U.S.-EU Trade Issues

Key Points

  • U.S.-EU trade and investment—based on transatlantic cooperation in economic, political, and security spheres—have grown exponentially since the 1950s, gaining new vitality since the end of the cold war.
  • The EU and U.S. have reacted differently to the problem of those left behind by globalization, boding ill for the current WTO round.
  • The WTO plays a significant role in resolving U.S.-EU disputes but is ill-equipped to handle new issues such as biotechnology.

Investment and trade between the U.S. and the European Union (EU) have expanded exponentially since Europe first began to integrate its market in the 1950s. Currently the U.S. and EU account for more than one trillion dollars in two-way trade and investment flows, directly supporting a total of more than six million jobs in the U.S. and the 15 EU countries and resulting in a degree of economic integration higher than that between the U.S. and Asia. The EU and U.S. now exchange roughly 19% of each other’s exports and imports.

The foundations of U.S.-EU relations lie in close post -World War II cooperation in economic, security, and political spheres. The U.S. and Europe quickly intertwined their trade and investment flows within an overarching consensus about the structure of the global economy. Yet as trade grew, so did the number of disputes, with tariffs and market access emerging as the main contentions in U.S.-EU economic relations since the 1960s. Today the major trade disputes between these two economic rivals revolve around bananas, hormone-injected beef, biotechnology, information technology, and the use of economic sanctions for political purposes.

The EU has gained new vitality since the end of the cold war. It is developing an independent political capacity to supplement its economic might and is seeking to become more of a global player. With economic interests in emerging markets such as Latin America, the EU is the only world region that rivals U.S. economic might and can compete on a par with it.

The advent of the European Monetary Union (EMU) in 1999 and the introduction of a common European currency, the euro, underscore this new power by creating a future reserve currency with the potential to rival the dollar and expand the EU’s international economic presence.

At the same time, both the U.S. and the EU are confronting the contradictions of economic globalization, where the push for ever-more-mobile capital and increased global trade liberalization raise difficult questions about the role of the social welfare state in the emerging global economy. Less regulation increases profits from new markets, yet concern over the domestic impact of globalization has led to calls for more. The U.S. and EU react differently to the problem of those left behind by globalization, creating friction in their common quest to liberalize the world trading system.

As the cold war wound down in 1990, the U.S. rebuffed EU calls for a formalization of relations through a transatlantic treaty, preferring a network of informal relations. The decade since the cold war has thus seen a number of smaller, vaguer agreements, starting with the Transatlantic Declaration in 1990. This highly rhetorical document was quickly overshadowed by the temporary collapse of the 1990 Uruguay Round due to U.S.-European differences. The EU, concerned about the effect of the North American Free Trade Agreement (NAFTA), then proposed a Transatlantic Free Trade Agreement (TAFTA) in 1994, and the U.S.—somewhat reluctantly—went along.

There was to be no TAFTA to complement NAFTA, however: only a renewed political gesture in the form of the 1995 New Transatlantic Agenda (NTA). Its main lasting effect was the Transatlantic Business Dialogue (TABD), the first transatlantic lobby, which brought about agreements on testing and certification as a step toward defining a new trade agenda. It also envisioned the creation of a New Transatlantic Marketplace (NTM) within which trade barriers between the U.S. and EU would be largely dismantled. Continuously diluted, in 1998 the NTM became today’s Transatlantic Economic Partnership (TEP), a limited agreement slighting key issues, particularly agriculture, audiovisual services, and culture.

This failure to develop substantive transatlantic regulations means reliance on the World Trade Organization’s (WTO) dispute settlement process for airing differences. This use of the WTO, while clearly envisioned by the U.S. and EU during the Uruguay Round, has turned U.S.-EU disputes into tests for trade rules and access to new markets in developed and undeveloped countries around the globe. Thus, the post-cold war era seems less a ready-born system of neoliberal economics and democratic politics moving seamlessly into place than a time of reformulating the structures of the international trading system.

Problems with Current U.S. Policy

Key Problems

  • In disputes over bananas and hormone-treated beef, the EU has defied WTO rulings, and the U.S. has retaliated by imposing sanctions.
  • U.S. use of extraterritorial unilateral sanctions against Cuba, Libya, and Iran, is straining U.S.-EU relations and undermining the search for a rule-based trading system.
  • The U.S. laissez-faire approach to regulation of electronic data conflicts with European privacy restrictions.

The main sites of discord in U.S.-EU trade fall into three categories:

The perennial issue of agriculture and the related reform of the EU’s Common Agricultural Policy (CAP). Reform of CAP has been sluggish, despite the pressing need to do so before enlarging the EU eastwards. The most recent agricultural trade dispute has concerned the EU’s preference for importing bananas from former European colonies.

New issues concerning technology. These fall into two broad categories. The first concerns biotechnology, genetically modified organisms (GMOs), and the use of hormones in U.S.-bred beef and milk. These developments raise larger issues regarding the relationship of consumer health and safety to commercially advantageous advances in science. The second category concerns the relation of information technologies to traditional approaches to information. The issues here include the privacy of electronically stored data, intellectual property in cyberspace, and regulation of electronic commerce and telecommunications.

Foreign policy and security issues that have important trade spillover effects, such as America’s imposition of economic sanctions on firms that do business with political undesirables, particularly Cuba, Libya, and Iran. These issues raise the question of the relation of economic means to political ends and are thorns in the side of trade ministries, who lack jurisdiction.

The ongoing U.S.-EU dispute about agriculture has tested the WTO’s new dispute settlement system, established in 1996. The WTO ruled that Europe’s policy of maintaining quotas for bananas from former (mainly Caribbean) colonies was a barrier to trade and must be abandoned. The EU continues to stall on eliminating banana quotas, and in 1999 Washington retaliated with 100% tariffs on $191 million worth of European luxury goods.

The newer issue of banning hormone-treated beef was also brought before the WTO following the European scare over mad cow disease. The WTO ruled that, without further scientific evidence, the EU could not employ the precautionary principle to bar further importation of U.S. beef. (Precautionary principle holds that lack of scientific certainty should not block cost-effective measures to protect health and environment.) The EU has also decided not to comply with this ruling, and again the U.S. has imposed punitive tariffs of $116.8 million on certain food imports.

The Clinton administration sees these two issues as a test of the WTO’s ability to “mandate that nations change their trading practices.” The U.S. claims that EU defiance of the dispute settlement rulings scuttles the norms that both sides worked hard to institute.

The EU, stung by U.S. retaliation, maintains that the appeals process has not been allowed to run its course and that the U.S. is attempting to commandeer the WTO as a coercive foreign policy tool. In both cases, however, the amount of trade at stake is much smaller than the rhetoric. Together, the tariffs on bananas and beef amount to less than 0.2% of all U.S.-EU trade.

The beef dispute raises a contentious issue: should a country’s perceptions of health risks be subordinate to multilateral trading rules? It tests the WTO provision that permits unilateral import restrictions due to scientifically based health or environmental protection concerns. An overly narrow interpretation of this provision requiring scientific proof of harm jeopardizes national laws regarding health, safety, and environmental protection—which may be considered in WTO dispute settlements as barriers to free trade.

As with a global definition of barriers to trade, international standards on personal information—from credit ratings to medical histories—are entering new and uncertain terrain. The U.S. has traditionally adopted a laissez-faire approach to regulating data, allowing consumer information to be bought and sold in the world’s largest information economy. The 1998 European Union Data Protection Directive requires a number of potentially time-consuming and expensive actions, from notifying individuals when information is gathered to giving individuals the right to sue data controllers. The most potentially disruptive stipulation is that data cannot be transferred from the EU to countries that lack similar standards, most notably the United States.

These regulations may be too burdensome in the internet age, when the dependence of modern commerce on electronic data makes the stakes in this battle tremendous. Again the crux of the matter lies less in dollar figures than in the underlying difference between U.S. and EU attitudes, pitting self-regulation—the preferred mode of operation in the U.S.—against the EU willingness to regulate industry in the name of the public good.

The third category of foreign policy and security issues revolves around U.S. sanctions against Cuba, Iran, and Libya. These actions hold far-reaching implications for European companies, renewing the specter of a United States unwilling or unable to distinguish between its political interests and the interests or concerns of others.

Regarding Cuba, Washington has mandated that sanctions be imposed against any company whose business involves expropriated U.S. property and, recently, trademarks. The EU charges that this is a barrier to trade, but the U.S. refuses to acknowledge this argument, claiming it is a foreign policy matter rather than a trade issue. Although the Clinton administration has consistently waived the most controversial parts of the sanctions law (known as Helms-Burton), thereby avoiding a showdown, the critical issue remains whether any one country can make a law that binds a third country without its consent. Such extraterritorial sanctions are counterproductive to efforts to build a rules-based system. The U.S. risks being seen as unwilling to play by the rules of the game, itself, while demanding that others tow the line.

Toward a New Foreign Policy

Key Recommendations

  • Washington should actively support effective consumer, environmental, and labor dialogues to complement the successful Transatlantic Business Dialogue.
  • The next round of the WTO should be broadened to include social and environmental issues as well as the concerns of developing countries.
  • The U.S. should seek to build a working consensus around regulatory procedures governing genetically modified and hormone-treated foods.

The New Transatlantic Agenda spawned a transatlantic business dialogue, but it has failed to produce an effective labor dialogue. Consumer and environmental groups are just beginning to be heard. The U.S. and EU should counter this asymmetrical structure with effective labor, consumer, and environmental dialogues. Existing groups, excluded from the U.S.-EU summit in Bonn in June 1999, found their suggestions soundly ignored, leading them to publicly criticize the summit as “a symbolic show of favoritism toward business interests.”

Although sanctions remain the prerogative of national policymakers, U.S.-EU issues surrounding agriculture and technology are increasingly addressed in the WTO’s multilateral framework. The EU has taken the initiative in defining an expansive WTO agenda, while the U.S. is more circumspect. America, as host of the Seattle round, seeks to focus on agriculture, the last bastion of EU protectionism and services. The U.S. also wants to discuss labor and environmental issues, a position that developing countries (given their generally weaker standards and structural disadvantages) oppose, worried that they will yield market access without getting new openings to markets in developed countries.

In response to these concerns, the EU has proposed that the WTO’s new negotiating agenda not only include social and environmental issues but also duty-free access for goods from the developing world to the developed countries. Also on the EU wish list is the expansion of the WTO for investment and competition policy, though EU social and development proposals challenge the narrow, corporate-friendly globalization embraced by the United States. Yet the very developing countries these proposals are purported to help, such as India and Brazil, continue to oppose the inclusion of social and environmental issues in the new WTO agenda, fearing new forms of protectionism. In an interesting twist, the International Chamber of Commerce and the UN also oppose including such issues in the WTO. They feel it is the wrong setting, stating that “the rule-based multilateral trading system was not designed to address these non-trade issues.”

If the U.S. wants to show global leadership, it can strive to ensure that consumer, labor, and environmental groups play a constructive role in setting the agenda. To do this, however, the U.S. position must change considerably toward genetically modified organisms (GMOs) and hormone-injected beef. Overreactions aside, there are genuine concerns both about genetically modified food and about the role of the U.S. government in promoting corporate interests despite potential health risks. Concerns about GMOs range from a recent variety of corn that reportedly kills Monarch butterflies to the potential for cross-pollination of nonmodified crops. The safety of hormone-injected beef has yet to be conclusively determined. Washington places the burden of proof on consumers to show that harm has been done. Despite success with WTO rulings on beef, the U.S. recently suffered a setback when the WTO found valid safety concerns regarding milk produced by cows injected with the growth hormone bovine somatropin (BST), which has been associated with breast and prostate cancer. Thus, Washington had to drop its suit to force the EU to allow importation of this milk.

Although European opposition has been the most vocal, Mexico, South Korea, and Japan have also begun to ban or regulate genetically modified food. Even U.S. baby food manufacturers Gerber and Heinz and pet-food producer Iams have refused to use modified food. As more foreign buyers start refusing genetically engineered crops, U.S. farmers are beginning to question current policy. Consumer unease and market realities may oblige the U.S. to rethink the costs of promoting these products.

U.S. foreign policy should emphasize inclusive dialogue and should rein in domestic constituencies whose interests force the government into often indefensible positions, from unqualified support of hormonally and genetically altered food to politically motivated sanctions. The EU should neither be treated as a partner superpower with whom the U.S. can share the spoils of unfettered trade nor should it be underestimated as a subordinate global power. EU concerns about those left behind by globalization should compel U.S. policymakers to be more receptive to critics at home and abroad. And as U.S. negotiators wrangle with the EU over bananas, beef, and biotechnology in the WTO, they should keep in mind that more is at stake than the economic interests of the U.S. or EU. The resolution of these disputes is shaping the future of the global economy, for better or worse.