authorising the opening of negotiations of an agreement with the United States of America on the elimination of tariffs for industrial goods

EXPLANATORY MEMORANDUM

1.CONTEXT OF THE RECOMENDATION

•Reasons for and objectives of the recommendation

On 25 July 2018, the President of the European Commission and the President of the United States of America reached agreement to launch a new phase in the trade relationship between the United States and the European Union, with a view to facilitate trade and avoid an escalation of trade tensions.

A Joint Statement was adopted on 25 July 2018, providing for the elimination of tariffs for industrial goods; increased cooperation on regulatory issues and standards; facilitation of trade in soybeans; and increased trade in liquefied natural gas (LNG) to allow the European Union to better diversify its energy supply. They also agreed to join forces to better protect European and US companies from unfair global trade practices and to work closely with like-minded partners to reform the World Trade Organisation (WTO).

An Executive Working Group was set up to carry this joint agenda forward, and asked inter alia to identify short-term measures to facilitate commercial exchanges. It was agreed that during the process of implementing the Joint Statement the European Union and the United States would fully respect the spirit of this agreement, unless either party terminates the negotiations. Both sides also agreed that they want to resolve the steel and aluminium tariff issues.

The European Commission is committed to implement the Joint Statement of 25 July 2018 in good faith. The Commission shall suspend the negotiations with the United States, in case the United States does not respect the commitment made on 25 July 2018 to abstain from adopting new measures against the EU under Section 232 of the Trade Expansion Act. The Commission may also suspend negotiations in case the US adopts trade restrictions against EU exports on the basis of Section 301 of the 1974 Trade Act or under any other similar United States law.

The goal of the negotiations on the elimination of tariffs will be to eliminate all duties for industrial goods, on a reciprocal basis, with the objective of achieving a substantial elimination of tariffs upon entry into force and a phasing out of such tariffs in a short time frame. Industrial goods encompass all goods other than those included in Annex I of the WTO Agreement on Agriculture. Account may be taken of the particular sensitivities of certain products. In this connection, the EU is ready to take into account potential US sensitivities for certain automotive products.

The EU and the US are the largest and most integrated economies in the world, with a long, shared history of trade and a similar level of economic development. The US is the main export destination of EU exports in industrial goods and is the second largest exporter of industrial goods to the EU (after China). EU-US trade in goods amounted to EUR 633 billion in 2017, composed mostly of industrial goods (EUR 598 billion, of which EUR 166 billion trade in machinery and equipment). Around 4.7 million EU jobs are associated with production for exports to the US. Industrial goods account for most of our trade in goods with the US (94 % of EU exports and 95 % of imports). EU-US trade in goods has been growing consistently over the last 10 years.

In general, both the EU and the US have low tariffs on industrial goods. The simple average applied MFN tariff rates on non-agricultural products are 4.2% and 3.1% respectively. While applied tariffs levels are relatively low, the sheer size of our trade relationship means that the elimination of all tariffs of industrial goods will have an important impact on businesses and consumers on both sides of the Atlantic.

An internal analysis with the computable general equilibrium model MIRAGE shows that the elimination of tariffs on industrial goods would benefit both partners about equally in terms of an increase in bilateral trade. EU exports of goods to the US would increase by 10%, US exports to the EU would increase by 13%.

The removal of tariffs on industrial goods should in particular result in important economic benefits for small and medium-sized enterprises (SMEs) who are disproportionality affected by the costs of placing a product on the market. Reductions in costs, including through the elimination of tariffs can help make exports from SMEs more competitive, thus making the difference between exporting or not.

•Consistency with existing policy provisions in the policy area

The scope of this recommendation only relates to the part of the Joint Statement of 25 July 2018 covering the elimination of tariffs for industrial goods. The Joint Statement was adopted under exceptional circumstances, in order to avoid an escalation of trade tensions between the EU and the United States. The objective to de-escalate trade tensions with the US is fully consistent with the Treaty on European Union (TEU), which enshrines that the EU should encourage the integration of all countries into the world economy, including through the progressive abolition of restrictions on international trade. The recommendation for the opening of negotiations with the US on the elimination of tariffs should by no means be construed as an indication that the Commission would be willing to derogate from existing trade and investment policies as provided for under the Commission Communication on ‘Trade for All: Towards a more responsible trade and investment policy’.

•Consistency with other Union policies

The recommendation is consistent with other Union policies.

2.LEGAL BASIS, SUBSIDIARITY AND PROPORTIONALITY