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Global trade will play a key role in economic recovery efforts in the United States and around the world. Business supply chains continue to be affected by the implementation of the updated free trade agreements in Canada and Mexico. The Biden administration is expected to continue negotiating separate free trade agreements with the European Union and the United Kingdom, as well as pursuing new trade agreements with other nations. Meanwhile, US-China trade policy is one area in which there may be some continuity from the Trump to the Biden administration.
This Insight describes key trade and policy developments and analyzes how these topics affect US inbound companies.
Action item: US inbound businesses and investors should seek to engage early with policymakers to inform them about the vital role they play in the US economy and about their unique concerns. Once consideration actively begins, legislation may move quickly, and it may become more difficult to participate effectively in the process.
There are numerous recent developments affecting US trade policy with many countries. These developments may have significant impacts on US inbounds.
The US Senate on March 17 confirmed Katherine Tai to lead the office of the US Trade Representative (USTR).
Tai previously served as chief trade counsel for the House Ways and Means Committee, playing a significant role in working with the Trump administration during negotiations of the United States-Mexico-Canada Agreement (USMCA), which went into effect on July 1, 2020. Tai also served in the USTR’s Office of General Counsel as associate general counsel from 2007 to 2011. In 2011, Tai, who speaks fluent Mandarin, was appointed USTR chief counsel for China trade enforcement, overseeing US litigation against China at the World Trade Organization (WTO). House Ways and Means Committee Chairman Richard Neal (D-MA) has named Alexandra Whittaker to replace Tai as chief trade counsel.
Observation: US Inbounds should monitor statements and positions taken by Tai, as the USTR plays a significant role in trade policy affecting US Inbounds. For example, in late March 2021, Tai noted that tariffs on Chinese imports were imposed ‘to remedy an unbalanced and unfair trade situation,’ and explained that any change in tariff policy towards China should be ‘communicated in a way so that the actors in the economy can make adjustments.’ Tai additionally noted that ‘the ability to plan’ is critical for the business community. In addition, on March 26, the USTR published several updates to digital service tax (DST) investigations in Austria, India, Italy, Spain, Turkey, the UK, Brazil, the Czech Republic, the EU, and Indonesia. Specifically, the USTR terminated its investigations in Brazil, the Czech Republic, the EU, and Indonesia—because these jurisdictions either have not adopted or not implemented a DST during the period of investigation—while, for other countries, the investigatory process is continuing and the USTR has proposed a list of goods for potential tariffs and is soliciting comments from the public. All March 26 USTR updates are listed on the USTR’s website.
The Biden administration is expected to continue recent US policies that seek to address a range of concerns with respect to China, while also seeking to increase coordination with allies in Europe and elsewhere.
Former President Trump and Chinese Vice Premier Liu He on January 15, 2020, signed Phase One of a multibillion-dollar trade agreement, which calls for certain actions by China, including structural reforms and other changes to China’s economic and trade regime regarding intellectual property, technology transfer, agriculture, financial services, and currency and foreign exchange practices. The agreement also includes a commitment by China to increase purchases of US agricultural goods, energy, and manufactured goods by $200 billion over the next two years.
The US-China Phase One agreement was reached after multiple rounds of tariff increases by both the United States and China. The Phase One agreement leaves in place the 25% and 7.5% tariffs on approximately $250 billion and $120 billion worth, respectively, of Chinese imports. The Trump administration said in August that the tariffs would remain in place until the two sides successfully negotiate Phase Two of the trade agreement. President Biden has not given any indication of a new direction with respect to the tariffs.
Former President Trump imposed the China tariffs under Section 301 of the Trade Act of 1974, which provides the president with the ability to take retaliatory actions against any country that violates or otherwise denies benefits under any trade agreement with the United States.
The WTO said in a September 15, 2020 report that the Section 301 tariffs imposed in 2018 on billions of dollars of Chinese imports violate the provisions of the General Agreement on Tariffs and Trade. The WTO announced on October 26, 2020 that the United States had appealed the ruling, but the appeal has not been heard due to a lack of appellate body members to preside over the case. Former President Trump on May 29, 2020 announced that the United States will begin the process of ending Hong Kong Special Administrative Region’s (SAR’s) special trade status in response to China’s enactment of new national security laws. As a result, the Department of Commerce suspended all license exceptions for the shipment of dual-use items subject to the Export Administration Regulations (EAR) to Hong Kong SAR. In addition, Hong Kong SAR is subject to the same arms embargo that generally is in effect for China.
Observation: Inbound companies — which may not always be familiar with the US regulatory framework and may be challenged by a frequently changing policy landscape with respect to trade and tariffs — may be more vulnerable to unexpected above-the-line costs. In addition to monitoring policy developments, companies affected by additional tariffs should consider and quantify the trade impacts in their supply chain planning, as well as utilize available mechanisms to reduce business impacts.
USMCA took effect on July 1, 2020, replacing the North American Free Trade Agreement (NAFTA). The new free-trade agreement leaves in place the basic NAFTA framework, but updates the arrangement with new labor and environmental standards, a new chapter on trade in digital goods, stronger intellectual property protections, and a more stringent set of requirements for automobiles and automotive parts to qualify for tariff-free access in North America.
House Ways and Means Committee Democrats on November 2, 2020, released a USMCA implementation report card detailing their concerns with implementation and enforcement as well as listed issues that they are closely monitoring. The USTR on December 9 announced the first enforcement action under USMCA to address Canada’s allocation of dairy tariff-rate quotas that the USTR says are contrary to the provisions of the agreement and harm US dairy farmers.
The EU on November 7, 2020, had imposed tariffs on certain US products, including a 15% tariff on aircraft as well as 25% tariffs on a wide variety of other specified US-origin products, including frozen fish; fresh cheese; sweet potatoes; fresh fruit; vanilla; nuts; vegetable fats and oils; cocoa and chocolate; tobacco, luggage, handbags and other cases; tractors; gaming equipment and tables for casino games; and exercise equipment.
The United States, effective March 18, 2020, had increased the additional tariff imposed on aircraft imported from the EU to 15% from 10%, and announced minor modifications, effective March 5, 2020, to the list of certain EU products that are subject to additional 25% tariffs. This category includes kitchen knives from France and Germany; dairy products, fruits, and seafoods from all EU countries; wine from France, Germany, Spain, and the United Kingdom; clothing from the United Kingdom; and both hand and electric tools from Germany.
However, the United States and the United Kingdom on March 4 released a similar joint statement announcing a four-month suspension of tariffs related to the same dispute.
According to a March 5 US-EU joint statement, the four-month suspension “will allow the EU and the US to ease the burden on their industries and workers and focus efforts towards resolving these long running disputes at the WTO.”
For further discussion, see PwC Tax Insight, US, EU, and UK announce suspension of tariffs in long-running aircraft dispute.
Observation: US inbounds that import and/or export goods to or from countries in the EU need to remain vigilant regarding continuing developments in this long-running dispute. In addition, US Inbounds affected by these tariffs should consider modeling possible resolutions of this situation in planning their future trade between the United States and the EU.
Even before a post-Brexit EU-UK trade agreement was reached, the United States and the United Kingdom completed five rounds of talks working toward a comprehensive US-UK Free Trade Agreement (US-UK FTA). The latest round focused on market access for goods, which determines whether a product can benefit from preferential tariffs. The focus of the talks includes economic recovery efforts in light of the pandemic including services and investment, as well as digital trade. Thus far, the negotiators have been able to separate the US-UK FTA negotiations from the US Section 301 investigation into the UK’s digital services tax in order to move forward with the talks.
Observation: While the outlook for a US-UK deal appears positive, the Biden administration’s early policy focus on domestic economic issues and the time needed to stand up a new trade team at USTR likely means a US-UK deal could not be concluded early in 2021. US Inbounds should watch for developments.
The USTR announced in an October 2, 2020, release that it was initiating an investigation under Section 301 of the Trade Act of 1974 into two significant issues with respect to Vietnam. Specifically, the USTR will investigate Vietnam’s acts, policies, and practices related to the import and use of timber found to be illegally harvested or traded, and also will investigate Vietnam’s acts, policies, and practices that could be deemed to contribute to the undervaluation of its currency and the resultant harm caused to US commerce.
The USTR published notices dated October 8 on the two investigations in the Federal Register. For further discussion, see PwC Tax Insight, USTR investigates Vietnamese timber imports, alleged currency manipulation.
Observation: Should any negative repercussions result from the Vietnam investigations, it is possible that US trade attention could expand to that theater, with the imposition of additional duties. If so, US inbounds with supply chains that include Vietnam may find themselves again dealing with tariffs on Vietnam-origin goods.
In addition to trade considerations, the US political landscape continues to be important for US inbounds.
Democrats’ unified control of Congress and the White House has increased the likelihood of tax law changes during the next two years. However, the timing and scale of any tax increases remains uncertain given the state of the economy and health crisis, as well as narrow Democratic majorities in both the House and Senate.
Democrats have the ability to pass tax legislation with simple majority votes in both the House and Senate under ‘budget reconciliation’ procedures; however, assuming no Republican support, this requires the support of all 50 Democratic Senators and virtually all House Democrats.
Some of the tax increases proposed by President Joe Biden during the campaign may face resistance from moderate-to-conservative Democratic lawmakers. For example, an increase in the corporate tax rate from 21% to 28% may not be achievable, but Democrats might be able to enact a smaller increase.
Observation: President Biden also has proposed changes to US international tax rules. A fact sheet issued by the Biden campaign on September 20 on tax proposals related to offshoring included an offshoring surtax, a ‘Made in America’ tax credit, and GILTI changes. Those changes could be relevant to US inbounds.
Biden’s initial focus will be on containing COVID-19 as well as enacting additional economic relief and an economic stimulus package focused on infrastructure that could be considered under budget reconciliation procedures. For information on the recently enacted economic relief package, see PwC Insight, House clears $1.9 trillion relief legislation for President Biden’s signature.
Trade policy will continue to be a priority topic for the Biden administration as part of overall efforts to promote US economic recovery. US inbound companies and investors should monitor these developments and should seek to engage with policymakers to inform them about the vital role they play in the US economy and about their unique concerns.
Managing Director, PwC's Customs and International Trade Practice Co-Leader, PwC US
Managing Director, Customs and International Trade, PwC US