Order Code RL30732
Report for Congress
Received through the CRS Web
Trade Conflict and the U. S.-European Union
Economic Relationship
Updated June 6, 2002
Raymond J. Ahearn
Specialist in Trade Relations
Foreign Affairs, Defense, and Trade Division
Congressional Research Service ˜ The Library of Congress

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Trade Conflict and the U. S.-European
Union Economic Relationship
Summary
The United States and the European Union (EU) share a huge, dynamic, and
mutually beneficial economic partnership. Trade conflicts, disputes, and rivalry,
however, are an important consequence of growing commercial interaction and
economic integration. While trade conflict in the past has tended to ebb and flow,
some observers believe that the threat of a trade war in 2002 is more serious than
before. A dispute over steel trade is the proximate cause of rising trade tensions, but
other high profile disputes involving tax breaks for U.S. exporters and the treatment
of genetically-modified (GE) products lurk in the background. Congress, through
legislative reaction to both EU practices and Bush Administration policies, has been
in the middle of these disputes.
Resolution of U.S.-EU trade disputes has become increasingly difficult in recent
years. An analysis of the causes, as well as the factors affecting the supply of and
demand for protection, help explain why some disputes may be more difficult to
resolve than others. Some disputes stem from demands from producer interests for
support or protection. Trade conflicts involving agriculture, aerospace, and steel fit
prominently into this grouping. These conflicts tend to be prompted by traditional
trade barriers such as subsidies or industrial policy instruments, where the economic
dimensions of the conflict predominate. Other conflicts arise when the U.S. or the EU
initiate actions or measures to protect or promote their political and economic
interests, often in the absence of significant private sector pressures. The underlying
cause of these disputes over such issues as sanctions, unilateral trade actions, and
preferential trade agreements are different foreign policy goals and priorities of
Brussels and Washington.
Still other conflicts stem from an array of domestic policies that reflect differing
social, cultural, and environmental values and objectives. Conflicts over hormone-
treated beef, GE products, protection of the audio-visual sector, and aircraft hushkits,
for example, are rooted in different U.S.-EU social preferences, as well as regulatory
approaches.
These three categories of trade conflicts - traditional, foreign policy, and
domestic - possess varied potential for future trade conflict. This is due mostly to the
fact that bilateral and multilateral agreements governing the settlement of disputes
affect each category of disputes differently. By providing a fairly detailed map of
permissible actions and obligations, trade agreements can dampen the inclination of
governments to supply protection and private sector parties to demand protection.
U.S.-EU bilateral trade conflicts do not appear to be as ominous and threatening
as the media often portray, but they are not ephemeral distractions either. Rather they
appear to have real, albeit limited, economic and political consequences for the
bilateral relationship. From an economic perspective, the disputes may also be
weakening efforts of the two partners to provide strong leadership to the global
trading system.

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Contents
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Ebb and Flow of Trade Tensions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Sources of Trade Conflict . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Producer Protection: Traditional Trade Conflict . . . . . . . . . . . . . . . . . . . . . . 9
Agriculture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Aerospace . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Steel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Clashing State Interests: Foreign Policy Conflict . . . . . . . . . . . . . . . . . . . . 14
EU Concerns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
U.S. Complaints . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Social, and Environmental Protection: Domestic Policy Conflict . . . . . . . 17
Beef Hormones . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Genetically Engineered Crops . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Audio-Visual Sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Aircraft Hushkits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Potential For Future Conflict . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Traditional Trade Conflict . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Foreign Policy Conflict . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Domestic Policy Conflict . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Trade Conflict in Perspective . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Relationship Impact . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Leadership Impact . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
List of Figures
Figure 1. U.S. Exports of Goods by Region, 2000 . . . . . . . . . . . . . . . . . . . . . . . . 2
Figure 2. U.S. Exports of Services by Region, 2000 . . . . . . . . . . . . . . . . . . . . . . . 2
List of Tables
Table 1. World Trade 2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Table 2. World Gross Domestic Product, 2000 . . . . . . . . . . . . . . . . . . . . . . . . . . 4

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Trade Conflict and the U. S.-European
Union Economic Relationship
Introduction
The bilateral economic relationship between the United States and European
Union (EU) is shaped by two outstanding trends. On the one hand, the two
transatlantic economies share a high degree of commercial interaction, most notably
a huge trade and investment relationship and a growing number of corporate
mergers. Cooperation between the two partners has been critical to the promotion
of world trade. On the other hand, the bilateral economic relationship is subject to
limited, but increasingly contentious, trade conflicts that potentially could have
adverse political and economic repercussions.1 These include a weakening of shared
interests and bonds as well as an undermining of the credibility of the World Trade
Organization (WTO).
The dimensions of the mutually beneficial side of the economic relationship are
well known. The United States and EU are parties to the largest two-way trade and
investment relationship in the world. Annual two-way flows of goods, services, and
foreign direct investment now exceed $1 trillion. This sum means that close to $3
billion is spent every day on transatlantic purchases of goods, services, and direct
investments.2
The European Union is the second largest trading partner of the United States
in merchandise or goods. In 2001, the EU accounted for 21.8% (or $159 billion) of
U.S. exports and 19.2% (or $220 billion) of U.S. imports. If trade in services are
added to trade in goods, the EU is the largest U.S. trading partner. In 2000, the EU
purchased $90 billion in U.S. commercial services (about one-third of the U.S. total).
1For the purposes of this report, the term “conflict” is used broadly to include U.S.-EU
disagreements on issues that may not have been raised in formal World Trade Organization
(WTO) proceedings. The term “dispute” is used more narrowly for issues that have been
subject to WTO consultations, including those requests which have led to panel and
appellate review proceedings. Unless referring to a particular dispute, the two terms,
however, are often used interchangeably.
2Data sources for this section, unless otherwise noted, are drawn from the following sources:
Cooper, William H., EU-U.S. Economic Ties: Framework, Scope, and Magnitude, CRS
Report RL30608; the European Union’s profile of facts and figures on the EU-U.S.
economic relationship found on-line at [http://www.eurunion.org/profile/facts]; and various
editions of the Survey of Current Business, Department of Commerce.

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CRS-2
Figure 1. U.S. Exports of Goods by Region,
2000
Source: U.S. Department of Commerce.
Figure 2. U.S. Exports of Services by Region,
2000
Source: U.S. Department of Commerce.

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CRS-3
The United States since 1993 has been importing more goods from the EU than
it has been exporting. In 2001, the resulting U.S. trade deficit with the EU totaled
$60.9 billion or 15% of the U.S. merchandise trade deficit with the world. This trade
deficit is partially offset by U.S. surpluses in services trade which have averaged
around $17-$18 billion dollars over the past four years.
Based on a market of some 379 million consumers and a 2000 gross domestic
product of $7.8 trillion (compared to a U.S. GDP of $10.0 trillion), the fifteen
members of the EU combine to form an increasingly integrated market that rivals the
United States in size.3 With the introduction on January 1, 1999 of a common
currency, the Euro, for twelve members of the EU, the EU today equals the United
States in many measures of economic strength. With a planned enlargement to
twenty-five members, the EU may exceed the United States on a number of economic
indicators in the future.
Given the EU’s huge market, future U.S. export opportunities are considerable.
Based on a moderate 1.5% growth rate in 2001, the EU economy expanded by over
$120 billion – an amount equivalent to an economy the size of Greece, Finland, or
Venezuela. As Europe increasingly adopts information technology and other new
economy reforms, a higher rate of economic growth and correspondingly enlarged
U.S. export opportunities can be anticipated.4
The fact that each side has a major ownership stake in each other’s market may
be the most remarkable aspect of the commercial relationship. At the end of 2000,
the total stock of two-way direct investment reached $1.37 trillion, making U.S. and
European companies the largest investors in each other’s market. U.S. direct
investments in Europe totaled $573.4 billion, accounting for 56% of all foreign direct
investment in the EU. European direct investments in the U.S. totaled $802.7 billion,
accounting for 60% of all foreign direct investment in the United States.5
An estimated three and one-half million U.S. workers today (1 out of 12 factory
jobs) are employed by European companies and an equal number of Europeans work
for American companies that are producing in Europe. Trade taking place within the
same company (imports by U.S. affiliates from their EU parent firms and exports by
U.S. companies to their EU affiliates) accounts for around one-third of U.S. total
trade with the EU.6
These employment and trade linkages, supported in recent years by hundreds
of corporate mergers valued at several hundred billions of dollars, help create strong
3The fifteen members are Austria, Belgium, Denmark, Finland, France, Germany, Greece,
Ireland, Italy, Luxembourg, Netherlands, Portugal, Spain, Sweden, and the United Kingdom.
4Hufbauer, Gary C. and Hyun Koo Cho, “How Fast Will The New Economy Reach Europe,”
Institute for International Economics, September 14, 2000.
5European companies are also the number one foreign investor in 41 U.S. states and the
second largest in the other nine.
6Eizenstat, Stuart. “The Future of Our Economic Partnership with Europe,” Testimony
Before the House International Relations Committee, Washington, D.C., June 15, 1999.

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CRS-4
and politically active interest groups that lobby on both sides of the Atlantic in favor
of maintaining friendly bilateral ties, reducing regulations, and in opposing
protectionist proposals.7
The United States and the European Union, acting in concert, are the
superpowers of the world trading system. Together they accounted for 37.6% of
world merchandise trade and 56.9% of the world’s production of goods and services
in 2000.
Table 1. World Trade 2000
(excluding intra-EU trade)
(Billions of U.S. Dollars)
Imports and Exports
% of Total
United States
2,040
19.9
EU-15
1,814
17.7
U.S. and EU-15
3,854
37.6
World
10,249
100
Source: Eurostat.
Table 2. World Gross Domestic Product, 2000
(Billions of Dollars)
Region/Country
GDP
% of World Total
United States
9,882
31.5
EU-15
7,946
25.3
Eu-15 plus United States
17,828
56.9
Japan
4,677
14.9
Latin America & Caribbean
1,995
6.3
East Asia and Pacific
2,059
6.6
China + Hong Kong
1,243
4.0
Canada
689
2.1
Middle East and Africa
591
1.8
South Asia
620
1.9
Sub -Saharan Africa
322
1.0
World
31,336
100
Source: World Bank, World Development Report - 2002.
7Merger and acquisition activity over the past several years has been dominated by European
takeovers of U.S. companies.

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CRS-5
Cooperation and joint leadership between the two partners have historically
been the key to all previous efforts to liberalize world trade on a multilateral basis,
including the creation of the General Agreement on Tariffs and Trade (GATT) in
1948 and the World Trade Organization (WTO) in 1995. Over the past several years,
the two have worked closely to obtain three new WTO agreements that have
liberalized market access for companies in the fields of financial services and basic
telecommunications, and that have phased out tariffs in information technology
products. The two partners have also cooperated closely in negotiating the terms of
China’s entry into the WTO, as well as the launch in November 2001 of the Doha
Round of Multilateral Trade Negotiations.
Trade tensions, disputes, and rivalry coexist alongside and, in part, result from
these cooperative and generally positive currents. Bilateral trade disputes have been
an important part of the relationship during the Cold War as well as after. They are
nothing new nor unexpected given the huge volume of commercial interactions.
Historically, with the possible exception of agriculture, the disputes have been
managed without excessive political rancor, perhaps due to the balanced nature of the
trade and investment relationship. Statesmen and many academics often emphasize
that the U.S. and EU always have more in common than in dispute, and like to point
out that trade disputes usually affect a tiny fraction (often estimated at 1 percent) of
the trade in goods and services.
All In the Family?
The notion that trade disputes with the European Union generally have engendered
less political rancor and bitterness than U.S. trade disputes with a number of developing
countries and Japan is a popular one. Whether the proposition is valid or not, the most
common explanation put forth relates to the view that transatlantic trade relations are
underpinned by comparable levels of socioeconomic development and by more balanced
economic interactions.
EU member states, unlike many developing countries, have wage rates and labor and
environmental standards that equal or exceed U.S. standards. From one perspective, this
fact shields Europe from charges of “cutthroat” competition and “unfair” trade that are
often directed at low-wage developing countries possessing relatively low labor and
environmental standards.
Several indicators support the argument that trade between the United States and EU
takes place on a “level playing field.” As measured by the value of imports and exports
as a percentage of GDP, for example, a case can be made that both economies are
similarly open to trade. In 2000, the trade openness ratios of both trading partners ranged
between 12 and 13 percent.
The composition of trade and pattern of trade deficits are also used to illustrate that
U.S.-EU trade ties are balanced and non-adversarial. Unlike U.S. trade with Japan, U.S.-
EU trade is characterized by a high level of intra-industry trade, where both sides import
and export similar products such as cars, computers, aircraft, and integrated circuits. Nor
have U.S. merchandise trade deficits with the EU given rise to the same kind of concern
that U.S. trade deficits with Japan or China have sparked. (In the 1990s, the United States
ran trade surpluses with the EU in 1999, 1991, and 1992 totaling $32 billion and from
1993-2001 experienced trade deficits totaling $265 billion). Macroeconomic factors, such
as differential economic growth rates and the exchange rates, are generally thought to
explain most of the fluctuation in the U.S.-EU bilateral deficit, rather than trade barriers
or structural aspects of the trade relationship.

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CRS-6
At the beginning of the new millennium, however, the mood and political
climate in Washington and Brussels may be changing as the two sides have been at
loggerheads over dozens of issues, ranging from agriculture and aircraft to wheat
gluten and wine. The conflicts, according to one former U.S. trade official, are
getting harder to resolve.8 The EU Commissioner for Trade, Pascal Lamy, judges
that “the problems seem to get worse, not better.”9 Moreover, some of the efforts at
dispute resolution have led to escalation and tit-for-tat retaliation. Instead of
compromising in an effort to find solutions, policymakers on both sides sometimes
appear more interested in getting even.
Congress has been in the middle of many of the bilateral trade disputes. By both
introducing and passing legislation, Congress has supported the efforts of U.S.
agricultural and industrial interests to gain better access to EU markets. Congress has
pressured the executive branch to take a harder line against the EU in resolving a
number of disputes, but has also cooperated with the administration in crafting
compromise solutions.
Combined with a growing value of trade now being disputed, the political and
economic effects of trade discord between Brussels and Washington are important
questions. Why are many disputes so difficult to resolve? What can be done to
improve dispute resolution efforts? Are the disputes undermining business
confidence or efforts at economic policy coordination? Are the disputes weakening
the credibility of the WTO dispute settlement system? Do the political disputes
reflect differences between the two partners in terms of basic values and orientations?
If so, could the disputes force a fundamental re-evaluation of the importance of the
bilateral relationship? In short, what is the significance of trade conflict to the
bilateral relationship?
This report considers these overriding questions in four parts. The first part
describes the ebb and flow of trade tensions between the United States and European
Union over the past several years. The second part categorizes and evaluates the trade
conflicts according to their underlying causes and characteristics. In light of the
causes and dimensions of the disputes, the third section examines the potential for
future trade conflict. A final section assesses the role that trade disputes may be
playing in the U.S.- EU economic relationship.
Ebb and Flow of Trade Tensions
U.S.- EU trade tensions have ebbed and flowed in recent years. During 1999 and
2000, the two sides bickered over the EU’s discriminatory policies affecting imports
of bananas and beef treated with hormones. U.S. retaliation against EU trade and
8Aaron, David L. “Communicating--and Failing To--Across the Atlantic, “ European Affairs,
Spring 2000, pp. 24-28.
9Lamy, Pascal. “New Round or No Round: Prospects for Resolving Transatlantic Trade
Disputes and Liberalizing Trade,” Speech Delivered at the European Institute, Washington,
D.C., November 2, 2000.

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CRS-7
credible EU threats of counter retaliation brought the two trading partners to the brink
of a trade war.

Both the beef and banana disputes had a long history. The beef case has its
genesis in an import ban issued by the EU in 1985, and the banana case stemmed
from an EU effort to devise a common import regime for bananas in 1993. In both
cases, after many years of litigation, the WTO found in favor of the U.S. petitions
alleging that EU policies toward these products violated world trade rules. In 1999,
EU offers of compensation for lost exports in lieu of lifting its beef hormone ban
or changing its banana regime were rejected by the United States and prohibitive
(100%) tariffs were imposed on $300 million of mainly luxury products such as
Danish ham, truffles, Roquefort cheese, and Italian handbags. Exports from Britain,
Spain, and France were mostly targeted in the banana case and exports from France,
Germany, Italy, and Denmark in the beef hormone case because these countries were
deemed most responsible and supportive of the discriminatory policies of each case.10
Tensions between the two sides escalated in response to related actions that each
side took. The first step was a decision by the EU to challenge a provision of the
U.S. tax code know as the Foreign Sales Corporation (FSC). This provision provides
around $4.0 billion in income tax benefits for big U.S. companies such as Microsoft
and General Electric by allowing them to funnel overseas profits through offshore tax
havens. The EU argued that the FSC constituted an illegal and trade-distorting
export subsidy.11
While the FSC was enacted in 1984, the EU did not challenge the provision
until November 1997. Many on the U.S. side suspect that the challenge had much
to due to with EU pique over U.S. pressures on bananas and beef. Winning a case
that involved a very large amount of trade may also have been seen by some
Europeans as providing significant negotiating leverage that could be used to settle
other trade disputes as well. The EU argued that its challenge was prompted by an
effort to level the playing field, but there is little indication that European companies,
with the exception of Airbus, were proponents of the challenge.
The case eventually provided the EU with a huge bargaining chip –
authorization from the WTO to impose trade sanctions on a value of exports that
could range from $1 billion - $4 billion – an amount of retaliation that might not only
disrupt trade on a massive scale, but also court a strong U.S. counter-response.12
(A WTO arbitration panel is scheduled to decide the exact amount by June 17, 2002.
The timing of the FSC dispute coincided with implementation of a new
provision in U.S. trade law, known as “carousel retaliation.” Passed by Congress in
10For full discussion of these disputes, see Hanrahan, Charles E. The U.S.-European Banana
Dispute, CRS Report RS20130, and Hanrahan, Charles E. The European Union’s Ban on
Hormone-Treated Meat, Report RS20142.
11For discussion of the economic aspects, see Brumbaugh, David L. The Foreign Sales
Corporation (FSC) Tax Benefit for Exporting and the WTO, CRS Report RS20571.
12Alden, Edward. “U.S. Tax Move in Bid To Avert EU Dispute,” Financial Times, July 25,
2000.

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CRS-8
2000, this provision directed the USTR to rotate items under trade sanctions from
product to product and country to country every six months. The congressional intent
was to build up political pressure in the EU to change its banana and beef policies by
spreading the pain of retaliation among European exporters, who would, in turn,
presumably lobby their respective governments to resolve the beef and banana
disputes.
With the onset of the Bush Administration in 2001, cooperation began to
supercede confrontation. Pascal Lamy, the EU Commissioner for Trade, and Robert
Zoellick, the U.S. Trade Representative, reached agreement on the banana dispute
and U.S. retaliatory tariffs associated with bananas were lifted in April. The two
sides agreed to disagree on the beef hormone dispute, and the EU consented to
provide the United States more time to bring its tax law in conformity with its WTO
obligations. Moreover, Lamy and Zoellick collaborated to launch a new round of
WTO negotiations in November 2001 at the Doha Ministerial.
The lull in trade threats, however, was broken on March 5, 2002 when President
Bush announced his decision to impose fairly steep, albeit temporary, tariffs of up to
30% on approximately $8 billion in steel imports. Canada, Mexico, Israel, and
Jordan – countries that have a free trade agreement with the U.S. – were exempted
from all tariffs.
The President’s decision to rely on a trade remedy and to impose tariffs in a
selective fashion raised cries of indignation and protectionism from European
leaders, and prompted a quick response. On March 27, 2002, citing a threat of
diversion of foreign steel from the U.S. market to Europe, the EU announced
provisional tariffs of 15% to 26% on 15 different steel products. More
provocatively, the EU took the initial steps under an untested provision of the WTO
to impose retaliatory tariffs by June 18, 2002 on U.S. exports with an explicit
authorization to act.
If Brussels decides on swift retaliation rather than waiting for the WTO to rule
on whether the U.S. steel tariffs are a violation of world trade rules, U.S. trade
officials will be under great pressure to retaliate against the retaliation. In this
context, U.S.-EU trade tensions are likely to escalate and potentially more explosive
disputes involving the U.S. tax benefits and the EU’s policy towards new genetically
-engineered products could become more difficult to manage.
Sources of Trade Conflict
Changes in government regulations, laws, or practices that protect or promote
domestic commercial interests at the expense of foreign interests are at the heart of
most trade conflicts. While governments are the sole providers or suppliers of trade
protection, there are a range of parties or interest groups that demand or request
measures that result in protection for domestic parties. These include producers and
workers, as well as consumer and environmental interest groups. Governments may
also be the primary demanders or initiators of actions that have trade protectionist
effects.

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CRS-9
U.S.- EU trade conflicts vary according to the nature of the demand for
protection. Many of the major U.S.-EU trade conflicts are classified and discussed
below according to the nature of the demand for protective action. While many of the
conflicts are spurred by multiple demanders and causes, an attempt is made to
classify disputes according to categories that seemingly account for the overriding
cause or demand for government action.
As most trade conflicts embody a mixture of economic, political, and social
dimensions, there is ample room for disagreement over the dominant cause of any
particular dispute. By and large, this report classifies most of the conflicts according
to American perspectives. U.S.-European disagreements over the cause and nature
of the controversy, of course, provides the basis for many of the conflicts. Whether
the conflict is propelled by protectionist or legitimate domestic aims remains a key
question in some disputes as well.
It is also useful to point out that the causes of trade conflicts can change over
time. The beef hormone case, for example, started out in the eyes of U.S. cattlemen
as an attempt to protect inefficient European cattlemen. Over the course of many
years, the dispute was transformed into a case primarily concerned about consumer
protection. This dynamic further complicates efforts to classify specific conflicts.
Producer Protection: Traditional Trade Conflict
Some conflicts stem primarily from traditional demands from producer or vested
interests for protection or state aids. These kinds of disagreements arise when both
transatlantic trade partners, in support of vested interests and key industries, craft
policies that try to open markets for exports but keep markets protected from imports
as much as possible. Trade conflicts involving agriculture, aerospace, and steel fit
prominently in this grouping. These are longstanding conflicts, prompted by
traditional trade barriers such as subsidies or industrial policy instruments, where the
economic dimensions of the conflict predominate.
Agriculture. Agricultural trade disputes historically have been major sticking
points in transatlantic relations. Accounting for a declining percentage of output and
employment in both the EU and United States, the agricultural sector has produced
a disproportionate amount of the trade tension between the two sides. In the past, the
majority of what can be called traditional conflicts stemmed primarily from
government efforts to shield or protect farmers from the full effects of market forces
(non-traditional agricultural disputes involving food safety and the application of
biotechnology to food production are discussed below under Social, and
Environmental Protection).
From the U.S. perspective, the restrictive trade regime set up by the Common
Agricultural Policy (CAP) has been the real villain. It has been a longstanding U.S.
contention that the CAP is the largest single distortion of global agricultural trade.
American farmers and policymakers have complained over the years that U.S. sales
and profits are adversely affected by (1) EU restrictions on market access that have
protected the European market for European farmers; (2) by EU export subsidies that

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CRS-10
have deflated U.S. sales to third markets; and (3) by EU domestic income support
programs that have kept non-competitive European farmers in business.13
What Is The CAP?
The Common Agricultural Policy of the EU is a domestically-oriented
farm policy whose primary objective is supporting farm income. Since its
inception in 1962, the CAP has been guided by three principles: (1) a free
flow of agricultural commodities within the EU; (2) community preferences
whereby EU products have priority in the internal market over imports; and
(3) common financing of agricultural programs.
Historically, the high support prices of the CAP have provided strong
incentives for investing in EU agriculture. Since 1970, the EU has shifted
from being a net importer to one of the world’s largest net exporters of wheat,
sugar, beef, pork, poultry, and dairy products.
One effect of the CAP has been to raise overall food prices for
consumers in the EU. Most U.S. farm programs, in contrast, support farm
income without raising food prices to the consumer.
Spending on the CAP accounts for over 50 percent of the EU budget.
High budget outlays in the past have caused several budget “crises,” leading
to policy reforms aimed at curbing agricultural expenditures. The EU goal of
expanding its membership to a number of East European countries that have
large agricultural sectors is providing additional pressures for reforming the
CAP.
Agricultural conflict, particularly over the decline in U.S. exports to the EU and
growing EU competition for sales in third markets, was intense in the 1980s. During
this period, the majority of U.S. Section 301 cases were directed at the CAP and
fierce subsidy wars were waged over third country markets.14
Tensions, however, have moderated markedly since the completion of the
Uruguay Round in the mid-1990s. The 1994 Uruguay Round Agreement on
Agriculture defined more clearly what both partners can do in their agricultural and
13For a comparison of agricultural programs, see Becker, Geoffrey S. Agricultural Support
Mechanisms in the European Union:A Comparison with the United States. CRS Report
RL30753.
14Section 301 of the Trade Act of 1974, as amended, requires the USTR to take all
appropriate action, including retaliation, to obtain the removal of any act, policy, or practice
of a foreign government that violates an international agreement or is unjustifiable,
unreasonable or discriminatory, and burdens and restricts U.S. commerce. In practice, it has
been employed mostly on behalf of American exporters fighting foreign import barriers or
subsidized competition in third-country markets.

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trade policies, as well as defined more clearly the quantities of agricultural products
that countries can export with subsidies. The agreement also contained a nine-year
“peace clause” whereby WTO members agreed not to challenge other countries’
subsidies with domestic cases or WTO challenges.15
From the perspective of the EU, the 2002 U.S. farm bill (“The Farm Security
and Rural Investment Act of 2002”) is a matter of considerable concern. The EU
claims that the bill aids farmers in a highly production-distorting way and could
increase U.S. spending on commodities by 70% over previous levels. As a result, the
EU claims that the U.S. has lost any claim to be a credible force for farm policy in
the context of the upcoming Doha WTO negotiating round. Whether the U.S. farm
bill will serve as a prod for other countries to engage in efforts to further reduce
production-distorting support programs or an obstacle remains to be seen.

Aerospace. Claims and counter-claims concerning government support for
the aviation industry have been a major source of friction in U.S.-EU relations over
the past several decades. The fights have focused primarily on EU member state
support for Airbus Industrie, a consortium of four European companies that
collectively produce Airbus aircraft. According to the Office of the U.S. Trade
Representative (USTR), Airbus member governments (France, U.K., Germany and
Spain) have provided massive subsidies since 1967 to their member companies to aid
in the development, production, and marketing of the Airbus family of large civil
aircraft. As described in USTR’s annual trade barrier report, “these subsidies have
enabled Airbus to garner a 50-55% market share, substantially eroding the near
dominant position that Boeing and McDonald Douglas held.” The U.S. has also
accused the EU of providing other forms of support to gain an unfair advantage in
this key sector, including equity infusions, debt forgiveness, debt rollovers,
marketing assistance, and favored access to EU airports and airspace.16
For its part, the EU has long resisted U.S. charges and argued that for strategic
and economic purposes it could not cede the entire passenger market to the
Americans, particularly in the wake of the 1997 Boeing-McDonnell Douglas merger
and the pressing need to maintain sufficient global competition. The Europeans
have also counter-charged that their actions are justified because U.S. aircraft
producers have benefitted from huge indirect governmental subsidies in the form of
military and space contracts and government sponsored aerospace research and
development.17
Current tensions center on the British government’s plan to provide more than
$800 million in development support (so-called “launch aid”) to underwrite its
company’s (Bae System’s) participation in the development of a new Airbus project
15Tangermann, Stefan. “The Common and Uncommon Agricultural Policies,” In
Transatlantic Relations in A Global Economy, Mayer, Otto and Scharrer, Hans-Eckart, eds,
Nomos Verlagsgesellschaft, 1999, p. 143.
16USTR National Trade Estimates Report: 2000, pp. 102-104.
17Burger, Bettina. “Transatlantic Economic Relations: Common Interests and Conflicts in
High Technology and Industrial Policies, “ In Transatlantic Relations in A Global Economy,
p. 110.

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- the A380 – a plane designed to be the world’s largest super-jumbo aircraft and the
first serious rival to Boeing’s 747 jumbo airliner.18
The large commercial aircraft (jet aircraft with 100 or more seats) production
industry is essentially a duopoly consisting of Boeing and Airbus. Until recently
Airbus was a consortium of national aviation firms, some with close government ties,
who cooperated to produce aircraft. As a result of recent European aerospace
consolidation, Airbus is now owned by just two firms, EADS and BAE systems.
Airbus itself is reforming as a public firm under the name Airbus Integrated
Company. In recent years, after two decades of trying, Airbus has come close to
achieving parity in sales with Boeing.
The basic premise of the dispute is whether, as U.S. trade officials contend,
Airbus is a successful participant in the market for large commercial jet aircraft not
because it makes competitive products, which by all standards it does, but because
it has received significant amounts of governmental subsidy and other assistance,
without which it probably would not be able to enter and participate in the market.
The assistance from the governments of France, Germany, Spain, and Great Britain
arguably have included infusions of equity, debt forgiveness, debt rollovers and
marketing assistance, including political and economic pressure on purchasing
governments. Airbus, not surprisingly, does not accept the U.S. view of the reasons
for its success.
At issue in the A380 development is at least $3.1 billion in already identified
direct loans to be provided by seven of the nine EU Member State governments in
the A380 development. The total cost is estimated to be $12 billion. The United
States is concerned that the level of state-aid needed for this project could violate
Member States’ adherence to their bilateral and multilateral obligations, including
the WTO Agreement on Subsidies and Countervailing Measures (SCM). The
United States has urged the Airbus member governments to ensure that the terms and
conditions of their support for the A380 are consistent with commercial terms and
rates and with their international obligations.
During 2001 the Bush Administration pressed the EU for more information
about the financing of the A380. The EU responded with mostly general information
on the scope and nature of government support for the A380. The United States
continues to request more detailed information.
Steel. Conflict over steel is again a high priority issue. Although the EU
industry has undergone significant consolidation and privatization in recent years, the
U.S. government alleges that many EU companies still benefit from earlier state
subsidies and/or engage in dumping steel products (selling at “less than fair value”)
in foreign markets. U.S. steel companies have aggressively used U.S. trade laws to
fight against EU steel imports by filing antidumping and countervailing duty petitions
18The United States also continues to be concerned about the use of European aircraft
certification standards to impede sales to Europe. According the 2000 Trade Estimates
report released by USTR, , processes and procedures employed by the European Joint
Aviation Authorities (JAA) appear cumbersome, and arbitrarily enforced.

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CRS-13
that include imports from EU countries. In return, the EU has countered with five
recent challenges in the WTO against the alleged U.S. misuse of its countervailing
duty and antidumping laws. Moreover, the EU, along with eight other petitioning
countries, initiated on July 10, 2001 a WTO dispute resolution complaint against the
so-called “Byrd” law, which allows duties collected under the U.S. antidumping and
countervailing duty statutes to be returned to the injured U.S. industry. The law was
passed with major backing of the U.S. steel industry.
In addition to “unfair” trade disputes, President Bush announced June 5, 2001
that his Administration would call upon the U.S. International Trade Commission
(ITC) to begin an investigation on international trade in steel under Section 201 of
U.S. trade law. He also announced that he would seek multilateral negotiations with
U.S. trading partners on fundamental issues of global overcapacity and government
subsidies. The President was reacting to continued problems in the U.S. steel
industry, parts of which still have not recovered from a major import surge in 1997-
98. The rise in imports to more than a quarter of U.S. finished steel consumption was
stimulated by financial crises in Asia, Latin America and Russia, which reduced
demand in those markets, and by the dramatically lower dollar-equivalent prices for
many foreign producers. After a partial recovery in 1999-2000, the U.S. industry has
again been affected by imports rising to more than 20% of finished steel
consumption, record-high levels of semi-finished products and falling market
demand and prices.
Section 201 relief, often referred to as “safeguard,” provides for temporary
restrictions on imports that have surged in such quantities as to cause or threaten to
cause serious injury to a domestic industry. The procedure is compatible with the
rules of the World Trade Organization (WTO). A Section 201 case does not in itself
need to demonstrate dumping, subsidization or other unfair practices by U.S. trading
partners.
The ITC in October determined that U.S. producers of about 80% of U.S.-made
steel are being injured by imports. The decision does not automatically mean that
quotas or duties will be imposed on the products found to be causing the injury. The
decision is left to the President, following recommendations from ITC on what
remedy to impose.
On March 5, 2002, President Bush announced trade remedies for all products
on which the ITC had found substantial injury except two speciality categories. All
remedies or import restrictions will be for a 3-year period beginning on March 20,
2002. Th tariffs will be up to 30% on approximately $8 billion in steel imports.
Canada, Mexico, and other U.S. free trade partners were exempted from all tariffs.
The U.S. decision raised cries of indignation and protectionism from European
leaders, and prompted a quick response. On March 27, 2002, citing a threat of
diversion of steel from the U.S. market to Europe, the EU announced provisional
tariffs of 15% to 26% on 15 different steel products. More provocatively, the EU
took initial steps under an untested provision of the WTO safeguards agreement to
impose retaliatory tariffs by as early as June 18, 2002 on U.S. exports without an
explicit authorization to act.

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CRS-14
If Brussels decides on swift retaliation rather than waits for the WTO to rule on
whether the U.S. steel tariffs are a violation of world trade rules, U.S. trade officials
will be under great pressure to counter-retaliate. In this context, U.S.-EU trade
tensions are likely to escalate and potentially more explosive disputes involving the
tax benefit for U.S. exports and the EU’s policy towards approval of ne GE products
could become more difficult to manage.
Clashing State Interests: Foreign Policy Conflict
This category comprises conflicts where the United States or the European
Union has initiated actions or measures to protect or promote their political and
economic interests, often in the absence of significant private sector pressures. The
underlying causes of these disputes are quite different foreign policy goals and
priorities, if not interests. Most of these conflicts have important economic interests
at stake, but seldom are the economic stakes viewed as the overriding cause or
explanation of the action that ostensibly precipitated the disagreement.
From the EU perspective, extraterritorial provisions of U.S. sanctions
legislation and unilateralism in U.S. trade legislation are concerns that fit into this
category. From a U.S. perspective, the EU’s preferential dealings with third
countries, the FSC export tax-rebate dispute, and challenges to varied U.S. trade laws
could be said to be driven primarily by EU foreign policy priorities.
EU Concerns. U.S. legislation which requires the imposition of trade
sanctions for foreign policy or non-trade reasons has been a major concern of the EU.
While the EU often shares many of the foreign policy goals of the United States that
are addressed in the offending legislation, it has opposed the extraterritorial
provisions of certain pieces of U.S. legislation that seek to unilaterally regulate or
control trade and investment activities conducted by companies outside the United
States. Some of the EU’s complaints are directed at the Cuban Liberty and
Democratic Solidarity Act of 1996 (so-called Helms-Burton) and the Iran and Libya
Sanctions Act (ILSA), which threaten the extraterritorial imposition of U.S. sanctions
against European firms doing business in Cuba, Iran, and Libya. Other EU concerns
about different instances of U.S. extra-territoriality relate to various environmentally
driven embargoes, export control legislation, and sub-federal (states) procurement
provisions.19
The Helms-Burton Act, passed in 1996 after the Cuban military shot down two
small U.S. based civilian planes, led to a firestorm of protest in Europe. Perhaps not
since the U.S. imposed sanctions against companies doing business on a Russian
pipeline in the early 1980s had the European outcry been so vociferous. The bill,
which was designed to further isolate Cuba economically, imposed a secondary
19The EU has been particularly critical of efforts by U.S. states and cities to limit
government procurement opportunities as a result of the companies’ business links with
particular foreign countries. A law adopted by Massachusetts focused on corporate
involvement with Burma had been a considerable concern until it was overturned by the
Supreme Court on June 19, 2000.

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boycott against foreign nationals and companies that “traffic “in Cuban-expropriated
properties formerly owned by U.S. nationals.20
Maintaining that Helms-Burton is extraterritorial and a violation of WTO rules,
the EU passed countervailing legislation against its enforcement and initiated a WTO
panel investigation. The U.S. responded by claiming the WTO lacked competence
to investigate the matter because Helms-Burton is a “national security” issue and
therefore should qualify for a waiver under section 21 of the GATT. After a year of
high-level political negotiations, an understanding was reached in April 1997 that
charted a longer-term solution through negotiation of international disciplines and
principles for greater protection of foreign investment, combined with the proposed
amendment of the Helms-Burton Act. In May 1998, the United States agreed to
either implement or seek measures that would protect EU companies from any
penalties called for in Helms-Burton and Iran-Libya Sanction Act.21
Closely related to EU concerns about extraterritoriality are complaints about
U.S. trade laws and procedures that allow for the “unilateral” imposition of trade
sanctions against offending countries or companies. Most EU complaints relate to
the “Section 301" family of trade provisions which authorize the executive branch
to impose trade sanctions in an effort to enforce U.S. rights under international trade
agreements and to combat foreign unfair trade practices. In addition to general trade
barriers which the U.S. government deems discriminate against or burden U.S.
commerce, other more specialized provisions dealing with government procurement
barriers and intellectual property rights violations are also subject to EU charges as
examples of U.S. unilateralism.22
Additionally upsetting to some American interests, the EU during this same
period has filed a number of mostly technical challenges in the WTO to a variety
of U.S. trade statutes, including Section 301, a law (section 337) dealing with the
protection of intellectual property rights, and the U.S. antidumping laws. Some
Americans view these WTO challenges as part of a systematic and concerted EU
strategy to weaken or gut U.S. trade laws, perhaps in an effort to gain negotiating
leverage that could be used in future efforts to arrive a transatlantic consensus on the
agenda for a new round of multilateral trade negotiations.23
U.S. Complaints. The United States has expressed concerns about the
discriminatory impact of preferential agreements the EU has negotiated with third
countries. These include preferential trade agreements with prospective EU
members in Eastern and Central Europe and with developing countries in Africa and
20This provision has been waived by President Clinton annually since its enactment.
21 “EU, Spain Warn U.S. of Action Over Helms-Burton Cuba Measure,” International Trade
Reporter, August 18, 1999, p. 1364.
22On May 1, 2000, USTR announced the successful resolution of a dispute with Germany
over procurement procedures in the heavy electrical sector, but placed the EU, Italy, Ireland,
and Greece on the “priority watch list” for intellectual property rights violations.
23Statement of Senator Max Baucus, “Improving U.S. Trade Law,” Conference on
America’s Trade Agenda After the Battle in Seattle, July 20, 2000.

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CRS-16
the Caribbean. As a result of these agreements, only eight countries including the
United States, Japan and Canada, now receive MFN treatment for their exports to
EU. The rest of the world is accorded better than MFN tariff treatment under these
agreements, which the WTO has determined, are increasingly structured to benefit
the EU, not just the other signatory in the agreement.24
To address this problem, the United States has been pressing countries like
Hungary and Poland to reduce tariffs on industrial products down to the level of the
EU’s common external tariff (CXT) in advance of joining the EU. Those countries
apply lower tariff rates on EU products, which the United States believes
disadvantages U.S. exporters and may violate world trade rules. U.S. companies most
concerned about differential tariff rates applied to U.S. and EU products include
those that export aircraft, autos, and electrical generating equipment.25 Withdrawal
of Generalized System of Preferences (GSP) duty-free benefits is one threat the U.S.
reportedly has employed to address the problem.26
Some U.S. observers have also worried that enlargement and institutional
deepening have become EU policy goals that are limiting its commitment to global
trade liberalization. Under this view, the EU’s “internal” preoccupation translates
into less interest in negotiating any new MFN or WTO obligations because such
obligations could intensify adjustment pressures EU firms are experiencing as a
result of the drive toward a single market and the heightened import competition
resulting from preferential tariff agreements negotiated with various regional trading
partners.27 At the same time, the United States has also supported both enlargement
and deepening in the political interest of “European stability”, thus raising a question
concerning the compatibility of U.S. political and trade goals.
For its part, the EU has expressed fears that free trade agreements being pursued
by the United States could lead to discrimination against its exports. Specifically, the
EU is concerned that U.S. efforts to negotiate free trade agreements with Asia
through the Asian Pacific Economic Cooperation (APEC) process and with Latin
America through the Free Trade Area of the Americas (FTAA) could lead to
discrimination against EU exports. This, in turn, has been a spur for the EU to
negotiate its own free trade accords with Mexico, and the Mercosur countries of
Latin America.
A different U.S. concern relates to the Foreign Sales Corporation (FSC)
provisions of the U.S. tax code. This provision allows U.S. firms to exempt between
24 “WTO Members Use Trade Policy Review To Criticize EU Practices, Inside U.S. Trade,
July 14, 2000.
25 “U.S., EU Split on Differential Tariffs in Prospective EU Members,” Inside U.S. Trade,
April 14, 2000.
26 “Hungary Resisting Commerce Demands to Adopt EU Common Tariff,” Inside U.S.
Trade, August 6, 1999.
27Schott, Jeffrey J. “Whether U.S.-EU Trade Relations?, in Eichengreen, Barry, ed.,
Transatlantic Economic Relations in the Post-Cold War Era, Council on Foreign Relations,
1998.

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15% and 30% of export income from taxation by sheltering some income in offshore
foreign sales corporations. General Electric, Boeing, Motorola, Caterpillar, Allied
Signal, Cisco, Monsanto, and Archer Daniels Midland are among the top
beneficiaries of this arrangement.28
The FSC was enacted in 1984 to replace the Domestic International Sales
Corporation (DISC) - a different tax benefit for exporting that the EU had
successfully challenged in the GATT. Both provisions were designed to stimulate
the U.S. economy through increased exports. While the European officials may not
have been fully satisfied that the FSC was fully GATT legal, they nevertheless waited
thirteen years (until November 1997) to take the first steps to challenge the scheme
under the WTO dispute settlement system. The challenge, as explained previously,
was successful, with the requirement that the U.S. bring the FSC provisions in
conformity with the WTO by October 2000. Absent compliance, the EU could
request compensation from the United States or request the WTO to authorize
retaliation on as much as $4 billion of U.S. exports. Such a scenario, most observers
feel, could risk the outbreak of a major trade war.
The EU argues that it challenged the FSC because it violates WTO subsidy
obligations, distorts international competition, and provides U.S. exporters unfair
advantages. Yet, with the possible exception of Airbus, the Brussels challenge
appears to have very limited backing from European business.29 A number of
European subsidiaries operating in the United States, in fact, benefit from the FSC.
A more common explanation is that the EU challenge had more to do with an
attempt to gain negotiating leverage over the United States, as well as with getting
even for U.S. pressures over beef and bananas, than to redress a perceived
commercial disadvantage. A Financial Times editorial views the challenge as “tit-
for-tat retaliation for U.S. bullying in trade disputes over bananas and beef. Having
won its point, the EU now seems determined – in the name of upholding trade rules
– to make the U.S. squirm.”30
Social, and Environmental Protection: Domestic Policy
Conflict
This category of conflict deals with an array of domestic policies, including
regulations and standards, that produce conflict by altering the terms of competition
in the name of promoting social, cultural, or environmental objectives. Most
generally, domestic producers benefit, either intentionally or inadvertently, at the
expense of foreign producers. Many of these clashes have occurred as a result of
efforts by both partners to strengthen food safety and environmental standards; others
28Brumbaugh, David L. The Foreign Sales Corporation (FSC) Tax Benefit for Exporting
and the WTO, CRS Report RS20571.
29One source cites Airbus Industrie’s concerns in the early 1990s over the FSC benefits
Boeing was receiving. See Airline Business, “Flying FSCs Anger Airbus,” May 1993, p.
21.
30 “Taxing the WTO to the Limit,” Financial Times, September 4, 2000, p. 8.

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have occurred as a result of the EU’s need to harmonize standards in support of its
drive towards a single market. Still others have occurred as a result of a drive to
maintain or promote cultural values and distinctiveness.
These disputes tend to involve complex new issues that have arisen as a result
of increased economic interdependence and of significant U.S.-EU differences in
social and regulatory approaches. The EU approach to regulation is based on the
notion that every important economic activity should take place under a legal
framework, whereas the central premise of the U.S. approach is that government does
not need to regulate unless a problem arises.
While the impact on trade may be the same as in other disputes, these conflicts
are often characterized by delicate considerations of motives. Parties that have
initiated the action, often consumer or environmental groups, tend to view the
protective impact as an indirect consequence of an attempt to attain some valid
domestic objective. Trade barriers motivated by food safety, for example, may be
considered more legitimate by the public than barriers motivated by economic
protectionism. If food safety is perceived as being sacrificed to free trade, support
for free trade could erode. Similarly, if food safety is used as a disguise for
protectionism, support for free trade could also erode.
The four disputes summarized below are rooted in different regulatory
approaches and public preferences. Disputes over beef hormone and genetically
engineered crops stem primarily from stronger European societal preferences for high
food safety standards. A longstanding dispute over the EU’s audio-visual sector has
a strong cultural basis, steeped in a perceived need to preserve West European society
from the U.S. dominance. And a clash over an EU regulation banning airplanes
outfitted with “hushkitted” or retooled engines ostensibly is driven by
environmental demands to reduce noise pollution surrounding European airports.
Numerous other disputes could also be included in the following discussion.
For example, a recently settled dispute over data privacy reflects very different
approaches between the U.S. and EU, as well as popular attitudes, towards the
protection of personal information that is transmitted electronically. The issue of
“multi-functionality” in agriculture, where the Europeans claim agriculture is more
than just another industry, has deep cultural roots that divide the two sides. Disputes
involving environmental, wildlife, and animal welfare protection, such as U.S.
restrictions on imports of tuna from Europe and EU efforts to ban fur imports from
the United States, also reflect competing social and cultural differences.
Beef Hormones. Begun in 1985, the dispute over the EU ban on the
production and importation of meat treated with growth-promoting hormones is one
of the most bitter and protracted disputes between the United States and Europe. The
dispute stems from the divergence of U.S. and EU standards for the sale of beef and
beef products from animals that have been treated with growth hormones.
The EU justified its ban to protect the health and safety of consumers. Highly
publicized accounts in the early 1980s of Italian children growing unusual sexual
characteristics as a result of consuming veal treated with hormones prompted a
vigorous consumer and environmental campaign to prohibit growth hormones in

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animal production. Coupled with a strong ecology movement in favor of ‘natural’
food products, the European Community (EC) implemented the ban in 1989.31
Consumer support for the ban was buttressed by economic considerations. In
the mid-1980s, the CAP had led to the accumulation of large and costly beef
surpluses, perhaps making any measure that would limit beef imports likely to
compete with domestic production quite tempting.32
In January 1996, the United States initiated a challenge in the WTO to the ban
on the grounds that it was inconsistent with the WTO Sanitary and Phytosanitary
Agreement (SPS). This agreement, which in fact was prompted by the beef
hormone controversy, defined new criteria that had to be met when a country
imposed food safety import regulations more stringent than those agreed upon in
international standards. These included scientific assessment that the measure was
needed, along with a risk assessment. Despite a lack of scientific evidence that the
hormones posed a health risk, the EU refused to remove the ban after receiving an
adverse WTO panel finding in 1998. Many European politicians countered that even
if numerous scientific studies had found hormone-treated beef to be harmless,
European consumers would still be opposed to the meat.33
The European position is steeped in what is known as the”precautionary
principle.” This approach allows that an industrial activity or product that is thought
to cause possible harm to humans or the environment should be banned even if only
limited scientific evidence exists that it may be harmful. The U.S. approach to food
safety regulatory activities, in contrast, tends to rely on risk assessment as an
important method by which science can be used to address food safety issues.34
Spearheaded by concern for consumer protection, the EU decided in 1999 to
accept U.S. retaliation against its exports, rather than to lift the ban. While the EU
offered to negotiate compensation, the United States determined that would be
acceptable only as an interim solution until the EU lifted the ban. U.S. and EU
negotiators have yet to find a compromise solution.
On the surface, the economic stakes for the United States are relatively small.
The ban affects an estimated $100-$200 million in lost exports – less than one-tenth
of one percent of U.S. exports to the EU in 1999. But many U.S. interest groups
support a hard line in this case because they fear that it could set a precedent for
keeping other products out of Europe based on health standards that lack a legitimate
scientific basis by U.S. standards. Other U.S. parties are concerned that the ban stri
31On November 1, 1993, The Treaty on European Union (Maastricht Treaty) went into
effect, establishing the European Union , which encompasses the EC.
32Hanrahan, Charles. The European Unions’s Ban on Hormone-Treated Meat, CRS Report
RS20142.
33The EU supports the precautionary principle, and states that it is waiting for studies that
will show more precisely any dangers posed by the hormones.
34Parish, Mickey. “Science Behind the Regulation of Food Safety: Risk Assessment and the
Precautionary Principle,” Congressional Research Service, August 27, 1999.

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kes at a much larger U.S. interest: its comparative advantage in applying modern
technological advances to agricultural production. If beef from cows that had
ingested growth hormones could be banned, what about processed food made with
chemical additives or genetically engineered crops?35
The EU has indicated its intention to make the ban on hormone-treated meat
permanent, while at the same time expressing some openness to discussions about
a compensation arrangement which would increase the EU’s market access for non-
hormone treated beef from the United States. To date, however, EU offers of
compensation for lost U.S. meat exports in lieu of lifting the ban have been rejected
by the United States.
Genetically Engineered Crops. Differences between the United States and
the EU over genetically engineered (GE) crops and food products that contain them
pose a potential threat to, and in some cases have already disrupted, U.S. agricultural
trade. Underlying the conflicts are pronounced differences between the United States
and EU about GE products and their potential health and environmental effects.
Widespread farmer adoption of bio-engineered crops in the United States makes
consumer acceptance of GE crops and foods at home and abroad critical to
producers, processors, and exporters. U.S. farmers use GE crops because they can
reduce input costs or make field work more flexible. Supporters of GE crops
maintain that the technology also holds promise for enhancing agricultural
productivity and improving nutrition in developing countries. U.S. consumers, with
some exceptions, have been generally accepting of the health and safety of GE foods
and willing to put their trust in a credible regulatory process.
In contrast, EU consumers, environmentalists, and some scientists maintain that
the long-term effects of GE foods on health and the environment are unknown and
not scientifically established. By and large, Europeans are more risk averse to the
human health and safety issues associated with bio-engineered food products than
U.S. citizens.
In 1999 the EU instituted a de facto moratorium on any new approval of GE
products. The moratorium has halted some $300 million in U.S. corn shipments. EU
policymakers also moved toward establishing mandatory labeling requirements for
products containing GE ingredients. Subsequently, the EU has put in place legislation
to restart the process of approving GE crop varieties, but has yet to complete
regulations on labeling GE foods. On July 25, 2001, the European Commission
proposed stringent rules on labeling and traceability of GM food and animal feed.
U.S. biotechnology, food, and agriculture interests are concerned that these
regulations, if adopted by the EU governments and EU Parliament, will deny U.S.
products entry into the EU market and may seek to challenge them in the WTO.
The Bush Administration in late August 2001 reiterated its view that regulatory
approaches toward products of biotechnology should be transparent, predictable, and
35Vogel, David, Barriers or Benefits: Regulation in Transatlantic Trade, Brookings
Institution, 1997, pp. 23-24.

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based on sound science. Moreover, the Administration made clear that it would
mount an aggressive campaign against proposed EU labeling and traceability
regulations by pressing the EU not to adopt regulations that would violate WTO rules
or hurt U.S. exports. On February 7, 2002, USTR Zoellick stated that the United
States is “very strongly” considering filing a formal dispute settlement complaint in
the WTO over the EU’s failure to lift its moratorium on imports of GMOs. EU Trade
Commissioner Pascal Lamy countered that U.S. action along these lines would be
“immensely counterproductive” because it would be seen as a challenge to
“consumer fears and perceptions.”
The April 2002 National Trade Estimates report, released by the Office of the
U.S. Trade Representative, warned the U.S. is evaluating its next steps for altering
the EU moratorium. A U.S. trade official defined that as including both continued
consultations with the Commission, which is trying to unblock the approval process,
as well as bringing a WTO case. Few observers predict a change in the EU approval
process will occur this year.
Audio-Visual Sector. This dispute dates back to 1989 when the EU issued
a Broadcast Directive that required that a majority of entertainment broadcast
transmission time be reserved for programs of European origin “where practicable”
and “by appropriate means.” All EU member states enacted legislation implementing
the Broadcast Directive by 1993.36
Implementation of the directive has varied from country to country. In general,
efforts to strengthen European content quotas have failed to materialize, but a
number of countries have passed specific laws that hinder the free flow of
programming. France, for example, has prime time rules that limit the access of U.S.
programs in prime time. Italy also has a European content prime time rule, as well
as requirements that large movie theaters show EU films on a “stable” basis. Spain
requires television stations to reserve 51% of their annual broadcast time to European
audiovisual works.
Within the EU, the Broadcast directive has been controversial. Efforts to tighten
restrictions have been opposed by Germany and Britain and by some elements of the
European industry. Moreover, consumer demand for foreign movies, coupled with
technological innovation through the introduction of cable and satellite television,
have undermined movement in the direction of increased protection.
The dispute highlights European concerns, particularly in France and Italy,
about creeping “Americanization” threatening to undermine their national identities
and cultures. It also underlines a fundamental U.S.-EU divide over the role of cultural
and social issues in trade disputes. While the U.S. tends to assign priority weight to
maximizing the economic value of efficiency in trade negotiations, the EU, by
attitude and law, places more weight on environmental and cultural values.
Aircraft Hushkits. European skies are quite crowded with aircraft, airports
tend to be situated in heavily populated areas, and there is a serious noise problem.
36Office of the United States Trade Representative, 2000 Trade Barrier Report, p. 113.

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Public concerns about aircraft noise are combined with environmental policy
discussions about emissions and greenhouse gases. To deal with this problem, the
EU attempted in 1997 to develop an EU-wide noise standard. When it became clear
that any such standard would likely impose high economic costs on European
manufactures and airlines, the EU advanced a regulation that would limit the
operation of “hushkitted” aircraft in European skies.
Hushkitting is a process that involves a combination of strategies, including
renovated engine enclosures and replacement engine components, designed to reduce
aircraft noise. Under standards adopted by the EU, it does not provide major
reductions in noise levels.37
As formally implemented by the EU on May 4, 2000, the vast majority of
aircraft affected by the regulation are of U.S. manufacture. Also adversely affected
are mostly U.S. manufacturers of noise reduction technology and new engines for
older aircraft. Conversely, all European Airbus aircraft are unaffected and there are
no major European hushkit producers. The U.S. aerospace industry estimates that the
regulation has cost its airlines and manufacturers $2 billion.
On March 14, 2000, the United States filed a motion with the International Civil
Aviation Organization (ICAO) seeking relief from the EU’s regulation. The U.S.
case maintained that the regulation does not comply with ICAO regulations and
discriminates against U.S. interests. Proceedings were suspended pending settlement
negotiations. In early 2002, a settlement was reached under which the EU repealed
the regulation and the U.S. withdrew its complaint.
Potential For Future Conflict
The three categories of trade conflicts - traditional, foreign policy, and domestic
- appear to offer different possibilities for future conflict. This is due not only to the
fact that the causes and dimensions of these categories of conflicts differ, but also
because the institutional relationships and forces that affect the supply of and demand
for protection are operative in varying degrees from category to category. These
factors include the presence or absence of bilateral or multilateral agreements and
rules that govern the settlement of the disputes, the extent to which the disputes fit
into the standard free trade versus protectionism dichotomy, and the relevance of
underlying economic and political trends.
! Bilateral and multilateral trade agreements can dampen the inclination of
governments to supply protection and the private sector to demand protection
by providing a fairly detailed “road map” of permissible actions and
obligations. While often litigated and disputed, the obligations tend to be
relatively clear-cut and help resolve disagreements. When new spats arise,
built-in procedures of many agreements can facilitate a settlement or help
avoid escalation.
37For a full discussion, see Fischer, John W. Aircraft Hushkits: Noise and International
Trade, CRS Report RL30547.

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! Conflicts that fall into the standard free trade versus protectionism dichotomy
also have a built-in potential for undercutting any rationale governments may
have to supply protection or private parties may use in demanding protection.
This happens due to an ideological consensus in both the U.S. and EU in favor
of resisting protectionism on both economic and political grounds. As a
result, most demands for protection from producer interests must be justified
as exceptions to the generalized support for freer trade arrangements and
policies.
! Diverse economic and political trends can also suppress the supply and
demand for protection. For example, declining support for industrial policy
initiatives, as has been the case in both the U.S. and EU, could make industry-
specific pleas for government assistance less compelling. High priority
political commitments, such as the EU’s policy towards enlargement, may
also create incentives for reform and liberalization as opposed to protection.
Applying these criteria to the three categories of trade disputes, there are
grounds for judging that traditional trade conflicts may become less disruptive to the
bilateral relationship in the future, but more limited grounds for projecting a
diminution of foreign policy induced friction. The prospects for future domestic-
policy related trade disputes fall somewhere in between these two extremes, with
reasons for foreseeing a reduction in friction associated with some disputes, but not
all. The basis for this assessment is presented below.
Traditional Trade Conflict
Traditional trade conflicts, involving demands from producer interests for
protection or state aids, by definition raise fairly routine commercial questions that
have been addressed by governments for decades. As a result, most are governed by
some bilateral or multilateral agreement or understanding. Key elements of conflicts
involving agriculture, aerospace, and steel are no exception.
The Uruguay Round Agreement on Agriculture has significantly dampened
trade conflict in the areas of EU home market protection and export subsidy wars for
third country markets. A 1992 U.S.-EU agreement on aircraft production subsidies
and the multilateral agreement on subsidies provides the terms of engagement for
any new clashes over “launch” aid for the A380. Steel trade conflict in recent years
has pivoted around the utilization of anti-dumping and safeguard laws, procedures
that both the U.S. and EU employ with considerable frequency and which both sides
in the past have considered legitimate. The fact that the steel trade battle in 2002 has
been so heated my stem from a mutual perception that each side is not adhering to
the letter or spirit of the safeguards agreement.

Traditional trade conflicts also tend to fit into the standard free trade versus
protectionism dichotomy. As in the case of the agriculture, aerospace, or steel,
proposals or requests for additional protection or promotion will be subject to full
transparency, investigation, and debate. Given that both the United States and
European Union have open societies with an ideological consensus in favor of

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competition and open markets, petitioners for protection will have the burden of
arguing that their request merits being excepted from the dominant policy orientation.

Several economic and political trends may also serve to limit future disputes
involving producer protection. These include a decline of support for industrial
policy in both Brussels and Washington, budgetary pressures in the EU, and a rising
level of foreign direct investment and corporate mergers.
Support for industrial policy initiatives, mostly efforts to use state aids to boost
the competitiveness of specific sectors or build up national champions in particular
industries, were considerable in the late 1980s and early 1990s in both the EU and
United States. Based on new rationales for targeted assistance from states, the
support for industrial policies posed new challenges to the maintenance of free trade
orthodoxy. For a variety of reasons, such policies today are viewed quite skeptically
in both Brussels and Washington, thereby lessening pressures for what many
observers construed as a new and disguised vehicle for protectionism.
The issue of subsidies or state aids is closely related to the industrial policy
debate. In Europe, with the movement towards a single market that is deregulated
and more competitive, subsidies and state aids to individual companies have been
increasingly challenged, scrutinized, and curtailed. This trend, which is reenforced
by budgetary constraints associated with fiscal targets required of member states
participating in the European Monetary Union, could serve not only as a strong force
for reducing conflict in aviation and steel, but in other sectors as well.38
A rising level of foreign direct investment and a wave of new corporate
mergers are also forces for dampening demand for protection. As these trends
accelerate, many formerly domestic or nationally-based industries will become
increasingly globalized. The Daimler-Chrysler merger is an example where the
answer to the question of ‘who is us?’ becomes increasingly blurred. Even in the
production of a new Airbus plane, it is estimated that American suppliers will
provide a considerable amount of the sourcing of the parts. These developments, in
turn, tend to create forces that may moderate demands for protection.39
A number of cross currents, of course, could create a much different outlook.
Historically, many industries have been quite creative and successful in justifying
demands for protection based on some unique argument. This has been particularly
true in the area of agriculture where both sides have argued that agriculture is not just
another industry.
The strength of the European agricultural lobby rests in part on public support
for it as a means of preserving a way of life and a particular kind of environment
perceived as worth preserving. On-going efforts in Brussels to reform the CAP must
38Kahler, Miles. Regional Futures and Transatlantic Economic Relations, European Studies
Association, 1995, p. 50.
39Kahler, Miles, Regional Futures and Transatlantic Economic Relations, p. 51..

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CRS-25
deal with this challenge. Absent reform, the peace clause, which ends in 2003, may
only prove to be a nine-year truce.40
Morever, fundamental economic conditions can change rapidly. Bumper world
crops creating an oversupply of basic agricultural commodities or an economic
downturn creating an over-supply of steel could ignite old trade battles in steel and
agriculture once again.
Foreign Policy Conflict
Unlike traditional trade conflicts, foreign policy inspired trade squabbles tend
to lack the same kind of institutional arrangements and pressures that dampen the
supply of and demand for protection. Nor are these conflicts easily framed along free
trade and protectionism lines. Some of these conflicts, but not all, may be moderated
in the future by lobbying efforts of big business on both sides of the Atlantic to
maintain stable commercial ties. However, if Brussels or Washington is determined
to use trade to achieve foreign policy objectives, lobbying efforts are unlikely to be
successful in the absence of a transatlantic agreement to treat these issues in a more
coherent fashion.
In most U.S.-EU sanctions conflicts, there are no bilateral or multilateral
understandings that can help resolve very basic foreign policy differences over how
to respond to violations by third countries of international norms affecting human
rights or security. Many trade measures taken in a foreign policy context are either
exempt from WTO disciplines because they are either mandated by the United
Nations or applied against non-WTO countries, or only very loosely regulated by the
WTO. The latter arises because the national security provision of GATT (Article 21)
provides wide latitude for countries to pursue sanctions if they deem the measures
to be in their national security interest.41
WTO rules also provide little guidance and “rules of the road” concerning
preferential regional agreements. While the WTO set up a new Committee on
Regional Trade Agreements in 1995 to highlight abuses of Article 24 provisions that
allow regional agreements to deviate from the non-discrimination principle of the
WTO, few challenges have been launched. A major obstacle has been the difficulty
of measuring the value of trade diverted from efficient producers to the beneficiaries
of preferences granted. As a result, the drive to cut preferential deals continues to
grow (along with mistrust) while the ability to challenge deals that raise new trade
barriers remains quite weak.
While the U.S. pursuit of market opening through unilateral means has declined
since passage of the Uruguay Round Agreements in 1995, pressures in the United
States to revisit this issue could grow. The EU’s refusal to implement WTO panel
findings on bananas and beef hormone, coupled with continued attacks on U.S. trade
laws, could lead U.S. policymakers to reconsider this Uruguay Round bargain of
40Ibid.
41Schott, Jeffrey, “Whither U.S.- European Trade Relations?,” p. 59.

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CRS-26
limits imposed on unilateralism in return for a more binding dispute settlement
process.
The dispute the U.S. export tax benefit program raises a different issue. It can
be argued that the WTO was not the proper forum in which the dispute should have
been pursued. But existing WTO “rules of the road” evidently presented a target of
opportunity for achieving other foreign policy goals, namely enhancing the EU’s
negotiating leverage vis-à-vis Washington.
Pressures and temptations to apply sanctions against countries that violate
international norms, to cut preferential trade deals, to act unilaterally in the pursuit
of national trade interests, and to use the WTO to achieve foreign policy objectives
are unlikely to go away. Nor are efforts of big and pro-trade business lobbies to curb
future actions along these lines likely to be successful in the absence of a broad
diplomatic undertaking or a pledge committing both sides to refrain from such
actions. Such a pledge or non-aggression pact has been suggested as a way to bring
greater coherence in areas of disagreement and in helping to achieve shared goals in
a less contentious atmosphere. But little progress has been made, perhaps due to the
high level of mutual suspicions, differences in diplomatic approaches, and foreign
policy-making machinery.42
Domestic Policy Conflict
The United States and the EU have made much progress bilaterally in mitigating
divergent standards and certification systems as a source of bilateral trade conflict.
Efforts have also been made multilaterally to manage trade conflicts that are driven
by divergent regulations between the two partners in the areas of health, safety, and
environmental protection. Although most of the domestic policy conflicts do not fit
easily into a free trade verus protectionism framework, the outcomes often have led
one side or the other to suspect that protectionist motives are at play. A variety of
factors, including technological progress and changes in consumer preferences, may
facilitate settlement of a number of the deep-seated issues that divide the U.S. and
the EU.
Bilateral efforts to promote regulatory cooperation have been a top priority in
both governments and private sectors since the signing of the “New Transatlantic
Agenda” (NTA) and “Action Plan” in late 1995. The creation of the Transatlantic
Business Dialogue (TABD), a multinational corporation-led initiative to lower trade
and investment barriers across the Atlantic, spearheaded efforts to focus particular
attention on problems posed by divergent standards and certification systems. In
addition to promoting convergence in regulatory systems through the principle of
“approved once, accepted everywhere,” efforts were undertaken to negotiate mutual
recognition agreements (MRAs) covering key sectors such as pharmaceuticals and
medical devices, and telecommunications equipment.43
42Frost, Ellen L. Transatlantic Trade: A Strategic Agenda. Institute for International
Economics, 1997, pp. 54-64.
43Schott, Jeffrey. “Whither U.S. -European Trade Relations,” p. 56.

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In June 1997, the two sides reached agreement on a package of MRA’s affecting
six sectors, including electrical equipment, pharmaceutical products,
telecommunications and information technology equipment. Each side basically
accepted the others’ inspection, testing, and certification standards in these sectors.
The agreements, which covered around $50 billion in U.S.-EU trade, allowed
European companies to sell products directly into the U.S. market after they have
been tested and certified to U.S. health and safety standards, and vice versa. In
addition to saving companies hundred of millions of dollars in redundant costs per
year, the agreements had the potential to preempt a number of potential trade
disputes.44
Under the 1998 Transatlantic Economic Partnership (TEP), the two sides agreed
to begin negotiation of MRA’s in other sectors, including regulatory processes
connected with biotechnology. How far this process may extend is an open question,
particularly given that the application of biotechnology to food production has been
a deeply divisive issue as evidenced by the beef hormone and GMO cases that have
resulted in import bans.45
There are numerous challenges raised by the application of modern
biotechnology to food production. The Uruguay Round Sanitary and Phytosanitary
Standards (SPS) Agreement was designed to deal with this issue. It requires
countries that impose regulations or trade bans to protect the health of plants,
animals, and people to base such decisions on risk assessments on sound scientific
evidence.46 But the SPS requirement of a sound scientific basis is open to varying
interpretations.
Ambiguities in the SPS agreement are complicated because many European
consumers may believe that avoidance of production practices associated with
biotechnology is a value in itself. For these consumers, scientific studies showing
that such technologies do not result in threats to human or animal health may not be
convincing. Given these strong views, many European officials want leeway to
impose trade restrictions on a “precautionary basis” and others want to renegotiate
the SPS agreement. Both avenues could open up a large loophole for discriminatory
trade barriers.
More ominously, some analysts are concerned that European agricultural policy
makers may be “under pressures to guarantee higher levels of safety than strictly is
necessary in order to maintain consumer confidence in the food system.”47 Even if
these conflicts are not primarily due to the deliberate use of health, safety, or
44Frost, Ellen. Transatlantic Trade: A Strategic Agenda, p. 6
45Implementation of the 1997 MRA’s is also currently being contested. See “EU Accuses
U.S. of Failing to Implement MRA’s on Electrical Safety, Pharmaceuticals,” International
Trade Reporter, November 2, 2000.
46A related multilateral code, the Agreement on Technical Barriers to Trade (TBT), covers
other types of regulations such as labeling and packaging.
47Josling, Tim. “Comment on Stefan Tangermann,” In Tranatlantic Relations in A Global
Economy, p. 166.

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environmental standards as trade barriers, mistrust grows in terms of how much
effort government authorities may have put into managing public concerns through
educational efforts. Under these circumstances, one analyst has argued that trade
disputes resulting from such differences are unlikely ever to be resolved; at best they
can be contained.48
On the other hand, transatlantic consumer views may be converging in some
areas. For example, while U.S. consumers generally have been quite receptive to
GMO’s, Kraft Foods’ nationwide recall in 2000 of taco shells that contained a
genetically engineered corn not approved for human consumption indicates some
underlying discontent. The recall was initiated by a coalition of environmental and
consumer groups critical of bio-engineered food.49 Others argue that in a number of
other areas, including corporate mergers and Internet privacy, the European Union’s
more active role in protecting consumers will gain growing appreciation and support
in the United States.50 At the same time, the European Commission is seeking
actively to re-create an approval process for GMO crops, moving to establish a pan-
EU food agency, and proposing action to provide consumers with more information
on GM foods.
In other disputes, technological progress can be a force for change. The audio-
visual dispute is a case in point where EU efforts to increase protection of this sector
have faced growing technological obstacles, as well as consumer resistance. Rapid
technological innovation in the form of cable and satellite television, innovations
strongly supported by consumers, offer new products that are difficult to block or
regulate. Regulations in this environment often are too complex to enforce or, if
enforced, prove adverse to the interests of European producers.51
Trade Conflict in Perspective
Mark Twain reportedly once said of Wagner’s music that “it is not as bad as it
sounds.” Similarly, U.S.-EU trade conflicts may not be as ominous and threatening
as they appear. Despite the rise in trade tensions and episodes of tit-for-tat retaliation
over the past two years, the notion that the relationship between the world’s two most
powerful economic powers is constantly teetering on the brink of a transatlantic
trade war seems a stretch. Nor does it appear that the trade conflicts represent or
symbolize any kind of fundamental rift that is possibly developing between the
United States and Europe.
48Vogel, David. Barriers or Benefits?, Brookings Institution, 1997. p. 62.
49Pollack, Andrew. “Kraft Recalls Taco Shells With Bio-engineered Corn,” Washington
Post, September 23, 2000, p. B1.
50Richter, Stephan-Gotz, “The U.S. Consumer’s Friend,” New York Times, September 21,
2000, p. A31.
51Kahler, Miles. Regional Futures and Transatlantic Economic Relations, Brookings
Institution, 1997, p. 53.

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At the same time, the disputes do not appear to be ephemeral distractions or
mere consequences of a mass media that grossly distorts, sensationalizes, and
defines the relationship unfairly. Nor are they products of trade negotiators, who like
generals, are often accused of fighting the last war. Nor are they trivial or silly
squabbles because they represent a mere 1-2% of transatlantic trade.
Trade conflicts rather appear to have real, albeit limited, economic and political
consequences for the bilateral relationship. Perhaps more significantly, trade disputes
may also pose very real obstacles for the two partners in their efforts to play a
leadership role in promoting a more open and prosperous world economy. This is
particularly evident in the way bilateral trade disputes may be testing the functioning
of the World Trade Organization.
Relationship Impact
The economic and political impacts that result from U.S.-EU trade disputes can
be easily identified, but are much harder to quantify. In both cases, a variety of forces
effectively contain the economic and political costs from rising or getting out of
hand.
The $300 million in retaliatory tariffs levied on European exports over the
banana and beef disputes provide the most visible economic costs associated with on-
going U.S.-EU trade. The 100% tariffs are designed to dramatically increase the
costs of selective European products, thereby making it much more difficult for those
“targeted” foreign producers to sell in the U.S. market. In theory, foreign exporters
denied access to the U.S. market are expected to pressure their respective
governments to change the policies that are in violation of WTO rules.
Retaliation is not, however, cost-free. The process also hurts U.S. importers,
consumers, and firms dependent on those imports as inputs in their production
process. These entities intensively lobby Congress and the administration to keep
their products off any retaliation list that is drawn up. Domestic political pressures,
thus, limit the scope and flexibility U.S. trade officials have in devising a retaliation
list. As a result, most retaliation lists tend to be dominated by luxury items, such as
truffles and specialty cheeses, or high value-added agricultural items that are also
produced in the United States. Under these conditions, coming up with a list of
products whose export value matches the relatively small sum of $300 million is no
easy task.52
Attempts by either Brussels or Washington to retaliate on a much larger value
of trade could be expected to ignite a firestorm of political opposition. The huge
stake each side has in the other’s market through foreign direct investments, merger
and acquisition activity, combined with “globalized” patterns of production, would
52The task is further complicated by the incomes and tastes of American consumers. The
100% tariffs levied against European products such as truffles, jams, Roquefort cheese,
chicory, specialized mustard, and biscuits have had very little impact in cutting back on sales
in the United States over the past year. “Administration Still Uncertain on Carousel,”
Washington Trade Daily, September 26, 2000.

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likely serve as major counter-forces to any rise in trade warfare. These trends create
extensive overlapping interests among companies and strong incentives to contain
disputes. In globally traded sectors, mass production in a single location is becoming
rare as companies source inputs, research, design, and marketing strategies from all
over the world. This, in turn, shrinks the scope of, as well as complicates, the
definition of what is domestic production or a domestic company.
In terms of political impacts, trade disputes likely have some effect on public
opinion and attitudes, as well as connect in some way to other transatlantic problems.
Polls indicate that there is a great deal of fear in Europe that the United States, due
to the strength of its economy, has the ability to impose both economic and social
changes on the rest of the world. This fear and perhaps frustration may translate into
antipathy to the United States, often expressed as anti-Americanism. U.S. retaliation
against Europe for not accepting hormone-enhance beef, for example, may only fuel
these generalized anti-American feelings that the United States is a bully.53
The reaction to U.S. retaliation may be even more acute among some European
policymakers. By selectively targeting only those EU members that have clearly
benefitted from WTO illegal policies, many European policymakers view retaliation
as a frontal assault on European unity--an old-fashioned divide-and-conquer
strategy.54 Commenting on the U.S. proposal to rotate items under trade sanctions
from product to product and country to country, French President Chirac complained
bitterly that carousel retaliation is “much closer to 19th Century gunboat diplomacy
than to 21st Century diplomacy.”55
Whether or how these reactions affect cooperation in other problem areas is
difficult to know. Clearly, if trade tensions work to undermine the notion that the
U.S. and Europe share common interests or lead to a view that a weaker Europe or
a weaker America is in the other’s interest, then the consequences could be major.
But there is no evidence to suggest that this is happening.
The U.S. and EU to date have been able to compartmentalize trade problems to
a remarkable degree. U.S. and European soldiers stood side-by-side in both Bosnia
and Kosovo as U.S. trade negotiators went through the long process of imposing
retaliatory tariffs in the amount of $300 million on the EU. More recently in 2002 ,
when trade tensions escalated in response to U.S. imposed steel tariffs, U.S.-EU
cooperation in the war on terrorism remain unaffected.
53Daly, Suzanne. “More Vehemently Than Ever, Europe Is Scorning the United States,” New
York Times, April 9, 2000, p. 1.
54Ironically, some observers see trade disputes as an instrument for promoting EU unity.
This view is that trade conflict with the U.S. may provide EU policymakers with a
convenient “enemy” that can help divert attention from internal problems and
disagreements. While this may be true for some disputes where there is a unified EU view,
on most trade disputes there are often different views and positions among the member
states.
55Trade Reports International Group, Washington Trade Daily, September 8, 2000.

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Leadership Impact
Trade disputes may have discernible impacts on U.S.-EU efforts to provide
leadership of the world economy. The growing number of disputes likely absorbs a
significant amount of time and energy of key policymakers at the expense of efforts
to pursue common interests and objectives, such as the start of a new round of
multilateral trade negotiations. Moreover, the two powers need to set an example of
cooperation and adherence to WTO rules if the whole system is not to unravel.
The credibility of the WTO depends critically on a prompt, effective, and fair
dispute-settlement mechanism. Unfortunately, the EU is seen by U.S. policymakers
and interest groups affected by the beef and banana cases as having used every
loophole to delay decisions and then refuse to comply with panel decisions. While
only 2 WTO disputes out of nearly 200 have ended in withdrawal of concessions (i.e.
retaliation) since 1995, non-compliance by a key member arguably weakens the
authority of the WTO and serves as a poor model for the rest of the world.56 Why
should we comply with WTO panel decisions if the EU does not have to, many
countries ask. Non-compliance by one of the two leading economic powers is also
said to diminish the perceived value of negotiating new trade agreements.57
Both the U.S. and EU (bananas in the case of the U.S. and the FSC in the case
of the EU) have brought complaints to the WTO that may have been motivated more
by a desire to score points with domestic political interests or to rack up negotiating
leverage by successfully prosecuting cases than to address serious trade problems.
To the extent that a charge of capricious use of the dispute settlement process is
valid, the WTO as an institution may also be weakened. Some may argue that no
institution can survive for long this kind of treatment by the body’s two biggest
members.
To deal with the problem of non-compliance, the U.S. and EU have legalistic
and diplomatic options. In the area of some of the most bitter U.S.-EU
disagreements, particularly over GMO’s, the WTO may be asked to make decisions
on very complex issues that go deep into the domestic social and the environmental
life of each side. Binding rulings in areas that have strong domestic roots can raise
sovereignty issues and court a public backlash. Under these circumstances, where the
formulations of right and wrong are increasingly blurred, it may be legitimate to
question whether WTO panels should be asked to clarify vague rules where there is
little U.S.-EU consensus, or whether trade officials should attempt to negotiate
diplomatic solutions to disagreements that are so difficult to resolve.
56“Transatlantic Trade Tensions,” Financial Times, May 17, 2000, p. 8.
57Schott, Jeffrey. “After Seattle,” The Economist, August 26, 2000, p. 66.

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