EU-US Economic Disputes: There is More to Trade than Goods and Services

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EU-US Economic Disputes: There is More to Trade than Goods and Services

Natalie Kuehler examines the latest developments in EU-US trade disputes and argues that recent controversy in this field reflects growing cultural and social differences on the two sides of the Atlantic. WTO settlement procedures need adjustment to meet the new challenges.

Introduction

In this period of increasingly frequent transatlantic disagreements, many observers claim that trade relations between the EU and the US are the worst in recent memory. In the past few weeks new potential disputes have emerged over the US Farm Bill, the imposition of tariffs on imports of steel to the US, and most recently the US decision to create anti-terrorist customs controls at certain EU ports. In this climate, even the procedural framework of the WTO dispute settlement process seems incapable of ensuring wholly amicable US-EU trade relations. Nevertheless, transatlantic cooperation in the area of trade is better than that in the international political arena, where open disputes have erupted over such issues as the International Criminal Court and the Kyoto Protocol.

This paper examines the current status of US-EU trade relations and analyses the role the WTO has played in the settling of their trade disputes. The paper also argues that, because the nature of trade and trade disputes has changed dramatically over the past few years, the current trend of cooperation in the WTO is not likely to continue into the future and new ways of solving transatlantic trade disputes are necessary.

Overview of Current EU-US Trade Relationship

The EU-US trade relationship is of great importance in today’s global economic system. Not only do bilateral economic relations between these two economic giants make up over 40% of world trade, but their trade relationship also greatly influences political cooperation between the two unions. As Leon Brittan, former EU commissioner for trade recently wrote, there is a loose linkage between economic and political cooperation and partnership. If serious strains arise on one side of the relationship, there is always a risk that the other will suffer. The US-EU trade relationship draws wider circles, however, and also serves an important signalling effect to the world trading system as a whole. Indeed, it is difficult to move the global trade agenda forward when the EU and US pull on opposite strands.

There is currently a long list of US-EU trade disputes ranging from unresolved issues, such as the EU refusal to allow imports of hormone treated beef (despite a contrary WTO ruling), to those disputes that are only just about to erupt, such as the potential row over the imposition of tariffs on US steel imports. Most recently, the EU has won a case against the US for its Foreign Sales Corporation (FSC) Law, which bestows special tax breaks on US companies in the exporting business. The EU was granted the right to impose sanctions worth up to $4 billion – the largest award in WTO history. For the status and a brief summary of the 11 currently active bilateral US-EU cases in the WTO please refer to the Annex below. Even though EU-US trade accounts for less than 22% of EU trade, it comprises over 47% of the EU’s WTO disputes. By contrast, the EU currently has not a single WTO dispute with its preferential partners in Europe and Africa, although 32% of its trade takes place with these countries. These numbers point out that, even though the EU and US try to settle their trade disagreements in various informal and formal bilateral settings, they still depend heavily on the WTO dispute resolution mechanism to solve their most contentious problems.

US Trade Policy Towards the EU

EU commercial policy is remarkable as it is the principal area in which the EU speaks with one voice thro ugh the European Commission. The US has been a strong supporter of such European economic integration, considering that its benefits far outweighed its downsides. Politicians and economists predicted that economic integration would lead to the development of strong, modern economies with higher productivity and consumption levels, which in turn would become better markets for US exports. Furthermore, the US would more easily be able to obtain a liberal trading policy from a unified Europe, and the stability of negotiated agreements would be increased. The US, in short, would have a better trading partner and a single phone number in Europe to call in questions of commercial policy.

The “Seat at the Table” Approach

Several scholars have identified three main US strategies to deal with the emerging European integration. First, successive administrations attempted to intervene pre-emptively by engaging in direct involvement in the European Union. The US recognized that European trade policy was hard to change once internal agreement had been reached, and several times requested a “seat at the table”. Though the Europeans repeatedly rejected this direct US involvement in European policymaking, an institutional framework to bring the two trading partners closer together was created. Examples of this increased cooperation include the Mutual Recognition Agreement, which eliminates or significantly reduces testing and certification requirements in various areas, as well as the Veterinary Equivalence Act, which facilitates trade in live animals and animal products.

The “Divide-and-Rule” Tactic

A second US strategy to deal with European economic unity, which has proved especially effective in trade disputes, is the exploitation of European internal differences. This “divide-and-rule” tactic, mainly employed in the area of transport, was openly used in the Open Skies negotiations and more recently seems to have been taken up in the US effort to install anti-terrorist checks at several major European harbours. The strategy entails the negotiation of bilateral agreements with some EU Member States, which then compel the other states to follow suit due to the threat of trade diversion. Accordingly, it was only after the finalization of open-skies agreements between the US and six small EU member states (Belgium, Denmark, Luxemburg, Austria, Sweden and Finland) that Germany, France and the United Kingdom agreed to enter into similar negotiations. The second prong of the divide-and-rule tactic is the use of specially targeted trade sanctions to put pressure on certain countries and alleviated it from others. The US’s decision to impose duties mainly on French products during the agricultural dispute after the accession of Spain and Portugal to the EU in 1986 illustrates this policy. This threat of enormous export losses forced France, which had been the main opponent of further concessions to the US, to give in to further US demands. Though the “divide-and-rule” tactic is only effective if European states cooperate with the US, the European Commission has had significant difficulties in keeping countries from doing so. It has repeatedly called on its Member States not to succumb to US pressure and enticements, as in the end the interest of each state can be better served by adopting a common position. In the future, the US’s ability to use this strategy might be curtailed if the EU can reach an internal agreement on maritime transport and if the European Court rules that the EU, and not the individual Member States, has the competency to conduct air traffic negotiations.

The “Promoting European Integration” Strategy

Finally, when favourable to its interests, the US has been an active promoter of increased commercial integration within the EU. This has been helpful chiefly in situations where some EU states’ objections to certain commercial policies could be overcome through cost shifting within the Union. Additionally, the necessity of reaching a common EU position compels Member States to voice their protests regarding certain trade policies at a union level. This internal mechanism for the articulation of concerns satisfies political demands for an effective forum in which to raise objections while at the same time removing these complaints from direct negotiations with the US. This leads to a harmonization of EU-US trade affairs as many minor frictions are dealt with at an inner-European level that has no direct impact on transatlantic relation.

The WTO As Multilateral Dispute Settlement Body

There are several other factors, besides the single European voice due to which US-EU interactions in trade are unique in the overall transatlantic relationship. Perhaps the most obvious is simply the existence of a multilateral dispute settlement organization, the WTO, as a formal quasi-judicial body whose rulings are binding. Created to enhance free trade around the globe, a key goal of both the US and the EU, the WTO is based on the fundamental belief that creating more open and free trade is a win-win situation for all parties involved. While the one party gains because the other has to eliminate trade barriers, the other wins as well because the survival of only its most productive and effective companies is encouraged. This philosophy, though it does not always hold true for developing countries, was long shared by both economic superpowers, and their cooperation in the WTO has been surprisingly good. With a number of famous exceptions, such as bananas and beef hormones, their trade disputes are settled fairly efficiently when the domestic congressional mood permits, and given some time both parties generally adhere to the WTO’s rulings.

Changing Nature of Trade Disputes

Recently, however, things have been changing. Trade relations have increasingly moved into the public spotlight, and trade policy has rapidly become a high-profile business. In addition while traditional trade disputes were concerned with market access or industrial policy, the EU and the US currently find themselves entangled above all in philosophical clashes. While the EU has subscribed fully to the precautionary principle, it has often been unsuccessful in explaining the need for special safety measures in areas of environmental protection and health to the US. The EU thus opted to disregard the WTO’s ruling on its ban on hormone treated beef not only because it seeks to protect European farmers, but because there is widespread agreement within Europe that hormone-treated beef is harmful to the consumers’ health. And the European Parliament decided to propose even more stringent rules for the labelling of GMOs not to keep U.S. products out of the markets, but because European consumers fundamentally distrust genetically altered foods. Since those erecting such philosophically based trade barriers don’t do so to protect their businesses but to protect their health, these new disputes no longer can be solved by pointing out the old principle that freer trade is a win-win. A relaxation of policies is not only harder to achieve, but may also be less desirable.

Furthermore, while traditional trade disputes usually involved a complaint by the EU against the US, these new ideological trade quarrels centre around complaints by the US against the EU. And while the traditional trade disputes were often only nominally between the two WTO parties and really only part of complex international corporate battles, the new disputes are amongst the different perceptions of the societies themselves. Thus, not only has a novel kind of dispute been introduced, but these disputes have also changed the underlying structure of the customary US-EU disputes.

Impact of Political Relations

Add into this new mix the recently cooled political relations between the US and the EU, and the picture looks bleaker yet. Though both powers have always faced protectionist pressures from certain industries and interest groups, George W. Bush seems particularly sensitive to the demands of powerful constituencies. Within the last few months he has created barriers to imports of lumber, added new tariffs on foreign steel, and signed into law a new Farm Bill, which increases agricultural subsidies considerably. In the middle of all this, the EU is becoming increasingly irritated at the current US administration’s leadership style on issues ranging from the International Criminal Court to dealing with “rogue states” such as Iran, Iraq or North Korea. And recently, both powers have been competing with each other to negotiate preferential trade deals with developing countries while the EU has moved into America’s backyard, signing Free Trade Agreements with Mexico, Mercosur and Chile. Even the unusually good professional relationship between Bob Zoellick, the US Trade Representative, and Pascal Lamy, the EU Trade Commissioner, is unlikely to be able to bridge all these gaps.

Inadequacy of the Current WTO Dispute Settlement Mechanism 

Unfortunately, the current WTO dispute settlement apparatus is unable to cope effectively with these new frictions in the transatlantic economic relationship. The WTO has no independent ways to enforce its rulings, and relies entirely on the threat of sanctions imposed by the winning party should the losing state fail to adjust its trade practices. As can be seen in the beef hormone case, however, the EU is more willing to suffer retaliatory tariffs in order to protect its consumers from sub-standard quality food products. Such decisions threaten to undermine the entire foundation upon which the WTO dispute settlement mechanism is built. If the EU, for no matter how laudable reasons, decides not to adhere to WTO rulings, the US population is unlikely to understand why it in turn should abide by the rules. Moreover, since the Americans do not understand the precautionary principle, they will not differentiate between those disputes surrounding the prevention of potential threats to human health or the environment and those disputes based on traditional protectionism. The already influential lobbying groups will be fed more and more ammunition, and as pressures grow on both sides of the Atlantic we could soon fall into a downwards spiral of non-compliance. In these times of increasing EU-US frictions it is unwise to rely solely on the WTO’s current dispute settlement mechanisms to ensure cooperation: with inadequate structures as well as resources to address ideological trade disputes and no real means to enforce its rulings the WTO risks loosing its authority.

Some Possible Future Transatlantic Trade Relationship Scenarios

Due to their growing politicisation trade disputes can no longer be dispersed simply through acts of litigation. This tedious and often lengthy process is increasingly unattractive since compliance with the panel rulings in the end no longer is assured. There are several ways in which this problematic situation might be addressed in the future: First, the parties could proceed as usual and hope that the challenges created through the new philosophical disputes have no impact on traditional WTO trade disputes. This, however, is rather unlikely. Once an example of non-compliance has been set in one area, increasing domestic pressure on both sides of the Atlantic will lead to greater reluctance to comply with WTO rulings on other areas as well. The second option would be for the US and EU to begin to settle their biggest ideological rows outside the WTO, in bilateral negotiations geared to constructing a new transatlantic economic relationship. The philosophical differences at the root of many of the new trade disputes are not likely to disappear anytime soon, and the challenge is not to force one power to give up its fundamental beliefs, but to find ways of maximizing gains from these differences . A third option would be to outfit the WTO with the necessary structures, resources and staff to be able to effectively address not only traditional trade disputes, but philosophical ones as well. In addition to including all the advantages of a bilateral solution, this approach carries with it the benefit of upholding and fostering the legitimacy of the WTO as a multilateral body that ensures adherence to the international laws of trade through an effective mechanism of dispute settlement.

Conclusion

Regardless of which path is pursued, the key to regaining stability in transatlantic trade relations is an increased understanding between the two societies. Stu Eizenstat and Hugo Paemen in their piece in the Financial Times London, of July 25th, 2002 suggested several steps to reach this objective, including a one-year suspension of the filing of new WTO cases and the drafting of a common economic goal and work programme to achieve it. This alone, however, is not enough. Congress and the European Parliament, as respective legislative bodies, should intensify information sharing and try to achieve a further harmonization of legal standards and trade laws. At the same time Europeans must double their efforts to explain the precautionary principle to the US so that the deep concerns at the heart of the new philosophical trade disputes are recognized and taken seriously by their transatlantic partner. Finally, both powers must realize that trade and politics no longer are easily separated. This is not necessarily a bad thing. Trade today is the only area in which the EU and the US deal as equals. But if Americans and Europeans can keep in mind the benefits reaped from multilateral economic cooperation and transfer the lessons learned here into the political sphere, the basis for a new transatlantic relationship might well be laid.

Natalie Kuehleris a junior policy analyst with The European Policy Centre.

For more analyses see The European Policy Centre’s

website.

ANNEX: Current US-EU Trade disputes in the WTO

1. EU–Hormone ban (WT/DS26)

The WTO ruled that the EU ban on imports of meat from animals to which any of six hormones for growth promotional purposes had been administered was inconsistent with the EU’s obligations under the Agreement on the Application of Sanitary and Phytosanitary Measures (“SPS Agreement”). Because the EU has still not complied with this, the US was authorized to impose -and has imposed -100 percent ad valorem duties on a list of EU products with an annual trade value of $116.8 million. While discussions with the EU to resolve this matter are continuing, no resolution has been achieved yet. On November 3, 2000, the EU notified the WTO of its plans to make permanent the ban on one hormone, oestradiol.

2. EU–Protection of trademarks and geographical indications for agricultural products and foodstuffs (WT/DS174)

The US believes that the EU Regulation 2081/92 is inconsistent with the EU’s obligations under the TRIPS Agreement. It claims that the regulation does not provide national treatment with respect to geographical indications for agricultural products and foodstuffs or sufficient protection to pre-existing trademarks that are similar or identical to such geographical indications. Consultations have been held since July 9th, 1999 but no resolution has been achieved so far.

3. United States–Foreign Sales Corporation (“FSC”) tax provisions (WT/DS108)

The EU challenged the FSC provisions of the U.S. tax law, and a WTO panel found that the FSC tax exemption indeed constitutes a prohibited export subsidy under the Subsidies Agreement, and also violates U.S. obligations under the Agreement on Agriculture. Legislation that was signed by the US President following this ruling wa s found to be insufficient to bring the US into compliance with its WTO obligations. The EU was awarded the ability to impose sanctions between $1 billion and $4 billion on US exports, but has refrained from doing so while the US administration tries to reform the law and rid it from illegal export subsidies.

4. United States–1916 Revenue Act (WT/DS136, 162)

The EU challenged Title VII of the Revenue Act of, often referred to as the Antidumping Act of 1916, which allows for private claims against, and criminal prosecutions of, parties that import or assist in importing goods into the United States at a price substantially less than the actual market value or wholesale price. A WTO panel found that the 1916 Act is inconsistent with WTO rules. Although legislation to repeal the Act was introduced in the House on December 20, 2001, no action was taken. Arbitration was briefly taken up on this matter, but suspended on March 4, 2002 in light of on-going bilateral efforts to resolve the dispute.

5. United States–Section 110(5) of the Copyright Act (WT/DS160)

A WTO panel held on June 15, 2000, that an exception in the Fairness in Music Licensing Act, which permits certain retail establishments to play radio or television music without paying royalties to songwriters and music publishers, violates the US’ WTO obligations. The panel found that lost benefits to the EU amounted to $1.1 million, but even though the US has not yet complied with the ruling no sanctions have been suspended in the light of ongoing efforts to reach a negotiated resolution of the issue.

6. United States–Section 211 Omnibus Appropriations Act (WT/DS176)

The EU won a ruling that Section 211 of the Omnibus Appropriations Act, which addresses the ability to register or enforce, without the consent of previous owners, trademarks or trade names associated with business confiscated without compensation by the Cuban government, breaches national treatment and most favored nation obligations of the TRIPs Agreement. The EU and the U.S. have agreed that the reasonable period of time for implementation of the necessary changes to the Act will expire on January 3, 2003.

7. United States–Countervailing duty measures concerning certain products from the European Communities (WT/DS212)

On November 13, 2000, the EU requested WTO dispute settlement consultations in 12 separate U.S. countervailing duty proceedings covering imports of steel and certain other products from member states of the EU, all with respect to the Department of Commerce’s “change in ownership” (or “privatization”) methodology that was challenged successfully by the EU in a WTO dispute concerning leaded steel products from the UK. A panel was established at the EU’s request on September 10, 2001.

8. United States–Countervailing duties on certain corrosion-resistant carbon steel flat products from Germany (WT/DS213)

Also on November 13, 2000, the EU requested dispute settlement consultations with respect to the Department of Commerce’s countervailing duty order on certain corrosion-resistant flat rolled steel products from Germany. The Department of Commerce declined to revoke the order based on a finding that subsidization would continue at a rate of 0.54 percent. The EU alleges that this action violates the Subsidies Agreement. A panel was established at the EU’s request on September 10, 2001.

9. United States–Safeguard measures on imports of line pipe and wire rod from the European Communities (WT/DS214)

On December 1, 2000, the EU requested consultations with the United States regarding U.S. safeguard measures on imports of circular welded carbon quality line pipe and on wire rod. The EU argued that these measures are inconsistent with the Agreement on Safeguards and the 1994 GATT. A panel was established at the EU’s request on September 10, 2001.

10. United States–Antidumping duties on seamless pipe from Italy (WT/DS/225)

On February 5, 2001, the EU requested consultations with the United States regarding antidumping duties imposed by the United States on seamless line and pressure pipe from Italy, alleging that these measures violate the WTO Antidumping Agreement. Consultations were held on March 21, 2001.

11. United States–Safeguard Measures on Certain Steel Products (WT/DS/248, WT/DS/249, WT/DS/251, WT/DS/252, WT/DS/253, WT/DS/254, WT/DS/258, and WT/DS/259)

On March 7, 2002, the United States received from the European Communities a request for consultations regarding safeguard measures imposed by the U.S. on certain steel products. Consultations were held April 11, 2002 and on June 3, 2002, the DSB established a panel at the request of the EC.

On May 30, 2002, the United States filed a consultation request with respect to the EU’s provisional safeguard measures against certain steel products, imposed effective on March 29, 2002.

Negotiations aimed of obtaining a compensatory package likely to neutralize as far as possible the effects of the steel tariffs are currently under way.

12. United States-Customs Controls in Ports of Le Havre and Rotterdam

EU Trade Commissioner Pascal Lamy has warned that there could be another trade dispute arising over the decision by US authorities to impose special anti-terrorist controls in certain European ports which could result in unfair competition between those European ports “approved” by the US and the others.

For more analyses see The European Policy Centre’s

website.