USA-EU: FUTURE OF TRANSATLANTIC ECONOMIC RELATIONS

– September 3, 2006

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The following is an English translation of an article by MACIEJ JARECKI, originally featured at the Portal of Foreign Affairs – an on-line magazine sponsored by the  Institute of Foreign Affairs in Warsaw, Poland. Its re-publication is made possible through to the courtesy of the copyright holder.

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The United States and the European Union are, with Japan, the most important and influential players in the global economy. Cooperation between the transatlantic partners has changed over time, becoming more regulated. Today we find institutional cooperation between the U.S. and the EU, but also serious conflicts as well.

The USA and the EU are each others’ biggest trade partners, accounting for 20% of their respective exports. But the patterns of trade have changed over the last sixty years. The EU, formerly a net importer of American products, is now a net exporter to the American market. In 2003, the EU’s exports to the U.S. came to €226 billion ($290 billion), 25.8% of the total EU exports that year. In that same year, American exports to the EU reached €157.2 billion ($201 billion), 16.5% of all US exports that year.

Overall U.S.-EU trade relations have remained stable, although the amount of trade has increased and the EU now shows a positive trade balance. There have been no major crises between the transatlantic partners. Similar stability is seen in the amount of Foreign Direct Investments (FDI). Between 1990 and 2000, European investments in the U.S. amounted to between 56-65% of all FDI in the United States at the time, while American investments came to 24-27% of all FDI in the EU, including investments among EU members. In 1998-2001 annual investments by European companies in the U.S. averaged €162.663 million ($208.000 million) a year, while investments by American businesses in the EU averaged €72.041 million ($92.000 million) annually.

Over time the relationship between the U.S. and the EU has changed. At one time America clearly dominated. Today the economic potential of the U.S. and EU are comparable and there is competition between the two.

The events that transformed trade relations between the U.S. and the EU occurred in the 90’s. In 1990 the Transatlantic Declaration was adopted, which institutionalized trade relations. The Declaration initiated a system of regular political and economic dialogue at various bureaucratic levels culminating in regular U.S.-EU summit meetings. The summits were to be held twice a year with meetings of the President of the European Commission and the President of the European Council with the President of the United States.

On December 3, 1995 the New Transatlantic Agenda (NTA) was adopted after six months of negotiations. The NTA established four main areas of cooperation:

(1) Promotion of stability and welfare in Europe.

(2) Combating terrorism, international crime, drug-trafficking and related offenses.

(3) The expansion of global trade and the strengthening of bilateral economic relations.

(4) Increased cooperation between businessmen, scientists and other professional groups.

Included in the NTA is the Joint EU-U.S. Action Plan, containing over 150 specific agreements to implement the NTA.

In May 1998, a joint statement on Transatlantic Economic Partnership (TEP) was adopted, calling for increased efforts to reduce or eliminate trade barriers, including any obstacles hampering the flow of foreign investments. The TEP established a Steering Group and an Early Warning Mechanism to prevent economic crises between the U.S. and the EU. The TEP incorporated the Joint EU-U.S. Action Plan. This mandated the reduction of barriers and tariffs on the flow of currency, the reduction of technical obstacles to trade, facilitation of access for American and European businesses to open markets in the U.S. and the EU, and began cooperation in protecting copyrights and intellectual property.

The bilateral agreements of the Nineties became less important once the World Trade Organization was organized as the main forum for economic debate. The WTO was established in Marrakech, in 1995, during the Uruguay Round of General Agreement on Tariffs and Trade (GATT) negotiations. The goals of the WTO were: liberalization of trade, promotion of policies supporting trade, resolution of trade disputes and the protection of copyrights and intellectual property.

Working through the WTO, the U.S. and the EU worked together to reduce world tariffs on industrial goods. The principal exporters of industrial goods are the best-developed and most prosperous countries, including the United States and the European Union. The biggest importers of industrial goods are developing states. Export subsidies for industrial goods were also limited. This favored countries where exporters can already compete in global markets without government support, again the U.S. and the EU.

Close transatlantic cooperation has also reduced cash flow barriers and obstacles to foreign direct investments. It is in the best interest of the U.S. and the EU to freely invest in developing countries, which themselves need foreign investments to advance their development.

But in areas of serious competition between the U.S. and the EU, easy compromises are not possible. The most divisive issue between the transatlantic partners is the trade in agriculture products. Negotiations on this problem were begun at the WTO during the Seattle Round of trade talks in 1999, and continued through the Doha (2001), Cancun (2003) and Hong Kong (2005) Rounds. Trade in industrial goods, farm products and export subsidies have divided the U.S. and the EU as far back as 1957.

The first break in bilateral relations was the U.S. protest against the Treaties of Rome (1957). The U.S. claimed that the Treaties violated Article XXIV of the GATT. The Americans protested against the manner in which import tariffs were set, and the mechanisms of the Common Agriculture Policy (CAP), which allowed for the creation of tariffs and subsidies. The United States eventually withdrew its protest and instead focused on increasing its trade with the European Economic Community (EEC). The U.S. decision led to the foundation of Organization for Economic Co-operation and Development (OECD).

The Common Agriculture Policy sparked a dispute over farm products. The CAP decreased U.S. farm exports to Europe, and increased European food production to satisfy internal demand and produce surplus for export purposes, including exports to the American market. In order to protect its market, the EEC created a number of specific mechanisms, including subsidies on feed for its poultry market. This led to a the “Chicken War” with the U.S. EEC tariffs reduced decrease of poultry import from the U.S. by nearly half. When the EEC’s member states refused to negotiate on the issue, the United States retaliated by boosting tariffs under Art. XXIII of the GATT on such European products as brandy and light trucks. Eventually negotiations at the GATT ended the conflict. Nevertheless, the “Chicken War” weakened the U.S. position as the exporter of food into EEC’s market.

Other conflicts over the agricultural subsidies and American access to the EEC’s market took place in the Seventies during the Tokyo Round of the GATT. In 1973, after EEC was joined by three new members, the Code on Subsidies and Countervailing Measures was adopted, which provisions were very favorable to the European Community. The Code obliged the U.S. and EEC to limit subsidies for exports of food and agricultural products. It laid out restrictions on the U.S. but did not enumerate the subsidies forbidden to the EEC. In the Seventies, competition between the U.S. and the EU was not as fierce as it is now, and the United States made a good faith attempt to improve political relations with the EEC. In fact, the adoption of the Code was not harmful to the American economy. Later, negotiations over the liberalization of trade in food and agricultural products, as well as the general liberalization of trade, took place at the GATT and, after 1995, the WTO.

The WTO witnessed a dispute over agriculture during the Seattle Round of negotiations in 1999. Delegates sought a compromise on the trade in industrial goods, food, and liberalization of the flow of services. During the Doha Round in 2001, a joint plan to resolve these disputes was adopted. Final negotiations on the issue of industrial goods was scheduled for the first half of 2006, with a final overall settlement planned for the mid-December, 2005, in Hong Kong.  The Doha Round continued in Cancun in 2003, where the joint proposal on agriculture was adopted by the U.S. and the EU.

But trade liberalization has not been achieved. In late 2005, the U.S. and EU could not reach an agreement, which was to have been concluded during the Hong Kong Round. The compromise failed when the U.S. and EU stiffened their positions. At the same time the developing countries rallied around India and Brazil to form the so called G-20 group.

The European Union has requested the free export of industrial products into the developing markets. On the other hand, developing countries have requested the reduction of agriculture subsidies, and easier access to the food markets in rich countries. The developing countries have also requested that the United States stopped overwhelming their markets with export of cheap food as it has been harming their internal agriculture production.

The European Union has been criticized by the U.S. and the G-20 for its unwillingness to compromise. The EU has also been criticized by France, the biggest recipient of subsidies under the Common Agriculture Policy. France warned that it would veto any compromise harmful to its national interests. The situation has not improved even after the Commissioner of the European Union for Trade, Peter Mandelson, proposed reducing tariffs by 47%. The proposal was treated with skepticism by the WTO partners and intensified criticism within the EU. As a result, one month before the Hong Kong Round, set for December 13-18, 2005, no party expected to see a compromise on the trade of industrial and agricultural products.

Such pessimism was unjustified. In Hong Kong, a EU proposal to abolish export subsidies by 2013 was accepted. Agreement was also reached for the gradual reduction of internal supports for international trade, though no deadlines were set. On the subject of access to agricultural markets, the parties merely agreed that the reduction of tariffs should take place in four steps and that the biggest reduction should take place in the countries which had the highest tariffs. The Swiss system, where tariffs were to be reduced in proportion to the total amount of the tariff, was adopted. Thus the higher the tariff the bigger the reduction applied. Unfortunately no dates were set on that issue.

The conflict over the export subsidies was not resolved in Hong Kong. It is likely that along with clashes between American Boeing and European Airbus, the dispute over export subsidies will be the main issue dividing the transatlantic partners in the near future.

Transatlantic relations are entering a new stage, which will be marked by competition between the U.S. and EU and a lessening of economic cooperation between the two. The history of U.S.-EU trade relations shows that the closer both economies are in economic power the more conflicts and disputes appear and the more difficult they are to be resolved.

Economic cooperation between the U.S. and the EU will be less efficient as long as competition between the two grows worse. For this reason, ambitious plans to establish a Transatlantic Free Trade Area (TRAFTA) seem unlikely to be realized. This is also due to the fact that the center of global economy is shifting toward the Pacific region. The U.S. and the EU will find themselves under growing pressure from developing countries like China, India and Brazil, whose economies may eventually overtake the economies of the present world leaders.

Maciej Jarecki

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The author of the article is a candidate for a Masters in International Relations at Wroclaw University, Poland, a second year JD candidate at the Wroclaw University’s School of Law, and an associate at the Portal of Foreign Affairs.

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