Trans-Atlantic trade disputes – From conflict to crisis?

Trans-Atlantic trade disputes – From conflict to crisis?

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.

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. Over the past few weeks potential new rows 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. But apart from the hormones issue and possibly port screening, several inactive disputes at the monitoring stage (EU dairy products, EU avionics subsidies, some EU states’ tax laws, US patent law) must also be factored in.

Nevertheless, transatlantic cooperation in the area of trade appears to be in better shape than that in the international political arena, where open disputes have erupted over such issues as the International Criminal Tribunal or the Kyoto Protocol. This paper examines the current status of US-EU trade relations and analyzes why the two powers have been able to settle their trade disputes rather peacefully. The paper also argues that, because the nature of trade and trade disputes has changed dramatically over the past few years, this trend of cooperation facilitated through the WTO is not likely to continue into the future and new ways of solving transatlantic trade disputes are necessary.

The perhaps most important bilateral trade relationship in the world is that between the US and the EU. Not only do these two economic giants together make up over 70% 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 co-operation 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 as an important signaling effect to the world trading system as a whole. Indeed, it is hard to imagine the global trade agenda moving forward when the EU and US pull on opposite strands.

Despite the importance of the relationship, there is currently a long list of US-EU trade disputes. Quarrels range 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. All in all there are currently 14 active bilateral US-EU cases in the WTO. This means that 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 non-EU Member State partners in Europe and Africa, although 32% of its trade takes place with these countries. These numbers point to a preference by the US and the EU to settle their bilateral trade differences in the WTO rather than through informal negotiations, and in the past this approach proved rather successful.

US strategies for responding to EU integration

EU commercial policy is unique, as it is the only area in which the EU speaks with one voice and Member States have given up all autonomy to conduct separate trade negotiations. The US was an ardent supporter of such European economic integrati on, and believes 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.

Scholars have identified three main US strategies to deal with the emerging European integration. First, successive administrations attempted to intervene preemptively by engaging in direct involvement in the European Community. 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.

US “divide and rule” tactics

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 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 harbors. This strategy mostly consists of negotiating bilateral agreements with some EU Member States, which then put pressure on the other states to follow suit. In addition, the US uses specially targeted trade sanctions to put pressure on certain countries and alleviated it from others. The EU has had significant difficulties in counteracting this strategy and has repeatedly called on its Member States not to succumb to it as in the end the interest of each state can be better served by adopting a common position.

Finally, when favorable 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 states’ objections to certain commercial policies could be overcome through cost shifting within the EC. A unified European position has also served to stabilize trade relations by giving individual Member States the opportunity to voice their concerns and objectives at the community level that does not directly endanger transatlantic trade relations.

Challenge to the WTO disputes mechanism

There are several other factors besides the single European voice that make US-EU interactions in trade rather unique in the overall transatlantic relationship. Perhaps the most obvious is simply the existence of a dispute settlement organization, the WTO, as a formal quasi-judicial body whose rulings are binding and final. 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 wins because the other has to eliminate trade barriers, the other wins because the survival of its most productive and effective companies is encouraged. Cooperation between the world’s two economic superpowers in the WTO has thus been surprisingly good. With a few famous exceptions, such as Bananas and Beef Hormones, their trade disputes are settled fairly efficiently and both parties adhere to the WTO’s rulings.

Recently, however, things have been changing. Trade relations have increasingly moved into the public spotlight, and trade 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 ideological clashes. The EU thus opted to disregard the WTO’s ruling on its ban on hormone treated beef not because it seeks to protect European farmers, but because there is widespread agreement within Europe that hormone-treated beef is harmful to consumers’ health. And the European Parliament decided to create even more stringent rules for the labeling of GMOs, not to keep U.S. products out of the markets, but because European consumers fundamentally distrust genetically altered foods.

These developments contradict the old belief that freer trade is a win-win situation, as those erecting trade barriers don’t do so to protect their businesses, but to protect their persons. Convergence 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 center 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.

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 getting increasingly concerned – even alarmed – at the current US administration’s leadership style on issues ranging from the International Criminal Court to foreign and economic policy towards Iran or North Korea. And recently, both powers have been competing with each other to negotiate preferential trade deals with developing countries, while the EU is trying to move into America’s backyard and has begun to take up trade talks with Mexico. Even the unusually friendly 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.

Unfortunately, the old 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 loosing 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 should abide by the rules. The already influential lobbying groups are fed more and more ammunition, and with such pressures growing on both sides of the Atlantic we could soon fall into a downwards spiral of non-compliance. With the EU and US increasingly at odds with each other, it is unwise to rely solely on the WTO ‘s current dispute settlement mechanisms to ensure cooperation: with neither the right structures to address ideological trade disputes nor real tools to enforce its rulings the WTO risks loosing its authority.

The search for a new way forward

The growing politicization of trade disputes can no longer be dispersed through acts of litigation. This tedious, often many years long process is increasingly unattractive as compliance with the panel rulings in the end is no longer 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 problems created through the new ideological 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 in complying 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 ideological 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 and venues to be able to effectively address not only traditional trade disputes, but ideological ones as well. 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.

Natalie Kuehler is a junior policy analyst with The European Policy Centre.

For more analyses see The European Policy Centre’s

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