1. One of the more worrisome ironies of the
North American-European trade relationship is that as the intensity of charges
and counter-charges rises, the level of trade and financial exchange
expands. Roughly $1 trillion of foreign
direct investment, goods and services are exchanged between Europe and the
United States each year. 50% of all US
foreign investment is directed toward the European market, while the figure for
European investment in the US is 70%, and trade naturally tends to follow
directly on the heels of investment. Moreover,
one out of twelve factory jobs in the US is the direct result of European
investment, and the same applies in reverse.
Canada’s position in trans-Atlantic trade is unique, but the same
general trends are apparent. It is now, proportionately, one of
the largest trading nations in the world, and 43% of its GDP is generated
through international commerce; by comparison the United States generates only
11% of its GDP from trade. Although the
United States is by far Canada's largest trade partner, roughly 7% of Canada’s
exports go to the EU.
2. Such statistics suggest
that trade is not strictly a matter of international economic concern. Indeed the line between what is a strictly
international economic matter and what pertains to the domestic realm is
nebulous, and trade policy contains within it vital domestic commercial,
employment and political consequences.
Multilateral trade negotiations and bilateral disputes involving the US,
Canada and the EU increasingly concern matters of domestic policy that can be
construed as hindrances to free-trade.
This trend has unleashed interest in trade among groups that previously
paid it little heed. As a result, the
political management of trade policy-making and trade disputes seems to have
grown enormously complex both as a result of the tendency to engage interest
groups with conflicting agenda and the current need to focus trade policy on
non-tariff barriers (i.e. standards and regulations, tax policy,
production subsidies etc.) Making the
problem even more complex is the fact that communication is not instantaneous;
this has added yet another degree of complexity to sorting out potential trade
differences among trading partners.
Public opinion can be mobilised much faster than states can settle
differences, and this lag has added new strains to the international trading
system. As a result of ever-higher
economic integration, the United States has become an important stake-holder in
European market harmonisation and standardisation. For their part, European officials also closely monitor US
domestic laws conditioning the context in which European firms operate. And both sides as well as Canada are keen to
ensure that the domestic laws of their trading partners do not result in
discrimination against their own products.
3. Thus the key challenge
today for both North America and Europe may well lie in constructing a
political and institutional framework to manage the inevitable conflicts that
arise in a world where the border between internal state prerogatives and
matters for international agreement is ever more porous. Oftentimes, as in the area of competition
law, this mutual dependence results in smooth co-operation between European and
North American officials. But in the
trade arena, bitter rivalry and disputes are increasingly pushing aside the old
patterns of co-operation.
4. What makes this trend all
the more worrisome is that trade disputes are partly stoked by a changing US-
European strategic relationship.
Although the European Union confronts a number of serious internal
challenges, some of which were aired at the Nice Summit, the fact that 13 non‑member
countries are seeking membership is a reflection of its inherent dynamism and
its fundamental success in forging a commercially, financially and increasingly
politically integrated Europe. The EU
is exercising a kind of magnetic force throughout the continent. Europe thus comes to the trade bargaining
table with a new sense of purpose and one that, because of the evaporation of
the old Soviet military threat, is less characterised by strategic dependence
on the United States. This changing
balance has theoretically widened the scope for trans-Atlantic trade disputes
and weakened America’s capacity to win its European and Asian allies over to
its own multilateral agenda. And in
some ways, this dynamism has even raised doubts in the American mind about the
value of multilateral solutions.
5. Indeed, the end of the
Cold War sometimes seems to have depressed the American public’s appetite for
international economic engagement, despite its mounting commercial and
financial stakes in global economic developments. The eminent American economist C. Fred Bergsten
suggests that these trends are manifested in numerous ways including the fact
that Congress has not renewed the president's “Fast Track” negotiating
authority, which expired in 1994, and in the amount of political capital the
previous administration had to expend simply to convince Congress of the merits
of replenishing IMF coffers in the midst of the Asian crisis. Bergsten argues that the domestic backlash
in the US against globalisation has made it very difficult for US leaders to
strike bargains with their trading partners. He consequently foresees the
emergence of a global economic leadership vacuum partly because the US is
trying to “call the shots without putting up much of its own money or making
changes in its own laws and practices".
Of course, similar trends are apparent in Europe, which, for its part,
seems to lack the unity of purpose to fill this vaccum. As a result, the international trading
system could well be drifting toward the shoals.
6. Meanwhile, there has been
a noticeable upswing in “tit for tat” trade disputes in which neither Europe
nor the US has betrayed much willingness to seek political settlements. Trade contention is constantly ratcheted
upwards, often times to a degree that belies the relatively low commercial
stakes involved. This has debased the
long-held notion of international trade as a mutually beneficial
undertaking. Rather, a more
mercantilist image of trade has begun to permeate public attitudes. Now the notion that one side’s gain is the
other side’s loss has become a kind of leitmotif in public discussions about
international commercial exchange. This
fundamentally incorrect notion of trade runs contrary to the basic tenants of
economic theory as well as the everyday reality of commercial exchange, in
which the gains from trade are mutual.
It obviously fails to account for the billions of dollars of trade that
occurs annually between North American and Europe – a set of exchanges that
would never transpire were it not in the interest of both parties. And this
view seems to overstate the importance of exports while downplaying the very
positive economic function of imports that, among other things, helps keep
prices low, bolsters the supply of vital production inputs and better satisfies
consumer demand.
7. The great problem,
however, is that mercantilist views are taking hold on both sides of the
Atlantic, and if unchecked, these could undermine trade relations far more than
banana commerce. At the same time the
global economy has become a bête noire for a range of groups with
diverse agenda. Opposing trade
liberalisation has unfortunately emerged as a rallying point for some
environmentalists, some consumer advocates, some trade unions, isolationists,
hyper-nationalists and various groups that might otherwise not share much in
common, but that have come to agree that free-trade is some malefactor to be
opposed utterly. The truth of the
matter, however, is that trade has been nothing less than an engine of dynamic
and enduring growth for North America and Europe, and there are few economists
who would argue that even the developing world should consider autarky as a
viable means to building a better economic future, or a more environmentally
sound one for this matter.
8. North America and Europe
have experienced strong economic growth over most of the last decade. While the US economy grew at a faster rate
over that period, Europe's economy now appears to be outpacing that of the
US For both sides, international
commercial and financial flows have proven critical to economic growth. Moreover, when an economy on one side of the
Atlantic struggles or falls into an outright recession, the other side can help
keep the global economy afloat by maintaining strong growth and demand. The US played the role of the economic
engine throughout the recent financial crisis in Asia and Russia, and now as
the US economy slows down, it may be time for Europe to assume that role. In
this process, trade plays a central mediating function; it is the vehicle
through which higher demand in one economy can be translated to higher demand in
the slowing economy.
9. Despite this rather happy
counter-cyclical symbiosis, there have also been worrying trends. One is the extraordinarily high US balance
of payments and trade deficits that are now approaching $500 billion a year. The US balance of payments deficits can be
attributed largely to the extraordinary rate of US growth, the inflow of
investment capital into highly dynamic American equities markets, which have
driven up the dollar on international currency markets, large levels of imports
linked to rapid income expansion, and relatively low private saving rates. Although the American deficit was critical
to sustaining global demand during the recent Asian, Russian and Mexican
financial crises, it also stoked a backlash against trade in the American body
politic. Import competing sectors and
their employees, in particular, felt penalised by the strong dollar and the
resulting influx of low cost imports.
The current slowdown of the American economy could well result in a fall
in the dollar and in US payments deficits.
The danger, however, is that a recession or low economic growth would
only galvanise protectionist forces in the United States. Their triumph, it
should be noted, would deprive the US of a vital means of recovery.
10. In Europe, as well, there
has been a great deal of public questioning of some of the virtues of
free-trade. Consumer movements have focused much attention on matters like food
safety and tightly linked these concerns to trade. That linkage has been
reinforced by the fact that genetically modified food and beef hormones have
assumed a prominent place in the transatlantic trade dialogue. Strong public demands that regulatory
sovereignty be protected in an era of global markets are driving European
governments to adopt a very cautious position on liberalising trade in some of
these commodities – to the obvious chagrin of the US negotiators and producers.
11. Thus for a variety of
reasons, resistance to free-trade is mounting on both sides of the
Atlantic. There is today a real risk
that the post-war consensus that supported wealth-generating trade
liberalisation could erode and ultimately break down. Parliamentarians on both sides of the Atlantic cannot ignore
these trends, and increasingly, politicians confront strong pressures to
abandon liberal trade positions; good economic policies do not always equate
with good politics. Of course, one
cannot deny that there are also strong advocates for free-trade, but those
voices sometimes seem muted in the current climate.
12. This is a critical moment
in the trans-Atlantic relationship. Important changes are underway in the
military and strategic fields on both sides of the Atlantic that if not
properly managed could open new fissures in the relationship. In this highly fluid environment, it is
becoming more difficult to keep trade disputes in a kind of hermetically sealed
lockbox. Linkages between security and
trade relations could strike a real blow to trans-Atlantic solidarity. Accordingly, there is a need for strong
leadership on both sides of the Atlantic to manage change and to focus public
attention on the national stakes in preserving the pillars of Atlantic
prosperity and security. Of course,
that makes it incumbent upon leaders on both sides of the Atlantic to resolve
some of the more prominent disputes that have recently plagued the relationship
in the security, commercial and environmental spheres. This will require a degree of political
daring, an open assertion of basic free-trade principles and no small amount of
imagination.
13. The election of a new
president in the United States will undoubtedly bring some change to American
trade policy, but the full implications of these changes are not yet
clear. Although the strategic thrust of
the Bush Administration’s trade policy is unlikely to diverge markedly from
that of the Clinton Administration, there are signs of a new style and set of
tactical priorities. First of all, President
Bush has shown a strong interest in hemispheric economic and security matters
and, in fact, his initial international forays have to date been largely
focused on North and South America.
President Bush’s first foreign trip was to Mexico and his second was to
Quebec on April 20 to participate in the summit of Americas. His announced goal for that meeting was to
discuss the possibility of building a Free-Trade Area of the Americas (FTAA)
that would link North and South America in a great free trading bloc. The president will only visit Europe for the
US - EU Summit in Gothenburg, Sweden in June 2001. For some, this sequence
signals a new ordering of US international priorities which de-emphasises the
place of Europe in America’s strategic priorities.
14. Prior to his selection as
the new United States Trade Representative, Robert Zoellick had hinted that the
United States should be prepared to hammer out more hemispheric trade
arrangements should the trading relationship with Europe turn sour or should
negotiations for a new round of multilateral liberalisation negotiations fail
to get underway. Indeed, Zoellick has
argued that the United States must exploit this hemispheric option as a
bargaining chit with the Europeans. At
the same time though, he well understands that the US-European economic
partnership remains the lynchpin of the US global economic strategy.
15. There was a sense among
some analysts that trade had failed to arouse a great deal of interest at or
near the very top of the Clinton Administration, and that the administration's
disinclination to focus on these matters was partly responsible for the drift
in the US-European trade relationship. Only when President Clinton conducted a
sustained political battle for a trade-related goal, such as the ratification
of the NAFTA agreement, was his administration able to make important advances
in the trade arena. But neither he nor
Secretary of State Albright had accorded trade matters a very high ranking in
the day-to-day order of priorities.
16. There are signs that the
new administration may approach the matters differently. Although a proposal to remove the United
States Trade Representative (USTR) from the Cabinet had initially been floated,
President Bush promptly squashed the idea.
Both National Security Council Director Condolezza Rice and Secretary of
State Colin Powell have publicly recognised that economic matters must be
better incorporated into national strategic calculations. The administration accordingly plans to
create a special body within the NSC to deal with the international
economy. Secretary of State Powell also
recently promised to review American trade sanctions policy, telling the Senate
Foreign Relations Committee that America’s frequent reliance on sanctions policy
“shows a degree of American hubris and arrogance that may not, at the end of
the day, serve our interests all that well.”
Powell has asked Congress not to apply any new sanctions without first
engaging in a dialogue with the State Department about the possible
ramifications of such a course. About
75 of the world’s 193 nations are currently subject to US sanctions.
17. US sanctions policy has
been a serious irritant to relations between the US and both Canada and the
EU. Undoubtedly, Powell’s statement to
the Senate was good news in European capitals where matters like the
Helms-Burton law on trade with Cuba and the Iran-Libya Sanctions Act generated
enormous political resentment because of the extra-territorial claims implicit
in those bills. The US has partly met
these concerns by not imposing sanctions on European firms. Yet, many European
and Canadian officials see these laws as a kind of Damocles sword hanging over
their trading relationship with the United States. Any effort to move away from this propensity to exercise
sanctions would also be good news to American business which has long
complained that such restrictions penalised the US economy without achieving
the desired political aims. USA Engage,
an Association of more than 670 US companies seeking to ease embargoes,
estimates that sanctions cost the US as much as $19 billion a year in lost
exports and more than 200,000 high wage jobs.
18. The Bush Administration has
also signalled its intention to move away from excessive concerns about labour
and environmental standards - a matter which had helped scuttle the effort to
launch a new round of multilateral negotiations last year because the
developing world would not support the inclusion of those matters in
multilateral trade negotiations. Here
the problem is that while the new administration seems willing to embrace the
developing world’s view that labour and environment standards should be
excluded, the European Union has until recently insisted that these items
remain on the multilateral trade agenda.
There were some signs that Europe too would be willing to be more
flexible on this, but the fall-out over Kyoto may make compromise on this all
the more elusive.
19. Of course, when considering
trade politics in the United States, it is essential to consider the other key
player in the policy making process - the US Congress. Here too, recent elections have brought
change, the full implications of which are not yet fully apparent. Although the Republicans retained their
majorities in both the House and the Senate, those majorities were reduced, and
the deciding vote in the Senate will now be cast by the vice-president
himself. Thus while the “co-habitation”
of a Democratic Administration and a Republican Congress, which shaped the life
of US government over the last six years, has ended, the Republicans’ narrow
majority gives it very little political leeway to set the trade agenda
alone. Some degree of bipartisanship
will be essential to forging US positions on a number of trade-related matters.
20. A central question is
whether Congress will grant President Bush fast track negotiating
authority. None of the key players at
the WTO will engage in serious negotiations with the United States unless the
President has been extended this authority. Without it, Congress could
unilaterally alter specific provisions contained within an eventual agreement
and thereby easily scuttle any deal the Americans signed. The previous fast-track expired early in
1994. Both parties in Congress contain elements
opposed to free-trade, so fast-track will require congressional leaders and the
administration to cobble together a bipartisan coalition to support it. Some analysts, however, maintain that any
deal will have to include concessions to those Democrats who want labour and
environmental conditions attached to multilateral trade arrangements. Senator Max Baucus, the Senior Democrat on
the Trade Committee has warned that he would oppose new fast-track authority
unless “legitimate labour and environmental concerns are included".
21. The new USTR Robert
Zoellick recently told the House Ways and Means Committee that in the absence
of fast track authority “other countries have been moving forward with trade
agreements while America has stalled.” According
to the USTR, the EU has signed 20 free-trade agreements since 1990 including
deals with Mexico, the second largest market for US exports. The EU has also struck important trading
deals with Central and Eastern Europe and is also negotiating agreements with
Mercosur and the Gulf Co-operation Council. Canada too has engaged in talks to
create special bilateral and regional arrangements with countries like Israel,
Chile, Singapore, EFTA members, and several states in Latin America. For its part the United States has only two
agreements in force: one with Canada and Mexico (NAFTA) and the other with
Israel. Mr Zoellick is intent on pursing a number of new bilateral and regional
free-trade initiatives like the Free-Trade Area of the Americas, but contends this
is also part of a broader strategy to advance global trade talks under the
auspices of the WTO. The danger here is
that both Europe and North America could become consumed with striking regional
deals which are often discriminatory and frequently foster trade diversion.
They must be sure therefore not to neglect the vital yet politically trying
multilateral process. A second best
solution is to foster inter-regional free-trade agreements among the emerging
trade blocs while watering down any potential discriminatory impact of regional
arrangements. But this is a rather
inefficient way to achieve the long-term goal of broader multilateral
liberalisation.
22. Europe confronts a number
of challenges constructing a more liberal trade orientation. While the Bush Administration will need to
build cross party coalitions in Congress to advance trade liberalisation,
Europe has to hammer out agreements among member states on negotiating mandates
for the European Commission. This
involves a complex set of trade-offs among member states and the interest
groups within those states. At the same
time, a shift in the balance of power is underway from the commission toward
member governments. When several
European governments repudiated the 1992 Blaire House agreements on textiles
and clothing that the commission had negotiated as part of the Uruguay Round
end game in 1992, this marked the beginning of a partial erosion of the
commission’s trading authority at the hands of the member states and the
European Council over which they preside.
The Nice Summit seemed to mark yet another reduction in commission
authority. Recent rulings by the European Court of Justice, moreover, have
given national governments ultimate responsibility for trade in services, and
this too could greatly complicate any new trade negotiations and possibly make
it even more difficult to settle outstanding trade disputes with the US and
Canada. This is all the more true because the service sector is perhaps the
most important component of OECD economies and knowledge itself represents its
most valuable assets. Insofar as member
governments do seize control of certain elements of trade policy, this could
give the United States an opportunity to negotiate bilaterally and pursue a
"divide and conquer" strategy.
The commission argues that this has already occurred in the open-skies
negotiations in which the US negotiated bilaterally with national governments
rather than with the commission itself.
23. Thus the evolving strategic
and institutional framework in which trade policy is articulated, combined with
the powerful role played by interest groups, and the fact that trade matters
themselves increasingly overlap domestic policy, all shape the context of trade
negotiations. These very same
conditions, moreover, have transformed ostensibly minor trans-Atlantic trade
disputes into major diplomatic challenges.
Add to this the need to accommodate the developing world in the
multilateral trade process, and one begins to gather a sense of the great
complexities involved both in advancing the multilateral negotiating process
and in containing bilateral trade disputes.
24. Canada’s
economic dependence on trade has reinforced its strong liberal orientation
which, in turn, has shaped its quest for a strong rules-based global framework
for trade. On the
one hand, its economy is tightly linked to that of the United States, and NAFTA
has certainly become the central plank in Canada’s overall trade posture.
Canada, like the United States is also playing a leading role in negotiations
to create a Free-Trade Area of the Americas and hosted a summit meeting of
hemispheric leaders to push forward that particular project. Yet, it also wants to diversify its trading
profile by developing markets for its high technology and service industries in
order to reduce the weight of primary goods that traditionally constituted the
greatest share of Canadian exports. In fact, Canada is exporting far more high
technology and service based products than in the past although resource based
products remain very important. Canada has also sought to lessen its high level
of dependence on trade with the United States and has looked to European
markets as an important means of achieving that end.
25. Like the United States,
Canada is a highly productive agricultural exporter, and on numerous
agricultural matters its position is very similar to that of the United States.
It obviously welcomes efforts to liberalise global agricultural markets, and
like the US, it has been a long-time critic of the EU's Common Agricultural
Policy. On the other hand, it shares
many concerns with the Europeans about certain aspects of American trade
policy, particularly in matters related to US reliance on extra-territorial
controls and anti-dumping policies.
Within the WTO process, Canada has supported inclusion of labour
standards, and competition policy in the negotiating mandate, and in a joint
statement with the EU, several years ago endorsed the notion of mutually
supportive trade and environment policies.
As
a rule, the Canadian government now conducts the equivalent of environmental
impact studies on any new trade initiatives.
26. Canada
is thus an important player in what must be seen as a trans-Atlantic trade
triangle rather than a mere duopoly. It
too holds a very high stake in a number of the trade disputes that are
typically characterised as US - European
spats.
27. One potentially useful
development in recent years has been the emergence of new collaborative
initiatives like bi-annual US-EU Summits and EU-Canada Summits both of which
had helped solidify the trade dialogue at a high political level. Canada and the US, of course enjoy the
collaborative machinery of NAFTA as well.
The Trans-Atlantic Economic Partnership is working on several protocols
to advance regulatory co-operation, while the Trans-Atlantic Business Dialogue
is engaging business leaders in a range of discussions on ways to improve
commercial ties. Recently
trans-Atlantic forums to engage trade unions, consumer and environmental groups
in discussions about trade matters have also broadened the dialogue. This is a highly welcome development, but it
also points to the mounting political complexity of managing trade policy.
28. One recent example suggests
how even well conceived efforts to build co-operative arrangements can run up
against traditional matters of sovereignty.
Recently the United States and the EU signed a landmark agreement to
streamline product safety regulations through mutual recognition of testing
facilities. The business communities on
both sides of the Atlantic invested a great deal of effort and resources to
adopt Mutual Recognition Agreements (MRA’s) that can dramatically reduce the
costs to exporters who otherwise have to navigate the regulatory minefields of
both North America and Europe. Mutual recognition dramatically reduces the
regulatory burden and presumably does so while preserving the intent of the
regulations. But it has proven enormously difficult to encourage co-operation
from national regulatory agencies that have traditionally not concerned
themselves with trade matters and, indeed, normally answer to very different
constituencies than do trade negotiators.
Thus OSHA, the US agency responsible in this area, has insisted on its
prerogative to certify test centres in Europe, while the EU says OSHA was to
transfer certification power over to national safety agencies in the 15 EU
member states. At the same time, some
consumer groups are highly wary of such efforts arguing that they effectively
turn over national regulatory power to foreign agencies. This matter has become yet another source of
current US - EU tension.
29. Despite some of the
outstanding problems described above, the Bush Administration, the government
of Canada and the EU agree that launching a new round of multilateral trade
talks is essential, despite several outstanding differences. There is a sense that failure to go forward
will result not only in the erosion of current agreements but could lead to a
roll back and give new life to protectionism.
For its part, the EU wants a broad mandate for the new round which would
include tariffs, intellect property rights, investment, technical barriers to
trade, competition policy, environment, services, agriculture and government
procurement. The EU needs negotiating
space to protect certain priority areas like agriculture. The idea is that a broad negotiating mandate
would make it possible to engage in trade-offs with its key trading partners.
30. The US, however, is seeking
a narrower agenda that would make it more difficult for Europe to protect
sacred cows like the Common Agricultural Policy. The Bush Administration has indicated that it wants to take
environment and labour off the agenda, and has resisted the inclusion of
competition policy and investment rules in the talks. Pascal Lamy has hinted at a possible compromise in recent weeks
and has asked member governments to drop demands to include talks on
competition policy, investment rules and environmental issues in the next
round. It is not clear if this will be
acceptable to the member governments, particularly those that feel that the US
is preparing for a frontal assault on the European agricultural system.
31. Of course, North America
and Europe alone cannot kick-start the WTO negotiating process, although their
combined leadership is an essential precondition. They will ultimately need to work with other OECD members as well
as developing countries. On this front,
Europe has recently offered tariff free access to the EU market for an array of
products from the least developed countries.
The Americans have not adopted this approach, and the future Secretary
General of the WTO recently complained that the United States needs to do more
to open its own markets to the least developed countries. Mr Supachai Panichpakdi also voiced his
disapproval of the number of anti-dumping cases the United States is pursuing
against developing countries. Finally
the US Administration position on labour and environmental standards could move
closer to that of the developing countries, Democrats in Congress may not grant
the president fast-track negotiating authority unless President Bush agrees to
include those matters in the talks.
32. Given the fragility of the
public support for free-trade policies, resolving a number of tough trans‑Atlantic
disputes will be essential. Since 1995
the United States has brought 24 complaints against the EU or member states,
while the EU has bought 17 complaints against the United States. The problem is that both sides have raised
the stakes to such an extent that resolution of outstanding disputes without
either side backing away from the various principals they have cited in these
cases could prove most difficult.
Moreover, the tendency to resort to the WTO’s dispute resolution
machinery has produced unsustainable legal solutions to what are inherently
political problems. Over reliance on
WTO panels to settle disputes on matters that mobilise public opinion has
served only to ratchet up trans-Atlantic tensions without moving the litigants
closer to ultimate resolution. This has
debilitated the WTO’s nascent dispute resolution apparatus and led many to
blame unjustifiably the WTO for the resulting tensions - something which has
further eroded public support both for that vital organisation and the very
concept of free-trade.
33. The recent dispute about
possible production subsidies of a new line of Airbus jumbo passenger planes
represents a potentially explosive trans-Atlantic trade dispute. So far, this case has not been thrown into
the WTO machinery, but should it end up there, both sides would be playing a
very dangerous game indeed.
34. The Boeing-Airbus rivalry,
in fact, has generated trade friction for decades, and the tension has largely
arisen out of matters pertaining to European government support for
Airbus. The office of USTR claims that
public subsidies have enabled Airbus to control 50-55% of the air carrier
market. At various times, the US
government has objected to European equity infusions, debt forgiveness, debt rollovers, marketing assistance as well
as favoured access to EU airports and air space for Airbus planes. Even the current hush kit controversy is
seen in the US as an indirect means to support the European aerospace
manufacturer. Needless to say, European
governments heartily reject these charges.
35. The emerging controversy
concerning production subsidies for the proposed Airbus A380 jumbo passenger
aircraft could dwarf these past disputes in scope and in potential political
fall-out. Indeed, Airbus is betting its
very future on the new aircraft, while Boeing, as its Chairman Phil Condit told
this Committee several years ago in Seattle, has taken a bet in the opposite
direction. To date, Airbus has won 50
orders for a plane it has yet to construct, while Boeing has yet to obtain one
order for its updated 747. The A380
will cost $11 billion to develop, and Airbus estimates that it will build
between 600 and 700 planes over the next 20 years while creating 225 thousand
direct and indirect jobs.
36. US government officials
charge that interested European governments intend to subsidise more than 33%
of production costs for the A380 and claim that this violates multilateral
agreements on subsidies. Beyond that they
also question the whole rational of subsidising Airbus, as it is hardly an
“infant” industry and, in fact, has established a powerful position in the
global marketplace. A successful
company of that weight, they argue, should not need government support to
launch a new product.
37. Under a 1992 bilateral
agreement, government support for aircraft programmes is limited to 33% of
development costs with a 3% limit on indirect support and loans that must be
repaid over a maximum of 17 years. That
agreement also calls for a Critical Project Appraisal (CPA) with a full
financial disclosure of loan terms. To
date, none of the consortium members have provided this appraisal, and this has
further raised US concerns about the project. For its part, Airbus is very
reluctant to open its books, claiming that to do so would grant its principal
competitor access to critical price related trade secrets.
38. In addition, a subsidies
code agreed to in a 1994 WTO agreement now prohibits the granting of financial
support on terms that do not provide a commercial rate of return. According to US officials, this agreement is
fully applicable to the aerospace sector.
Thus if Airbus offers government financing on terms more favourable than
the company could have negotiated in private capital markets, it has in essence
benefited from a prohibited subsidy under this subsidies code. The US Ambassador to the EU, Richard
Morningstar, recently noted that the Canadian company Bombadier recently lost a
very similar subsidies case, and he maintains that the likelihood is very
strong that Europe would lose a challenge in a WTO panel arbitration.
39. The Airbus consortium
members, EADS and BAe have also been in negotiations to pool their Airbus
interests to create a unified publicly traded company. US trade officials are concerned that such
an operation could result in debt forgiveness that would result in a de
facto subsidy for the new company.
On the other hand, a public company would be legally required to open
its books to public scrutiny, and this might help ease US concerns over
financial transparency.
40. For their part, commission
officials insist that government loans to underwrite development of the new
aircraft will be repaid with interest and thus do not technically constitute a
subsidy. The loans to Airbus made by
government financial agencies and banks could amount to roughly $3 billion and
cover as much as one third of the development costs of the A389. European officials are also quick to point
out that 40% of the jobs this project is likely to generate will be in the
United States if, as is possible, a US company is selected to manufacture the
engines. The US firm, BF Goodrich has
just landed a contract that could be worth $2 billion to supply the landing gear
system for the A380.
41. In recent trade disputes,
one reigning tactic has been that the best defence is to employ an aggressive
offence. Along those lines, European
officials have responded to American complaints about A380 financing by
charging that Boeing itself is subsidised through Department of Defense and
NASA research and development contracts, which, they argue, account for 5-10%
of the company’s Aerospace turnover. The EU has already indicated that if the
US were to launch legal action under the WTO, the commission would not hesitate
to propose a counter suit. According to EU spokesman, Gunnar Wiegand, “We would
question the indirect subsidisation of Boeing through preferential contacts
from its co-operation with NASA and the Department of Defence.”
42. The Americans counter that
Europe is providing Airbus consortium members the same kind of indirect support
through research and development contracts, and that the critical difference
lies in Europe’s direct support to the new project. Europe has yet to provide any concrete evidence of cross‑subsidisation,
and Ambassador Morningstar contends that consortium member BAe is one of DoD’s
largest customers, enjoys higher defence sales than Boeing and sells more
military goods to the US Department of Defence that it does to the to the UK.
43. The stakes in this
particular dispute are extraordinaryily high because Boeing is the single
largest US commercial exporter, and its 747 has dominated the long haul market
for years. That then President Clinton
appealed to Prime Minister Blair, President Chirac and European Commission
President Romano Prodi to make every effort to ensure that government loans to
the company are not effective subsidies suggests that the matter is already
being dealt with at the highest level of government. Because the companies involved are also critical defence market
players and given that defence R&D contracts are now central to the
dispute, this budding controversy has taken on an important security dimension
as well - an unsettling development for those already concerned with the recent
drift in Alliance politics.
44. What is also particularly
disheartening in all of this is that the problem has quickly escalated to a set
of charges and counter-charges over production financing in two companies which
Europe and the United States respectively identify as of vital commercial and
strategic interest. Each side appears
to be backing itself into a corner from which retreat could prove difficult.
There seems to be little appreciation for the shared interest in preserving
competition in this vital sector, fostering deeper trans-Atlantic integration
of Aerospace markets and production, and avoiding a major escalation in trade
tensions. It seems almost
counter-intuitive, but it is the case that the Americans need Airbus and the
Europeans need Boeing simply to prevent the emergence of a monopoly price
setter in the commercial aerospace market.
Although the United States could well have a case to bring to the WTO,
given the Bombardier precedent, it has yet to play that particularly draconian
card. Ambassador Morningstar has said, “We recognise that Airbus is a European
symbol and that Europe wants to support it.
Our main concern is that terms of that support comply with the EU’s international
obligations.” Boeing itself has been
somewhat cautious on this matter as it does not want to alienate its own
customer base; yet it has recently lost important contracts to Quantas and
Singapore Airlines, both of which have signed contracts to purchase the A380.
Thus this large American company’s own stakes in this particular case have
risen considerably, and they may turn up the heat to take this to litigation.
45. Ultimately both the United States and
Europe must endeavour to avoid a trade battle on this issue. A trade war involving vital companies which
play critical roles in the European and North American arms markets would
constitute a genuine blow to Alliance solidarity and would likely have serious
repercussions for defence co-operation.
Indeed, if an aerospace trade war erupts, it could well signal a genuine
schism in the Atlantic partnership.
46. A second potentially
explosive dispute - that over Foreign Sales Corporations (FSC) - unfortunately
has already fallen into the WTO machinery.
Although a panel has ruled against the United States in this case, the
political fall-out is not yet apparent because the Europeans so far have not
applied sanctions. Undoubtedly the
Europeans hold a powerful card here, but the game is clearly not yet over. The United States has proposed a new tax
system for export earnings, but the indications are that the Europeans will not
find these acceptable. Moreover, the
United States is now threatening to challenge a number of national tax policies
in Europe, which, it argues constitute hidden subsidies for Europe’s exporting
companies.
47. The economic scope of this
case is wide ranging. According to
Brussels, US goods worth more that $4 billion are exported exclusively as
result of the subsidies under FSC. Among
the principal beneficiaries are GE, Boeing, Motorola and Caterpillar. American authorities were shocked by the
EU’s challenge to FSC because that particular tax regime had been in place for
many years and had never been a source of official complaint. There were strong suspicions that then EC
Trade Commissioner, Sir Leon Brittan, had launched the case after the EU
had lost the banana and beef hormone cases before WTO panels and was casting
about for a powerful bargaining chit to “one up” the Americans. He certainly found one in the FSC.
48. The Europeans argue that to
date congressional proposals hammered out in consultation with the Clinton
Administration to create an alternative export earning tax structure are still
export contingent and continue to require US content of 50% - both of which,
they maintain, are incompatible with WTO rules. US trade officials disagree on both counts and claim that any
advantages accruing to US companies as a result of ESC are roughly parallel to
similar advantages enjoyed by European companies. Like the Airbus case, a “tit for tat” pattern has begun to
emerge. American trade officials have
accordingly identified a number of export earning tax relief schemes in EU
member states that they contend are not WTO compliant.
49. The FSC matter has thus
evolved into a highly complex fiscal and legal case in which Congress has been
asked to play a leading role by adopting WTO compliant legislation. So far, the EU has not demanded compensation
nor has it retaliated, both of which it is entitled to do under WTO rules. The EU, in fact, agreed not to begin
imposing sanctions on $4 billion in US exports until Nov 2000 in order to grant
Congress more time to craft a replacement bill. The EU has requested a new dispute settlement panel to rule on
the US proposal, and thus no sanctions against US exports are likely until
mid-2001.
50. Such restraint is essential to resolving
this matter. Retaliation at this
juncture would constitute a major rupture in the trade partnership and could
threaten the prospects for a new round of multilateral talks.
51. There are numerous other
trans-Atlantic disputes complicating the North American-EU relationship, many
of which were outlined in last year's full Committee report by Mr Paul
Helminger. There is not sufficient
space here to detail these complex cases, but the brief updates below give a
sense of the range and types of disputes that are now plaguing the
relationship.
52. In April the long-running
US-EU dispute on bananas may have finally ended with a compromise. Under the terms of the agreement, which is
subject to approval by the EU, the European Parliament and the WTO, the United
States would drop the penalty tariffs worth $191 million it had imposed with
WTO approval on a range of European goods.
Europe, in turn, would begin to ease restriction on US companies
importing bananas from Latin America.
Over the long-term, the market will be opened even further. The EU will
maintain a quota system until 2006, which will favour producers in former
European colonies, while US producers will gain marginally greater access at
the lowest tariff rate. The import quota system will be abolished in 2006, and
all banana imports will then come under the same tariff schedule. The agreement
thus provides what has been called “fair access” to the European market for
bananas of all origins, while protecting producers in Africa, the Pacific and
the Caribbean. If this agreement
survives, (and it is already being challenged in some circles), it will remove
a major irritant from the trans-Atlantic trade relationship.
53. Agriculture, of course, is
rife with other tough issues dividing North America and Europe including the
matter of genetically modified food, the use of hormones in US and Canadian
beef production, and American ambitions to ensure that the next round of
multilateral trade talks advances the liberalisation of agricultural policy and
trade. A nine-year peace
clause has been in place since the Uruguay Round, under which the US and the EU
agreed not to challenge each other’s domestic subsidies and defined what could
and could not be done in export markets.
That clause runs out in 2003, and both sides are already positioning
themselves for the coming battle over farm support and trade.
54. The current crisis in the
European agricultural system could have an important impact on these
disputes. Both the mad-cow crisis and
now the foot and mouth epidemic have raised concerns in Europe about highly
intensive agricultural production techniques while reinforcing hostile public
attitudes towards genetically engineered food, although neither problem can be
technically linked to the latter. While
one can partly impute the persuasive use of intensive farming techniques to CAP
production subsidies - an old source of Canadian and American complaint - the
crisis is also leading some consumer groups to question the wisdom of a truly
unfettered global agricultural market.
Both Canada and the United States are strong proponents of global
agriculture markets and so the political fall-out from these difficulties could
further complicate what is already one of the more difficult portfolios for EU
and North American trade negotiators.
It should also be mentioned that the recent outbreak of foot and mouth
disease has resulted in a US and Canadian ban on EU meat and livestock imports
which could cost the EU $372 million a year in lost export revenue - a decision
that is already stoking new trans-Atlantic tension.
55. Trade in steel also
continues to be very sensitive in both Europe and North America, and has become
inextricably entwined with controversial anti-dumping practices. There is talk
of imposing an industry-wide safeguard action to protect the US steel industry
from European imports, and of course this would result in an immediate
challenge from Europe. The controversy
over US Senator Byrd’s recent amendment to use proceeds from anti-dumping cases
to subsidise US steel companies that had originally brought the case to US
authorities has further stoked tension.
European Union officials strongly object to the proposal and suggest
that it not only fails to comply with WTO rules, but that it also gives steel
firms every incentive to file anti-dumping cases. More broadly, the European Union has continually complained about
US anti-dumping procedures covered in the “Section 301” law. EU officials argue that these procedures
lead to global trade matters being resolved through forced settlements based on
unilateral determination of unfairness, unilateral timetables, and the threat
of unilateral sanctions in the absence of agreement. From the US perspective, however, these are all tools that simply
help open markets.
56. Another area of potential
conflict between the EU and North America involves a key foreign policy
priority for the European Union enlargement.
The EU has established a series of preferential trading relations with
associate countries in Central and Eastern Europe and the United States is
concerned that these agreements may lead to a rising degree of trade
diversion. Once these countries join
the Union and adopt the EU's Common External Tariff (CET), this could result in
new members’ suddenly switching out of American manufactured goods simply because
the adoption of the EU’s common tariffs would effectively price certain US
goods out of new member markets. This
has happened in past enlargements, and is thus considered a potential downside
of EU enlargement among American officials.
57. Attention must also be paid
to ways in which electronic commerce and the Internet could shape trade
relations. This is unchartered
territory, and there are numerous matters like regulatory jurisdiction and
taxation that could lead to contrasting North American and European positions.
In 1998, WTO members agreed to a temporary moratorium on customs duties for all
products delivered over the Internet until a permanent solution can be
found. Problems have recently arisen in
the talks from the lack of agreement on whether ‘electronic” products should be
defined as goods or services. Goods
that are delivered electronically have been generally seen as services, while
products like books, which are ordered electronically but delivered physically,
would appear to be subject to WTO rules on trade in goods. Broadly speaking, the United States has
sought to create as liberal a framework as possible for e-commerce – one which
is characterised by low or no customs duties.
Several European governments have been more hesitant and sought to limit
the initial moratorium. European
officials have argued that digitalised products should be covered under rules
governing services trade rather than rules on goods trade, which tend to be
more liberal.
58. In these talks, the EU has
focused on consumer protection, contacts, privacy and content while the US
argues that these matters are best dealt with in bodies like the OECD. The WTO
has dealt with these issues in several different committees, and there has been
a suggested that the WTO’s General Council, its leading body, should deal with
the entire issue in order to treat the matter as broadly as possible. This is an ongoing debate and obviously one
of great potential importance. WTO
members would be wise to grant this new industry a very liberal trading
structure both because to do so makes economic sense and because of the near
futility of imposing a heavy regulatory burden on a sector which is yet to
define itself.
59. In January 2001, OECD
members reached a landmark agreement defining how states should tax business conducted
through internet servers and websites.
The agreement means that doing business through a website would not
leave a company liable to taxation in the country from which the website had
been accessed. The exemption from tax
liability applies even if the company’s website is hosted by a third party
service provider. The OECD committee
ruled that a company should generally pay tax in countries hosting servers
through which business is routed unless the server has no other function than
to act as a conduit for information that will be processed elsewhere. Further
talks are needed, however, to sketch in the proposal’s details. Nevertheless this is an excellent example of
managing a potential trade conflict before it explodes in the political
arena.
60. One key development in the
multilateral trading system has been the WTO TRIPS Agreement which established
a framework of rules on minimum levels of protection for intellectual property
rights and the means to enforce those rules. It divides intellectual property
protection into two categories: industrial property like patents, trade marks
and industrial designs; and copyrights which include literary and artistic
works like plays films, literature, musical scores and broadcasting. The United States has a number of specific
complaints stemming from what it claims is a lack of compliance with this
agreement. US complaints include Danish
photocopying laws, audio-visual piracy in Greece, national content restrictions
in Italy, and soft-war e-piracy in Spain. Most of these complaints are highly
specific and do not suggest systemic differences between the US and Europe on
these matters. But there is clearly
room for improved rules harmonisation to lower barriers to trade and prevent
copyright or patent violations.
61. With global markets slowing
in North America and Asia in particular, it is more vital than ever to
reinforce the North American-European trading relationship. The rise of protectionism at such a
vulnerable moment would deal a serious blow to economic confidence. It could accelerate recessionary tendencies
currently in evidence and hasten the creation of potentially hostile regional
trading blocks at the expense of a far more economically fruitful multilateral
order. Should North American and Europe
fail to stem any drift in this direction, it could also raise serious questions
about the solidity of the Alliance itself.
62. North America and Europe need to begin to
rebuild public consensus in support of a multilateral trade order. This requires a more realistic, honest and
politically courageous public dialogue about trade which clarifies not only the
very real welfare benefits global liberalisation brings but also the costs to
those working in certain import competing sectors. This process also requires the development of public policies
that facilitate transition away from declining industries and re-trains workers
for more competitive and productive employment. Indeed, trade must be seen as
an opportunity rather than a threat, otherwise no government will be able to
advance a liberal agenda conducive to trans-Atlantic and global economic
integration. Failure on this front
could well result in a wave of protectionism that might choke-off future
economic growth and poison transatlantic relations.
63. The current focus on
constructing regional trade blocks is drawing political attention away from a
more economically bountiful multilateral solution that will bring benefits not
only to Alliance countries but also to the developing world. Here again, only European and North American
joint leadership will jump-start a new round of multilateral negotiations.
Regional arrangements are a second best option, although they can be helpful if
they don’t generate a high degree of trade diversion and if they pave the way
to broader multilateral liberalisation.
64. Both the United States and
Europe must step away from their increasing reliance on WTO dispute panels to
solve bilateral trade disputes, some of which are so politically leveraged that
panel decisions are simply ignored.
This is dramatically weakening these fledgling bodies that, when used
judiciously, undoubtedly have an important technical function to play. The problem is that the WTO is being asked
to resolve fundamentally political matters that elude mere technical
solutions. It is thus increasingly
burdened with disputes that ultimately it cannot resolve without the political
will of the litigants to come to terms.
This pattern is undermining the WTO’s legitimacy and weakening the case
for a global set of trade rules. The
business communities in both the United States and Europe have made it clear
that the United States and Europe should exercise restraint in using dispute
panels and should find a way to make deals.
Will the WTO ever resolve fundamental difference stemming from divergent
foreign policy or consumer driven domestic policy goals? Probably not, and thus new strategies to
achieve accommodation are essential.
65. What can be done to
approach these matters in a less litigious fashion? First of all political bargains are needed to end bilious
disputes which leave great damage in their wake. While high principal and pure
theory make for good religious and economic texts, they sometimes grossly
underestimate political realities. It seems that both sides need to refine
their respective political antennae and work towards solutions that make
political sense. In the old days, that was called good diplomacy. More effort
is also needed to identify potential trade problems before they explode
politically. The EU and the US have set up a disputes-settlement trigger to
pre-empt the kinds of battles like that over bananas that have recently plagued
the relationship; but this mechanism has not yet functioned according to plan.
66. It is unlikely that
multilateral talks will get underway or be successfully concluded if Western
governments continue to insist that environmental and labour matters should
constitute core areas for multilateral trade talks. Resistance to this is simply too strong in the developing
world. Particularly in the area of
labour, Western concerns seem like a disingenuous ploy to strip developing
countries of their most fundamental comparative advantage - relatively low
labour wages. A real dialogue on these
issues must begin among North America, the EU, the rest of the OECD countries
and the developing countries. It is
disappointing that an agreement cannot be achieved at this juncture on a
major challenge like global warming; but if this particular failure were to
spread to the trade realm because the two were somehow linked, the damage would
only be multiplied. Clearly environment
and labour matters are vital and they merit close attention. Both sides also stand to gain from engaging
in constructive dialogue with NGO’s, but in the end, governments will make the
decisions based on their electoral mandates.
67. It is also true that both
the environment and labour would suffer if the trading system were submitted to
renewed waves of protectionism. If
there is no agreement to include these matters on the agenda for the next round
of multilateral talks, than a more limited trade platform should be constructed
to assure some degree of progress on global trade. Moreover, trade policy can be an extraordinarily blunt instrument
for dealing with non-trade matters like environmental standards. Using the WTO
and a panoply of tariffs and quotas to condition other non-trade policies can
have very adverse collateral effects.
Anything a tariff can do, some other instrument of economic policy can
probably do better. Forging
international environmental and labour standards is probably best left up to
the International Labour Organisation and the United Nations Environment
Programme, and if the international community is indeed serious about these
matters, it should give these institutions the clout to have a real
impact. The Canadian government’s
effort to encourage deeper collaboration among these institutions is probably
the best approach as it allows each institution to take the lead in areas where
it has the greatest expertise.
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