Airbus-Boeing aviation dispute

The US government has announced changes to its retaliatory tariff dispute on aviation subsidies with the European Commission and other trading partners. This briefing explains what has happened so far, what looks different, and what CBI members need to consider.

The story so far

On 2 October 2019, the World Trade Organisation (WTO) announced that the US had won the right to impose up to $7.5bn in punitive tariffs on EU products in response to excessive EU subsidies for Airbus, a case going back 15 years. On 18 October 2019, the US Trade Representative (USTR) imposed retaliatory tariffs on goods from four named parties – Germany, France, Spain, and the United Kingdom. These included a 10% tariff on all commercial aircraft (since raised to 15%) and a 25% tariff on specified consumer goods.

These are the highest ever penalties granted by a WTO arbitrator and can be levied indefinitely until there is a new judgement or an agreement between both parties.

UK goods affected in this original list included:

• New airplanes or other aircraft (other than military) (10%) – raised to 15% in March
• Single-malt (but not blended) whiskies (25%)
• Knitwear including sweaters and pullovers (25%)
• Recreational outwear including anoraks and windbreakers (25%)
• Men’s and boy’s suits both woollen and artificial fibres (25%)
• Women’s or girls’ nightdresses, pyjamas, and swimwear (25%)
• Blankets and bedlinen (25%)
• Certain kinds of Pork and Cheese (25%)

What has changed?

On 12 August, USTR announced a modification of the tariff list, by removing tariffs on sweet biscuits from Germany and the UK (including shortbread) and imposing 25% tariffs on jam products from Germany and France. The remainder of products on the original list remain unchanged and are still subject to the same duties.

The reviews are an obligation on the US government obligation under Section 306 of the 1974 US Trade Act. They are used to facilitate a so-called ‘carousel retaliation’ which allows to keep shifting targets to maximise pressure in a dispute – including by a divide and rule approach to different EU member states.  A first review was announced on 12 December and, after consultations, resulted in tariffs on aviation products being raised from 10% to 15% in March. The second modification just announced will take effect on 1 September.

How has the EU responded?

The EU has said from the beginning of the dispute that it would have ‘no alternative but to follow through with its own tariffs’ if and when the EU receives a WTO judgement in a separate case against Boeing, which is expected in September or early October.

The EU has also, without much success, sought to bring the US back to the negotiating table and demonstrate to the US that Airbus has paid back under subsidies.  Airbus announced on 24 July that it had moved to eliminate subsidies deemed illegal by the World Trade Organisation by amending repayable launch aid arrangements with French and Spanish governments for the A350 wide-bodied jets.

The European Commission took a deliberately measured response to the latest review with the Commission spokesperson, acknowledging “the decision of the U.S. not to exacerbate the ongoing aircraft dispute by increasing tariffs on European products,"  while EU Trade Commissioner Phil Hogan said he would keep working "to find a negotiated solution”.  Reaction amongst member States was sharper.

What is the UK government reaction?

The Prime Minister, Chancellor and Trade Secretary have all raised the issue in private with their US opposite numbers in recent months.  Trade Secretary Liz Truss publicly called for change she flew to Washington the week of 10 August to meet with U.S. Trade Representative Robert Lighthizer, for the third round of UK-US talks. In reaction to the decision, Liz Truss said that while pleased that the US had not applied additional tariffs on products like gin and was lifting tariffs on shortbread, she would step up talks with the US to remove existing tariffs.

What is likely to happen next?

So far, the US has deliberately not gone as far it could in the dispute (e.g. by raising tariffs to 100% as allowed under the WTO ruling). Instead it has targeted sensitive pressure points, including those where the EU has previously applied sanctions (the EU applied sanctions to US whiskey in response to a dispute over US steel tariffs in 2018).

A WTO decision on a separate case regarding US government support for Boeing will likely come in September or October. If the WTO rules that US state and federal subsidies were illegal, the EU will be permitted to impose some retaliatory tariffs on US products entering the EU market.

While USTR Lighthizer said in his statement that the US would ‘begin a new process with the EU in an effort to reach an agreement,’ little is expected to change ahead of the US elections.  US authorities have been careful not to rule out further escalations and, based on the pattern thus far, a third review may take place in November just after the US election. In the event of a change in administration in January, a Biden presidency would probably continue to take a hard line, albeit with a different tone and less unpredictability.

Despite the UK’s exit from the European Union on 31 January 2020, US tariffs remain in place on UK products because the UK is a named party in the US’ original WTO arbitration case. DIT has been careful to point out that of the tariffs imposed, 36% are on French exports, 25% on German, 12% on Spanish and 11 per cent on UK exports.

The fully independent trade policy at the end of transition does not guaranty that the UK will be treated differently.   If the dispute continues the UK will be forced to put the issue on the table of the UKUS FTA. The UK has avoided this so far but Liz Truss raising this in Washington suggests a change in approach.

How might this impact CBI members?

Every UK product on the first October tariff list remains subject to duties except for sweet biscuits. Members should continue to check carefully with the official list on the USTR website, noting that there are specific restrictions on individual products (e.g. electric blankets are exempt).

The tariffs disproportionately impact SMEs in Scotland and Northern Ireland because of the importance of whisky and textiles to regional economies, the specialised nature of their production and the value of exports to the US. The United States remains the largest market by value for Scotch Whisky. Other specialist SMEs affected include Savile Row tailors and pork farmers.

CBI members in the Aviation and Whisky sectors have made their concerns clear in public. The Scotch Whisky Association has launched A Let's Call Time on Tariffs Campaign.

What is the CBI doing about this?

The CBI continues has kept in close touch with authorities in Washington, Brussels, London, and Edinburgh and has continued to make the case for restraint, including through Business Europe. It has supported members with insight and access, including direct contacts between CBI Washington Office and members in NI and Scotland.  The CBI has fed member views to USTR at each stage of the process, including the latest USTR review in June.

The CBI recognises the legitimacy of the WTO ruling but questions the fairness and proportionality of retaliatory tariffs which will impact across the wider economy and fall disproportionately hard on specific regions and sectors. The CBI has consistently called for all sides to come to the negotiating table.

Increasingly the CBI is making the link in private to UK-US negotiations arguing that completing a deal will be extremely challenging if this dispute is not resolved.