Euro Spindoctors!

national | miscellaneous | news report Friday October 25, 2002 13:53 by LD

Oh it all sounds so 'NICE' !

EU Commissioner for External Relations, Chris Patten, echoed this point recently when he commented: “While the EU and the US are happy pelting each other with genetically modified tomatoes …. or laying into one another with steel bars or bananas, politicians often take a break form the fun to remind people that there is so much more that unites us rather than divides us”.

INSTITUTE OF EUROPEAN AFFAIRS
EU-US UPDATE
October 2002

INTRODUCTION
The Institute of European Affairs has recently established a new EU/US project to explore the nature of the EU/US relations and of Ireland’s role in this regard. The project is chaired by John Travers and Joe Carroll is the project leader. The group proposes to issue a regular bulletin highlighting issues of interest in the EU/US debate.
The Transatlantic Relationship is not monolithic; it involves a complex nexus of relationships between the US and the EU and between the US and individual member states of the EU – some of which have been characterized as “special relationships”.
The US and the EU have traditionally shared common views on many aspects of foreign policy. Their co-operation has allowed substantial progress in both in the economic and political arenas and this cooperation has increased in the aftermath of the tragic events of Sept 11. Although the media tends to focus on strains in the relationship, behind the scenes, in the corridors of diplomacy continuities rather than changes define debate on both sides of the Atlantic.
EU Commissioner for External Relations, Chris Patten, echoed this point recently when he commented: “While the EU and the US are happy pelting each other with genetically modified tomatoes …. or laying into one another with steel bars or bananas, politicians often take a break form the fun to remind people that there is so much more that unites us rather than divides us”.
This issue of the EU/US bulletin will focus on trade and commercial issues – with a special supplement on the issue of corporate governance.

TRADE ISSUES
In August 2002, legislation was passed in the US, which gives fast track negotiating authority (known as TPA – trade promotion authority) to President Bush in trade negotiations at the World Trade Organisation. This is likely to improve relations between the US and its international trading partners, which has been marred by arguments over trade issues ranging from steel tariffs to agricultural reform.

The Bill, passed at the beginning of August, was welcomed by the EU as it is expected to provide a fillip for the new round of WTO negotiations launched at Doha. This optimism, however, may be premature. Disagreements remain unresolved in numerous areas (see below). Furthermore, the willingness of all sides, including the EU, to promote fairer global free trade conditions will continue to be tested. It also remains to be seen which direction trade policy in the US will take particularly after the November mid-term elections. A Democratically controlled Congress is likely to keep a close eye on trade policy proposals from the Bush administration.

The FSC Provision
Tax rates on foreign companies and some US companies have become the subject of a dispute between the EU and the US. The US is now under pressure to rewrite its corporate tax law after the WTO ruled that a portion of US international tax law known as the Foreign Sales Corporation (FSC) – a 4bn$ tax benefit for US-based multinational corporations - violates international trade rules as it operates as an illegal export subsidy.

The WTO has ruled that the EU could impose sanctions of up to 4bn$ a year on imports from the US. The EU has issued a draft list of products that may be targeted, including steel, beef, wood, cotton and electrical goods.

In an attempt to assuage EU concerns, President Bush stated at the EU/US Summit in May that his administration would begin to overhaul the FSC, emphasizing that the EU and the US “must bring this same spirit of co-operation [as in Afghanistan] to our common economic agenda".

New legislation proposed by Bill Thomas, Chairman of the House Ways and Means Committee, would repeal the FSC and offer tax breaks to compensate American companies with substantial offshore operations for the loss of the FSC benefit.

What concerns Europeans is that the US proposes to finance these breaks by increased taxes on the subsidiaries of European companies which are the largest foreign investors in the United States. According to a recent study by the Internal Revenue Service in the US,
American subsidiaries of European corporations paid a record amount of taxes last year.
Opponents of the bill in the US, argue that revenue from the repeal of the FSC should be devoted to enhancing the competitiveness of companies operating within the US. Representative Phil Crane of the tax-writing House Ways and Means Committee argues that the new legislation proposed by Committee Chairman, Representative Bill Thomas, and backed by the Bush administration would punish US based manufacturers and encourage companies to move overseas with an attendant loss of jobs. Mr Crane reflects the views of companies such as Boeing, Microsoft and Kodak who are big beneficiaries of the FSC.

Other US corporations such as Wal-Mart, General Motors and Coca Cola, support Mr Thomas’s bill as it would end double taxation on the overseas operation of US companies.

Although there is a fair amount of sabre-rattling on either side of the Atlantic, both parties are aware of the implications of a transatlantic rift over this issue. EU Trade Commissioner Pascal Lamy has warned of the adverse effects on the extent of foreign investment: “the US has to decide how much foreign direct investment they want … I have never been told by the US government or by Congress that foreign companies are providing too many jobs in the US”.

Conversely, if the US administration is seen to provide tax and trade incentives to companies moving their operations overseas, with the attendant job losses which this would entail, this could have damaging consequences for any attempt to enact new trade legislation as the fast track negotiating authority of the president is in the gift of Congress.
US trade policy is based on the principle of enhancing the competitiveness of US industries and ensuring that they have fair access to overseas markets. The creation of good jobs in the US is its overriding objective.

Competition Policy
Competition policy is an policy area which is currently receiving a lot of attention in official and corporate circles as different conceptions of the principles underpinning competition policy have led to divergence between the EU and US. For example, with regard to the criteria for blocking a merger the basic test in the US is whether a merger would substantially lessen competition. The EU approach outlaws mergers that create or strengthen a dominant market position.
In July 2001, the European Commission blocked General Electric’s $43bn takeover of Honeywell after it had been cleared in the United States. As a result, relations between EU regulators and their American counterparts deteriorated, although diplomatic efforts have since been made to build bridges between the two parties. However, the pending EU ruling on the Microsoft corporation may hinder these efforts.
In December 2001, a Green Paper from the European Commission included suggestions to either move closer to the American view on anti-competitive behaviour and to give greater consideration to efficiencies (i.e. cost savings that would be passed on to consumers). Competition Commissioner Mario Monti has given some indication that he may be willing to look more favourably upon the latter proposal. However, even if the EU accepts an “efficiency defence” in mergers, it may still differ from the US about the importance of efficiencies in individual cases.
On a positive note, a new joint initiative by the EU and the US is expected to urge companies to simultaneously inform competition authorities on both sides of the Atlantic of proposed mergers. This latest initiative, which was agreed at a meeting of international competition authorities in Naples at a meeting of the International Competition Network (ICT) on 28/29 September, is an attempt to reduce the possibility of divergent rulings on merger deal proceedings. The ICN was created on 25 October 2001 as a new instrument for international competition cooperation. Officials believe that simultaneous notification of pending mergers would assist in the co-ordination of analyses and decisions by US and EU authorities and anti-trust authorities.

Agricultural Reform

The New US Farm Bill
On 13 May 2002, the US Congress approved what has been called the “most generous farm subsidy package in US history”. The “Farm Security and Rural Investment Act of 2002” will last for six years. Its genesis lies in a response to a drop in US farm exports between 1996 and 2001 of approximately 12% and a concomitant rise in imports by more than 30%. Federal spending on farm programmes will increase by $82.8 billion over the next decade, on top of some $100 billion which Congress has already committed to American farmers.
US Trade Representative, Robert Zoellick, contends that the bill is within the framework of the Doha Development Agenda, which was negotiated in November 2001 in preparation for the next round of WTO trade negotiations. The Doha text lays out the basis for a common approach towards agricultural policy, including moving in the direction of a “fair and market-oriented trading system” through reductions of all forms of export subsidies and reductions in domestic trade-distorting support”
Franz Fischler, the EU Commissioner responsible for Agriculture, Rural Development and Fisheries, sharply criticised the new US farm Bill on the grounds that the Bill contains “elements that are nothing more than hidden export subsidies that will create serious difficulties for the developing countries”.
However, the Bill has not tempered US assertiveness on global agricultural reform. Subsequent US proposals in July 2002 include the world-wide elimination of €102bn in domestic supports by 2010 and the reduction of the average world tariff on farm products from 62% to 15%.

The EU response to these proposals has been critical as the US proposals would entail substantial cuts in agricultural supports in the EU and Japan, but not in America itself.

US Steel Tariffs
Another contentious area in EU/US economic relations has been steel tariffs. In March 2002, President Bush imposed tariffs of 30% on steel imports in an effort to protect the declining US steel industry. This provoked a strong reaction in EU circles, as the tariffs will potentially lock out billions of euros worth of EU steel exports to the US. EU Trade Commissioner, Pascal Lamy, claims the EU is the main target of the tariffs, as its high-end steel products will be hit harder than countries producing lower quality steel.
US Trade Representative Robert Zoellick defends the legality of the US action, but the European Commission insists that because overall US imports from the rest of the world have been declining since 1998, the tariffs infringe WTO law.
The EU requested compensation from the US and took action against what it considers blatant US protectionism by bringing the case before the WTO. The EU also threatened to impose duties of up to $350 million on US products (such as textiles from the Carolinas) in retaliation.
On 30 September 2002, EU governments agreed not to proceed with immediate sanctions against the US, but to wait instead for the WTO ruling, expected in Spring 2003. The European Commission also relaxed the protective tariffs it had previously erected in reaction to the US duties. Safeguard tariffs are to remain in place on seven products until expiry of the US tariffs.
A second WTO ruling, also expected in spring 2003, will directly affect the resolution of this issue. The US, for its part, has taken a case to the WTO, arguing against the EU safeguard measures.
Conclusion:
Most analysts of EU/US relations concur that economic relations have reached a low point over the last year and point out that this reflects fundamental differences in policy approaches and in the philosophies underpinnng trade policy. This bulletin has highlighted some of these issues. Others such as biotechnology, data privacy, e-commerce and environmental issues will be dealt with at a later stage.

Tensions in the political arena over the International Criminal Court, the Kyoto Protocol and Foreign and Security policy matters also impact on trade and economic relations. Future issues of this bulletin will examine how the EU and the US are at pains to check this perceived antagonism in political matters and to keep the transatlantic dialogue alive.

Editors: Joe Carroll, Jill Donoghue
Researcher: Nicki O Connor