Top Takeaways for German Industry
- The Trump Administration is likely to face serious obstacles to its plan to withdraw 9,500 U.S. forces from Germany by September.
- Congress is likely to expand sanctions in an effort to block the Nord Stream 2 project.
- The U.S. Trade Representative Lighthizer will sit for questioning in Congress this week.
Congress is Skeptical of Trump’s Plan to Reduce U.S. Troop Presence in Germany
The Trump Administration is reportedly considering a substantial reduction of U.S. military personnel on German soil, which would decrease American force levels by 9,500 (28 percent of the current force) and cap the number at 25,000. Reports indicate that the Administration wants this to occur within the next 90 days. President Trump has personally asked U.S. Secretary of Defense Mark Esper to effectuate the plan, and the National Security Council has outlined a plan; nevertheless, the President has not yet signed a formal order to carry out the reductions.
Ultimately, we do not expect this plan to move forward — especially on such a rapid timetable and in the thick of an election season. Instead, we believe that the Administration will either simply never execute the plan, or else Congress would legislate to prevent it in the National Defense Authorization Act (NDAA) for Fiscal Year 2021, currently being debated and drafted.
The House Armed Services Committee will mark up its version of the NDAA on July 1, and we believe that the Ranking Member Mac Thornberry (R-Texas) plans to insert language to prevent the Administration from reducing U.S. troop levels in Germany. Thornberry has already sent a letter to the Administration explaining his view that such a drawdown would “significantly damage U.S. national security.” In an unusual public split between Republicans in Congress and Trump, the letter is signed by almost all of the other 25 Republicans on the committee, including Chair of the House Republican Conference Liz Cheney (R-Wyoming). The U.S. presence in Germany also includes huge infrastructure investments (including the largest American air base and largest American military hospital outside the United States), and serves a “transit hub” for U.S. military capabilities in other parts of the world.
The Senate Armed Services Committee (SASC) approved its version of the NDAA last Friday, and is set to release the text of the bill this week. While we do not expect the Senate bill (summarized here) to address this issue, the House bill would create an avenue for the provision to be included in the final compromise bill. In all likelihood, Trump would have to sign the final bill, even if it includes a provision preventing the troop drawdown.
Republicans in Congress have also expressed opposition to Trump’s trade agenda, but have not mustered the political will to restrain the President. However, Republicans in Congress have been much more willing to band together with Democrats to pick fights with the Trump Administration on matters of national security — especially when it pertains to Russia. In some cases (such as anti-Russia sanctions in 2017), Congress has successfully and overwhelmingly pushed back against the Trump Administration. In other cases, bipartisan majorities have tried but ultimately failed to constrain the President (e.g. against the lifting sanctions on RUSAL, or constraining the President’s war powers). In this case, there is likely to be a sufficiently large coalition in Congress to ensure that the drawdown doesn’t occur.
Congress Seeks Again to Block Construction of Nord Stream 2 Pipeline
The U.S. Congress successfully interrupted construction of the Nord Stream 2 pipeline six months ago. After enacting a law in December 2019 that would sanction any company providing vessels constructing the pipeline, the Swiss-Dutch firm Allseas SA stopped work on the pipeline, to avoid U.S. sanctions. That left a stretch of 100 miles (160 km) unconstructed. In the meantime, two Russian-owned vessels (Akadmemik Cherskiy and Fortuna) have arrived in the Baltic Sea; many experts believe that they can and will finish building the pipeline. Under U.S. law, the U.S. government is required to sanction these vessels; a group of House members has written to U.S. Secretary of State Mike Pompeo, urging the State Department to sanction MRTS and STIF (the Russian companies that own the vessels).
A new bill filed by Sen. Ted Cruz (R-Texas) and Sen. Jeanne Shaheen (D-New Hampshire) would expand the scope of sanctions to other companies providing support services — including persons who provide insurance and reinsurance to the vessels, persons who provide technology upgrades to the vessels, and persons who provide services for the testing and inspection of the pipeline. The introduction of the new bill strongly implies that Congress believes that MRTS and STIF may complete construction of the pipeline, even if sanctioned. Accordingly, the sanctions threat must apply to a broader set of actors, in order to stop work.
As with the previous sanctions bill in 2019 (also sponsored by Senator Cruz), the new bill will almost certainly need to be attached to a larger package in order to be signed into law. However, Congress has several “must pass” items on its plate this summer, as well as several other agenda items that could serve as a vehicle. First, there will almost certainly be another COVID-19 rescue package this summer (known as “Phase 4”). Second, Congress will likely enact national police reforms soon, in the wake of the killing of George Floyd and other African-American victims of violence. Finally, Congress must pass several items before September 30, including the NDAA and funding for the fiscal year beginning October 1. One expert believes that construction could resume in about two months, and could be complete in November or December. If this is true, Congress does have at least a window of opportunity to get the sanctions enacted. Given its success last December, and the virtual unanimity surrounding the goal of stopping the pipeline, we see a substantial likelihood that Congress will succeed again in its aim.
U.S. Trade Representative Testifies in Congress
U.S. Trade Representative Robert Lighthizer will testify about the Administration’s trade agenda on Wednesday in both the House Ways and Means Committee and the Senate Finance Committee. The House hearing will be held via videoconference; the Senate hearing will be held in person. Lighthizer is the architect of Trump’s trade policy, and rarely speaks in public; therefore this will be “must see TV” for those seeking clarity on where things are headed on trade for the remainder of 2020. Lighthizer also published an essay last week in Foreign Affairs, reiterating explicitly that the Administration seeks to use trade policy to create and protect American jobs. We anticipate high participation among the members on a range of topics, including:
- China Policy. Committee members will ask for status updates on the Phase One trade deal with China. Despite growing U.S.-China tensions, Lighthizer has recently expressed confidence in China’s commitment to the purchasing commitments in the deal. Members will likely ask how the Administration intends to act against China based on Hong Kong’s loss of autonomy; Donald Trump has threatened trade sanctions but not yet specified what they might be.
- USMCA. The new North American trade deal will enter into force on July 1. New regulations governing the interpretation of the deal were released earlier this month. The new rules of origin for automakers are designed to incentivize the automakers to shift some jobs from Mexico to the United States. Congress voted overwhelmingly for the USMCA and will be eager to know whether the Administration is on track to meet its objectives. Some members will also likely call for flexibility as automakers and suppliers struggle with the new rules amidst the ongoing pandemic.
- Boeing-Airbus. The U.S. currently has $7.5 billion in tariffs imposed against the E.U. authorized by the WTO; a WTO arbitrator award is expected within weeks, that will authorize the E.U. to impose tariffs of its own. According to European trade commissioner Phil Hogan, the U.S. is not actively engaged in settlement talks, and the two sides are “quite far apart” in their positions. The WTO award should help push the two sides toward settlement, particularly once the size of the award is known. Boeing is no longer expected to seek financial assistance from the reserve of $17 billion created by the CARES Act, which could have also acted to catalyze a settlement.
- Digital Services Taxes. The U.S.T.R. has announced a new investigation into the European Union and nine other countries, arising out of proposals to institute digital services taxes (DSTs). The Administration has already concluded that France’s DST would unfairly discriminate against the big American tech giants, and has entered a truce with France to refrain from trade sanctions until the end of 2020. There is bipartisan support for the new investigation, and for the ultimate goal of reaching an international solution through the “inclusive framework” process at the OECD.
- National-Security Tariffs. President Trump recently threatened again to impose tariffs on European automotive imports, based on national security. Despite tremendous opposition in Congress to auto tariffs, lawmakers thus far have failed to advance legislation to restrain the President in this area. Nevertheless, we continue to believe that Trump won’t impose auto tariffs. Lighthizer in particular opposes the idea of automotive tariffs. Sen. Pat Toomey (R-Pennsylvania) can be expected to be especially active in questioning on this topic.
- The future of the WTO. Members will likely ask about the Administration’s plan to spur reforms at the WTO, including the future of its leadership. The Ways and Means Committee approved a resolution last December providing that the United States “should continue to lead reform efforts” at the WTO.