Transatlantic Trade: US and European Trade Talk Update – May 29, 2020
The European Commission unveiled a revamped budget and recovery plan for the European Union (EU) this week, as the continent looks toward re-opening and beginning its recovery from the COVID-19 pandemic. The United Kingdom (UK) also announced some lifting of restrictions this week. The United States (US) Congress, meanwhile, has temporarily paused efforts on another possible economic stimulus package. Amid the public health crisis, the North Atlantic Treaty Organization (NATO) has had a significant role, quietly bolstering Allied and partner countries. This report touches on transatlantic recovery plans, describes NATO’s response during the COVID-19 pandemic, and provides an update on other transatlantic developments.
COVID-19 | Recovery Plans & Related Developments
On May 27, the European Commission unveiled its plans for a major Recovery Plan of the EU totalling €1.85 trillion (US$2.03 trillion), which includes a new €750 billion (US$824 billion) recovery instrument called the “Next Generation EU”, embedded within a €1.1 trillion (US$1.21 trillion) revamped EU budget. The package of proposals include: (i) a Communication outlining the Commission’s Next Generation EU Recovery Instrument Plan, and (ii) a Communication outlining the revamped EU Budget for the Recovery Plan and its Annex. As anticipated, the European Commission’s proposed Recovery Instruments are centered around its policy ambitions and priorities, namely: climate neutrality through the European Green Deal, strengthening and adapting the Single Market to the digital age, providing a fair and inclusive recovery, and building the EU’s strategic autonomy and crisis preparedness.
Under the Recovery Plan, Brussels plans to borrow on the markets to fund the recovery of EU countries through a mixture of grants and loans to: (i) support Member States with investments and reforms, (ii) reboot the EU economy by incentivizing private investments, and (iii) address the lessons of the crisis and preparing for future crises. The borrowed money would be repaid over 30 years. According to the Commission’s rough estimate based on the leverage effect of the EU budget and Next Generation EU Recovery Instrument, the total investment that could be generated via this package of measures amounts to €3.1 trillion (US$3.4 trillion). The European Commission called on the EU27 Leaders and co-legislators to adopt the Next Generation EU Instrument and the revised seven-year EU budget by July 2020.
Part of the Commission’s proposal involves creating a “strategic investment facility”, which aims at strengthening resilience and “strategic autonomy across key technologies and value chains” for industries such as critical infrastructure and health care. According to Commission President Ursula von der Leyen, it is important to have a certain level of strategic autonomy without renouncing global trade. Trade Commissioner Phil Hogan also emphasized the need to rely less on third countries for goods of a strategic nature, including pharmaceutical ingredients and raw materials, in what is referred to as an “open strategic autonomy.” The package is also directed at trade policy review, and the report confirms that Brussels aims to complete the review, including efforts to reform the WTO in the last quarter of 2020. In the context of strategic autonomy, the EU is also preparing a white paper on “an instrument on foreign subsidies” to address the level-playing field of state subsidies from third countries in the EU Single Market. EU diplomats have stated that the paper proposes giving the EU’s competition authority the power to intervene in foreign takeovers if they are subsidized by another state.
One of the key elements that will contribute heavily to finance the repayment of and interest of loans envisaged in the EU’s recovery efforts, are tax proposals. This includes a digital tax that would be aimed primarily at Silicon Valley firms with large footprints across the EU. In March 2019, a number of member states blocked plans to introduce such a tax for tech firms, which led to the decision to pause EU-level negotiations and instead focus at the OECD negotiations that aims to build a global solution for the taxation of the digital economy. Countries such as France and Italy have made a national effort with digital taxes of their own, which led to threats of responses from the United States. Brussels remains firm that it will continue ahead with its own plans in 2021 if a global deal cannot be reached and possibly introduce an EU-wide minimum corporate tax rate, a thorny issue for many EU countries. This could potentially raise €1.3 billion for the EU’s annual budget. Unanimity for any such tax would be required across member states including from Ireland, which offers low corporate tax rates to companies like Google and Facebook and who have actively fought against the position of a digital tax.
In addition to a digital tax, the EU mentions its desire for a “level playing field” with non-EU member states that operate more relaxed climate rules, in particular because it is trying to leverage recovery funds to make its economy greener. The Commission wants to impose a carbon border mechanism, through a levy on non-EU imports coming from such regions. However, it has yet to be clarified what this will look like and whether the mechanism will be in the form of a tariff or a tax. The legality and practical application of the tax have also not been clarified. However, it is likely to include a similar methodology as the EU’s Emission Trading System, which includes a ‘cap and trade’ principle.
In addition to a carbon border tax, the proposal also mentions a plastics tax and a corporate tax. The plastics tax would entail a fee on “non-recycled plastic packaging waste”. This is more likely to be voted through by member states. The corporate tax would yield “around EUR 10 billion annually” and would target companies that draw huge benefits from the EU single market, who will survive the crisis. The proposal also pitches for completing the “common consolidated corporate tax base that would provide businesses with a single rulebook” in calculating their tax base in the EU. An attempt to achieve this was made in 2011, but was undermined by the requirement of unanimity from member states. A revised proposal was put forward in 2016, which has yet to bring results and is also likely to be undermined again by the unanimity requirement.
European leaders will meet – yet to be determined if in-person or virtually – on 19 June to discuss the Commission’s proposal, but a final deal is not expected at this meeting. It is unlikely that the Recovery Package can be finally agreed in isolation from a deal on the next Multi-annual Financial Framework (MFF) – effectively the EU budget – which runs for seven years from January 2021. Both require unanimity among the 27 member states. The MFF negotiations were proving difficult even before the Coronavirus pandemic, not least because of the hole left in the EU budget by the departure of the UK. German Chancellor Angela Merkel has suggested EU leaders would likely not achieve a compromise before this Fall, noting this would give national parliaments and the European Parliament “enough time” to discuss and ratify the proposed mechanisms so that they can enter into force on 1 January. It also remains to be seen how the so-called “frugal four” – the Netherlands, Austria, Sweden and Denmark – will respond to the Commission’s proposal.
In the United Kingdom, British Prime Minister Boris Johnson announced on Thursday, 28 May, that groups of up to six people from different households will be able to meet outdoors in England, effective Monday, 1 June. This includes small gatherings in gardens and other private outdoor spaces, provided strict social distancing guidelines are followed. Earlier this week, the Prime Minister announced a series of measures for resuming schools in phases and re-opening some retail (outdoor markets and car showrooms), also effective 1 June. Non-essential retail (clothes, shoes, toys, all furniture stores, books, and electronics, tailors, auction houses, photography studios, and indoor markets) would re-open from 15 June, as long as the Government’s five tests are still being met and COVID-19 secure guidelines are followed. Government guidance for businesses re-opening is available here.
The United States marked over 100,000 COVID-related deaths this week, as more US states moved to re-open their economies despite localized spikes in infection cases. Washington DC announced on Wednesday that it would begin to lift shelter-in-place restrictions on Friday, 29 May, implementing phase one of re-opening, permitting some retail and some parks to re-open, while maintaining other restrictions.
The US Congress has paused advancing additional economic stimulus packages, with Republicans arguing for additional time to evaluate how previous packages have helped to stabilize the US economy and to ascertain where gaps may exist. Congress has provided hundreds of billions in emergency money to states in recent months, and House Democrats passed a fourth economic package in mid-May that would provide hundreds of billions more – a package the Republican-controlled Senate deemed “dead on arrival.”
The US Senate is in recess this week, while the US House of Representatives is working virtually and proxy voting, an issue Republicans are calling unconstitutional. Meanwhile, Senators continue to put forth targeted legislative proposals and plan for congressional hearings in the coming weeks on topics related to the pandemic and the re-opening of the American economy. Loan forgiveness for struggling enterprises that rehire workers, a key feature of the CARES Act’s Paycheck Protection Program (PPP), is set to expire at the end of June, while the enhanced unemployment benefits authorized by Congress this Spring are set to end in July. These and other approaching deadlines are likely to bring congressional Republicans and the White House back to the negotiating table with Democrats. Bipartisan negotiations are likely to commence sometime in mid-to-late June with an eye toward enactment of the next major federal COVID-19 response bill before the August congressional recess. One key topic of debate will be additional federal assistance to US states, territories, counties and municipalities.
NATO’s Role Amid the Pandemic
A less touted but successful transatlantic cooperation has been happening via NATO, which has responded to the COVID-19 pandemic. The Alliance has been handling logistics and delivering needed medical equipment and supplies, similar to the US Department of Defense’s response in the United States. According to NATO, Alliance military forces have flown more than 350 flights to transport medical personnel and over 1,000 tons of equipment. They have helped build almost 100 field hospitals and more than 25,000 treatment beds, and deployed thousands of medical personnel in support of civilian efforts. The Euro-Atlantic Disaster Response Coordination Centre (EADRCC), NATO’s principal disaster response mechanism, has provided assistance during the pandemic. The Centre coordinates requests from NATO Allies and partners, as well as offers of assistance in response to major crises such as the COVID-19 pandemic. Furthermore, on 15 May, NATO Allies agreed to support the United Nations (UN) Office for the Coordination of Humanitarian Affairs (OCHA) call for appropriate military and civil defense assets be made available for the transport of urgently needed humanitarian and medical items during the pandemic.
In April, Bosnia and Herzegovina received medical supplies, including masks and test kits, from the United States, Hungary, Slovenia and Turkey. More recently, NATO donated critical supplies and medical equipment to the citizens of Bosnia and Herzegovina and the Republic of Srpska. The donation included thermometers, face shield visors, masks, protective goggles and suits, blankets, pillows and bed linen sets and hundreds of liters of disinfectant.
Poland donated 50,000 face masks and 1000 liters of disinfectant fluid to Kosovo in May. Similarly, Romania, Lithuania, Slovakia and Austria donated medical equipment, medicine and medical supplies to the Republic of Moldova in early May. Moldova also received medical supplies from Hungary and the United States in April. The Netherlands delivered protective equipment and medical supplies from Beijing to Montenegro, after it requested assistance via EADRCC. Montenegro also received medical supplies – patient monitors, infusion sets and an infusion pump – from the United States, through the US Department of Defense’s (DOD) European Command.
Turkey has provided assistance to 55 countries, including 15 NATO Allies and 21 NATO partner countries. The United States was a recipient of surgical masks, overalls, disinfectant, goggles, N-95 masks and face shields that were flown in on a Turkish military aircraft in April. NATO’s Rapid Air Mobility (RAM) measures and priority handling by EUROCONTROL, which handles air traffic over Europe, made the emergency delivery possible.
On 25 May, a 15-member specialized military medical team from Romania landed in Montgomery, Alabama, on a two-week mission to provide medical support at long-term care facilities, nursing homes and hospitals. Alabama has seen a spike in COVID-19 infections. The exchange was facilitated via the National Guard’s State Partnership Program, which has provided US European Command with another avenue for strengthening relationships with allies and partner countries. In April, a specialized Polish military medical team similarly supported Chicago, Illinois, as the city worked to address COVID-19 infections.
NATO has also engaged in exposing disinformation campaigns during the pandemic. In an April interview with Foreign Policy, NATO Secretary General Jens Stoltenberg warned, “The disinformation campaigns we have seen—they are also supported by government actors, including China—try to divide us and try to undermine our resolve.” After a 15 April meeting, a DOD readout of the virtual NATO Defense Ministerial reflected: “They emphasized the importance of countering disinformation from both state and non-state actors who are using the pandemic to spread false and harmful narratives.”
Prior to the pandemic, US President Donald Trump repeatedly reminded NATO members of the need to meet their annual defense spending target of two percent of gross domestic product (GDP). While this tension subsided during the pandemic, it could flare up since the pandemic put additional pressure on public spending, which in turn could mean reduced defense spending by NATO members. In 2019, nine of the then 29 NATO members (Macedonia joined in March 2020, making it 30 members) achieved the target defense spending. At a press conference in April, Secretary General Stoltenberg acknowledged the COVID-19 economic downturn, saying: “We have seen forecasts about further reductions and of course, there will be budget consequences. At the same time, I think it’s a bit too early to say how big those consequences will be, because that will not least depend on how long the crisis will last.” Notably, the Heritage Foundation – a conservative think tank in Washington – published a report in May that acknowledged NATO’s positive role during the public health emergency.
EU-UK Trade Talks
UK Prime Minister Boris Johnson is set to fly to Brussels in June for his first personal talks with EU leaders in more than four months in order to revive Brexit negotiations. UK Chief Brexit Negotiator David Frost confirmed to a parliamentary committee that “leader-level” discussions would be part of a planned stock-take in June on how to unblock talks.
Frost also confirmed the UK would stand firm and refuse to any agreement to extend the transition period beyond 31 December, despite a lack of progress in discussions. EU Chief Negotiator Michel Barnier has affirmed the EU is open to an extension of up to two years, a decision that must be taken by the Joint Committee before 1 July and be accompanied by an agreement on a financial contribution to the EU from the UK.
During the week, the European Parliament’s trade committee and its foreign affairs committee met to discuss post-Brexit trade talks along with the UK and a draft report from Members of the European Parliament (MEP) on the issue. Recommendations contained in the report will be adopted through a plenary vote in June, ahead of the high-level conference that will look at the process of negotiations. Most MEPs welcomed the proposals set out in the report and have expressed concern for slow pace of negotiations, while reminding the EU has already granted the UK “unprecedented” concessions. The final text of the draft report will be voted on during the plenary session of 17 June. The EU has furthermore made it clear that a “conditional extension” to the Brexit transition period is not a valuable alternative and that the Withdrawal Agreement is the legal basis for how the EU and UK must decide on an extension.
As part of a wider review of relations with China, British Prime Minister Boris Johnson has reportedly instructed UK officials to draft plans to reduce Huawei’s involvement in the U.K.’s 5G network to zero by 2023. This would mark a reversal from January, when Prime Minister Johnson said the Chinese telecommunications company could build up to 35 percent of the UK 5G network, while blocking access to “sensitive core” parts of the network. Downing Street has not issued a statement confirming the media reports. If true, the United States would welcome the move, as it continues to advocate for NATO countries and trading partners to ban and remove any existing Huawei equipment and technology from their domestic 5G infrastructure.
On Wednesday, 27 May, US Secretary of State Mike Pompeo spoke with UK Foreign Secretary Dominic Raab of concerns with respect to Beijing’s national security legislation for Hong Kong. The leaders affirmed the People’s Republic of China must honor its commitments and obligations under the Sino-British Joint Declaration and the international community needs to prevent continued erosions of Hong Kong’s autonomy. The US, along with the UK, Australia and Canada, issued a joint statement on Thursday affirming the UN-registered Sino-British Joint Declaration. The US Mission to the UN noted on Wednesday that China prevented the UN Security Council (UNSC) from convening a virtual meeting to discuss the situation in Hong Kong. China is one of five permanent members of the UNSC, along with the United States, Russia, France, and the United Kingdom.
Also on Wednesday, US Secretary of State Mike Pompeo confirmed he had certified to Congress that Hong Kong “does not continue to warrant treatment under United States laws in the same manner as US laws were applied to Hong Kong before July 1997.” Secretary Pompeo made this certification pursuant to the Hong Kong Policy Act, as amended in November 2019, which requires the Secretary of State make certain certifications annually relating to Hong Kong’s autonomy. The Act further provides “the Secretary may issue additional certifications at any time if the Secretary determines it is warranted by circumstances in Hong Kong.” Secretary Pompeo’s certification alone does not suspend Hong Kong’s special status, but it may open the door to further responses by the Trump Administration. President Trump is expected to hold a press briefing on Friday related to China.
In a Federal Register notice that published on Wednesday, the Office of the US Trade Representative (USTR) announced it would be taking public comment on any changes to the current list of World Trade Organization (WTO) approved retaliatory tariffs in the large civil aircraft dispute, which initially took effect last Fall. The agency confirms that it is setting up a separate portal to accept comments from the public as it prepares for its next review of products subject to tariffs. It also provides a copy of the form USTR plans to use and reports the agency plans to open the portal for comments on or around 23 June.
 The United States (3.42% of its GDP); Bulgaria (3.25%); Greece (2.28%), the United Kingdom (2.14%), Estonia (2.14%), Romania (2.04%), Lithuania (2.03%), Latvia (2.01%) and Poland (2.0%).