Risk & Compliance

Euro Clash

Removing tariffs is easy. Breaking down social barriers to trade is hard.
Tim ReasonMay 10, 2004

The GMO Monster Tomato Tour kicked off last November in Brussels, outside the European Council building. During the following month, members of the environmental group Friends of the Earth Europe rolled the giant inflatable fruit around the continent, with stops in Paris, Madrid, and Budapest, among other cities. Problems in Warsaw with the air compressor aside, the tomato’s menacing visage helped the environmentalists send a clear message to the world: Keep genetically modified food out of Europe.

That message resonates over there. Europeans, it seems, are far less sanguine than Americans about eating genetically modified organisms (GMOs) — so much so that the European Union banned GMOs until last month. That squeamishness prompted the United States to file suit against the EU in the World Trade Organization last May.

“This is not a classical 20th century trade dispute,” argues Maria Aranzazu Gonzalez Laya, trade spokesperson for the European Commission. “It’s a 21st century trade issue. It’s about values, it’s about what is risky and what is not risky.”

Indeed, the GMO quarrel may signal a new stage in transatlantic trade relations. As obvious trade barriers such as tariffs, quotas, and subsidies fall, left standing are more complex obstacles — differing regulatory regimes, standards, and values.

Such issues may prove to be much more intractable than tariffs. And that’s troubling. With the ebb of Cold War cooperation and the rise of Iraq War fractiousness, trade has been touted as the glue that holds the United States and Europe together.

Indeed, U.S. and EU trade representatives often downplay such trade disputes as representing only a small fraction of the transatlantic total. The bilateral trading relationship between the United States and the EU, which is about to add 10 more nations to the fold, is by far the largest in the world.

But the GMO spat and other disputes — especially ones that reflect a sense of national identity — are political tinder boxes. And they threaten to ignite during election years, like this one. That means they represent a greater threat to business stability than numbers would otherwise suggest.

Conventional Battles

Even on traditional trade issues, relations between the United States and the EU are at an all-time low. “I’ve been more worried about that relationship [with Europe] than any other one we have,” says William A. Reinsch, president of the National Foreign Trade Council, a Washington, D.C.-based lobbying group for U.S. multinationals. “The EU has been very aggressive about complaining — even in situations where they are hard-pressed to demonstrate they have been hurt.”

Since the WTO was founded in 1995, the United States has initiated more disputes — 75 — than any other country. And it has won most of them, as plaintiffs generally do. Three years ago, its role as free-trade crusader was epitomized when it won a contentious battle over the EU’s banana tariffs. Since then, however, the United States has been uncharacteristically passive about initiating claims. As a result, it has more often been the defendant, and, thus, the loser.

Reinsch is critical of this failure to “assert our rights,” which he says creates the impression that the WTO is skewed against the United States. “Now we pay the price in this raft of cases against us,” he huffs. The United States has recently lost several cases in which the EU challenged American trade laws, particularly those dealing with dumping (see “Dumping Gets the Byrd,” at the end of this article). In two of those cases, the WTO ruled that U.S. law went overboard in punishing foreign companies for trading violations. And in two other notable wins for the EU, the WTO ruled that U.S. laws provided unfair advantages to U.S. corporations.

The most publicized of these was the dispute over steel tariffs, imposed in March 2002 by President Bush, who cited U.S. law giving him power to provide temporary aid to industries suffering from imports. Although WTO rules also allow such actions, most observers agree that the U.S. steel industry’s woes were of its own making, and that the tariffs were transparently protectionist. The EU immediately filed a complaint, and the WTO declared the tariffs illegal in March 2003. Facing the threat of $2.2 billion in retaliatory sanctions from the EU — as well as complaints from domestic steel-consuming industries — the Bush Administration withdrew the tariffs at the end of last year.

Two months ago, the EU began imposing trade sanctions as the result of a long-simmering dispute over a tax break for U.S. exporters. The Foreign Sales Corporation (FSC) tax law, passed in 1984, provided a tax exemption for a portion of the income U.S. companies earned from export transactions conducted through foreign subsidiaries. The law was intended to help U.S. companies — which pay taxes on income earned overseas — compete with European businesses, which tend to be taxed only on income earned within their country’s borders. But the EU challenged the FSC law in 1998, and in March 2000, the WTO ruled that the FSC amounted to an illegal subsidy. Congress replaced the law with the Extraterritorial Income Exclusion Act of 2000 (ETI Act), but that too failed to pass muster with the WTO. Since then, U.S. lawmakers have been divided over how to remedy the situation (see “A Taxing Dispute,” CFO, August 2003).

Authorized in August 2002 to impose annual tariff sanctions of $4 billion on U.S. exports, the EU held off until this past March. “Despite waiting for more than two years, the United States has not brought its [export tax] legislation in line with WTO rules,” said EU trade commissioner Pascal Lamy on March 1. “We are therefore left with no choice but to impose countermeasures.” The punitive tariffs are being phased in.

The FSC/ETI case and the dumping cases also put Congress in the awkward position of complying with the rulings of the supranational WTO. These days, that’s a problem because Europe has been slow to respond to complaints against its own practices, says Reinsch. “If Congress thinks the deck is stacked against us, it is not going to be all that interested in further participation in the WTO,” he warns.

Very Simply Different

One way to correct that perception is by generating more wins, and the Bush Administration has begun to get more aggressive — notably by filing a case against Europe’s then four-year-old ban on GMO food last May, and against China’s value-added tax on semiconductors in March (see “Chinese Walls,” at the end of this article).

But unlike those involving bananas or steel, these latest cases point to a more-serious divide welling up between the United States and Europe. “Increasingly, I’m worrying that [the disagreements] are over fundamental, almost philosophical issues, rather than over bananas or some other commodity,” says Reinsch. He points to the EU’s actions against Microsoft last March — fining the software giant $613 million for anticompetitive behavior, and ordering it to unbundle its media player from Windows software and share some of its code — as the latest sign of a divergence between U.S. and EU regulation of competition. Reinsch says this trend began with European antitrust regulator Mario Monti’s decision to kill the proposed merger of Honeywell and General Electric in 2001.

And then there’s “the vexed question,” as Lamy called it, of Europe’s opposition to GMOs, which the United States claims has cost American farmers more than $200 million a year in U.S. corn exports. The United States argues that Europe has wrongly closed its markets to GMO products (and beef from hormone-treated cattle) without providing any scientific basis for doing so. “This case is about playing by the rules negotiated in good faith,” said U.S. Agriculture Secretary Ann Veneman when the claim was filed.

But the question is somewhat more complex. The EU’s ban on GMOs was finally lifted last month after a series of traceability and labeling regulations were put in place for all biotechnology products and “downstream” products — that is, products that may contain (or have eaten) biotech crops. The U.S. Trade Representative office says these rules are expected to be “onerous and expensive,” and the United States has not lifted its WTO suit. Meanwhile, the European Food Safety Authority has lined up more than 10 GMO food products for review. By the time the WTO rules on the U.S. complaint, predicts the EC’s Laya, “it will no longer be an issue.”

To Lamy, there’s a sharp distinction between Bush’s steel tariffs and the GMO ban. The former, he said in March, “were clearly designed to protect an uncompetitive industry.” By contrast, the GMO ban was not designed to protect European farmers (the EU does import non-GMO crops and seed), “but reflects our society’s highly precautionary preference in this area.” Ultimately, said Lamy, there’s a distinction between protectionism and “the legitimate protection of social choices.”

Honey Dip

But that protection is beginning to rankle. On this side of the Atlantic, the EU’s social choices on health and safety issues often look like thinly disguised trade barriers. A case in point: Last June, the EU banned all U.S. honey exports because the Food and Drug Administration would not agree to adopt Europe’s more-stringent testing standards. “There’s never been a quality issue with U.S. honey,” says the National Honey Board’s Julia Pirnack, “but a ban doesn’t look good to [European] consumers.”

The bureaucratic dispute is also frustrating for U.S. honey growers, who see the strong euro and low U.S honey prices combining to provide the best export opportunity in a decade. “I am losing between half a million and $1 million in revenue this year,” says Doug McGinnis, vice president of the family-owned Tropical Blossom Honey Co., in Edgewater, Florida. McGinnis, whose firm is one of the largest U.S. honey exporters, says exports now make up 12 percent of his revenue, but that could go as high as 50 percent if Europe dropped its ban. (Ironically, if and when honey exports resume, they’ll be slapped with Europe’s 5 percent retaliatory tariff against the FSC.)

Likewise, Reinsch cites a proposal introduced in October by the EU to require that manufactured and imported chemicals undergo certain types of testing and be registered in a central database. As currently written, the so-called REACH proposal “would essentially shut out smaller and midsize companies outside of the EU that wouldn’t have the ability to jump through all the hoops and spend all the money to register,” says Chris VandenHeuvel of the American Chemistry Council (ACC), a trade group. The ACC has also warned the EU that the current REACH proposal violates WTO rules.

Although the WTO recognizes the rights of its members to protect public health or the environment, they’re also supposed to do so in ways that minimize the impact on trade. “That’s what the arguments tend to be about now,” says Reinsch. Indeed, as Lamy noted, “The scope of these rules is not always terribly clear, and case law in this field…is both incomplete and subject to interpretation.” That’s a concern for Reinsch, because in his view, the EU’s approach to setting standards “creates opportunities for mischief,” in which standards appear to favor European production methods over those of importers.

Clarity Begins at Home

Of course, Europe isn’t the only place where social choices and safety regulations are sometimes at odds with free trade. The EU has long complained that drug-approval procedures by the U.S. Food and Drug Administration “continue to give non-U.S.-based firms difficulties.” Similar technical differences exist on electrical and electronic equipment. More significant, the United States also has come in for criticism of its own protectionist bent, notably the recent backlash against offshore outsourcing. “One of the most disquieting aspects of U.S. policy is that domestic pressure to adopt protectionist measures appears to be stronger than the willingness to seek internationally agreed[-on] solutions,” notes an EU inventory of U.S. trade barriers published last November.

In a February speech, British Trade Secretary Patricia Hewitt blasted the Bush White House — “an Administration supposedly committed to free trade” — for the now-repealed steel tariffs. Then Hewitt took aim at both American political parties. “The Presidential economic adviser who dares to speak the truth on globalization is threatened with redundancy by Republican members of Congress,” she declared. “And Democrat candidates are vying with each other in protectionist rhetoric.”

Hewitt is not alone in her criticism. “The bigger challenge to American leadership [in the WTO] comes from inside — not outside — the United States,” warned WTO director-general Supachai Panitchpakdi in a February speech in Washington, D.C. “In America’s current debate about trade, jobs, and globalization, we have heard a lot about the costs of liberalization. We need to be reminded of the advantages of America’s openness and its trade with the world.”

Next month, President Bush may have an opportunity to smooth ruffled feathers when he hosts the annual summit of G8 leaders at Sea Island in Georgia. Four of the G8 nations are European countries, and the EU sits at the table as an unofficial ninth member.

But major trade advances are unlikely in an election year in which American jobs are a key battleground. And although Lamy objected recently to the idea that “the [United States] never moves on trade in an election year,” he also conceded that “we shouldn’t expect much movement after Labor Day, in the high season of U.S. political campaigning.”

“It is evident that we are in an era of what I have called ‘generalized trade fatigue,’” said Lamy, “where the constant pressures and challenges of globalization have the capacity to ‘wear down’ decision-making by governments.” Elections aren’t likely to speed things up.

Tim Reason is a senior writer at CFO.

Dumping Gets the Byrd

In the past few months, the United States has lost several significant trade cases over its own dumping laws. (Dumping is the practice of selling a product at a lower price abroad than in the home market.) Under U.S. and international trade law, countries may retaliate against dumping with tariffs. But some U.S. laws go further.

The Continued Dumping and Subsidy Offset Act — better known as the Byrd Amendment — passed in October 2000, requires the U.S. Treasury to turn over any antidumping tariffs it collects to the U.S. companies that filed the original complaint. The law has resulted in payouts to a wide range of industries, ranging from pasta producers to steelmakers. Last year, the World Trade Organization (WTO) ruled that those payouts amounted to an illegal subsidy, but Congress has refused to change the law. The European Union and seven other countries are seeking authority to retaliate with tariffs equal to the amount of Byrd payouts received by U.S. companies.

The EU won a similar case over another U.S. antidumping law, the so-called 1916 Act, which subjects violators to treble damages. In that case, President Bush urged Congress to repeal the law, but it has yet to do so. In February, the WTO authorized the EU to retaliate if it can prove that European companies have suffered damages.

And the EU isn’t finished. Also in February, it took the first step in initiating a complaint against the United States for “zeroing.” That’s a reference to the U.S. method of calculating how much financial harm is done by dumping. (Under international law, nations seeking to impose tariffs must prove that dumping actually inflicts damage.) The EU says the U.S. method inflates the numbers. Without zeroing, claims the EU, dumping margins in many Byrd Amendment cases would have been minor or even negative.

What War?

Is there a connection between the lousy state of U.S.-European trade relations and the transatlantic rift over the war in Iraq? Apparently not. Although diplomatic relations between the United States and Europe were badly strained by the war — and further soured when countries that opposed the war were forbidden by the Bush Administration to bid on Iraqi reconstruction contracts — most observers say the clash over the war has not been reflected in trade.

In March, the U.S. Council on Foreign Relations issued a report that frets over the serious deterioration in U.S.-European relations as a result of the war. “Although there have been frequent disputes over tariffs and subsidies through the years, the Task Force notes that the Iraqi crisis had little discernible effect on patterns of European-American trade and investment,” the report notes. Indeed, it adds, “a greater public emphasis on the economic benefits of the relationship might help leaders on both sides of the Atlantic resolve, or at least minimize, their political differences.” —T.R.

Chinese Walls

If things are bad between the United States and its top trading partner, the European Union, they aren’t much better with China — which is this country’s fourth-largest trading partner, after Mexico and Canada. During a December visit, Chinese Premier Wen Jiabao felt compelled to begin a speech in New York by assuring his audience that “I have come to this country to seek friendship and cooperation, and not to fight a trade war.”

Just a few days after Wen departed, however, the United States initiated a dumping investigation against the Chinese furniture industry. The United States has already instituted dumping tariffs against Chinese textiles, televisions, and iron pipes.

China’s $125 billion trade surplus with America is a sore spot for the United States, along with its refusal to revalue the renminbi and its poor performance in protecting the intellectual property of U.S. companies. But China’s enormous market and its role as prodigious purchaser of U.S. Treasury securities have traditionally earned it kid-glove treatment from the United States.

That may be changing.

Just as the mature trade relationship between the United States and Europe is beginning to expose intractable differences between cultures, so the relatively immature one with China is giving rise to offenses America feels it can no longer ignore. Particularly obnoxious to the United States is a rebate for domestically manufactured semiconductors that reduces the value-added tax of 17 percent to as little as 3 percent. That gives domestically manufactured chips a huge price advantage, and encourages foreign chip makers to move jobs and technology to China. On March 18, the United States filed a World Trade Organization claim against China — the first filed by any country since China joined the WTO in 2001.

More challenges are likely. U.S. Trade Representative Robert Zoellick told Congress on March 25 that his office was bulking up on staff dealing with China — including doubling its staff of negotiators. “We are expanding our work in the enforcement area — with a particular focus on China,” he said.

Skirmish Lines

October 1998: European Union imposes moratorium on genetically modified organisms (GMOs).

March 2000: World Trade Organization declares U.S. Foreign Sales Corporation (FSC) export tax benefit an illegal subsidy.

September 2000: WTO declares U.S. 1916 Act illegal.

October 2000: U.S. Continued Dumping and Subsidy Offset Act (Byrd Amendment) passes.

November 2000: Congress replaces FSC with Extraterritorial Income Exclusion Act (ETI Act).

November 2000: EU says ETI Act does not address FSC problems, requests authority to levy $4 billion in trade sanctions.

December 2000: WTO rules EU banana restrictions illegal.

January 2001: U.S. and EU agree to reduce barriers on telecommunications and electronic products.

April 2001: U.S. and EU resolve longstanding dispute over banana trade.

November 2001: Doha round of global trade talks begins in Doha, Qatar.

January 2002: EU requests WTO permission to retaliate over 1916 Act.

January 2002: WTO rules ETI Act illegal.

March 2002: U.S. imposes tariffs on steel imports.

April 2002: EU threatens retaliation against U.S. steel tariffs.

June 2002: EU says it may restrict U.S. access to its grain and rice markets.

August 2002: WTO rules EU may impose $4 billion in sanctions over ETI Act.

January 2003: WTO declares Byrd Amendment illegal.

March 2003: U.S. invades Iraq.

May 2003: U.S. files case against EU moratorium on GMOs.

September 2003: Doha round breaks down in Cancun, Mexico.

November 2003: WTO declares U.S. steel tariffs illegal.

February 2004: British Trade Secretary Patricia Hewitt criticizes U.S. for protectionist stance.

February 2004: WTO rules EU may retaliate against U.S. for 1916 Act.

March 2004: EU institutes retaliatory tariffs for Byrd Amendment.

March 2004: EU begins instituting retaliatory tariffs for FSC and ETI Act.

Sources: U.S. Trade Representative, EU Trade Commissioner, WTO