Order Code IB10087
Issue Brief for Congress
Received through the CRS Web
U.S.- European Union Trade Relations: Issues and
Policy Challenges
Updated September 10, 2002
Raymond J. Ahearn
Foreign Affairs, Defense, and Trade Division
Congressional Research Service ˜ The Library of Congress

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CONTENTS
SUMMARY
MOST RECENT DEVELOPMENTS
BACKGROUND AND ANALYSIS
Overview
Closer Economic Ties
Growing Strains
Current Trade Agenda
Major Issues and Policy Challenges
Avoiding A “Big Ticket” Trade Dispute
Steel Trade
U.S. Tax Benefits for Exports
Resolving Longstanding Disputes
Airbus Production Subsidies
Beef Hormones
Dealing with Different Public Concerns Over New Technologies and New Industries
Bio-technology
E-Commerce and Data Privacy
Fostering a Receptive Climate for Mergers and Acquisitions
Enhanced Antitrust Cooperation
Strengthening the Multilateral Trading System
Accommodating Foreign Policy Sanctions That Have An
Impact on Trade
FOR ADDITIONAL READING
CRS Reports
Other Reports

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U.S.-European Union Trade Relations: Issues and Policy Challenges
SUMMARY
The United States and European Union
this effort. But the recent passage of U.S.
(EU) share a huge and mutually beneficial
legislation increasing farm spending, as well
economic partnership. Not only is the U.S.-EU
as a EU proposal that would reduce market
trade and investment relationship the largest in
access for grains, could complicate efforts to
the world, it is arguably the most important.
move the Doha Round forward and thwart the
Agreement between the two economic super-
new round’s potential beneficial impact on
powers has been critical to making the world
resolving other disputes.
trading system more open and efficient.
Currently, both sides are seeking to
Given a huge level of commercial inter-
avoid the imposition of retaliatory duties in
actions, trade tensions and disputes are not
response to the steel and export tax disputes.
unexpected. In the past, U.S.-EU trade
In reaction to the Bush Administration’s
relations have witnessed periodic episodes of
March 5, 2002 decision to impose temporary
rising trade tensions and even threats of a
tariffs of up to 30% on approximately $8
trade war, only to be followed by successful
billion in steel imports, the EU threatened
efforts at dispute settlement. This ebb and
throughout the spring ans summer of this year
flow of trade tensions has occurred again this
to counter with retaliatory tariffs on U.S.
year with high-profile disputes involving steel
exports. But subsequent decisions by the
and tax breaks for U.S. exporters.
Bush Administration to exempt 50% of
European steel from the tariffs have substan-
Resolution of U.S.-EU trade disputes has
tially diffused the conflict. Similarly, both
become increasingly difficult in recent years.
Brussels and Washington are working to avoid
Part of the problem may be due to the fact that
implementation of a August 30, 2002 WTO
the U.S. and the EU are of roughly equal
ruling that authorizes $4 billion in retaliation
economic strength and neither side has the
in the dispute over the U.S. export tax sub-
ability to impose concessions on the other.
sidy.
Another factor may be that many bilateral
disputes now involve clashes in domestic
The major U.S.-EU trade and investment
values, priorities, and regulatory systems
policy challenges can be grouped into six
where the international rules of the road are
categories: (1) avoiding a “big ticket” trade
inadequate to provide a basis for effective and
dispute associated with steel or the tax breaks
timely dispute resolution.
for U.S. exporters; (2) resolving longstanding
trade disputes involving Airbus production
In order to build a smoother relationship,
subsidies and beef hormones; (3) dealing with
Brussels and Washington may have to resolve
different public concerns over new
a number of these disputes and avoid an
technologies and new industries (4) fostering
outbreak of retaliatory actions this year. The
a receptive climate for mergers and
agreement to launch a new round of multilat-
acquisitions; (5) strengthening the multilateral
eral trade negotiations at the World Trade
trading system; and (6) reaching understand-
Organization (WTO) trade ministerial held
ings on foreign policy sanctions that have a
last November in Doha, Qatar has facilitated
trade impact.
Congressional Research Service ˜ The Library of Congress

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MOST RECENT DEVELOPMENTS
The World Trade Organization ruled on August 30, 2002 that the EU had the right to
impose $4 billion in punitive duties on U.S. exports to Europe because of the illegality of
an export subsidy provided by U.S. tax law.
The United States announced on August 22, 2002 a final list of steel products to be
excluded from safeguard tariffs. Cumulatively, more than 50% of European steel products
will be exempt from the tariffs.
House Ways and Means Committee Chairman Bill Thomas introduced on July 11, 2002
international tax reform legislation (H.R. 5905) to bring U.S. tax law into compliance with
the World Trade Organization.
European Parliament deputies voted on July 3, 2002 in favor of a virtual ban on the
presence of genetically modified material not authorized in the European Union food and
animal feed, while imposing strict traceability and labeling requirements on genetically-
engineered foods.
The European Union and Japan on May 15, 2002 notified the World Trade
Organization of their intent to retaliate against U.S. steel safeguard tariffs if the United
States does not provide concessions either in the form of compensation or steel exclusions.
A senior European Union official stated the Commission intends to begin a process of
progressively approving biotechnology products beginning on October 17, 2002.
U.S. Trade Representative Robert Zoellick stated on February 7, 2002 that the United
States is considering filing a formal complaint against the EU in the WTO over its
moratorium on imports of genetically modified organisms (GMOs).
BACKGROUND AND ANALYSIS
Overview
The United States and the European Union (EU) share a huge and mutually beneficial
economic partnership. Not only is the U.S.-EU trade and investment relationship the largest
in the world, but it is also arguably the most important. Agreement between the two partners
in the past has been critical to making the world trading system more open and efficient.
Given the high level of U.S.-EU commercial interactions, trade tensions and disputes
are not unexpected. In the past, U.S.-EU trade relations have witnessed periodic episodes
of rising trade tensions and conflicts, only to be followed by successful efforts at dispute
settlement. This ebb and flow of trade tensions has occurred again this year with the high-
profile disputes involving steel and tax breaks for U.S. exporters.
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The two sides still face a major challenge this year in keeping the relationship on an
even keel. While the agreement reached to launch a new round of multilateral trade
negotiations at last November’s WTO trade ministerial in Doha, Qatar provides a basis for
building a smoother relationship, the 2002 U.S. farm bill may complicate continuing U.S.-
EU cooperation on this front. Congress in its response to both EU practices and Bush
Administration initiatives will play a key role in managing the U.S.-EU economic
relationship.
Closer Economic Ties
The United States and the European Union share the largest bilateral trade and
investment relationship in the world. Annual two-way flows of goods, services, and foreign
investment transactions exceeded $1.1 trillion in 2000. Viewed in terms of goods and
services, the United States and EU are each other’s largest trading partners. Each purchases
about one-fifth of the other’s exports of goods in high-technology and sophisticated product
areas where incomes and tastes are the primary determinants of market success.
Based on a population of some 377 million citizens and a gross domestic product of
about $7.8 trillion (compared to a U.S. population of 284 million and a GDP of $9.9 trillion)
in 2000, the fifteen members of the EU provide the single largest market in the world. Given
the reforms entailed in the introduction of the European single market in the early 1990s,
along with the introduction of a single currency, the euro, for twelve members, the EU
market is also increasingly open and standardized. Over the next decade, with a possible
enlargement to 27 countries, the EU market could become even more important as a
destination for U.S. exports and investments.

The fact that each side has a huge investment position in the other’s market may be the
most significant aspect of the relationship. By year-end 2000, the total stock of two-way
direct investment reached $1.37 trillion (composed of $802 billion in EU investment in the
United States and $573 billion in U.S. investment in the EU), making U.S. and European
companies the largest investors in each other’s market. This massive amount of ownership
of companies in each other’s market translates into an estimated 3.5 million Americans who
are employed by European companies and an equal number of EU citizens who work for
American companies in Europe.
Growing Strains
Given the huge volume of commercial interactions, it is commonly pointed out that
trade disputes are quite natural and perhaps inevitable. While the vast majority of two-way
trade and investment is unaffected by disputes, a small fraction (often estimated at 1%-2%)
of the total often gives rise to controversy and litigation. Historically, with the possible
exception of agriculture, the disputes have been handled without excessive political rancor.
Over the past several years, however, trade relations are being strained by the nature
and significance of the disputes. The EU Commissioner for Trade, Pascal Lamy, stated on
November 20, 2000 that the “problems seem to get worse, not better.” Richard Morningstar,
then U.S. Ambassador to the EU, said in a January 23, 2001 speech that the inability of our
two sides “to resolve our list of disputes, which are growing in both number and severity, is
beginning to overshadow the rest of the relationship.” Moreover, some of the efforts at
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dispute resolution have led to escalation and “tit-for-tat” retaliation with the potential to harm
the multilateral trading system.
In 1999 the United States imposed punitive tariffs on $308 million of EU exports of
mostly higher value-added agricultural products such as Danish ham and Roquefort cheese.
This action was a response to a refusal by the EU to change its import regimes for bananas
and hormone-treated beef which the World Trade Organization (WTO) determined to be in
violation of world trade rules. (The U.S. retaliation for bananas was lifted in 2001 but $116
million in punitive duties remains in effect due to the beef dispute.) EU pique over U.S.
pressures on bananas and beef, in turn, led the EU to threaten retaliation against $4 billion
dollars in U.S. exports that the WTO found in violation of an export subsidy agreement. In
addition, the EU has filed numerous WTO dispute resolution petitions alleging that a variety
of U.S. trade laws violate international obligations in some technical fashion, contributing
to an impression that these challenges are part of a concerted EU strategy to weaken or gut
U.S. trade laws.
The underlying causes of the trade disputes are varied. Some conflicts stem primarily
from traditional demands from producer or vested interests for protection or state aids. Other
conflicts arise when the United States 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. Still other conflicts are rooted in an array of regulations that deal mostly
with issues that are considered domestic policy.
Resolution of these disputes has proven difficult in recent years. Part of the problem
may rest in the fact that the EU and United States are of roughly equal economic strength and
neither side has the ability to impose concessions on the other. Another factor may be that
numerous new disputes involve clashes in domestic values and priorities where the
international rules of the road are inadequate to provide a basis for effective and timely
dispute resolution. (For further discussion, see CRS Report RL30732, Trade Conflict and the
U.S.-European Union Economic Relationship.)
Current Trade Agenda
The United States and European Union have a full plate of high profile bilateral disputes
this year. Several of the disputes may need to be resolved and new potential disputes
avoided if the bilateral trade strains are to be contained and a smoother trade relationship is
to develop. Moreover, progress on the bilateral front could provide a foundation for the two
trading giants to make progress in efforts to begin the process of multilateral trade
negotiations as prescribed by the Doha Ministerial Declaration.
Resolution of disputes over steel and the U.S. export tax subsidy are at the top of the
list of bilateral challenges. In response to the Bush Administration’s March 5, 2002 decision
to impose temporary tariffs of up to 30% on approximately $8 billion in steel imports, the
EU threatened to counter with retaliatory tariffs on U.S. exports throughout the spring and
summer of this year. But subsequent decisions by the Bush Administration to exempt much
of European steel from the tariffs have substantially diffused the conflict. Similarly, both
sides are working to avoid implementation of a August 30, 2002 WTO ruling that authorizes
$4 billion in EU retaliation in the dispute over the U.S. export tax subsidy.
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Major Issues and Policy Challenges
Major EU -U.S. trade and investment issues and policy challenges can be grouped into
six different categories: (1) avoiding a “big ticket” trade dispute; (2) resolving two
longstanding trade disputes; (3) dealing with disputes involving new technologies or
industries; (4) fostering a receptive climate for mergers and acquisitions; (5) strengthening
the multilateral trading system; and (6) accommodating trade-related foreign policy
sanctions. A summary and status update of each challenge follows.
Avoiding A “Big Ticket” Trade Dispute
Perhaps the most serious trade disputes that currently cloud the bilateral relationship
deal with steel and tax breaks for U.S. exporters. If not managed properly, either could lead
to a massive disruption of trade and a major increase in political tensions.
Steel Trade.1 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 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
1 Prepared by Stephen Cooney, Industry Analyst, Resources, Science, and Industry Division.
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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 2001 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 three-year period beginning on March 20, 2002. The 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 categories. More provocatively, the EU took initial steps under an untested
provision of the WTO safeguards agreement to impose retaliatory tariffs on U.S. exports
without an explicit authorization to act.
The EU threat was based on a WTO provision that permits countries to demand
compensation for safeguard measures for vulnerable industries, like steel, if they are not done
in response to an “absolute increase in imports.” The EU argues that U.S. steel imports have
declined since 1998. But the Bush Administration maintains that retaliation is a legal matter
that has to be determined by normal WTO dispute settlement procedures, a process that could
take up to two years.
To make its short-term threat credible, the EU released on March 22, 2002 a retaliation
“hit-list” of about 300 products encompassing $360 million worth of U.S. exports. The list
comprised products such as motorcycles from Wisconsin, textiles from the Carolinas, and
steel from Ohio and West Virginia. By targeting goods produced in states deemed critical
to the President’s 2004 re-election bid, the EU hoped to pressure the President to reverse or
modify his decision.
Attempting to find a way to contain the dispute, the Bush Administration began
considering requests from foreign steel producers for exemptions from the tariffs. As of mid-
August 2002, the Administration had exempted around 50% out of $2.3 billion of steel from
European producers affected by the tariffs. While the EU in July agreed to postpone until
September 30, 2002 a decision on the threatened retaliation, most observers feel that the high
level of steel exemptions granted European producers undercuts the case for retaliation
considerably.
However, if Brussels decides on swift retaliation rather than waits until 2003 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. (For more discussion, see CRS Electronic Briefing Book
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on Trade, [http://www.congress.gov/brbk/html/ebtra1.shtml], Steel: Trade and Industry
Issues.)
U.S. Tax Benefits for Exports.2 The controversy between the European Union
(EU) and the United States over U.S. tax benefits for exports has been simmering for years.
Since 1984, the U.S. tax code provided an export tax benefit known as the Foreign Sales
Corporation (FSC) provisions, which enabled U.S. exporters to exempt between 15% and
30% of their export income from U.S. tax. According to Internal Revenue Service data, FSC
was used in connection with almost half of U.S. annual exports of goods. In 1998, however,
the EU lodged a complaint with the World Trade Organization (WTO), arguing that the
United States’ FSC tax benefit was an export subsidy and was, therefore, in violation of the
WTO agreements.
An aspect of the controversy concerns why the EU waited almost 14 years to challenge
the U.S. tax provision. While EU officials maintain they never formally agreed that the FSC
was legal, many on the U.S. side suspect that the challenge had much to do with EU pique
over U.S. challenges in the WTO to the EU’s import regimes for beef and bananas. Winning
a case that involved a 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 responded that the challenge was prompted by an effort to level the playing
field, but there is little indication that European companies, with the possible exception of
Airbus, were proponents of the challenge.

In October 1999, a WTO panel issued a report that essentially upheld the EU’s position.
An appeal by the United States was denied, and, under WTO procedures, the United States
had until October 2000, to bring its tax system into WTO-compliance or face possible
retaliatory measures by the EU.
In November 2000, the United States repealed the FSC and put in its place the
“extraterritorial income (ETI)” regime. The ETI provisions consist of a tax benefit for
exports of the same magnitude as FSC, but also extend tax free treatment to a certain amount
of income from exporters’ foreign operations. The partial tax exemption for extraterritorial
income is the design feature of the ETI provisions that was intended to achieve WTO
compliance. However the EU maintained that the ETI provisions provide an export subsidy
in the same manner as the FSC, and has asked the WTO to rule against it. The WTO next
ruled in January 2002 that the ETI was no better than the FSC because it still gave a selective
break to exporters. And as a result of the U.S. violation, the WTO ruled on August 30, 2002
that the EU can impose $4 billion in punitive duties on U.S. exports to Europe.
While the EU will draw up a detailed list of U.S. exports that could be subject to
punitive tariffs, EU officials have made clear that they are more interested in compliance
than in retaliation. But the threat of sanctions could supply the United States with more
incentive to bring the tax provision in conformity with world trade law.
2 Prepared by David Brumbaugh, Specialist in Public Finance, and Jane G. Gravelle, Senior
Specialist in Economic Policy, Government and Finance Division
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Legislation (H.R. 5905) to repeal the ETI has been introduced in the House this year,
but not in the Senate. This House bill is opposed by a number of big U.S. companies such
as Boeing, Microsoft, and Caterpillar. Several influential Senators have proposed
establishment of a working group to study the issue further, lending support to the view that
the dispute will not be fixed this year. (For further discussion, see CRS Report RS20746,
Export Tax Benefits and the WTO.)
Resolving Longstanding Disputes
The United States and EU are engaged in long-running disputes involving aerospace
production subsidies and trade in beef that has been treated with hormones. While neither
of these disputes are currently on the front-burner, some efforts at resolution are likely to
continue this year.
Airbus Production Subsidies3
On December 19, 2000, Airbus announced that it had formally launched a program to
construct the world’s largest commercial passenger aircraft, the newly numbered Airbus
A380. In the spring of 2001, Boeing dropped its support of a competing new large aircraft,
opting instead to focus on the development of a new class of higher speed commercial
aircraft. The Airbus action potentially reopens a long-standing trade dispute between the
United States and Europe about subsidization of aircraft projects that compete directly with
non-subsidized U.S. products, in this case the Boeing 747 series aircraft.
The large commercial aircraft (jet aircraft with 100 or more seats) production industry
is essentially a duopoly consisting of an American manufacturer, Boeing, and a European
manufacturer, Airbus. Until recently Airbus was a consortium of national aviation firms,
some with close government ties, who cooperated to produce commercial aircraft. As a
result of recent European aerospace industry 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 between the U.S. and EU is whether, as U.S. trade
policymakers 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 have been able to enter and participate in the market.
The assistance from the governments of France, Germany, Spain and Great Britain arguably
has included equity infusions, 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
3 Prepared by John W. Fischer, Specialist in Transportation, Resources, Science, and Industry
Division.
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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.
To date, the Bush Administration has not changed U.S. policy on this issue. At a June
6, 2001 meeting of the WTO Committee on Civil Aircraft, Bush Administration officials
pressed the EU for more information on the financing of the A380. The EU responded with
the provision of mostly general information about the scope and nature of their member
states’ support for the A380. The United States is still seeking more detailed information,
including information on the critical project appraisal - Airbus’ projections on costs and sales
of the A380. In response, the EU raised questions concerning alleged subsidies Boeing
receives from the U.S. government and its dealings with the Department of Defense. (For
further discussion, see CRS Electronic Briefing Book on Trade,
[http://www.congress.gov/brbk/html/ebtra1.shtml], Airbus and Competition Issues.)
Beef Hormones. The dispute over the EU ban, implemented in 1989, on the
production and importation of meat treated with growth-promoting hormones is one of the
most bitter disputes between the United States and Europe. It is also a dispute, that on its
surface, involves a relatively small amount of trade. The ban affected an estimated $100-
$200 million in lost U.S. exports –less than one-tenth of one percent of U.S. exports to the
EU in 1999.
The EU justified the ban to protect the health and safety of consumers, but several
WTO dispute settlement panels subsequently ruled that the ban was inconsistent with the
Uruguay Round Sanitary and Phytosanitary (SPS) Agreement. The SPS Agreement provides
criteria that have to be met when a country imposes food safety import regulations more
stringent than those agreed upon in international standards. These include a scientific
assessment that the hormones pose a health risk, along with a risk assessment. Although the
WTO panels concluded that the EU ban lacked a scientific justification, the EU refused to
remove the ban primarily out of concern that European consumers were opposed to having
this kind of meat in the marketplace.
In lieu of lifting the ban, the EU in 1999 offered the United States compensation in the
form of an expanded quota for hormone-free beef. The U.S. government, backed by most of
the U.S. beef industry, opposed compensation on the grounds that exports of hormone-free
meat would not be large enough to compensate for losses of hormone-treated exports. This
led the way for the United States to impose 100% retaliatory tariffs on $116 million of EU
agricultural products from mostly France, Germany, Italy, and Denmark, countries deemed
the biggest supporters of the ban.
The U.S. hard line is buttressed by concerns that other countries might adopt similar
measures based on health concerns that lack a legitimate scientific basis according to U.S.
standards. Other U.S. interest groups are concerned that non-compliance by the EU
undermines the future ability of the WTO to resolve disputes involving the use of SPS
measures.
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Recent occurrences of “mad cow disease” in several EU countries and the outbreak of
foot-and-mouth disease (FMD) in the United Kingdom and three other EU countries have
contributed to an environment that is not conducive to resolving the meat hormone dispute.
The EU has recently indicated its intention to make the ban on hormone-treated meat
permanent, while at the same time expressing some openness to renewing discussions about
a compensation arrangement which would increase the EU’s market access for non-hormone
treated beef from the United States. In discussions held June 11, 2001, a U.S. industry
proposal for expanded access to the EU market for hormone-free beef for a period of 12
years was rejected by the EU. In response, the EU countered with a 4-5 year period for
compensation. The compensation talks have since languished .
In pursuing compensation talks, the Bush Administration is faced with a divided
industry position. The American Meat Institute and the American Farm Bureau prefer
carousel retaliation to settle the dispute while the American Cattlemen’s Beef Association
supports efforts to gain increased access for non-hormone treated beef in exchange for
dropping the retaliatory tariff on EU exports.
The Bush Administration has maintained that it would not use so-called “carousel”
retaliation (rotating the products subject to retaliation) while the negotiations for
compensation are on-going. Some observers speculate that both the EU and the U.S. have
made a political decision to handle the dispute by insisting that they are making progress
towards a resolution. This arguably could shield USTR from congressional and private
sector pressures to apply the carousel provision against the EU.
On August 2, 2002, eleven senators, including Senate Minority Leader Trent Lott and
Senate Finance Committee Chairman Max Baucus, called on the Bush Administration to
increase the level of retaliation for the EU’s ban on beef imports to adjust for the additional
trade that will be lost when new countries join the EU. The Senators also suggested that the
U.S. should implement the carousel provision of U.S. trade law. (For further discussion, see
CRS Report RS20142, The European Union’s Ban on Hormone-Treated Meat.)
Dealing with Different Public Concerns Over New Technologies
and New Industries
The emergence of new technologies and new industries is at the heart of a growing
number of disputes. Biotechnology as a new technology and e-commerce (and related data
privacy concerns) as a new industry are emerging issues that have great potential for
generating increases in transatlantic welfare, as well as conflict. These issues tend to be quite
politically sensitive because they affect consumer attitudes, as well as regulatory regimes.

Bio-technology.4 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.
4 Prepared by Charles E. Hanrahan, Senior Specialist in Agricultural Policy, Resources, Science, and
Industry Division.
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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 come $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 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.
On July 3, 2002 the European Parliament approved changes to a regulation on the
tracing and labeling of biotechnology crops that would prevent any unapproved GM crops
from being imported into the EU in trace amounts, impose stricter labeling requirements on
processed foods derived from GMOs and create new hurdles to GMO approval. The action
is likely to widen U.S.-EU differences over this issue.
E-Commerce and Data Privacy. The EU Council of Ministers in December 2001
reached agreement on a proposed directive on the taxation of e-commerce. The agreement
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was to adapt and apply existing taxes on e-commerce, not to levy any new or additional taxes
as had been actively considered. The proposed directive considers that e-commerce
transactions that do not involve the delivery of physical goods still constitute the provision
of a service subject to each Member State’s value-added-tax (VAT). The VAT is a
consumption tax payable on deliveries of goods and services. The proposed directive requires
that non-EU suppliers register with a VAT authority in a single Member State. The VAT on
digital products such as software or computer games supplied over the Internet from outside
the EU would be levied at the rate applicable in the customer’s country of residence, and
VAT revenue then reallocated from the supplier’s country of registration to that of the
customer.
U.S.-based companies have questioned whether the proposed Directive treats U.S.
suppliers of digital products less favorably than EU suppliers. One problem cited is that U.S.
suppliers would be required to collect and remit the VAT at 15 different rates in accord with
the consumer’s Member State of residence. By contrast, EU suppliers would only be obliged
to collect and remit VAT at the rate of the single Member State in which that supplier is
registered. Another concern is that non-EU companies could be forced to charge higher VAT
rates to European customers than would European retailers.
If the Directive is formally adopted by Member States this year, it would likely be
implemented by 2003. In the interim, nine members of th House Subcommittee on
Commerce, Trade and Consumer Protection wrote the Bush Administration on July 25, 2002
that the EU proposal raises “grave concerns that additional barriers are being imposed on
electronic commerce.”
The related issue of data privacy rights is also a source of friction. While the EU
supports strict legal regulations on gathering consumer’s personal data, the United States has
advocated a self-regulated approach. Controversy emerged when the EU adopted a directive
forbidding the commercial exchange of private information with countries that lack adequate
privacy protections. The issue appeared resolved by the “Safe Harbor” agreement of 2000,
whereby U.S. companies that agree to abide by privacy principles can enter a safe harbor
protecting them from the EU directive barring data transfers to countries that do not
adequately protect citizens’ privacy. But U.S. companies have been slow to participate in
the Safe Harbor by self-certifying to the Department of Commerce (only 217 had signed on
as of August 2002). Currently, only entities whose activities fall under the regulatory
authority of the Federal Trade Commission or the Department of Transportation are eligible
to participate in the Safe Harbor. Whether or how other sectors, particularly financial
services, will be considered in relation to Safe Harbor has not yet been determined.
The U.S. financial services industry argues that existing U.S. laws (Gramm-Leach -
Bliley Act and the Fair Credit Reporting Act) adequately protect data privacy. In a May 11,
2001 letter to Treasury Secretary Paul O’Neill, some Members of Congress expressed
concern with the “EU’s unwillingness to grant an adequacy determination to U.S. financial
services firms.” Negotiations between the U.S. and EU, however, are currently taking place
and differences over providing coverage for financial institutions under the Safe Harbor
agreement reportedly have been narrowed. (For further discussion, see CRS Report
RS20823, The EU-US Safe Harbor Agreement on Personal Data Privacy.)
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Fostering a Receptive Climate for Mergers and Acquisitions
Consistent with the trend of increased globalization, U.S. and European companies have
engaged in hundreds of mergers and acquisitions (M&A) in recent years. In 1999 European
companies reportedly spent over $200 billion on acquisitions of U.S. companies compared
to U.S. company expenditures of $90 billion for European companies. Although concerns
regarding foreign control and ownership of companies in particular sectors, such as
telecommunications or mass media, have been raised from time to time, M&A activity has
been pretty much noncontroversial. That was until July 3, 2001, the day the European
Commission blocked the merger of General Electric and Honeywell, opening a debate on
the need for better U.S.-EU antitrust cooperation.
Enhanced Antitrust Cooperation
As M&A activity has accelerated in recent years among U.S. and European companies,
the U.S. Justice Department and the European Union’s competition directorate have worked
closely in passing judgment on proposed deals. Pursuant to a 1991 bilateral agreement on
antitrust cooperation between the European Commission and the United States, the handling
of these cases has been viewed generally as a successful example of transatlantic
cooperation. In reviews of several hundred mergers over the past 10 years, there has been
substantial agreement between regulators in Brussels and Washington on antitrust decisions.
However, the EU’s recent rejection of General Electric’s $43 billion merger with Honeywell
International has highlighted major differences in antitrust standards and processes employed
by the EU and the United States. In the process, some observers have argued that the GE-
Honeywell case points to a need for closer consultations or convergence in antitrust
standards.
The GE-Honeywell merger would have combined producers of complementary aircraft
components. GE produces aircraft engines and Honeywell makes advanced avionics such as
airborne collision warning devices and navigation equipment. GE and Honeywell do not
compete over any large range of products. The combined company arguably would have
been able to offer customers (mostly Boeing and Airbus) lower prices for a package that no
other engine or avionics company could match. In its review, the U.S. Justice Department
concluded that the merger would offer better products and services at more attractive prices
than either firm could offer individually, and that competition would be enhanced.
With regard to the European Commission’s merger review (which occurs over any
merger between firms whose combined global sales are more than $4.3 billion and that do
at least $215 million of business in the European Union), the legal standard employed for
evaluating mergers is whether the acquisition creates or strengthens a company’s dominant
position as a result of which effective competition would be significantly impeded. The
commission’s Task Force on Mergers concluded that, together, GE-Honeywell’s
“dominance” would be increased because of the strong positions held by GE in jet engines
and by Honeywell in avionics products.

EU antitrust regulators relied, in part, on the economic concept of “bundling” to reach
its decision. Bundling is the practice of selling complementary products in a single,
discounted package. The combined company makes more profits than the pre-merger
companies and prices are lower, making consumers better off. But the EU concluded that
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the lower prices and packages of products that could be offered by the merged entity would
make competition a lot more difficult for other producers of airplane equipment such as Rolls
Royce, Pratt& Whitney, and United Technologies. In the long run, European regulators had
concerns that the merger could force weaker competitors out of the market, thereby leaving
GE-Honeywell free over time to raise prices.

GE officials countered that the commission relied on a theory that is not supported by
evidence, particularly in the aerospace industry. Boeing and Airbus, for example, tend not
to be weak or passive price takers, but are strong and sophisticated customers that negotiate
all prices. And even if the new company offered discounted “bundled” packages, the winners
would be the airlines and, ultimately, their customers.
In short, the GE-Honeywell case crystallized differences in standards and processes
employed by antitrust regulators in Washington and Brussels. In terms of standards, in the
United States, a merger could be acceptable if it results in efficiencies that regulators were
convinced would lower prices to consumers, even if competition in the marketplace might
adversely be affected. In Europe, however, the governing regulation requires the competition
commissioner to block a merger if he determines that it will “create or strengthen a dominant
position.” This is based on a concern that “dominance” increases the likelihood of “consumer
abuse.” Regarding process, one of the most striking differences is that the European process
clearly affords competitors more leeway to oppose mergers by allowing for testimony behind
closed doors and places more weight on economic models that predict competition will be
reduced and competitors eliminated in the long-run. In contrast, U.S. antitrust regulators
tend to presume that any post-merger anti-competitive problems can be taken care of later
by corrective antitrust enforcement action.
Since the GE-Honeywell dispute, there have been few cases that have tested whether
an emerging rift on antitrust policy may be developing. One reason is that M&A activity has
been slow in 2001 and again this year to date. The next test, however, could be the EU’s
handling of the Microsoft case. The EU is expected to take action on Microsoft by year-end
2002. U.S. antitrust officials reportedly have been urging the EU to adopt sanctions modeled
on the U.S. settlement.
Strengthening the Multilateral Trading System
After three years of efforts, including the ill-fated ministerial held in Seattle in 1999,
trade ministers from the 142 member countries of the WTO agreed to launch a new round
of trade negotiations last November in Doha, Qatar. At Doha the WTO members agreed to
launch a new round of trade negotiations and agreed to give priority attention to a number
of developing country concerns.
By most accounts, U.S.-EU cooperation played a major role in producing agreement at
Doha. USTR Zoellick and EU Trade Commissioner Lamy reportedly worked closely
together, agreeing that making concessions to developing countries on issues of priority
concern was necessary to move the trading system forward. Their cooperation began early
in 2001 with the settlement of the long-running banana dispute and tacit agreement to settle
other disputes without resort to retaliation. Each also recognized that both trading
superpowers would have to make concessions at Doha to achieve their overall objectives.
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At Doha, both the U.S. and EU shared the goal of liberalizing markets in which each
enjoyed competitive advantages and to preserve as many protected and less advanced sectors
as possible. To gain support from other WTO members, the United States agreed to allow
negotiations on its trade remedy laws and on patent protection while the EU agreed to greater
liberalization of the agricultural sector than some Member States wanted. Both also agreed
to support a number of capacity building initiatives designed to help developing countries
better take advantage of world trade opportunities.
The agenda agreed to at Doha calls for a comprehensive three-year negotiation to be
completed by 2005. The negotiations will cover trade in services, industrial tariffs, and
agriculture. The broad agenda provides scope for negotiators to derive balanced packages
of concessions from all participating countries.
Agriculture is an issue that could prove divisive once the negotiations pick up
momentum. Transatlantic trade tensions over agriculture delayed the conclusion of the
Uruguay Round by several years in the early 1990s. The U.S. has been a longstanding
demander for the liberalization of agricultural trade barriers and domestic support programs,
while the EU has been reluctant to put agriculture on the negotiating agenda.
Already actions by both sides have increased agricultural trade tensions. On the U.S.
side, passage of the 2002 farm bill has increased subsidies for a number of major crops to
support levels that could well approach limits set by the Uruguay Round. On the EU side,
a June 24, 2002 proposal to replace its current tariff system for controlling grain imports with
a system of tariff-rate quotas is drawing criticism from the United States. Whether these
disputes will serve as prods or obstacles for further negotiations remains to be seen.
Accommodating Foreign Policy Sanctions That Have An
Impact on Trade
U.S. legislation that requires the imposition of economic sanctions for foreign policy
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 legislatively, 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 foreign companies outside
the United States. Most persistent EU complaints have been directed at the Cuban Liberty
and Democratic Solidarity Act of 1996 (so-called Helms-Burton Act) and the Iran and Libya
Sanctions Act (ILSA), which threatens the extraterritorial imposition of U.S. sanctions
against European firms doing business in Cuba, Iran, and Libya.
In May 1998 the EU reached an understanding with the Clinton Administration
concerning Helms-Burton and ILSA. Regarding Helms-Burton, the Clinton Administration
agreed to continue to waive Title III (at six month intervals, as allowed by law), which allows
lawsuits for damages in U.S. courts over investment in expropriated U.S. property in Cuba,
in order to avoid a major dispute with the EU. The Clinton Administration also pledged to
work with Congress to amend the law’s provision (Title IV) barring entry into the United
States of executives working for companies that have invested in property confiscated by the
Cuban government. This permanent waiver of Title IV would be undertaken in exchange for
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the EU’s efforts to promote democracy and human rights in Cuba. The understanding also
tried to insulate the EU from sanctions under ILSA, which threatened sanctions on foreign
oil companies that invest more than $20 million in one year in Iran’s energy sector, or $40
million in one year in Libya’s energy sector.
EU Commissioner for External Affairs Christopher Patten called on the Bush
Administration to endorse the 1998 understanding at a March 6, 2001 press conference.
President Bush, in turn, has continued to suspend implementation of Title III. On July 16,
2001, President Bush made the decision to continue to suspend the implementation and cited
efforts by European countries and other U.S. allies to push for democratic change in Cuba.
On January 16, 2002, President Bush once again suspended implementation of Title III for
a six-month period. Concerning ILSA, the House and Senate both passed bills (H.R. 1954,
S. 1218) extending ILSA for an additional five years. H.R. 1954, also provides for
termination of the bill with the passage of a joint resolution of the Congress. (For further
information, see CRS Report RS20871, The Iran-Libya Sanction Act (ILSA), by Kenneth
Katzman.
FOR ADDITIONAL READING
CRS Reports
CRS Report 98-861ENR U.S.-European agricultural trade: food safety and biotechnology
issues, by Charles E. Hanrahan.
CRS Report RL30753. Agricultural support mechanisms in the European Union: a
comparison with the United States, by Geoffrey S. Becker.
CRS Report RL30547. Aircraft hushkits: noise and international trade, by John W. Fischer.
CRS Report RL30608. EU-U.S. economic ties: framework, scope, and magnitude, by
William H. Cooper.
CRS Report RS21185. Trade policymaking in the European Union: Institutional
arrangements, by Raymond J. Ahearn.
CRS Report RS21223. U.S.-EU trade tensions: causes, consequences and possible cures,
by Raymond J. Ahearn.
Other Reports
The Atlantic Council of the United States. Changing Terms of Trade: Managing the New
Transatlantic Economy, Policy Paper, April 2001, 32p.
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