Transatlantic Trade Update text overlaid on top of images of US, UK and EU flagsThe United States has been experiencing large-scale protests in urban centers in response to the death of George Floyd, a black American citizen, in police custody in Minneapolis, Minnesota, on 25 May.  This is not the first time the country has seen protests related to racism against black Americans, but it comes amid a global health crisis that has led to high levels of unemployment.  The US protests have also spawned solidarity protests across Europe.  Consequently, the protests have overshadowed COVID concerns and raised a renewed focus on perceived erosion of American leadership in the world.  China, Russia, and Iran have not remained silent.  This report recaps the racial unrest in America and overseas, touches on Russia’s role in the transatlantic relationship and provides further updates on transatlantic developments, including those related to trade, such as digital services tax developments.

US Racial Unrest Expands Overseas

Racism continues to be an issue globally, not just in the United States.  Protests in solidarity of those in America have sprung up in Europe highlighting similar concerns.  In Paris, protesters gathered in the thousands on Tuesday, 2 June, to protest a case similar to that of George Floyd.  Adama Traoré was 24 when he lost his life after being taken into custody; a medical report exonerated law enforcement, finding that the cause of death was a cardiac condition rather than asphyxiation.  Protestors congregated outside the Paris courthouse in response.  Earlier in the day, the Paris police issued a statement banning the protest because it had failed to get proper authorization and because a state of emergency remains in place over the COVID-19 pandemic.  However, the protest went ahead and was for the most part peaceful.  There were also gatherings in Lyon, Marseille and Lille.  In London, thousands also gathered in a predominantly peaceful protest for the Black Lives Matter movement.  Two police officers were persuaded to “take the knee” outside the gates of Downing Street as a mark of respect to George Floyd and other black victims of police violence.  Peaceful protests for the Black Lives Matter movement were also held in other European capitals, such as Amsterdam and Berlin.

In light of Floyd’s death and subsequent “black lives matter” protests, police reform is once again on Washington decision makers’ minds, especially as corporate entities weigh-in on the matter.  If leadership from the White House in unifying the nation appears to be lacking, Congressional leadership remains divided on addressing the long-standing grievances.  Rather than a comprehensive measure, Members of Congress have introduced bills or dusted off previous measures that never advanced.

Senate Majority Leader Mitch McConnell (R-Kentucky) responded to the violence and issued a statement on 29 May, calling for “senseless behavior” to stop.  He added,

Our city, our state, and our country have to pull together.  Violence does not make our streets safer.  Injustice does not promote justice. Destruction does not build a better society.  We will only be able to chart the future we want if we do it together.”

Senate Republicans, for the most part, remain unified in backing President Donald Trump.  On 2 June, the Republican-controlled Senate blocked a Democratic resolution that would have condemned President Trump for the alleged use of tear gas and rubber bullets against peaceful protesters near the White House.  Senate Democrats returned the favor, blocking a McConnell measure that similarly condemned violent protests and police violence against black Americans but offered no criticism of President Trump.

In an interview on 3 June, Speaker of the House Nancy Pelosi (D-California) spoke of the need to “honor what happened to George Floyd,” while adding, “But, at the same time, it’s a just an explosion of so much else that is out there, a tinderbox in terms of economic injustice, social injustice, environmental injustice, the list goes on.”  She acknowledged the need for comprehensive legislation to reform the police, while using the interview to advocate for further congressional action on The Heroes Act, a fourth COVID-19 economic stimulus package, saying it addresses health injustice.  Speaker Pelosi pointed to efforts from the Congressional Black Caucus (CBC), noting CBC members have introduced bills to address grievances raised by those protesting.  These, she said, include a bill introduced recently by Representative Barbara Lee (D-California) that would establish a US Commission on Truth, Racial Healing, and Transformation, and a bill (H.R. 1636) introduced by Representative Frederica Wilson (D-Florida) in April to establish a Commission on the Social Status of Black Men and Boys.  House and Senate Democrats have also said they are preparing legislation that would address police violence against black Americans.  Without Republican support, particularly in the Senate, the measures will likely not advance.

President Trump has yet to follow through on designating the domestic Antifa group as a terrorist organization, as promised earlier this week.  Notably, in 2019, he threatened to similarly act and surprisingly received push-back from Germany.  In the United States, Antifa has become increasingly visible, where it was involved in the Charlottesville protests in 2017 that included white nationalists rallying against the removal of a statue of Confederate Gen. Robert E. Lee and an Antifa counter-demonstration that turned violent.

Meanwhile, the COVID-19 public health crisis remains an issue of concern in America.  US officials have voiced concerns there could be increased COVID-19 cases in the aftermath of the protests, since social distancing recommendations have been ignored.  It remains to be seen whether there will be a rise in COVID-19 infections in the coming weeks.

With US domestic leadership decidedly lacking on an approach for addressing the protestors grievances, it is not surprising some are increasingly questioning and challenging US leadership more globally.  This includes US rivals, such as China, Russia and Iran.  In response to US actions last week regarding Hong Kong, Chinese state-run media entities welcoming the US domestic unrest, with some calling it a “beautiful sight.”  Senator Marco Rubio (R-Florida), Chairman of the Senate Intelligence Committee, spotlighted foreign social media influence via Twitter last Saturday, noting:

Tonight seeing VERY heavy social media activity on #protests & counter reactions from social media accounts linked to at least 3 foreign adversaries. They didn’t create these divisions. But they are actively stoking & promoting violence & confrontation from multiple angles.”

A private firm, Graphika, released a report on Wednesday that confirmed China, Russia and Iran are using state-sponsored media to attack the United States over its response to Floyd’s death.  Graphika, which uses artificial intelligence to analyze huge volumes of social media traffic, reported the three countries had differing goals for their efforts.  According to the report,

China’s primary goal appears to be to discredit U.S. criticism of China’s crackdown on Hong Kong.  Iran’s primary goals appear to be to discredit U.S. criticism of Iran’s human-rights record and to attack U.S. sanctions.  Russian state-controlled outlets largely focused on the facts of the protests, in line with a longstanding practice of covering protests in the West; some individual pieces of editorial content also attacked Kremlin critics and the mainstream media.”

Russia – A Transatlantic Challenge

For several years now, including during the Obama Administration, the United States has been advocating for Europe to diversify its energy dependency away from Russia.  More recently, the focus has been on Gazprom PJSC’s Nord Stream 2 pipeline, which was the subject of sanctions passed as part of the Fiscal Year (FY) 2020 National Defense Authorization Act (NDAA).  Citing national security concerns, the United States has been seeking to block completion of the project, stating additional flows of Russian gas would likely increase Russia’s political leverage over European Union (EU) countries.  As an alternative, Washington continues to urge European partners to purchase more American liquefied natural gas (LNG), of which, the United States is a major exporter.

The US Congress continues to prioritize energy security for Europe.  On Thursday, 4 June, Senators Ted Cruz (R-Texas) and Jeanne Shaheen (D-New Hampshire), along with Senators John Barrasso (R-Wyoming), Tom Cotton (R-Arkansas), and Ron Johnson (R-Wisconsin) introduced a bill that would expand US sanctions on the Nord Stream 2 pipeline to include insurance companies involved in the project, among other things.  It remains to be seen whether the measure will advance as a standalone bill or as part of the FY 2021 NDAA – a more likely avenue, as the NDAA is a must-pass bill that is typically enacted before the end of the calendar year and is viewed as having a better chance of garnering the President’s signature into law.  Next week, the Senate Armed Services Committee is set to hold a number of closed subcommittee mark-ups of its NDAA measure on 8-9 June; the full Committee mark-up is also set to be held behind closed doors on 10 June.

Nevertheless, US tension with Russia extends to intelligence gathering overflights and nonproliferation concerns, with the United States alleging Russia has not adhered to its treaty obligations.  On 21 May, President Trump announced the U.S. would withdraw from the Open Skies Treaty, citing numerous violations by Russia.  (This Treaty is not related to civil-aviation open skies agreements.)  Senate Foreign Relations Committee (SFRC) Chairman James Risch (R-Idaho) welcomed the move, noting Russia’s “documented and continuing lack of compliance with this treaty.”  SFRC Ranking Member Robert Menendez (D-New Jersey) opposed it, saying he does “not accept the legitimacy of the administration’s reckless decision to unilaterally withdraw from the Open Skies Treaty.”  Apart from the United States and Russia, the Treaty has 33 other parties; it establishes a program of unarmed aerial surveillance flights over the entire territory of its participants.  Russia was formally notified of the US decision on 22 May; the United States’ exit will be final in six months (if President Trump does not reconsider this decision).  Under the Treaty, its depositaries (Canada and Hungary) should convene a conference of States Parties 30 to 60 days after receipt of the United States’ notification.

After the news broke, ten EU countries[1] expressed regret at the US decision and vowed to uphold the pact as crucial for improving transparency and security across the Euro-Atlantic area.  NATO Secretary General Jens Stoltenberg issued the Alliance’s statement on the situation, saying the Allies “agree that all states party to the Open Skies Treaty must fully implement their commitments and obligations.  All NATO Allies are in full compliance with all provisions of the Treaty.”  Stoltenberg said of Russia, a non-NATO member,

Russia’s ongoing selective implementation has undermined the Open Skies Treaty.  NATO Allies are engaging with Russia to seek Russia’s return to compliance at the earliest date possible.” 

Some believe President Trump may also be considering a US withdrawal from the one major arms treaty remaining[2] with Russia – New Strategic Arms Reduction Treaty (“New START”), which limits the United States and Russia to 1,550 deployed nuclear missiles each.  New START expires in February 2021, weeks after the next US presidential inauguration.  President Trump has insisted that China must join the treaty to similarly curb its nuclear arsenal, otherwise China will remain unchecked.  Moreover, with no signs of negotiations, it remains unclear whether a replacement treaty can be negotiated before New START expires.

While the US Congress has consistently demonstrated an appetite to increase pressure on Russia, President Trump has, at times, taken a more conciliatory approach to Russia.  He recently proposed allowing Russian President Vladimir Putin to attend the postponed June G-7 Summit, which is now set to happen on a date yet-to-be-announced this Fall in the United States.  On Tuesday, 2 June, European High Representative of the Union for Foreign Affairs, Josep Borrell rejected the idea floated by the White House to re-invite Russia to this year’s G-7 gathering hosted by the United States.  In a video press conference, Borrell stressed, “cooperation amid like-minded partners is crucial more than ever.”

This comes amid the potential for the EU to slap sanctions on a group of Russian hackers.  The sanctions, expected to be imposed later this year, come after the German Government announced it had evidence tying the group to a cyberattack on the Bundestag in 2015.  On Wednesday 3 June, diplomats gathered in person to discuss the attack and whether they should respond using a new cyber sanctions regime.

Digital Services Tax Developments

On Tuesday, 2 June, the Office of the US Trade Representative (USTR) announced it would initiate a new Section 301 investigation examining digital services taxes (DST) adopted or under consideration by Austria, Brazil, the Czech Republic, the EU, India, Indonesia, Italy, Spain, Turkey, and the United Kingdom (UK).  As a first step, USTR will conduct an investigation into whether these DST are actionable under Section 301.  This will include exploring if they are (1) an “unreasonable or discriminatory and burden or restrict U.S. commerce, and (2) “if the act, policy, or practice, while not necessarily in violation of, or inconsistent with, the international legal rights of the United States, is otherwise unfair and inequitable.”  Information on this investigation, including opportunities to comment (deadline 15 July) is accessible here.  If USTR makes a determination to proceed with duties, the agency will likely hold a second comment period regarding potential goods that could be subject to tariffs from these jurisdictions.

This action is similar to USTR’s previous investigation into France’s DST, which was put on hold before the imposition of tariffs.  On 25 July 2019, the French Digital Service Tax Law (Loi no 2019-759 du 24 juillet 2019 portant création d’une taxe sur les services numériques et modification de la trajectoire de baisse de l’impôt sur les sociétés) was published in the French Official Journal.  Following unsuccessful attempts to dissuade the French Government from moving forward with its DST law, US Trade Representative Robert Lighthizer launched a formal Section 301 investigation into the French Digital Service Tax Law on 10 July 2019, citing unfair trade practices.

On 2 December 2019, USTR published its report on the French DST investigation, concluding the law is unreasonable or discriminatory, and it burdens or restricts US commerce.  Consequently, USTR considered tariffs on 63 tariff subheadings (various cheeses, sparkling wine, cosmetic products, handbags, porcelain and related kitchenware) totaling approximately US$2.4 billion. After USTR hosted public hearings on its report, French President Emmanuel Macron and President Trump negotiated a deal to avert US duties.  On 21 January 2020, both sides announced France would delay the tax payments foreseen within the French Digital Service law until the end of 2020, to allow additional time for the Organisation for Economic Co-operation and Development (OECD) negotiations to continue on DSTs.  The US similarly averted imposing its pre-announced tariffs to French products.

The EU has not officially responded to USTR’s broader Section 301 DST investigation announcement.  This is likely because EU negotiations on a DST proposal for the bloc have stalled, after consensus could not be reached.  The EU Member States agree in the near-term to instead focus on the ongoing OECD negotiations for a global consensus on taxing digital services.  Nevertheless, the EU has not backed down from its intention to introduce an EU DST.  European Commission Executive Vice President Margrethe Vestager has been tasked with pursuing an EU DST should the OECD negotiations fail at the end of 2020.  Meanwhile, France and Italy have doubled down on DST, by making it clear they will not back down on their overhaul of the international tax system.  In defending its DST proposal, Italy’s Finance Minister Roberto Gualtieri argued that amid the COVID-19 pandemic,

Their digital tax is the right answer to the question of fairness and equal tax treatment between traditional and digital businesses, the only ones that have not suffered the tremendous impact of the crisis.”

Political will to devise a taxation framework for the digital economy has been prominent over the last few years. The G-20 countries tasked the OECD in March 2017 with delivering an interim report on the implications of digitalisation for taxation by April 2018 and a final report in 2020.  The interim report, which published in March 2018, sets out the OECD’s Inclusive Framework for digitalization and international tax rules through to 2020.

The OECD presented its initial proposals for the possible solutions for a taxaton of digital economy through a public consultation document, issued on 13 February 2019. The solutions are divided into two pillars:

  • Pillar I | The Broader Tax Challenges Proposals to Revise Nexus and Profit Allocation Rules: The first pillar focuses on the allocation of taxing rights between the jurisdictions in which a multinational business operates or has customers.  This involves looking at the tax rules on both taxable presence, or nexus, and the allocation of profits to a taxable branch or subsidiary.
  • Pillar II | Remaining BEPS Concerns Global Anti-base Erosion Proposal: The second pillar focuses on the continued risk of base eroding payments (BEPS) activity, aggravated by digitalisation, that allows multinational businesses to shift profits to jurisdictions with no (or low) taxation. The proposal to combat this risk set out in the consultation document is a so-called global minimum tax regime, aimed at preventing base erosion and profit shifting to low-tax locations.

The OECD was due to present the architecture of the tax solution for the digital economy at the Inclusive Framework Meeting in Berlin, on 1-2 June 2020.  Due to travel restrictions linked to the COVID-19 outbreak, the meeting was cancelled, and the presentation of the architecture of the tax solution has instead been moved to early October 2020.  Meanwhile, the OECD Secretariat continues to work on the assumption that the global solution will be finalized by the end of 2020 and aims to propose a package of proposals at the October Inclusive Framework meeting for approval at the G-20 level.

EU-UK Trade Talks

Ahead of the start of the fourth round of negotiations on Tuesday 2 June, EU Chief Brexit Negotiator Michel Barnier stated the UK needs to remember its promise via its political declaration, if they want to avoid a break down in trade talks.  The fourth round of talks are the last round before a high-level summit in June where the two sides will decide whether to extend the transition period.  Fishing continues to be one of the more contentious areas of discussion.  Barnier consulted with EU member states with a higher interest in the outcome for fisheries; reportedly all were unanimous in stressing the Commission stick to its negotiating mandate and oppose flexibility in this area.  According to a UK official with knowledge of the talks, the British Government does not intend to ditch talks and focus on preparations for quitting the bloc without a trade deal after June, even though it has previously threatened to do so.  The Government’s plan is to continue negotiating through the summer in the hopes of reaching a final deal.

In a press conference held on Friday, 5 June, Barnier announced no significant progress had been made during the fourth round of talks and that negotiators had failed to advance discussions on any of the key points including fisheries, level playing field, governance, law enforcement and security matters.  Barnier also pointed out the UK is refusing to extend the negotiation period, which leaves the parties with roughly five months for continued talks before the end of October to reach a deal that would ensure the possibility of ratification before the end of the year.  In Barnier’s words,

We have to use this time as efficiently as possible. We need more concentrated and more focused work on the more difficult issues in the next round end of June.”

Barnier also accused UK Prime Minister Boris Johnson of trying to backtrack on the Political Declaration agreed by both sides and asked for full respect of the Withdrawal Agreement and included citizen’ rights and the Northern Ireland Protocol as examples of areas where the EU needs to remain vigilant.  UK Chief Brexit Negotiator David Frost was also quick to point out that progress “remains limited”, stating,

We are close to reaching the limits of what we can achieve through the format of remote formal rounds.”  He added, “If we are to make progress, it is clear that we must intensify and accelerate our work.”

According to a report published on Monday by the Social Market Foundation (SMF), ending the transition period on 31 December will result in lost jobs in the UK, especially in parts of the country that are more reliant on manufacturing, finance, banking and insurance.  SMF further warned that due to the increase in government expenditures brought on by the pandemic, the British Government is unlikely to be able to afford another stimulus package in early 2021.  In addition, an internal paper drawn up by officials of the European Parliament’s UK Coordination Group, which analysed and rejected the arguments outlined by Frost in his letter to Barnier, has made it clear the EU has no legal duty to grant the UK privileges offered to other countries in trade deals.

The Institute for Government, a think tank, has set out different ways the UK could allow itself extra time to prepare for Brexit, should both sides agree against an extension period.  According to the Institute for Government, the Withdrawal Agreement could be amended to change the end of the transition period any time after June, warning that the EU would need to find legal basis for doing this, adding it is not clear if there is such legal precedent.  Alternatively, the Institute suggests both sides could agree to a new deal that establishes a second transition period beginning after 31 December 2020, which would need to be ratified.  However, it noted such an agreement could be challenged by WTO members on the basis of the WTO’s most-favoured-nation principle.  Finally, the Institute argued that if a deal is reached but there is not enough time to ratify and prepare, an implementation phase could be established (a de facto extension).

US-UK Developments

After the United States moved last week to reconsider Hong Kong’s special status, UK Prime Minister Boris Johnson penned an opinion piece on Hong Kong that The Times published on Wednesday.  He argued, “China has a greater interest than anyone else in preserving Hong Kong’s success”, which he attributes to the fact that Hong Kong’s people are free.  Regarding the Chinese Government’s new national security law for Hong Kong, the Prime Minister noted,

If China proceeds, this would be in direct conflict with its obligations under the [Sino-British] joint declaration, a legally binding treaty registered with the United Nations.  Britain would then have no choice but to uphold our profound ties of history and friendship with the people of Hong Kong.”

This, he noted, would include revising Britain’s immigration law for Hong Kong citizens holding British National (Overseas) passports, expanding visa-free access to the UK for passport holders from six to twelve months and revising other immigration rights, such as the right to work, which could place Hong Kong citizens on a route to UK citizenship.  He further urged the Chinese Government to not move forward with the national security law, saying Britain seeks a “modern and mature relationship, based on mutual respect and recognising China’s place in the world.”  Nevertheless, he also reiterated Britain would honour its obligations to Hong Kong, should China decide otherwise.

On Thursday, the UK hosted the Global Vaccine Summit, an annual pledging conference for Gavi, the Vaccine Alliance, which assists with vaccine development and treatments for less developed countries.  With a target goal of US$7.4 billion, Prime Minister Johnson was pleased to announce pledges had exceeded this goal, totalling US$8.8 billion for Gavi’s work to continue over the next five years.  The Prime Minister added the funds would also support healthcare systems in the world’s poorest countries, which are increasingly victims of the coronavirus pandemic.  At the Summit, the Vaccine Alliance launched the Gavi Advance Market Commitment for COVID-19 Vaccines (Gavi Covax AMC), a new financing instrument aimed at incentivising vaccine manufacturers to produce sufficient quantities of eventual COVID-19 vaccines that ensure access for developing countries.

The United States is one of the Vaccine Alliance’s original six donor countries and contributes to Gavi through direct contributions.  Annual US contributions have increased from US$48 million in 2001 to US$290 million in 2018, an amount that has been sustained in 2019 and 2020.

US-EU Developments

Richard Grennell stepped down from his position as US Ambassador to Germany on Monday, 1 June.  During his two-year tenure, Ambassador Grennell voiced criticism of German policies related to NATO, as well as its involvement in the Nord Stream 2 gas pipeline.  President Trump will have to announce a new nominee for the position, which will require US Senate confirmation.

Frank Samolis (partner, Washington DC), Matthew Kirk (international affairs advisor, London) and Wolfgang Maschek (partner, Brussels) provided insights for this report. 


[1] Belgium, the Czech Republic, Finland, France, Germany, Italy, Luxembourg, the Netherlands, Spain and Sweden.  Of the 10 countries, Finland and Sweden are not NATO members.

[2] In 2019, President Trump withdrew the United States from the Intermediate-range Nuclear Forces (INF) Treaty, citing Moscow’s development and fielding of weapons in violation of the Treaty and adding these weapons threaten the United States and its European allies.