Emergency Committee For American Trade - Publications

SECTION 5: THE EUROPEAN UNION

Despite the longstanding and deep economic and political 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 in recent years 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 2002. 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 2004.

U.S. goods exports to the EU have increased by approximately 34 percent since 1990, from $103 billion in 1990 to $138 billion in 2003. Total U.S. trade with the EU increased by almost 90 percent during the same period, from $201 billion in 1990 to $380 billion in 2003. 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. With the expansion of the EU on May 1, 2004 to add 10 additional countries, the U.S.-EU relationship will become even more significant and more complex.

EU Integration Efforts

On May 1, 2004, the EU completed the second major enlargement by expanding from 15 members – Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal, Spain, Sweden and the United Kingdom – to add an additional 10 members – Cyprus, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia, and Slovenia. As a result of this enlargement, the EU has expanded from 370 million to 450 million consumers.

The addition of these additional countries culminated a six-year formal process of negotiations on more than 30 broad issues, including the economy, finance, politics and trade. In December 2002, the EU invited 10 of the 13 countries in which it was in discussions to accede to the EU in 2004: According to the EU Commission, Romania and Bulgaria will probably not be ready until 2007. With respect to Turkey, the EU indicated that it had not met the EU’s political criteria because of lingering human rights problems.

The EU’s enlargement will provide both challenges and opportunities for U.S. farmers, manufacturers, service providers and their workers. As a result of their new agreement with the EU, several of the acceding countries will modify their commitments in a variety of international agreements. For the United States, the changes will have significant impacts on a variety of sectors. In agriculture, for example, the EU’s expansion of its ban on U.S. imports of poultry, beef raised with growth hormones, and genetically modified organisms and other agricultural and sanitary and phytosanitary measures to the 10 acceding countries could result in a significant reduction of export opportunities for U.S. farmers. Other issues include increases in tariffs by acceding countries, increases in services barriers,

The United States, EU and eight of the acceding countries also negotiated new provisions so that existing bilateral investment treaties (BITs) with acceding countries could be retained, but conform to EU policies and international commitments. While some advances were made, the United States also agreed to restrict certain provisions in these BITs in a manner that reduces market access in the acceding countries.

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 intra-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);
Association Agreements with the countries of central and eastern Europe;
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 approximately 30 regional or bilateral free trade agreements and special customs agreements. It is currently negotiating preferential trade agreements 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 Positive Economic Agenda and 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 WTO negotiations pursuant to the Doha Development Agenda. In addition, the United States continues to press the EU for access to the EU’s poultry market, which has been banned since 1997, despite the 1999 U.S.-EU Veterinary Equivalence Agreement. In 2003, the United States gained EU approval for the use of alternative antimicrobial treatments.

In mid-2003, the EU notified the United States that it was withdrawing from market access concessions on rice and would replace the Margin of Preference program with global tariff-rate quotas. EU efforts to negotiate similar changes to the Margin of Preference programs for grains were dropped after the United States and EU reached an agreement on these issues.

In March 2003, the EU launched an internal review of whether U.S. government support, pursuant to the 2002 farm bill, to oilseed producers violates WTO subsidy disciplines.

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 planning to come 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 Dispute Settlement Cases

With regard to dispute settlement, the United States and the EU have widely resorted to the WTO’s system. As discussed in sections 3, 12 and above, the United States and EU are involved in a number of high-profile and significant cases involving trade remedy rules, agricultural products, and the Foreign Sales Corporation/Extraterritorial Income Act. In addition to these disputes, the United States and EU are also involved in the following primary disputes:

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 decision. 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.

After several years of seeking a mutually agreeable settlement, the United States and EU notified the WTO on June 23, 2003, that a satisfactory temporary arrangement had been reached, pursuant to which the United States would make a lump-sum payment of $3.3 million to the EU. This agreement covers the three-year period through the end of 2004.

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. The United States and EU have pushed back the deadline for U.S. compliance with the decision to December 31, 2004.

Corporate Accounting Standards

On July 30, 2002, the United States enacted the Sarbanes-Oxley Act of 2002 (Pub. L. 107-204) that seeks to improve corporate accounting standards and disclosure of information. In particular, the legislation establishes an accounting oversight board to: (1) oversee the audit of public companies that are subject to the securities laws; (2) establish audit report standards and rules; and (3) inspect, investigate, and enforce compliance on the part of registered public accounting firms, their associated persons, and certified public accountants. The legislation also directed the Securities and Exchange Commission (SEC) to promulgate regulations requiring corporate certifications of financial reports and requiring enhanced disclosure of financial information. This legislation applies to U.S. and foreign accounting firms that prepare or furnish an audit report with respect to any issuer in the United States.

The EU, which unsuccessfully sought a blanket exemption for European firms during Congressional consideration of this legislation, is seeking flexibility in the implementation of these rules by the Securities and Exchange Commission, including mutual recognition of oversight procedures so that EU companies do not have to provide documents to the U.S. oversight board and exceptions to the requirement that members of a company’s auditing committee be independent from the company they are auditing (because, the EU argues, in some countries, representatives of employee organizations are part of the audit committee).

Japan, Canada and Australia have similarly objected to what they view as burdensome and overly restrictive requirements.

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 remain a significant issue, given European subsidies for the development of all Airbus aircraft models. The Airbus Integrated Company – a partnership of the French-German-Spanish European Aeronautic, Defense, and Space Company (EADS-80-percent equity share) and the UK’s BAE Systems (20-percent equity share) – is the third largest aerospace company in the world. Since the inception of Airbus in 1967, the governments of France, Germany, Spain and the UK have provided direct subsidies to their respective Airbus member companies to aid in the development, production and marketing of Airbus civil aircraft. Airbus member governments have borne a large portion of the development costs for all Airbus aircraft models and provided other forms of support, including equity infusions, debt forgiveness, debt rollovers and marketing assistance, including political and economic pressure on purchasing governments. The development subsidies alone have a commercial value of more than $30 billion. These subsidies have facilitated Airbus’ substantial increase in sales in the worldwide market. In 2003, for the first time in history, Airbus is expected to deliver more commercial aircraft than The Boeing Company. In three of the last four years, Airbus has sold more new aircraft than Boeing and has a greater backlog of aircraft to be delivered in the future, as well.

Despite the advances that Airbus has made in the marketplace, the EU continues to subsidize the company. In 2001, the EU announced that seven of the nine EU Member State governments that have companies participating in the A380 superjumbo aircraft project have committed a total of $3.1 billion to Airbus for the development of the aircraft, the total cost of which had been initially estimated to be $12 billion. Many in the industry now believe the cost to develop the A380 will be in excess of $15 billion. The repayment terms and interest rates for these loans are not equivalent to those available from private lenders. To the contrary, the loan repayment obligations are to be success-dependent, e.g., they are repayable only through royalties on aircraft sold, and at very low interest rates that do not reflect the commercial risks involved.

Furthermore, the EU's aeronautics research programs are driven significantly by a policy intended to enhance the international competitiveness of the European civil aeronautics industry. Through these research programs, the EC and many of the Airbus member governments have provided additional funding worth billions of dollars to support the development of Airbus aircraft programs, including the A380. The United States believes that government support to Airbus raises serious concerns about the Member States’ adherence to their bilateral and multilateral obligations, including the WTO Agreement on Subsidies and Countervailing Measures (SCM Agreement). The United States has urged the Airbus member governments to ensure that the terms and conditions of their A380 support are consistent with commercial terms, reflecting both their international obligations and the fact that Airbus is now a highly competitive global producer of aircraft.

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 the 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. The United States is considering possible WTO action against EU subsidies to Airbus.

Another issue in the aircraft sector is the EU’s discriminatory noise standards. 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 28, 2001. Individual airports would, however, be able to ban certain “marginally compliant” aircraft, which could be removed from service in five years.

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 EU has also adopted a telecommunications-specific data privacy provision in 2000 and a Directive on Privacy and Electronic Communications in January 2002. The U.S. Government and U.S. companies have been concerned over the implementation of various provisions since, unlike the comprehensive legislative approach adopted by the EU, since 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.

Positive Economic Agenda and Trans-Atlantic Economic Partnership

At the May 2002 U.S.-EU Summit, leaders announced an agenda of areas in which the U.S. and EU intend to initiate or expand cooperative efforts. The so-called “Positive Economic Agenda” will initially cover issues related to financial services, regulatory cooperation, electronic procurement and customs, regulation of organic foods, and sanitary and phytosanitary measures.

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 Mutual Recognition Agreement (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.

In 2002, the United States and EU concluded “Guidelines for Regulatory Cooperation and Transparency” -- voluntary principles to promote an improved dialogue between U.S. and EU regulators early in the development of regulations. Agreement was also reached in 2002 on an MRA on marine equipment.

In 2003, the TABD focused on reorganization so that it could focus more effectively on key issues in U.S.-EU commercial relations.

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 2004 and 2005. In 2004 and 2005, ECAT also urges the Administration to strengthen its efforts to address concerns that the EU’s enlargement will result in diminished market opportunities for U.S. farmers, manufacturers, service providers and their workers in the 10 newly acceded countries.