Order Code IB10087
Issue Brief for Congress
Received through the CRS Web
U.S.- European Union Trade Relations:
Issues and Policy Challenges
Updated March 21, 2003
Raymond J. Ahearn
Foreign Affairs, Defense, and Trade Division
Congressional Research Service ˜ The Library of Congress

---

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-Boeing Subsidy Tensions
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

---

IB10087
03-21-03
U.S.-European Union Trade Relations: Issues and Policy Challenges
SUMMARY
The United States and European Union
as the continuing EU moratorium on approval
(EU) share a huge and mutually beneficial
of new genetically modified crops, could
economic partnership. Not only is the U.S.-EU
complicate efforts to move the Doha Round
trade and investment relationship the largest in
forward and thwart the new round’s potential
the world, it is arguably the most important.
beneficial impact on resolving other disputes.
Agreement between the two economic super-
powers has been critical to making the world
Currently, both sides are seeking to
trading system more open and efficient. Given
avoid the imposition of retaliatory duties in
a huge level of commercial interactions, trade
response to the steel and export tax disputes.
tensions and disputes are not unexpected. In
In reaction to the Bush Administration’s
the past, U.S.-EU trade relations have
March 5, 2002 decision to impose temporary
witnessed periodic episodes of rising trade
tariffs of up to 30% on approximately $8
tensions and even threats of a trade war, only
billion in steel imports, the EU threatened
to be followed by successful efforts at dispute
throughout the spring and summer of last year
settlement. This ebb and flow of trade tensions
to counter with retaliatory tariffs on U.S.
has occurred again this year with high-profile
exports. But subsequent decisions by the Bush
disputes involving steel, tax breaks for U.S.
Administration to exempt about 50% of
exporters, and the EU ban on approvals of
European steel from the tariffs have substan-
GMO products. Resolution of U.S.-EU trade
tially diffused the conflict. Similarly, both
disputes has become increasingly difficult in
Brussels and Washington are working to avoid
recent years. Part of the problem may be due
implementation of a August 30, 2002 WTO
to the fact that the U.S. and the EU are of
ruling that authorizes the EU to impose
roughly equal economic strength and neither
punitive tariffs on $4 billion in U.S. exports to
side has the ability to impose concessions on
Europe. In addition, the Bush Administration
the other. Another factor may be that many
is still considering initiating a WTO case
bilateral disputes now involve clashes in
against the EU’s failure to open its market to
domestic values, priorities, and regulatory
genetically modified food products. The
systems where the international rules of the
major U.S.-EU trade and investment policy
road are inadequate to provide a sound basis
challenges can be grouped into six categories:
for effective and timely dispute resolution.
(1) avoiding a “big ticket” trade dispute asso-
ciated with steel or the tax breaks for U.S.
In order to build a smoother relationship,
exporters; (2) resolving longstanding trade
Brussels and Washington may have to resolve
disputes involving aerospace production
a number of these disputes and avoid an
subsidies and beef hormones; (3) dealing with
outbreak of tit-for-tat retaliatory actions. The
different public concerns over new
agreement to launch a new round of multilat-
technologies and new industries (4) fostering
eral trade negotiations at the World Trade
a receptive climate for mergers and
Organization (WTO) trade ministerial held
acquisitions; (5) strengthening the multilateral
November 2001 in Doha, Qatar has facilitated
trading system; and (6) reaching understand-
this effort. But the recent passage of U.S.
ings on foreign policy sanctions that have a
legislation increasing farm subsidies, as well
trade impact.
Congressional Research Service ˜ The Library of Congress

---

IB10087
03-21-03
MOST RECENT DEVELOPMENTS
Bush Administration trade officials indicated on March 5, 2003 that they may still
initiate a dispute settlement case in the WTO against the EU for failing to open its market
to genetically modified food products.
U.S. Trade Representative Robert Zoellick stated on March 3, 2005 that U.S. patience
over the EU’s failure to lift its moratorium on approvals of genetically modified food
products is running thin.
The European Commission on February 26, 2003 submitted for approval by European
Union member states its plans for imposing possible sanction targeting about $4 billion in
U.S. exports to Europe if the United States continues to fail to comply with a WTO ruling
against U.S. tax legislation for U.S. exporters.
European Union environment ministers approved on December 9, 2002 strict
traceability provisions for genetically modified organisms, which together with a stringent
labeling plan, will allow for targeted monitoring and possible product withdrawal in the
event of environmental or health problems.
U.S. trade officials announced on December 5, 2002 an intention to seek compensation
from the EU for exports likely to be displaced when countries such as Poland and the Czech
Republic become members of the EU over the next few years.
A high-level Bush Administration trade official on November 21, 2002 criticized the
European Union for not having done enough to allay concerns of some sub-Saharan African
countries of accepting U.S. food aid that might contain genetically modified organism
(GMOs).
The Trans-Atlantic Business Dialogue (TABD), at its annual meeting held November
7-8, 2002, said the U.S. and EU should emphasize “dispute avoidance” through better
regulatory cooperation and compliance with WTO dispute settlement rulings.
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 last year with the high-
profile disputes involving steel and tax breaks for U.S. exporters.
CRS-1

---

IB10087
03-21-03
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, festering trade disputes may complicate continuing U.S.-
EU cooperation on this front. The 108th 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 2002. 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 378 million citizens and a gross domestic product of
about $7.9 trillion (compared to a U.S. population of 285 million and a GDP of $10.2
trillion) in 2001, 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. By 2004, with enlargement to 25
countries, the EU market will grow to 450 consumers and will 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 2001, the total stock of two-way
direct investment reached $1.45 trillion (composed of $871 billion in EU investment in the
United States and $628 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
CRS-2

---

IB10087
03-21-03
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, the U.S. export tax subsidy, and the EU ban on
imports of genetically modified organisms (GMOs) 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 about
50% of European steel from the tariffs helped persuade the EU not to retaliate against the
United States without authorization from the WTO. Similarly, both sides are working to
avoid implementation of a August 30, 2002 WTO ruling that authorizes $4 billion in EU
CRS-3

---

IB10087
03-21-03
retaliation in the dispute over the U.S. export tax subsidy. And the Bush Administration is
under increased pressure from several farm organizations to request the creation of a special
WTO panel to adjudicate the dispute involving the EU’s ban on imports of food products
containing GMOs.
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
1 Prepared by Stephen Cooney, Industry Analyst, Resources, Science, and Industry Division.
CRS-4

---

IB10087
03-21-03
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 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. This, in turn, prompted the EU to suspend its
short-term retaliation threat. As the EU decided on September 30, 2002 to wait until after
a formal WTO ruling on the dispute before imposing any countermeasures, steel trade
tensions have dissipated considerably. Meanwhile, multilateral discussion in the steel
committee of the Organization for Economic Cooperation and Development (OECD) have
CRS-5

---

IB10087
03-21-03
produced promised global capacity reductions of about 120 metric tons by 2005, including
roughly equal U.S. and EU projection of 15-20 million metric tons of reduction.
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
CRS-6

---

IB10087
03-21-03
Legislation (H.R. 5095) to repeal the ETI was introduced in the House in 2002, but not
in the Senate. By eliminating the tax breaks associated with the export subsidy, the bill would
have a considerable differential impact on large corporations. It would cost large exporting
companies such as Boeing, Microsoft, and Caterpillar million of dollars. However, new tax
breaks inserted in the bill would provide benefits for U.S. multinationals such as General
Motors and Coca Cola that have major overseas operations. As a result of the disparate
effects on large U.S. corporations, Congress has so far been unable to reach a consensus on
a legislative solution and it is uncertain whether H.R. 5095 will be re-introduced in the 108th
Congress. In the Senate, the Finance Committee has established a bipartisan work group in
an effort to study the feasibility of other solutions. Prominently mentioned are negotiations
within the Doha Round that would seek to change world trade rules affecting the tax
treatment of export earnings. However, incoming Finance Committee Chairman Chuck
Grassley stated on November 13, 2002 that the group may not conclude its work until March
2003. How the EU reacts to this timetable remains to be seen. (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 and next.
Airbus-Boeing Subsidy Tensions.3 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. And in recent years, after two decades of trying, Airbus has
come close to achieving parity in sales with Boeing.
The dispute between the United States and the European governments participating in
the Airbus consortium is of long standing. The basic premise of the dispute 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
3 Prepared by John W. Fischer, Specialist in Transportation, Resources, Science, and Industry
Division.
CRS-7

---

IB10087
03-21-03
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.
Airbus does not accept the U.S. view of the reasons for its success. Although admitting
to, but not publically disclosing, the level of direct subsidies from supporting governments,
Airbus contends that it is in the market for long-term profit. Airbus points to the loan
repayments it has provided over the last several years as proof of its long-term intent to
operate in a market environment. Airbus counters the U.S. argument that subsidies are the
principal reason for Airbus’ success with claims that U.S. manufacturers have benefitted
from huge indirect governmental subsidies in the form of military and space contracts and
government-sponsored aerospace research and development.
The Airbus A380 will be offered in several versions seating between 500 and 800
passengers. Airbus has almost 100 firm orders for the aircraft. The project is expected to
cost at least $10.7 billion. Airbus expects its members will provide 60% of the sum, with
the remaining coming from subcontractors. State-aid from European Governments will also
be a source of funding for Airbus member firms. State-aid is limited to one-third of the
project’s total cost by a 1992 U.S.-EU Agreement on Government Support for Civil Aircraft.
At issue in the A380 development is at least $2.5 billion in already identified direct
loans to be provided to Airbus member firms by the governments of France, Germany, Spain,
and the United Kingdom. Additional funds are likely to be provided to subcontractors by
other EU members such as Belgium and Italy. In December 2000, then President Clinton
expressed concerns that the loans to be supplied for the A380 would not be at commercial
rates and that they might be forgiven if the A380 is a commercial failure. So far, the Bush
Administration has expressed similar concerns, but has taken no additional actions. The EU
provided information in April 2001 that it claimed showed that all state-aids to be provided
would fully comply with the 1992 Civil Aircraft Agreement. (For further discussion, see
CRS Electronic Briefing Book on Trade, which is available on the CRS web site at
[http://www.congress.gov/brbk/html/ebtra121.html], 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
CRS-8

---

IB10087
03-21-03
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.
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.
In a new development, the EU reportedly plans to ask the WTO sometime in 2003 to
require the United States to lift sanctions despite the existing ruling against the ban. Some
CRS-9

---

IB10087
03-21-03
EU officials have said that the decision will be based on new scientific evidence showing that
the six hormones – oestradiol-17-beta, progesterone, testosterone, zeranol, trenbolone, and
melengestrol acetate – pose a significant risk to public health.(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.
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 and
for tracing GE crops through the food chain. The EU Commission has prepared regulations
for approving products of agricultural biotechnology that, once approved, would come into
effect in October, 2002. At that point, according to the EU Commission, approvals could be
progressively “unblocked.” Some EU member states might still object to such approvals,
however. Also the EU Parliament has recently voted to toughen the Commissions proposed
rules on tracing and labeling bio-engineered crops and to make the approval process more
difficult. Differences between the Commission and the Parliament will have to be reconciled
4 Prepared by Charles E. Hanrahan, Senior Specialist in Agricultural Policy, Resources, Science, and
Industry Division.
CRS-10

---

IB10087
03-21-03
before the new rules take effect. 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.” During October 2002, Zoellick
reportedly told European officials that the United States may bring the issue to the WTO by
the end of the year. On December 3, 2002, the Trade Policy Review Group, a sub-cabinet
trade policymaking entity, decided to ask a higher level Cabinet inter-agency trade group to
make the final recommendation. On January 21, 2003, Zoellick told reporters that he
expected that the Administration would decide whether or not to challenge the de facto
moratorium on biotechnology approval within a few weeks. (For further discussion, see CRS
Report 98-861, U.S. -European Agricultural Trade: Food Safety and Biotechnology Issues).

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
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
CRS-11

---

IB10087
03-21-03
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.)
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
CRS-12

---

IB10087
03-21-03
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
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
CRS-13

---

IB10087
03-21-03
tend to presume that any post-merger anti-competitive problems can be taken care of later
by corrective antitrust enforcement action.
On October 30, 2002, the U.S.-EU Merger Working Group, formed in the aftermath of
GE-Honeywell, issued a series of non-enforceable approaches to merger review.
Importantly, the group findings emphasized that when transactions are reviewed in both the
U.S. and EU, “both jurisdictions have an interest in reaching, insofar as possible, consistent,
or at least non-conflicting outcomes.” The next test of meeting this objective could be the
EU’s decision on the Microsoft case, which is expected in a few months. 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.
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.
CRS-14

---

IB10087
03-21-03
The United States is calling for cutting tariffs on farm good dramatically, with deeper
cuts for the highest tariffs; limiting trade-distorting domestic supports and eliminating certain
export subsidies. The EU and other WTO members are calling for a more gradual approach
to agricultural policy reform.
Beyond agriculture, Washington and Brussels will have differences on many other
issues. These range from how to change international dispute settlement rules to the
treatment of environmental rules in the WTO.
U.S. Trade Representative Zoellick has stated that significant progress will need to be
made at the next WTO ministerial meeting, to be held in Cancun in September 2003, in order
for the talks to have any chance of success. Two WTO “mini-ministerial” meetings have
also been planned for this year in Japan and Egypt.
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
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. Most recently,
he notified Congress on January 16, 2003 of his decision to continue to suspend the
implementation for six months beyond February 1, 2003 of the right to bring an action under
Title III because it is “necessary to the national interests of the United States and will
expedite a transition to democracy in Cuba.” Concerning ILSA, the House and Senate both
CRS-15

---

IB10087
03-21-03
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.
In the view of the EU, implementation of the 1998 Understanding continues to depend
on legislative action by Congress. Furthermore, the EU maintains that the European
commitments under the Understanding can be fulfilled only once the presidential waiver has
been fully exercised. (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, 32 p.
The Atlantic Council of the United States. Risk and Reward: U.S.- EU Regulatory
Cooperation on Food Safety and the Environment, Policy Paper, November 2002, 35
p.
CRS-16

---