTR) is due to review the tariffs on 12 August 2020 presenting a significant risk to the UK spirits industry for a potential increase in the rate and/or an expansion to include other categories, including other whiskies and gins from the UK.
Such an escalation would be devastating to a sector that delivers c.£1.5 billion in exports every year to the US. Small distillers have driven industry growth over the last decade creating thousands of jobs, particularly across rural Scotland and England. But the tariffs could lead to over 6,500 UK jobs being lost from small distillers, farmers and others along the supply chain.
The job losses are likely to be concentrated in Scotland where over 90% of UK spirits are made, including 70% of gin production in the UK. Indeed, the total value of spirits production in Scotland that are exposed to tariffs is valued at c.£1.4 billion, which is almost three times the estimated gains that Scotland will derive from a UK-US FTA over the long term (£517m). The Scotch whisky industry alone directly employs 11,000 people across Scotland, many in economically disadvantaged areas, and supports over 40,000 local jobs across the UK.
The implications for the Union at a time when the government has launched an internal market consultation cannot be understated.
Potential Early Harvest Measures
The UK and US are unlikely to conclude a full FTA before the US election, but that by itself is not fatal to build a strong UK/US relationship, and an FTA shortly thereafter. As long as there is momentum behind the negotiation, this will benefit both the UK and US. One way of demonstrating momentum is to agree early harvest measures prior to the break for the US elections. These could be done as early as mid-August.
This could include:
- the closing of chapters that are relatively uncontroversial;
- agreement to de-escalate tensions on the UK-US aspects of the Airbus-Boeing dispute including elimination of tariffs on unrelated sectors such as distilled spirits, proper application of launch aid, and export financing where UK and US might be able to come to an agreement more easily than US and EU; a group of measures and agreements that could constitute early harvest/phase one deal, which would include a fresh approach to trade disputes that allows for UK and US concerns in ongoing EU-US disputes – Airbus-Boeing and steel/aluminium – to be resolved directly and quickly, including an agreement that the US would not use retaliatory tariffs against the UK for actions taken by the EU; and
- Zero for zero tariff agreement on key sectors, including distilled spirits building on best practices from the UK-US Agreement on the Mutual Recognition of Certain Distilled Spirits / Spirits Drinks (2019).
It is crucial that the UK and US show momentum in these negotiations, and early harvest measures are a good way of doing so. As our Competere report shows, applying retaliatory tariffs to UK companies erodes public support for the US-UK FTA, drives a wedge between the UK and US governments which those who are not allied with our global vision can exploit, and achieves no political gain in terms of changing EU policy. They cannot stand and an urgent solution must be found.
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