Emergency Committee For American Trade - Publications

THE EUROPEAN UNION

Despite the longstanding and deep economic, political and strategic linkages between the United States and the European Union (EU) and their common interests on many trade and investment issues, U.S.-EU relations have been fraught with conflicts through much of the 1990s as several high-profile, politically-sensitive trade disputes have overshadowed these deeper alliances. These trade disputes have involved relatively little of the total trade and investment between the United States and EU, which exceeded one trillion dollars annually in 2001. Yet, these disputes have significantly frustrated improved relations and represent a serious impediment to further trade and investment liberalization in the World Trade Organization (WTO). ECAT strongly supports recent efforts by the United States and the EU to strengthen their economic relationship, address ongoing trade disputes that have undermined the historically close U.S.-EU relationship, and move forward with mutually-supportive trade initiatives in 2002.

U.S. goods exports to the EU have increased by over 40 since 1990, from $103 billion in 1990 to $147 billion in 2001. Total U.S. trade with the EU increased by 82 percent during the same period, from $201 billion in 1990 to $366 billion in 2001.

Trade disputes make up less than four percent of that figure. U.S.-EU trade supports more than seven million jobs on both sides of the Atlantic, generating a billion U.S. dollars in trade value per day. Bilateral foreign direct investment supports approximately three million jobs alone.

EU Integration Efforts

The EU is already the world's largest market, and it is expected to expand through its continued enlargement negotiations with Eastern Europe. The 15 members of the EU are: Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Netherlands, Portugal, Spain, Sweden and the United Kingdom. In 2001, the EU continued the process of deepening integration among member states, broadening its borders to Eastern Europe, and developing deeper trade relations with other countries through trade preferences and free trade agreements.

On January 1, 2002, Spain assumed the rotating presidency of the EU through June 30, 2002. Denmark will assume the presidency at the beginning of July.

Enlargement of the European Union

In March 1998, the EU formally began the accession process for enlargement. The EU is currently negotiating with twelve applicants: Bulgaria, Cyprus, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Romania, Slovakia and Slovenia. The EU had concluded so-called Europe Agreements with each of these countries earlier in the 1990s, except Malta and Cyprus with which it has Association Agreements. The Europe Agreements cover trade and non-trade issues and seek to work towards the establishment of free-trade areas between the EU and the applicant countries. The Association Agreements with Malta and Cyprus cover similar areas, but do not address political integration issues. The EU is also considering the application of Turkey, with which the EU already has a customs union, but Turkey is still not viewed as ready to begin negotiations, largely over political criteria.

In the November 2000 reports on the progress made on each accession negotiation, the EU found that substantial progress had been made on the negotiations in 2000 and on achieving the criteria laid out in 1993 at the Copenhagen European Council. Two countries, Cyprus and Malta, were found to fulfill the two economic criteria for membership ("the existence of a functioning market economy as well as the capacity to cope with competitive pressure and market forces within the Union"). Five countries, Poland, Hungary, Estonia, the Czech Republic, and Slovenia, were also classified as market economies and found likely to be able to cope with competition "in the near term." Latvia, Lithuania and the Slovak Republic were classified as market economies and found likely to handle competition "in the medium term." Bulgaria was found to have made some progress, but neither it nor Romania has met either criteria.

Continued progress was made in 2001 on company law, employment, environment, foreign policy, the EU internal market, competition policy, transport policy, energy, taxation, customs union and some agricultural issues. Remaining issues for the negotiations include agricultural issues, regional policy, financial and budgetary policy, and institutions. In its November 2001 assessment, the EU found that negotiations were on track with ten of the thirteen countries - Poland, Hungary, Slovenia, Czech Republic, Slovakia, Malta, Cyprus, Estonia, Latvia, and Lithuania. It is hoped that negotiations with these candidate countries that fulfill the criteria for membership will conclude by the end of 2002. Progress was also made with respect to Bulgaria and Romania, but these countries do not have functioning market-based economies according to the EU assessment. Turkey's accession partnership was adopted in March 2001, which sets forth areas where political and economic reform are required. In its annual assessment report, the EU noted that Turkey had made significant political and economic reform.

The Treaty of Nice was agreed to at the December 2000 European Council meeting in Nice. This Treaty will amend the Treaty on European Union, the Treaties establishing the European Communities and the Protocol on Enlargement of the European Union. The amendments, which will come into force when the Treaty of Nice has been ratified by all the EU Member States, address changes to EU institutions, voting procedures, and related matters in an enlarged EU. Three member states (Denmark, Luxembourg and France) have ratified the treaty (Denmark in June, Luxembourg in September, France in October). Ireland will be holding a second referendum in 2002.

European Monetary Union and the Euro

Pursuant to the terms of the Maastricht Treaty of 1992, 11 of the 15 EU member countries participating in the European Monetary Union (EMU) adopted a single currency, the euro, on January 1, 2000: Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, the Netherlands, Portugal, and Spain. On January 1, 2001, Greece joined the so-called Euro Zone. On January 1, 2002, Euro currency replaced cash transactions in national currencies. U.S. companies should benefit from the creation of the euro, as it is expected to reduce currency volatility and the need for inter-European currency exchange, thereby lowering transaction costs and facilitating cross-border trade. It should also enable U.S. firms to expand their business in the EU by allowing them to price their products on a euro-basis, rather than on a country-by-country currency basis.

Other Preferential Trade Arrangements

The EU also maintains and continues to negotiate preferential trade arrangements. Its primary agreements are:

the European Economic Area (with Norway, Iceland and Liechtenstein);
the Association Agreements with the countries of central and eastern Europe;
the agreements with the Mediterranean countries;
the Lomé Conventions with the ACP (African, Caribbean and Pacific) countries until December 31, 2007 by which time the EU hopes to conclude new FTA agreements.

The EU currently has 29 regional or bilateral free trade agreements and special customs agreements. It is currently negotiating a free trade agreement with Chile, which it hopes to conclude by May 2002. The EU is also proceeding with negotiations with MERCOSUR, several Gulf States, and other countries.

U.S.-EU Trade Relations

In recent years, U.S.-EU trade relations have focused to a large degree on several high-profile disputes that continue to cloud the relationship. These disputes have overshadowed the attempts at greater cooperation as part of the Transatlantic Economic Partnership and the efforts of the Transatlantic Business Dialogue.

Agricultural Issues

Agricultural issues remain a major source of contention between the United States and EU. The agricultural issues involve many of the issues already discussed in Sections 2 and 3: genetically-modified organisms, the EU's failure to implement the WTO's ruling in the beef-hormone dispute, and the EU's reluctance to eliminate export subsidies as part of new WTO negotiations.

In June 2001, the EU and United States did, however, reach agreement on their longstanding dispute over the EU's banana import regime, which the WTO Appellate Body found to violate WTO rules. The United States lifted its $191 million in sanctions on EU imports in return for the EU coming into compliance with the WTO decisions by January 1, 2006, when the EU will replace quotas with tariffs. The WTO approved a waiver of this program in November 2001. In January 2002, the EU reported that it had adopted new regulations as required to open part of its banana quota to Latin American suppliers.

WTO Negotiations and Dispute Settlement Cases

Differences on negotiating objectives between the United States and the EU were one of the reasons behind the failure of the WTO to launch negotiations at the Seattle WTO Ministerial Conference. To prevent a similar result, EU Trade Commissioner Pascal Lamy and USTR Ambassador Robert Zoellick worked actively to establish common ground on the negotiations throughout 2001. In particular, the United States agreed not to oppose the EU push for negotiations on investment and competition policy, although they are not issues that the United States was independently seeking to be addressed in the WTO. While deep differences remained on the EU's unwillingness to agree to the elimination of agricultural export subsidies as part of the objectives of the agricultural negotiations as sought by the United States and many other WTO member countries, compromise text was developed committing countries to "comprehensive negotiations aimed at: substantial improvements in market access; reductions of, with a view to phasing out, all forms of export subsidies; and substantial reductions in trade-distorting domestic support." These and other efforts to narrow differences between the U.S. and EU negotiating positions were critical in paving the way for negotiations to be launched in Doha.

With regard to dispute settlement, the United States and the EU have widely resorted to the WTO's system. In addition to the beef-hormone, antidumping, countervailing duty, and safeguard cases discussed in Section 2 and the bananas case discussed above, the United States and EU are involved in the following primary disputes:

EU Challenge to U.S. Foreign Sales Corporation Rules

In April 2000, the WTO Appellate Body found that the Foreign Sales Corporation (FSC) provisions of U.S. law constituted an illegal export subsidy and agreed with the panel's decision that the United States had until October 2000 to bring its law into compliance. Legislation was enacted in November 2000, which repealed the FSC provisions and established rules for the treatment of extraterritorial income. The history of the FSC provisions and the new legislation are discussed in detail in Section 12.

In November 2000, the EU challenged the WTO-consistency of the FSC Repeal legislation and threatened sanctions worth $4.043 billion, on which the United States has requested arbitration. The EU also issued a so-called "indicative" list of selected chapters of the U.S. tariff schedule that would be subject to retaliation, although no individual products were identified.

In a report circulated in August 2001, the WTO panel reviewing the case found that the United States had not come into compliance with earlier WTO rulings. The Appellate Body reached a similar conclusion in January 2002. USTR Ambassador Zoellick has indicated that the United States would work to comply with the Appellate Body decision in a manner that assures a level playing field. The EU requested arbitration of the amount of retaliation allowed. The U.S. has argued that the amount of trade damages equals $956 million. The arbitrator has indicated that a decision will not be reached on this matter before the end of April 2002. A more detailed discussion of the WTO's findings is provided in Section 12.

EU Challenge to "Carousel" Legislation

On June 5, 2000, the EU requested consultations on the so-called "carousel" provision added to section 306 of the Trade Act of 1974 by the Trade and Development Act of 2000. This provision, authored by Senator DeWine (R-OH), aims to increase pressure on the EU to bring its banana and beef-import regimes into compliance with WTO rulings. The provision amends section 301 of the Trade Act of 1974 to require USTR to review every six months the lists of products subject to retaliatory tariffs in these cases, and revise them to add new products in an effort to increase the leverage on the country or countries subject to the retaliation. This provision provides that the retaliation lists need not be revised if the industry that initiated the trade case agrees that revision is unnecessary. (Prior to the enactment of this provision, USTR had the authority to revise retaliation lists, but it was not required to do so.)

The EU unsuccessfully sought to prohibit this practice as part of the WTO's review of the Dispute Settlement Understanding during the Seattle Ministerial, arguing that it represents an unreasonable burden on importers, who will not know whether the products that they import will be subject to prohibitive tariffs. U.S.-EU consultations were held on July 5, 2000. As of early March 2002, the United States has not rotated the retaliation list in the ongoing beef-hormone dispute. The EU has not requested a panel in this case. The EU has sought a new rule as part of the discussions on reforming the Dispute Settlement Understanding to prevent this practice.

EU Challenge to Section 110(5) of the Copyright Act

On January 26, 1999, the EU requested consultations on a 1998 amendment to the Copyright Act, which permits certain retail establishments to play radio music without paying royalties to songwriters or music publishers. In a report adopted on July 27, 2000, a WTO panel found that this provision violated U.S. WTO commitments and the United States informed the DSB that it would comply with the ruling. An arbitration panel determined that the United States had 12 months, until July 27, 2001, to implement this provision. Congress has not yet acted upon legislation to modify this provision. In November 2001, arbitrators determined that the value of benefits lost to the EU equaled $1.1 million.

In July 2001, the WTO extended the deadline for compliance until the end of the 1st session of the 107th Congress or December 31, 2001. The United States was unable to meet that deadline. The United States and EU are seeking to reach an accord on compensation until the United States comes into compliance.

EU Challenge to Section 211 of the Omnibus Appropriations Act

On July 8, 1999, the EU requested consultations on section 211 of the Omnibus Appropriations Act of 1999 (the so-called Cuba trademark provision), which, the EU alleges, prevents the registration or enforcement of rights of certain trademarks confiscated under Cuban law. In its August 2001 decision, the WTO panel established to hear this case ruled largely in favor of the United States, except for a finding that the measure was inconsistent with Article 42 of the TRIPS Agreement because it limits effective access to and availability of civil judicial procedures. The EU appealed the decision to the Appellate Body, which reversed the panel's one finding of inconsistency and agreed with the panel that WTO members are entitled to determine trademark and trade name ownership criteria. The Appellate Body found, however, that the measure was inconsistent with the national treatment and most-favored nation obligations under the TRIPS Agreement and the Paris Convention for the Protection of Industrial Property.

Other EU Challenges to U.S. Law and Decisions

The EU has also requested consultations in the following matters:

Section 337 of the Tariff Act of 1930, which the EU is challenging on national treatment and TRIPs grounds. Section 337 permits U.S. companies to seek exclusion orders or other orders permitting seizure of goods found to infringe on U.S. intellectual property rights or otherwise involved in unfair methods of competition.
U.S. imposition of a harbor maintenance fee of 0.125 percent, which the Supreme Court later struck down as a violation of the "export clause" of the Constitution. (Article I, section 9 prohibits taxes and duties from being imposed on the export of any article.)

In addition, the EU has requested consultations on the United States' imposition of tariffs and quotas on steel imports pursuant to the Section 201 action. This issue is discussed in Section 2.

Other U.S. Challenges to EU Law and Decisions

In addition to the high-profile beef and bananas cases and the United States' challenge to the EU's imposition of retaliatory tariffs on corn gluten feed (in retaliation for the U.S. safeguard on wheat gluten), the United States has brought several challenges to EU law and decisions, including:

Belgium's failure to use actual transaction values in computing customs duties on rice. On January 19, 2001, the United States requested that a panel be established.
EU Regulation 2081/92, which the United States alleges does not provide national treatment with respect to geographical indications for agricultural products and foodstuffs and does not provide adequate protection to pre-existing trademarks. Consultations were held in November 2000.

Aircraft Issues

The United States and EU also remain engaged in serious disputes over aircraft subsidies and the EU's implementation of noise-reduction standards.

Aircraft subsidy issues reemerged following pledges by Britain and Germany to provide financing support to the European Airbus Consortium to develop the new Airbus Industries A380 (A3XX) superjumbo jetliner. This issue was discussed at the U.S.-EU summit in December 2000. The United States and EU held consultations on this issue on January 11, 2001, where the United States explained to EU officials that any support must be provided on commercial terms in order to comply with the WTO Agreement on Subsidies and Countervailing Measures. EU officials have argued that that earlier 1992 Civil Aircraft Agreement (which sets limits on government subsidies to manufacturers of large civil aircraft of 100 seats or more) should control the issue despite the fact that aircraft subsidies were not generally exempted from the WTO Subsidies Agreement, as the EU had sought during the Uruguay Round negotiations. In October 2001, the EU approved 250 million pounds sterling in aid from the United Kingdom to Rolls Royce for the development of the engine for the A380, which raises serious subsidy concerns. Bilateral discussions have not resolved these issues. The United States is considering bringing a WTO challenge against any EU subsidies to Airbus to develop the superjumbo jet as illegal export subsidies.

In March 2000, the United States filed a formal complaint against the EU in the International Civil Aviation Organization (ICAO) over the EU's discriminatory aviation noise standards. The United States is challenging the EU aircraft noise regulation, which prohibits flights of aircraft in Europe equipped with noise-muffling hush kits after April 1, 2002. The hush kits are manufactured primarily by U.S. companies. The United States contends that the EU regulation violates the EU's obligations under the ICAO, on the ground that it is based on an arbitrary design and not a performance standard. On October 29, 2001, the United States and EU reached a preliminary agreement under which the European Commission would propose legislation repealing the ban. The European Commission proposed such legislation on November 28th. Individual airports would, however, be able to ban certain "marginally compliant" be removed from service for five years. It is not clear whether the European Parliament and Council of Ministers will approve this plan.

Privacy

On March 14, 2000, the EU and the United States finalized a data privacy agreement intended to resolve issues over how U.S. companies would be able to comply with the European Commission Directive on Data Privacy, which went into effect in October 1998. The EU Directive prohibits the transfer of personal data to non-EU nations that fail to meet the EU's "adequacy" standard for privacy protection. The U.S. Government and U.S. companies have been concerned over the implementation of this provision since, unlike the comprehensive legislative approach adopted by the EU, the United States has taken a largely "self-regulatory" approach to data privacy, combined with some legislation and regulation.

This agreement, which the EU approved in July 2000, establishes a "safe harbor" framework under which U.S. companies would be able to comply with the EU directive by signing contracts with EU member state data authorities which commit them to meet EU data directive standards, showing that they are already covered by U.S. privacy laws, signing up with a self-regulatory privacy organization in the United States, or agreeing to refer privacy-related disputes to a panel of EU data privacy protection authorities. Companies that join self-regulatory bodies with safe harbor codes of conduct would face false advertising penalties if they violate the standards. The Commerce Department issued revised safe harbor privacy principles in July 21, 2000.

In 2001, U.S. financial services companies pushed for an EU determination that their data privacy measures provide adequate protection for EU citizens.

ECAT POSITION: ECAT supports efforts by the United States and the EU to strengthen their economic relationship, address ongoing trade disputes that have undermined the historically close U.S.-EU relationship, and move forward with mutually supportive trade initiatives in 2002.

Trans-Atlantic Economic Partnership

Under the Trans-Atlantic Economic Partnership (TEP), launched at the May 1998 U.S.-EU Summit, the United States and the EU agreed to work together to increase trade and avoid disputes on a number of issues, including technical barriers to trade, agriculture, intellectual property, government procurement, services, electronic commerce, environment, and labor. The United States and the EU also agreed to involve citizens more fully in the TEP process. The TEP also serves as a vehicle for consideration and implementation of recommendations from the Trans-Atlantic Business Dialogue discussed below.

The United States and the EU are continuing their efforts to enhance regulatory cooperation through the implementation of the U.S.-EU MRA initiated in 1998, which aims to reduce duplicative product testing, while respecting domestic health, safety, and environmental standards. The MRA currently includes six annexes, covering health safety issues, industry measurement standards, and other issues. The combined U.S.-EU trade activity in the MRA sectors are worth more than $50 billion in annual two-way trade. Negotiations are ongoing in several areas, including electrical safety, pharmaceuticals and medical devices.

Trans-Atlantic Business Dialogue

Since the TABD's establishment in 1995, business leaders have sought to address existing and emerging bilateral trade disputes by holding annual conferences to facilitate discussions with U.S. and EU government officials. At the TABD's 2001 annual meeting and in its 2001 report, the TABD called for the launch of multilateral trade negotiations as the top priority. The TABD also pressed the EU and the United States to continue to improve their handling of ongoing trade disputes, comply with WTO rulings and seek to avoid future disputes. The TABD also called on the two governments to ensure that regulatory systems encourage economic efficiency and innovation, to implement policies that promote open and transparent flows of capital and investment information, and to endorse pro-technology principles to support the growth of e-commerce and the Internet.

In January 2002, the TABD proposed increased public participation in the development of regulations. Specifically, the TABD recommended that U.S. and EU regulators engage in "early and broad" consultations with the public early in the regulatory process.

The TABD is currently Co-Chaired by James J. Shapiro, Chief Executive Officer of PricewaterhouseCoopers, and Michael Treschow, President and CEO of Electrolux.

ECAT POSITION: ECAT supports continuing U.S.-EU efforts to promote a positive trade agenda), to reach additional Mutual Recognition Agreements (MRAs) in the goods and services sectors, and to develop further an early warning system to identify and resolve potential areas of dispute. ECAT also endorses the highly productive efforts of the Trans-Atlantic Business Dialogue (TABD) and the TABD recommendations that have helped to lay the foundation for greater regulatory cooperation and harmonization under the TEP.