On October 16, 2018, the Office of the U.S. Trade Representative (“USTR”) notified the U.S. Congress of the Administration’s intent to negotiate three separate trade agreements with the European Union (“EU”), the United Kingdom (“UK”), and Japan. In the press release announcing the negotiations, USTR stated that it was providing the notice in accordance with the requirements of the Bipartisan Congressional Trade Priorities and Accountability Act of 2015 (“TPA”). Under TPA procedures, USTR’s notifications trigger a 90-day clock after which the United States can formally begin negotiations with each country. This means the United States could launch the negotiations as soon as January 14, 2019.
At this early stage, it is unclear whether all of these negotiations will formally launch – and, if they do, what the scope of negotiations will be. However, preliminary discussions to lay the groundwork for eventual FTA negotiations are already underway. This creates an opportunity for companies with interests in these bilateral trade relationships to engage with their governments now, to help shape the negotiations and ensure their concerns are addressed.
In the remainder of this alert, we provide additional background on each of the prospective negotiations and discuss some key questions they will raise.
U.S.-EU Trade Agreement Negotiations
Under the Obama Administration, the United States began negotiating the Transatlantic Trade and Investment Partnership (“TTIP”) with the EU, which focused largely on easing regulatory barriers to trade. However, the negotiations stalled, and the Trump Administration did not resume them. Instead, under the authority of Section 232 of the Trade Expansion Act of 1962, the Trump Administration unilaterally imposed tariffs on steel and aluminum imports from the EU, and it has threatened to impose additional tariffs on imports of EU autos and auto parts. The EU has responded with retaliatory tariffs of its own.
Transatlantic trade tensions appeared to subside in July 2018, when President Trump and European Commission President Jean-Claude Juncker met and agreed to two objectives: First, to “work together toward zero tariffs, zero non-tariff barriers, and zero subsidies on non-auto industrial goods.” Second, to “reduce barriers and increase trade in services, chemicals, pharmaceuticals, medical products, as well as soybeans.”1 The Trump-Juncker joint statement contained no explicit renunciation of unilateral tariffs, although it stated that “we will not go against the spirit of this agreement, unless either party terminates the negotiations. We also want to resolve the steel and aluminum tariff issues and retaliatory tariffs.” USTR subsequently issued a statement expressing “hope” to achieve an “early harvest” on technical barriers to trade by early November2– a very ambitious timeline.
The prospective U.S.-EU FTA negotiations represent one step towards fulfilling the commitments in the Trump-Juncker joint statement. However, USTR’s notification letter to Congress leaves open key questions about the scope of negotiations, including:
- How the Administration will pace FTA negotiations with the EU. USTR’s notification letter to Congress stated: “We may seek to pursue negotiations with the EU in stages as appropriate” – something that the UK notification letter omits (but, as noted below, the Japan notification letter also includes).
- How (if at all) the negotiations will impact the potential imposition of Section 232 tariffs on imports of EU autos and auto parts. As noted above, the Trump-Juncker joint statement stated that the parties “will not go against the spirit of this agreement, unless either party terminates the negotiations.” It is unclear how long such restraint will last, particularly given USTR’s hope to achieve an early harvest by November.
- How the United States and the EU will address the existing U.S. tariffs on steel and aluminum, and the retaliatory tariffs imposed by the EU.
- The extent to which the U.S.-EU negotiations will address agriculture. EU protections for agriculture are a perennial sticking point in transatlantic trade relations, and the Administration’s notification letter does not cite agriculture as an explicit negotiating objective (although it expressed a commitment to achieve “timely and substantive results” for U.S. farmers and ranchers, among others). As noted above, the Trump-Juncker joint statement referenced soybeans, but it did not address other agricultural products. However, the EU Council voted on Friday to authorize negotiations to increase U.S. beef imports.
- The extent to which the U.S.-EU negotiations will address regulatory barriers to trade. Regulatory requirements (including in the areas of food safety, labeling, and certifications) are a major constraint on U.S. market access in the EU, and they were a major focus of the TTIP negotiations. Furthermore, as noted above, USTR stated that it intends to achieve an early harvest on technical barriers to trade. However, omitting regulatory trade barriers would simplify negotiations and allow the parties to focus on low-hanging fruit, such as tariffs.
- How the U.S.-EU negotiations will address digital trade. The recently-concluded U.S.-Mexico-Canada agreement includes a cutting-edge digital trade chapter that the United States will likely want to emulate (see our Client Alert on the USMCA). But the EU has proposed a series of rules that would significantly hamper U.S. digital services exports to the EU, such as the Digital Services Tax, the ePrivacy Regulation, and the EU Copyright Directive. It is also possible that EU courts will invalidate the U.S.-EU Privacy Shield. It is unclear whether U.S. negotiators will seek to address any of these complex issues in the negotiations.
- The extent to which the U.S.-EU negotiations will address regulatory enforcement and associated penalties. Recently the EU has imposed or threatened large fines on U.S. companies as the result of antitrust investigations, and the EU’s General Data Protection Regulation empowers the EU to impose large fines on a similar scale and with extraterritorial reach. While such law enforcement activities are traditionally considered to be separate from trade rules, it is unclear whether the Administration will accept this distinction in the case of the EU.
Preliminary discussions over the FTA have already hit a stumbling block, with the European Commissioner for Trade Cecilia Malmström insisting last week on a preliminary “scoping exercise,” and U.S. Secretary of Commerce Wilbur Ross pushing for broader negotiations and stating that President Trump’s patience is “not unlimited.” It is unclear how the parties will overcome the impasse.
U.S.-UK Trade Agreement Negotiations
USTR’s notification to Congress touts the potential benefits of an “ambitious” U.S.-UK FTA. However, formal trade negotiations cannot begin until after “Brexit” is completed and the UK leaves the EU (scheduled for March 29, 2019). Thus, during the intervening period, USTR and the UK Secretary of State for International Trade will focus on “laying the groundwork for a potential future free trade agreement” through the U.S.-UK Trade and Investment Working Group (launched in July 2017). If the UK and the EU are unable to reach a Brexit agreement by March 29, 2019, and instead face a “hard Brexit,” this could potentially accelerate U.S.-UK FTA negotiations.
The U.S.-UK FTA negotiations are likely to cover many of the same issues addressed in the USMCA. Key issues regarding the scope of U.S.-UK FTA negotiations include:
- How the U.S.-UK negotiations will address regulatory issues, including those that relate to food security, the environment, manufacturing, and so on. Because the UK has more trade with the EU than the United States, it may prefer to maintain regulatory harmony with the EU. However, this would make it more difficult to achieve a U.S.-UK trade agreement, given that those same regulations restrict U.S. exports in many cases. Indeed, USTR’s Chief Agricultural Negotiator Gregg Doud stated in June 2018 that an FTA with the UK would be “extremely difficult” because it would require the UK to be “bilingual in terms of regulation.”3
- Whether the United States is willing to increase UK access to federal and state procurement – which the UK Ambassador to the United States recently stated that the UK would seek. This would conflict with the approach that the United States took in the USMCA negotiations: shrinking Mexico’s access to U.S. government contracts, and eliminating the procurement chapter as between the United States and Canada, relying instead on the two countries’ reciprocal commitments under the plurilateral WTO Agreement on Government Procurement.
- The extent to which the U.S.-UK negotiations will address financial services. The USMCA financial services chapter broke new ground by prohibiting data localization requirements as they pertain to financial institutions, and by expanding the list of financial services that companies may supply on a cross-border basis. While the EU might find it difficult to match the level of ambition in USMCA in its own negotiations with the United States, it is possible that a U.S.-UK agreement would seek to exceed the USMCA commitments.
The UK is also engaged in preliminary consultations about the possibility of joining the Comprehensive and Progressive Agreement for Trans-Pacific Partnership ("CPTPP"), which is essentially the Trans-Pacific Partnership ("TPP") without the United States (because President Trump withdrew the United States from the agreement in January 2017). If the UK decides to enter into CPTPP negotiations post-Brexit, this could potentially involve many of the same elements as the U.S.-UK FTA negotiations.
U.S.-Japan Trade Agreement Negotiations
The United States and Japan were both parties to the TPP negotiations, and in that context agreed to a wide swath of reciprocal trade liberalization measures similar to those in USMCA. However, President Trump’s 2017 withdrawal from TPP restored the status quo ante, in which U.S.-Japan trade is governed by WTO rules. Meanwhile, the Trump Administration has imposed Section 232 steel and aluminum tariffs on Japan and is threatening to impose Section 232 tariffs on Japanese autos and auto parts (as discussed above with respect to the EU). Unlike the EU, however, Japan has thus far not retaliated against the U.S. tariffs with offsetting tariffs of its own. Rather, Japan signed onto the CPTPP, and it also signed an FTA with the EU.
On September 26, 2018, President Trump and Prime Minister Shinzo Abe issued a joint statement committing to a two-stage negotiating agenda: first, address goods and “other key areas including services, that can produce early achievements,” and then move on to “other trade and investment items.”4 In addition, the joint statement acknowledged that the United States will seek market access for the motor vehicle sector that increases U.S. production and jobs, and that Japan’s “previous economic partnership agreements constitute the maximum level” for concessions with regard to “agricultural, forestry, and fishery products.” The joint statement also said that the parties will “refrain from taking measures against the spirit of this joint statement during the process of these consultations.”
Key issues regarding the scope of U.S.-Japan FTA negotiations include:
- How the FTA negotiations will deviate from the agreement that the United States previously reached in TPP. The Administration would likely prefer to treat the market access concessions that Japan made in the earlier agreement as the starting point here, but it is unlikely that Japan will agree. Indeed, as noted above, Japan already signaled that it will not go beyond its TPP commitments with respect to agriculture, forestry, and fishery products.
- How much flexibility Japan will demonstrate on liberalizing sensitive domestic sectors, such as autos and insurance. Japan has historically been very reluctant to expose these sectors to international competition, but it agreed to liberalize them in TPP to some extent. As noted above, the Trump-Abe joint statement identifies increased market access for autos as a top priority for the United States. In addition, USTR’s notification letter to Congress identifies both autos and services as being among the sectors “challenged by multiple tariff and non-tariff barriers for decades, leading to chronic U.S. trade imbalances with Japan.”
- How, if at all, the negotiations will address the Section 232 tariffs. As noted above, Japan has thus far refrained from retaliating against the United States for its tariffs on aluminum and steel. It may be less conciliatory, however, if the United States were to extend the tariffs to the automotive sector. The Trump-Abe joint statement’s commitment to “refrain from taking measures against the spirit of this joint statement during the process of these consultations” suggests that there is currently an informal moratorium on further tariffs, and Prime Minister Abe told the Financial Times that he understood the United States had committed not to impose Section 232 tariffs on autos and auto parts while negotiations are pending.5 However, it is unclear how long this moratorium will last.
Like other U.S. FTAs, the U.S.-EU, U.S.-UK and U.S.-Japan FTAs have the potential to establish new rules that will affect companies and workers across the entire spectrum of the economy, from goods manufacturers to service suppliers, companies involved in digital trade, farmers and ranchers, and so on. The ultimate impact of each agreement is not yet clear, however, as it will depend on the final scope of each negotiation. In addition, as the outcome of the USMCA negotiations illustrates, the Trump Administration is committed to changing the U.S. approach on certain key issues (e.g., auto trade, government procurement rules, investment protections). Potentially impacted companies would be well advised to follow the negotiations closely to ensure their interests are protected.