Transatlantic Trade: US and European Trade Talk Update – September 11, 2020
For several months, the United States (US) has been a COVID-19 hotspot. This week, Western Europe surpassed the US in new daily infections, re-emerging as a hotspot. The European Commission shuffled some portfolios this week, after former European Union (EU) Trade Commissioner Phil Hogan’s resignation. Meanwhile, talks between the EU and the United Kingdom (UK) resumed this week, amid some complicating developments that even had some US Democratic lawmakers weighing-in.
Topics discussed in this report:
New EU Trade Commissioner Appointed
UK-Japan | FTA Concluded
Digital Services Tax Updates
Russia | Notable US Developments
COVID-19 Updates | EU, US and UK
US Elections | Possible Trade Agenda Mentions
The US Congress returned to session on Tuesday, 8 September, after a lengthy August recess. The US Government focused on several issues related to Russia this week, including perceived election interference by foreign actors. On Friday, America commemorated the nearly 3,000 victims that lost their lives during the 11 September 2001 terrorist attacks in New York City, Washington, D.C., and near Shanksville, Pennsylvania. US President Donald Trump visited the memorial in Pennsylvania on Friday; US Vice President Mike Pence visited the memorial in New York City. US Secretary of Defense Mark Esper and Joint Chiefs of Staff Chairman Army Gen. Mark Milley participated in the memorial observance at the Pentagon.
Update: US Secretary of State Mike Pompeo’s virtual conversation with Atlantic Council President and CEO Frederick Kempe has been rescheduled for 9:15 a.m. EDT on Tuesday, 15 September. As noted in last week’s report, the Secretary is expected to discuss his recent trip to Europe, and “how European nations are awakening to the China challenge.”
New EU Trade Commissioner Appointed
This week, European Commission President Ursula von der Leyen announced European Commission Executive Vice President (EVP) Valdis Dombrovskis would officially replace former Commissioner Hogan as the EU’s Trade Chief. Mairead McGuinness of Ireland has been tapped as the Commissioner for Financial Services. Dombrovskis is a former prime minister of Latvia and is a well-respected European diplomat. Dombrovskis’ European career has focused mostly on economics, including having previously worked at the Latvian Central Bank before entering politics. Under the previous EU administration, Dombrovskis served as vice president overseeing economic matters. The two Commissioner-designates must next undergo European Parliamentary scrutiny and approval before being confirmed to these positions.
The eighth round of Brexit talks began on Tuesday, 8 September. Ahead of the talks, UK Foreign Secretary Dominic Raab said on Sunday, “All the UK is asking for is to be treated like any other country in free trade negotiations. No other country would accept being bound by or controlled by the EU’s rules.” He added, “There’s a good deal there for the EU, we’d love to do that free-trade agreement and if not we’ll fall back on Australian-style rules.” On Monday, UK Prime Minister Boris Johnson said in a statement, “There needs to be an agreement with our European friends by the time of the European Council on 15 October if it’s going to be in force by the end of the year. So there is no sense in thinking about timelines that go beyond that point. If we can’t agree by then, then I do not see that there will be a free trade agreement between us, and we should both accept that and move on.” He reiterated Foreign Secretary Raab’s point on Australian-style rules, adding the UK “will not compromise on the fundamentals of what it means to be an independent country” to achieve a free trade agreement with the EU. The week that followed was the bumpiest yet.
Complicating the UK-EU talks, on Tuesday, 8 September, leaked reports suggested that the UK’s draft Internal Market Bill (“the Bill”) would override certain parts of the Northern Ireland Protocol to the Withdrawal Agreement. The Government confirmed in Parliament that the Bill (published on 9 September) would breach the UK’s international treaty obligations “in a limited and specific way”. Northern Ireland Secretary Brandon Lewis told the House of Commons that the UK plans to breach international law by backtracking on provisions of the Withdrawal Agreement. According to Lewis, the UK Government is “taking the power to dis-apply the EU concept of direct effect required by Article 4 in certain, very tightly defined circumstances.” The head of the UK Government Legal Department Sir Jonathon Jones resigned on Tuesday, reportedly because of disagreements over the Government’s intention to legislate to disregard its treaty obligations.
If approved, the Bill would give the UK Government the power to decide which goods in movement between Great Britain and Northern Ireland can be considered to be “at risk” of ending up in the Republic of Ireland, and these goods would face greater customs requirements (the Protocol provides for this decision to be taken jointly in the UK-EU Joint Committee, failing which all goods are considered “at risk”). If no trade agreement is reached by the end of the transition period, UK Ministers could choose to ignore or overrule customs rules. This goes against what was agreed in the protocol contained in the Withdrawal Agreement, which promises to maintain unfettered access for Northern Irish goods to the UK market while allowing it to remain in the EU Single Market for trade in goods. In the wake of the controversy, Downing Street insisted it had no plans to backtrack on the Northern Ireland Protocol. A spokesman for Prime Minister Johnson said the Government remains “fully committed to implementing the Withdrawal Agreement and the Northern Ireland Protocol and we’ve already taken many practical steps to do so.”
UK Prime Minister Johnson spoke with Irish Taoiseach Micheál Martin on 9 September to discuss the UK Internal Market Bill. According to 10 Downing Street, Prime Minister Johnson “confirmed the UK’s commitment to implementing the Northern Ireland Protocol and the Joint Committee process”, adding he was hopeful an agreement “would be possible within that framework.” The readout further reflected, “if an agreement was not reached, as a responsible government, we had to provide a safety net [a reference to the UK Internal Market Bill] that removed any ambiguity and ensured that the government would always be able to deliver on its commitments to the people of Northern Ireland.”
In response to the Bill, the EU called for an emergency meeting of the EU-UK Joint Committee, which took place on Thursday, 10 September. Via Twitter, European Commission President von der Leyen said she is “very concerned about announcements from the British government on its intention to breach the Withdrawal Agreement… Pacta sunt servanda = the foundation of prosperous future relations.”
In a statement issued by European Commission Vice President Maroš Šefčovič following the emergency meeting of the EU-UK Joint Committee, the EU called on the UK Government “to withdraw these measures from the draft Bill in the shortest time possible and in any case by the end of the month” and that the “UK has seriously damaged trust between the EU and the UK.” The statement also made clear that the adoption of the Bill would be a serious violation of the Withdrawal Agreement and of international law and rejected the UK’s position that the aim of the Bill is to protect the Good Friday Agreement. Šefčovič also stated the EU would not be afraid to make use of legal remedies contained in the Withdrawal Agreement. Šefčovič gave London an end-of-September deadline to change course or else risk legal action, but UK Cabinet Office Minister Michael Gove said that the UK would be doing no such thing and that Gove had “made it perfectly clear to Vice President Šefčovič that we would not be withdrawing this legislation. He understood that.”
US lawmakers also weighed-in on the UK’s draft Internal Market Bill. US Speaker of the House Nancy Pelosi (D-California) warned on 9 September, “Whatever form it takes, Brexit cannot be allowed to imperil the Good Friday Agreement, including the stability brought by the invisible and frictionless border between the Irish Republic and Northern Ireland. The U.K. must respect the Northern Ireland Protocol as signed with the EU to ensure the free flow of goods across the border.” She added that if the Good Friday Agreement were violated, it would imperil chances of any final US-UK free trade agreement being approved by Congress. House Ways and Means Committee Chairman Richard Neal (D-Massachusetts) urged on 8 September, “I sincerely hope the British government upholds the rule of law and delivers on the commitments it made during Brexit negotiations, particularly in regard to the Irish border protocols.”
Meanwhile, the EU’s Chief Negotiator, Michel Barnier, has strongly denied claims that he is being pushed out of his Brexit role. In an interview given on Monday, Barnier said talks remain difficult between the parties because the “British would like the best of both worlds and to export their products to a market of 450 million consumers on their terms”, while the EU would like the conditions to be fair.
In an interview, UK Chief Brexit Negotiator David Frost reminded the current UK Government “came in after a government and negotiating team that had blinked and had its bluff called at critical moments and the EU had learned not to take our word seriously…and so a lot of what we are trying to do this year is to get them to realize that we mean what we say and they should take our position seriously.” Frost also reiterated the UK will leave the transition period “come what may” in December.
Following the conclusion of the eighth round of talks, Frost stated a number of challenging areas remain and that the “divergences on some are still significant.” Both parties have agreed to hold informal meetings next week ahead of the final round of talks due to take place on the week beginning 28 September. According to Barnier, “the UK is refusing to include indispensable guarantees of fair competition in our future agreement, while requesting free access to our market. We have taken note of the UK government’s statement on ‘A new approach to subsidy control’. But this falls significantly short of the commitments made in the Political Declaration.” Barnier also said, “the UK has moreover not engaged on other major issues, such as credible horizontal dispute settlement mechanisms, essential safeguards for judicial cooperation and law enforcement, fisheries, or level playing field requirements in the areas of transport and energy. There are also many uncertainties about Great Britain’s sanitary and phyto-sanitary regime as from 1 January 2021. More clarity is needed for the EU to do the assessment for the third-country listing of the UK.”
Despite the drama of the week, negotiations resume next week in Brussels.
UK-Japan | FTA Concluded
The UK Government announced on 11 September that it had concluded a new Free Trade Agreement (FTA) with Japan. The UK-Japan Comprehensive Economic Partnership Agreement broadly replicates the market access between the UK and Japan, which had been provided within the EU-Japan FTA. The new FTA does however include enhanced provisions on services, in particular financial services.
UK International Trade Secretary Liz Truss acknowledged on Friday, “Strategically, the deal is an important step towards joining the Trans-Pacific Partnership and placing Britain at the centre of a network of modern free trade agreements with like-minded friends and allies.” She added, “This is just the beginning for Global Britain.” A UK Government press release on the UK-Japan Agreement is accessible here.
On Tuesday, 8 September, the European Commission published a proposal for a Council and Parliament regulation to remove duties on certain US imports to the EU. In accordance with the EU-US Tariff Agreement reached in August, the US will also reduce its tariffs on certain exports from the EU to the US. This will result in an increase of market access between the US and EU of approximately EUR 200 million annually. EVP Dombrovskis said of the action, “From the EU side, we view this agreement as an important step towards improving our relationship and resolving outstanding disputes. We remain eager to deepen transatlantic cooperation wherever possible as we firmly believe that, when it comes to truly global challenges, the chances of achieving successful global outcomes are improved if the European Union and United States work together.”
Digital Services Tax Updates
According to leaked draft documents related to the Organisation for Economic Co-operation and Development’s (OECD) efforts on negotiations of a global digital tax, there remain significant politically contentious points to resolve. The leaked documents suggest that on Pillar I, which includes a tax based on where digital companies generate profit, OECD leaders still need to decide on the scope of the tax, the amount of profits to be reallocated, as well as the extent of tax certainty. The United States has previously been vocal against the work on Pillar I, arguing it unfairly targets American companies. EU Finance Ministers are determined to ensure the tax applies to American companies starting in 2021. The United States is strongly advocating against the idea of a tax applying only to digital companies, suggesting instead that technology companies should pay such a tax on a voluntary basis.
With the 15-16 October G20 Finance Ministers meeting approaching – a meeting that is expected to approve the framework of the digital tax proposal – there is a growing sense that the OCED negotiations will likely not be concluded before the end of the year. The EU is not optimistic that a deal will be reached. As such, it maintains the position to introduce an EU digital tax proposal within in the first half of 2021, should the OECD talks not realize an agreement by year-end. Notably, the newly designated Trade Commissioner, EVP Valdis Dombrovskis, will maintain his current portfolio of overseeing the Eurozone, social and economic policy, including taxation matters such as digital taxation.
In remarks to reporters on Wednesday, French Finance Minister Bruno Le Maire accused the United States of “making obstacles that prevent us from reaching an agreement even though the technical work is done.” The United States walked away from the OECD talks earlier this summer. Minister Le Maire urged the EU to move forward in 2021 with a digital cross-border taxation proposal, expressing confidence that Irish Finance Minister Paschal Donohue would support such a tax, despite Dublin previously objecting to such an EU approach.
Responding to European countries’ digital services tax (DST) proposals, US technology companies – Apple, Google and Amazon – have announced price changes to offset the costs of these unilateral taxes. For example, in response to the UK DST, Apple is changing how it pays developer fees on the App Store in the UK. It is adding an extra two percent on top of the usual 20 percent VAT it pays to the UK Government on each purchase before splitting what remains with the developer. Google is increasing fees for all advertising bought on Google Ads and YouTube in the UK by two percent. Effective 1 September, Amazon also increased fees for third-party sellers by two percent in the UK. In general, tech firms support a global agreement on the taxation of the digital economy at OECD level rather than unilateral taxes.
Russia | Notable US Developments
On 8 September, House Foreign Affairs Committee Chairman Eliot Engel (D-New York) and Ranking Member Michael McCaul (R-Texas) sent a letter to President Trump urging an investigation of Russia’s alleged use of chemical weapons in the poisoning case of Alexei Navalny. They reminded of the 2018 Novichok attack on Sergei and Yulia Skripal (father and daughter) in the United Kingdom and urged, “If the Russian government is once again determined to have used a chemical weapon against one of its own nationals, additional sanctions should be imposed.”
That same day, the Group of Seven (G7) Foreign Ministers, along with and the High Representative of the European Union, issued a statement condemning the confirmed poisoning of Navalny. They further called “on Russia to urgently and fully establish transparency on who is responsible for this abhorrent poisoning attack and, bearing in mind Russia’s commitments under the Chemical Weapons Convention, to bring the perpetrators to justice.”
Senate Foreign Relations Committee (SFRC) Ranking Member Robert Menendez (D-New Jersey) and SFRC Member Benjamin Cardin (D-Maryland), who also authored the Sergei Magnitsky Rule of Law Accountability Act of 2012 (“Magnitsky Act”), sent US Secretary of the Treasury Steven Mnuchin a letter on 9 September calling on the Administration to immediately release a set of Magnitsky Act designations for 2019. The Sergei Magnitsky Rule of Law Accountability Act requires the US President to designate individuals who were involved in the detention, abuse, or death of Russian whistleblower Sergei Magnitsky. It also directs the President to designate individuals responsible for gross violations of human rights against people seeking to promote human rights in Russia or to expose illegal activity by Russian Federation officials. These designations are generally released annually by the end of the year. To-date, the Trump Administration has yet to release the 2019 designations.
On Thursday, 10 September, the US Department of the Treasury’s Office of Foreign Assets Control (OFAC) sanctioned four Kremlin-linked individuals (3 Russians; 1 Ukrainian lawmaker) for their alleged efforts to interfere in the upcoming US electoral process. In a statement, Treasury noted, “Russia uses a variety of proxies to attempt to sow discord between political parties and drive internal divisions to influence voters as part of Moscow’s broader efforts to undermine democratic countries and institutions.” The US Department of State observed in a separate statement: “This action sends a clear signal: the United States will not hesitate to use all tools of national power to respond to foreign actors that seek to interfere in or otherwise influence our elections by any means.”
Also on Thursday, Acting US Secretary of Homeland Security Chad Wolf issued a separate statement related to foreign actors seeking to influence the US elections. His statement came in response to Microsoft’s announcement that it had detected cyberattacks targeting individuals and organizations involved in the upcoming US presidential election, including unsuccessful attacks on individuals associated with the Trump and Biden campaigns. Microsoft spotlighted attacks that originated from Russia, China and Iran. Acting Secretary Wolf applauded Microsoft’s election initiative and stated, “Today’s announcement from Microsoft reaffirms my statements in the recent State of the Homeland Address: China, Iran, and Russia are trying to undermine our democracy and influence our elections. [The Department of Homeland Security] and this Administration have been consistent in calling out all these bad actors and taking action wherever appropriate to protect the integrity of our election systems.” The Acting Secretary gave his annual State of the Homeland Address on Wednesday, 9 September.
COVID-19 Updates | EU, US and UK
According to Bloomberg on Thursday, 10 September:
The 27 countries in the European Union plus the U.K., Norway, Iceland and Liechtenstein recorded 27,233 new cases on Wednesday, compared with 26,015 for the U.S. That follows several weeks of resurgent infections in Spain, France and other countries across the continent.”
Effective this coming Monday, UK Prime Minister Johnson explained some new domestic restrictions on 9 September that are intended to curb the spread of COVID-19 and avert a possible second national lockdown. For example, the restrictions include a new “Rule of Six”, which includes penalties if violated, which prohibits gatherings larger than six individuals at home and in public, with some exceptions, including at work. The UK Government will also:
Simplify the Passenger Locator Form needed for travelling to the UK, and take measures to ensure these are completed and checked before departure.
Border Force will step up enforcement efforts at the border to ensure arrivals are complying with the quarantine rules.”
In the United States, negotiations between Democrats and Republicans on another COVID-19 legislative package that would address lapsed COVID-19 economic relief programs remains stalled. Democrats continue to press for $2.2 trillion in economic relief, while White House officials have indicated they may be willing to go up to $1.5 trillion, from Republican’s previous stance of no more than $1 trillion.
On Tuesday, 8 September, Senate Republicans introduced a pared-down coronavirus relief bill that includes a $300 per week federal unemployment benefit, $258 billion in Paycheck Protection Program (PPP) funding, a $10 billion grant to the US Postal Service, $105 billion for schools, $47 billion for vaccines and testing needs, and liability protections for employers. Speaker Pelosi and Senate Minority Leader Charles Schumer (D-New York) warned that same day the “skinny” bill is “headed nowhere.”
The Senate voted on the COVID-19 bill on Thursday, 10 September; while the measure secured 52 Republican votes in the chamber, the Senate requires 60 votes to advance legislation, which means the bill did not pass. Democrats in the Senate voted against the bill because it did not include housing assistance, nutrition assistance, or assistance to state and local governments. All but one Republican in the Senate voted for the measure, sending a signal to Democrats that Republicans remain aligned firmly with the White House’s approach on the next COVID-19 relief bill.
Meanwhile, in a possible set-back, AstraZeneca-Oxford University’s COVID-19 phase 2/3 trials for its vaccine candidate (AZD1222) was paused on Tuesday for a safety review, after a patient in the UK experienced a serious adverse event.
US Elections | Possible Trade Agenda Mentions
Senior House Ways & Means Committee Democrats expressed optimism last week that if Democratic presidential candidate Joe Biden wins in November that he would “reset” US trade relations. Trade Subcommittee Chairman Earl Blumenauer (D-Oregon) in an interview with Inside U.S. Trade criticized the Trump Administration’s heavy use of tariffs. He observed, “The notion that we basically have one tool in the tool kit and that’s sort of a drive-by tariff policy, which inflicts costs, and most Americans that pay attention know that tariffs are not paid by Chinese – they are costs consumed by American consumers and American businesses.” In a separate interview, Representative Ron Kind (D-Wisconsin), a member of the pro-trade New Democrat Coalition, confirmed an ongoing dialogue with the Biden campaign on a possible trade agenda. A top priority he said is ensuring the US-Mexico-Canada Agreement (USMCA) is “implemented correctly.” Repairing the US relationship with the World Trade Organization (WTO), continuing bilateral free trade negotiations with Kenya and the United Kingdom, along with revitalizing trade negotiations with the EU, were other priorities that Congressman Kind spotlighted.
During a webinar hosted by the World Affairs Council last week, US Trade Representative Robert Lighthizer outlined trade priorities for a possible second Trump Administration term, which he noted includes enforcement of trade agreements as a top issue. Ambassador Lighthizer also said China and WTO reform would remain priorities, along with ongoing trade negotiations with the United Kingdom and Kenya. He also spotlighted the Republican National Convention focused on trade, contrasting it with the Democratic National Convention, where he said the word “trade” was “almost not mentioned.” According to Ambassador Lighthizer, “Democrats really don’t talk about trade. I think they find the global view, the globalist view that’s the view of the vice president [Democratic presidential candidate Joe Biden] is not a popular view.”
 G-7 countries include Canada, France, Germany, Italy, Japan, the United Kingdom and the United States.
Frank Samolis, Matthew Kirk and Wolfgang Maschek contributed insights to this report.