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CAROUSEL RETALIATION: TARIFF UNCERTAINTY ON ANOTHER RIDE

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CAROUSEL RETALIATION: TARIFF UNCERTAINTY ON ANOTHER RIDE

The Ride Music Starts

On October 2, a World Trade Organization (WTO) arbitrator rendered a decision that authorizes the United States to apply retaliatory tariffs on as much as $7.5 billion worth of European exports each year until WTO-illegal European subsidies to its aircraft industry are removed.

In a press release issued that day, the U.S. Trade Representative (USTR) announced that beginning October 18, the United States would apply WTO-approved tariffs on a list of EU products. The list includes 10 percent duties on civil aircraft, but also 25 percent duties on goods we consume directly including butter, various cheeses, clementines, clams, green olives and single-malt Irish and Scotch Whiskies.

Before their next cocktail party, U.S. shoppers might stock up to beat the tariffs, but they may not want to go overboard buying Parmigiano Reggiano. That’s because the Administration is reportedly considering what is known as “carousel” retaliation – a regular rotation of goods targeted for tariffs, designed to impose maximum pain. The United States and Europe have been on this ride before.

Theme Park Rules

In a trade dispute, the parties first enter into consultations. If they are unable to come to an agreement, the complainant may request a WTO panel to review the dispute. Once the panel issues a report, the WTO Dispute Settlement Body (DSB) will adopt it, unless a party appeals it or all DSB members vote against adoption.

If there is an appeal, the Appellate Body reviews the case and delivers its findings, together with the panel report as modified by the appeal, to the DSB. If the complaining party wins, the losing party is given a “reasonable” period of time to implement the decision. The original panel may be called upon to determine if the losing party implemented the ruling in the agreed timeframe. If not, there are two alternatives for the party bringing the case: seek compensation or retaliate. In the latter case, the complainant estimates its loss, the losing party can seek arbitration on the level, and the DSB authorizes the final amount.

Such countermeasures should be “equivalent” to the injury caused and “related to” the economic sector of the illegal measure, with the goal to induce the removal of the offending measure. Often the offending party will, in fact, withdraw the measure before the imposition of authorized retaliatory measures.

US wins 7.5 billion dispute against EU on Airbus illegal subsidies

Beef and Bananas – How Carousel Started

In some cases, applying tariffs on imports isn’t enough to induce compliance. When the United States, Ecuador, Honduras, Guatemala and Mexico won their case in the WTO challenging the legality of Europe’s banana import policy, the European Union (EU) failed to comply with the ruling, even in the face of nearly $200 million in U.S. tariffs.

U.S. banana exporters, increasingly frustrated with the EU’s lack of compliance with the WTO ruling, looked to Congress to enact a new tool to increase the pressure. They found allies in U.S. livestock exporters, who had won a WTO case that a European ban on U.S. imports of meat produced with hormones was inconsistent with the EU’s WTO obligations. As with the banana case, the EU had employed delaying tactics to stall implementation of the panel decision against it.

Riding a New Horse

Two months after USTR imposed retaliatory tariffs in the beef hormone dispute, a group of Senators introduced S.1619, the Carousel Retaliation Act of 1999. Proposed as an amendment to Section 301 of the Trade Act of 1974, its provisions would have required USTR to “carousel” or rotate its product retaliation list when an offending country does not implement a WTO decision. More specifically, USTR was to rotate items 120 days after the first retaliation list and every 180 days thereafter, with the ability to opt not to do so if compliance is imminent or rotation is deemed unnecessary. The bill language ultimately became part of the Trade and Development Act of 2000.

While banana and meat producers were supportive, other industries were not. Some argued that frequently rotating the products subjects to tariffs would be challenging for retailers. The EU contended the method was WTO inconsistent, though the WTO never ruled on the matter.

USTR ultimately did not pull the trigger to rotate its retaliatory tariff list in either the banana or beef cases as the matters got bound up in a separate dispute over U.S. tax benefits for foreign sales corporations (FSC). The EU had previously won a case against FSC and the U.S. amended its law in November 2000 in response. The EU challenged whether that revision brought the measure into WTO compliance. The United States and EU agreed informally that the EU would not pursue sanctions in the FSC case, but if the United States revised its product lists under the carousel provisions, all bets were off. Ultimately, the WTO ruled the revised U.S. law was not compliant, the United States lost its appeal, and the issue was not resolved until five years later.

Others Get on the Ride

The United States develops retaliation lists with an eye to maximizing pain on the trading partner that committed the foul, while trying to minimize the inevitable adverse impact on its own consumers and firms. Mexico has adeptly turned this practice against the United States in response to practices it viewed as inconsistent with WTO or NAFTA obligations.

NAFTA provisions governing retaliation state that an injured party should first “seek to suspend benefits in the same sector” as that covered by the restrictive measure. If it is not practical or effective to suspend benefits in the same sector, the injured party “may suspend benefits in other sectors.”

During the original NAFTA negotiations, the United States and Mexico agreed to phase out restrictions on cross-border passenger and cargo services. In 1995, however, the United States announced it would not lift restrictions on Mexican trucks and, in 2001, a NAFTA dispute panel found the U.S. to be in breach of its obligations. After years of negotiation and a false start with a U.S. pilot program, Mexico retaliated in 2009 on more than $2 billion worth of U.S. goods.

Mexico used a carousel approach, rotating different products on and off the retaliation list. The first list of 89 products went into effect in March 2009. The list was revised in August 2010, by removing 16 of the listed products and adding 26 more, bringing the total number of products on the updated list to 99. Through this method, Mexico was able to target key pain points, leading the U.S. to institute another pilot program in 2011, and Mexico to remove its tariffs.

More recently, when the Trump Administration moved forward with 25 percent tariffs on Mexican steel imports and 10 percent tariffs on Mexican aluminum imports in June 2018, Mexico responded with retaliatory tariffs on $2.7 billion of U.S. goods that included various steel products but also pork legs, apples, cheese and other agricultural products that had seen significant growth in export value and market share in Mexico.

In March 2019, Mexico’s Deputy Economy Minister Luz Maria de la Mora stated that if the United States did not repeal the tariffs, her government would have an updated list in its “carousel” of U.S. targets ready in about two months, noting that Mexico would bring in some new products and remove others. In early May, she announced the revised list was ready and under final review, but the United States agreed in mid-May to remove its tariffs, hoping to boost the chances of ratification of the U.S.-Mexico-Canada (USMCA) agreement.

Round and Round We Go

Perhaps symbolic of the differences that the United States and Europe are trying to bridge, in America carousels turn counterclockwise and in England and much of Europe, they rotate clockwise.

Some observers see the recently announced U.S. retaliation list against the EU as more restrained than expected. Tariff rates of 100 percent had been possible and some of the announced exemptions were not anticipated. We’ll soon know more about the Trump Administration’s thinking on a carousel approach and how the Europeans will respond. There are no height restrictions to get on this tariff retaliation ride, but riders may need to buckle up.

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Leslie Griffin is Principal of Boston-based Allinea LLC. She was previously Senior Vice President for International Public Policy for UPS and is a past president of the Association of Women in International Trade in Washington, D.C.

This article originally appeared on TradeVistas.org. Republished with permission.

Tariffs & Shippers

IS THE CARGO SHIP SAILING ON NEW TARIFFS?

Demand for Space on Cargo Ships is Surging Ahead of Anticipated Tariffs on China

As over 300 witnesses present testimony in Washington, DC this week and next on the impact of proposed China tariffs on their businesses, uncertainty hangs in the air.

Following the hearing process, committee review and publication of tariff schedules, new tariffs could be imposed as soon as late July or August, which means the cargo shipping rush is on to beat the potential hikes.

Don’t Miss the Boat

The prospect of tariff hikes acts like an “early bird” registration rate as companies are incentivized to lock in better prices now. Many retailers are competing just to find space for their goods on an ocean carrier. Air shipments are an alternative, but far costlier. The shipment surge has resulted in massive congestion at ports and warehouses that are bursting at the seams.

This scenario is familiar. Retailers scrambled last year to book cargo to get ahead of tariffs. Importers front-loaded holiday merchandise shipments to beat the 10 percent tariffs on $200 billion of Chinese imports in the fall of 2018, and then front-loaded spring 2019 merchandise imports late in the year when they anticipated the tariffs would go up from 10 to 25 percent on January 1, 2019. That threat temporarily subsided when President Trump extended the negotiation deadline with China, but reemerged in May 2019. This time, the tariff threat materialized. Goods would remain at 10 percent only if they were exported from China to the United States prior to May 10, 2019 and entered into the United States before June 15, 2019.

New Tariffs, New Shipping Surge

The President has said he will make a decision after the June 28-29 G-20 meetingwhether to impose 25 percent tariffs on an additional $300 billion in Chinese imports, meaning a tariff on nearly everything the United States imports from China, including the kitchen sink (yes, kitchen sinks are on the tariff list).

Retailers generally import most of their holiday goods in August and September, but many are moving up this timetable in anticipation of higher tariffs, accelerating the traditional holiday peak shipping season. If major importers all do the same, advancing the shipment of months of inventory, how will shipping lines manage the demand and allocate vessel space? Where does all this volume sit when it arrives? What is the impact on costs for shippers?

All of this can add up to some choppy trade waters.

Hold My Spot

Retailers, who are the “shippers” of goods, may negotiate service contracts with ocean carriers under which the shipper commits to provide a certain amount of volume over a given period and the carrier commits to a certain rate schedule and set of services. Typically, the greater amount of volume, the better the rates will be. The alternative to contracts is the less predictable spot rate market. Usually valid for only one shipment, the spot rates fluctuate with market conditions.

Larger established shippers are more likely to have service contracts, while small- and medium-sized businesses are likely to be more at the mercy of the spot rate market. Because retailers generally require more pricing certainty and service guarantees, they may opt for contractual arrangements and lose out on the chance to capitalize on weak spot markets. Spot rates can dip below contract levels, for example, if carriers add too much capacity into the system or volume slows. Some businesses play it both ways, confirming some volume under contract and turning to the spot rate market for the rest.

There can also be price-based competition to secure slots on a particular vessel during peak periods, with carriers able to demand surcharges to protect shippers from being rolled onto a later vessel departure. When tariffs are imminent, shippers are often more willing to pay these surcharges to get space on the next available crossing.

Rather than contracting with an individual shipline, a shipper may choose to work with a common carrier, like UPS, that offers ocean transportation, but does not operate the vessels. These Non-Vessel Owning Common Carriers (NVOCCs) differentiate themselves by pointing to their ability to offer a diversified carrier mix and flexibility in cases of unexpected circumstances, such as a strike at the dock a particular carrier uses. The NVOCC negotiates with ocean carriers for a number of slots on particular trade lanes, in effect negotiating as the shipper, and then offers ocean shipping service to customers.

Seeking A Port in a Storm

In theory, changes to service contracts must be agreed upon by both parties – carrier and shipper – before taking effect. In practice, however, shippers and carriers sometimes treat service contracts more as guidelines than binding agreements. Import surges have caused some carriers to hike previously agreed rates, and if the shipper won’t pay, the cargo might sit in Shanghai.

Various organizations are developing innovative solutions to address these contract challenges, including through the use of technology to record contract terms and track shipments’ conformity with those terms, financial security tools to ensure penalty settlement, and requirements to pay collateral at the time of contract, unlike the current spot market where no money is exchanged until goods are on the water and either party can cancel at any prior point without an enforceable penalty.

As the race to get goods to shore heats up, shippers not only face cost increases at sea. With ports struggling with containers stacked six or seven high, shippers also face extra charges to get their goods off ships, onto trucks and into warehouses. As one example, the onslaught of containers also means a surge in demand for chassis, the steel frames that allow trucks to carry shipping containers. If sufficient chassis are not available, truckers have to delay deliveries, incurring costs that are passed to the shipper.

With thousands of retailers moving tremendous volume, the issue of warehouse capacity also becomes a challenge. According to Los Angeles Times reporting, Southern California’s warehousing and distribution complex, the largest in the world, has a less than one percent vacancy rate. Some retailers have resorted to storing pallets outside, while others face hefty fees for exceeding storage windows.

Ports part one
China trade

Are China’s Neighboring Ports Ready?

What about sourcing from countries other than China to avoid the tariffs? That’s easier said than done, at least in the short term to beat a looming tariff deadline. Switching to new vendors and manufacturers takes money and time. New vendors must be trained to meet retailer standards and be able to meet needed lead times. Factories must be vetted for quality standards, social welfare conditions and security factors. China also has superb logistics and other supply chain advantages that other countries cannot match.

In a recent piece in The Hill, the Cato Institute’s Dan Ikenson pointed to trade data showing that, as U.S. imports from China fell by 12 percent in the first four months of 2019, imports from Vietnam grew by 32 percent over the same period. However, Vietnam’s transportation infrastructure is reportedly overwhelmed with the new volume, straining the country’s roads and ports. And, Vietnam is facing pressure to adopt more rigorous measures to ensure that Chinese products do not get transshipped through the country and into the United States, merely to avoid U.S. tariffs.

“The Port of Los Angeles and the Port of Long Beach together comprise the San Pedro Bay Port Complex…On the import side, our most recent analysis estimates the current and proposed tariffs directed at China will impact roughly 66% of all imports by value at the San Pedro Bay.”

– June 17 letter to U.S. Trade Representative Robert Lighthizer from Eugene Seroka, Executive Director, Port of Los Angeles

Rough Waters Ahead

Despite the current shipping boom as producers and retailers build inventory to get ahead of tariffs, the shipping industry is concerned about the future impacts of an inevitable falloff in volume, even if the U.S. economy remains strong. When import volumes soften, dockworkers are not called to work, and the demand shrinks for logistics workers, warehouse workers and truckers. The surges and variability caused by tariff threats – some enacted and some not — have generated a boatload of uncertainty across the wide range of industries that make up the supply chain.

That uncertainty affects not only the users of shipping infrastructure, but sometimes the infrastructure itself. The Massachusetts Port Authority (Massport) owns and operates the Conley Container Terminal in the port of Boston, which serves 1,600 regional import and export businesses. After avoiding tariffs last fall on ship-to-shore cranes to service larger container ships, Massport finds the cranes back on the proposed tariff list. The imposition of 25 percent tariffs would add at least $10 million in costs for three new cranes it plans to buy. Currently, there is no U.S. manufacturer for these cranes and the only experienced manufacturer is in China.

The President and CEO of the American Association of Port Authorities is among those testifying at the hearings this week. He will make the case that tariff increases would negatively impact ports’ ability to make investments in infrastructure that are needed to handle significant growth in trade volumes in years to come. Modern transport infrastructure and a return to greater trade certainty will add up to smoother sailing for ports, consumers, and workers across the supply chain.

Leslie Griffin is Principal of Boston-based Allinea LLC. She was previously Senior Vice President for International Public Policy for UPS and is a past president of the Association of Women in International Trade in Washington, D.C.

This article originally appeared on TradeVistas.org. Used with permission.