WTO formally backs US tariffs on EU goods

The United States has cleared the final procedural hurdle in order to impose tariffs on billions of dollars of European products later this month, at a meeting of the WTO’s (World Trade Organization) governing body on Monday.

The President Donald Trump administration no longer faces any legal obstacles for its set of previously scheduled sanctions against European goods that could now take effect Friday, after a three-person WTO tribunal of arbitrators earlier this month issued a ruling that allowed the enactment of $7.5 billion worth of countermeasures — an historically high amount.

According to a Geneva trade official, the U.S. ambassador to the WTO, Dennis Shea, told WTO members that the size of the award approved Monday documents a point the U.S. has long made, that European subsidies to Airbus had caused massive harm to the U.S. economy over the course of several decades.

In the absence of a last-minute negotiated settlement between Washington and Brussels, the tariffs will kick in on a medley of products that range from Scotch whisky, to French wine, Spanish olives and Italian cheese.

The Dispute Settlement Body (DSB) that adopted the arbitrators’ Oct. 2 ruling is essentially the WTO’s general council, and consists of all WTO members.

The U.S. had requested the emergency meeting at the WTO’s headquarters on the shores of Lake Geneva, and the outcome was always going to be “in practice a foregone conclusion,” according to Joshua Paine, a senior research fellow at the Max Planck Institute in Luxembourg, who focuses on international adjudication law.

That’s because of the DSB’s “negative consensus” rule, whereby any WTO member that wants to block a ruling must persuade all other members, including the country that initiated the complaint, to join it in voting against the decision.

According to the trade official’s account, the U.S. ambassador Shea said it had always preferred a negotiated settlement but that it hoped the countermeasures that take effect later this week would “encourage the EU to agree to a genuine cessation of its WTO-inconsistent subsidies and the adverse effects that flow from them.”

The outgoing European Commissioner for Trade, Cecilia Malmstrom, told CNBC earlier this month that she had offered the U.S. fresh proposals on civilian aircraft manufacturing, and in a statement she had also said that if the DSB were to authorize the countermeasures, as was the case today, any U.S. decision to move forward with them would be “short-sighted and counterproductive.”

Airbus insists that it is now fully compliant with previous WTO rulings, and said it expects another WTO panel to confirm that compliance is complete before the end of the year.

Last week, French Finance Minister Bruno Le Maire warned that if American tariffs take effect on Friday, Europe will not have “any other choice but to also take measures.”

And so soon after a temporary truce between the U.S. and China began to appear possible, the economic implications of a fresh trade confrontation has been raising concerns among European government officials and investors alike.

“The risk of a U.S. trade conflict with the EU continues to loom large,” said Holger Schmieding, the chief economist at the German private bank Berenberg, in a Monday research note.

Under the WTO’s definitions, the arbitrators’ ruling on Airbus is not a “punishment” and instead is a “remedy,” but next month the U.S. may also seek to impose separate and more controversial penalties on European auto manufacturers, predicated on a view that they represent a threat to U.S. national security.

The findings of a U.S. Commerce Department investigation had paved the way for that option to target European car imports, though Trump decided in March to offer more time for negotiations between the two sides.

The White House’s ongoing dispute with China has taken center stage since then though, and consequently little progress has been made between the U.S. Trade Representative’s office and the European Commission, the EU’s executive branch that oversees the bloc’s international trading arrangements.

At some point next year WTO arbitrators are expected to rule against Airbus’ U.S. rival Boeing, and U.S. tax concessions that have made it difficult for Airbus to compete with Boeing aircraft sales.

The level of countermeasures allowable in that ruling may be equivalent or even exceed those granted this month to the U.S., and European officials say that is what makes the imposition of U.S. tariffs ahead of that Boeing ruling unreasonable.

But experts insist that Trump is simply following a well-trodden path, and any U.S. administration would have taken similar advantage of the situation.

“The EU has no negotiating leverage right now,” according to Rambod Behboodi, a partner at law firm King & Spalding LLP that focuses on international arbitration. “And it will not have any strength in negotiations until that Boeing arbitration ruling.”

Separately, the main dispute enforcement mechanism at the WTO is also likely to fall apart in December, when term limits will mean the membership of the organization’s court of last resort, the Appellate Body, shrinks from three to one. It is designed to have seven members, but the U.S. has in recent years vetoed all potential nominations and term extensions.

That could also prove problematic for the European Union as it seeks to strengthen its position in future discussions with the U.S. Public hearings scheduled at the WTO in early November will focus on yet another strand of the transatlantic trade dispute, the existing tariffs on steel and aluminum that were similarly enacted under national security criteria, and which the Europeans have also argued are not appropriate.

The U.S. could theoretically appeal any ruling against it that relates to those metal sanctions, and without an operational Appellate Body that appeal would act as a de facto veto. This would mean the Europeans cannot legally retaliate within the WTO framework unless an alternative dispute mechanism can be formulated in the next few months.