Order Code IB10087
CRS Issue Brief for Congress
Received through the CRS Web
U.S.- European Union Trade Relations:
Issues and Policy Challenges
Updated June 9, 2003
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-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
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
passage of U.S. legislation increasing farm
(EU) share a huge and mutually beneficial
subsidies, as well as the continuing EU mora-
economic partnership. Not only is the U.S.-EU
torium on approval of new genetically modi-
trade and investment relationship the largest in
fied crops, could complicate efforts to move
the world, it is arguably the most important.
the Doha Round forward and thwart the new
Agreement between the two economic super-
round’s potential beneficial impact on resolv-
powers has been critical to making the world
ing other disputes. Currently, both sides are
trading system more open and efficient. Given
seeking to avoid the imposition of retaliatory
a huge level of commercial interactions, trade
duties in response to several disputes. In
tensions and disputes are not unexpected. In
reaction to the Bush Administration’s March
the past, U.S.-EU trade relations have
5, 2002 decision to impose temporary tariffs
witnessed periodic episodes of rising trade
of up to 30% on approximately $8 billion in
tensions and even threats of a trade war, only
steel imports, the EU filed a WTO complaint
to be followed by successful efforts at dispute
against the U.S. Section 201 trade action. A
settlement. This ebb and flow of trade tensions
March 26, 2003 interim report of the WTO
has occurred again last year and this year with
found that the U.S. safeguard actions were out
high-profile disputes involving steel, tax
of compliance with WTO rules. If the U.S.
breaks for U.S. exporters, and the EU ban on
loses an appeal on this case, the EU could win
approvals of GMO products. Resolution of
a second authorization to impose countermea-
U.S.-EU trade disputes has become increas-
sures on U.S. exports. The first authorization
ingly difficult in recent years. Part of the
was won in conjunction with the failure of the
problem may be due to the fact that the U.S.
U.S. to bring its export tax subsidy provision
and the EU are of roughly equal economic
into conformity with its WTO obligations.
strength and neither side has the ability to
Made final by the WTO in May 7, 2003, this
impose concessions on the other. Another
ruling provides the EU with a legal basis to
factor may be that many bilateral disputes now
retaliate against $4.043 billion of U.S. exports
involve clashes in domestic values, priorities,
to Europe. In addition, the Bush Administra-
and regulatory systems where the international
tion on May 13, 2003 moved the dispute
rules of the road are inadequate to provide a
involving the EU’s failure to open its market
sound basis for effective and timely dispute
to genetically modified food products to the
resolution. How foreign policy discord over
WTO. The major U.S.-EU trade challenges
the Iraq war may affect economic relations is
can be grouped into five categories: (1) avoid-
a major new unknown. In order to build a
ing a “big ticket” trade dispute associated with
smoother relationship, Brussels and Washing-
steel or the tax breaks for U.S. exporters; (2)
ton may have to resolve a number of these
resolving longstanding trade disputes involv-
disputes and avoid an outbreak of tit-for-tat
ing aerospace production subsidies and beef
retaliatory actions. The agreement to launch
hormones; (3) dealing with different public
a new round of multilateral trade negotiations
concerns over new technologies and new
at the World Trade Organization (WTO) trade
industries (4) fostering a receptive climate for
ministerial held November 2001 in Doha,
mergers; and (5) strengthening the multilateral
Qatar has facilitated this effort. But the recent
trading system.
Congressional Research Service ˜ The Library of Congress

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MOST RECENT DEVELOPMENTS
President Bush in a May 21, 2003 speech blamed the EU ban on new genetically-
engineered products and agricultural export subsidies for hindering the fight against hunger
in Africa.
The Bush Administration on May 13, 2003 requested consultations with the EU under
the auspices of the WTO in an effort to pressure the EU to lift its longstanding moratorium
on the approval of new genetically-engineered products.
On May 9, 2003, EU Trade Commissioner Pascal Lamy said that the EU would decide
in the fall whether the United States had made enough progress towards repealing its Foreign
Sales Corporation statute and its successor regime in order to avoid retaliation.
The World Trade Organization authorized the European Union to retaliate against U.S.
exports worth $4.043 billion in a special session of the Dispute Settlement Body on May 7,
2003.
Senate Finance Committee Chairman Chuck Grassley demanded on May 6, 2003 that
the Bush Administration set within two weeks a “date certain” for filing a WTO challenge
against the European Union’s moratorium on approvals of biotechnology.
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.
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
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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.
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
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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
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. The Bush Administration’s March 5, 2002 decision to impose temporary tariffs
of up to 30% on approximately $8 billion in steel imports was angrily criticized by the EU.
The EU and seven other steel-exporting countries filed a WTO case against the U.S.
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protective tariffs, claiming that they violated WTO rules. A March 26, 2003 interim report
of the WTO reportedly finds for the plaintiff. If the U.S. loses an appeal on this cased, the
EU could win a second WTO authorization to impose countermeasures on U.S. exports.
On the basis of a May 7, 2003 WTO final ruling, the EU now has legal authority to
retaliate against $4 billion in U.S. exports to the EU. This is due to the failure of the United
States to date to bring its export tax subsidy provision, known as the Foreign Sales
Corporation (FSC), and its replacement regime (the ETI or extraterritorial income) in
conformity with WTO rules. Currently, two coalitions of U.S. companies are backing
different legislative approaches as an alternative to the FSC and its successor regime.
The third dispute involves the EU’s longstanding moratorium on the approval of new
GM products. After considerable congressional pressure for filing a WTO case against the
EU for this ban, the Bush Administration on May 13, 2003 requested consultations with the
EU under the WTO’s dispute settlement process. Unless the EU lifts the moratorium before
the 60-day consultation period ends, the U.S. likely will process with the next steps in the
dispute settlement process.
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.
1 Prepared by Stephen Cooney, Industry Analyst, Resources, Science, and Industry Division.
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In addition to “unfair” trade disputes, President Bush announced June 5, 2001 that his
Administration would call upon the U.S. International Trade Commission (ITC) to begin an
investigation on international trade in steel under Section 201 of U.S. trade law. He also
announced that he would seek multilateral negotiations with U.S. trading partners on
fundamental issues of global overcapacity and government subsidies. The President was
reacting to continued problems in the U.S. steel industry, parts of which still have not
recovered from a major import surge in 1997-98. The rise in imports to more than a quarter
of U.S. finished steel consumption was stimulated by financial crises in Asia, Latin America
and Russia, which reduced demand in those markets, and by the dramatically lower dollar-
equivalent prices for many foreign producers. After a partial recovery in 1999-2000, the U.S.
industry has again been affected by imports rising to more than 20% of finished steel
consumption, record-high levels of semi-finished products and falling market demand and
prices.
Section 201 relief, often referred to as “safeguard,” provides for temporary restrictions
on imports that have surged in such quantities as to cause or threaten to cause serious injury
to a domestic industry. The procedure is compatible with the rules of the World Trade
Organization (WTO). A Section 201 case does not in itself need to demonstrate dumping,
subsidization or other unfair practices by U.S. trading partners.
The ITC in October 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
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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. However, a March 26, 2003 interim report of the
WTO reportedly found the U.S. safeguard actions to not be in compliance with WTO rules.
If the U.S. loses an appeal on this case, the EU could win a WTO authorization to impose
countermeasures on U.S. exports, thereby increasing trade tensions. At the same time,
multilateral discussion in the steel committee of the Organization for Economic Cooperation
and Development (OECD) have 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
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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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 May 7, 2003
that the EU can impose $4.043 billion in punitive duties on U.S. exports to Europe
immediately.
While the EU has drawn 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. EU Trade Commissioner Pascal Lamy has stated that the EU would
decide in the fall whether the U.S. has made enough progress towards repealing the FSC and
ETI statutes to avoid 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.
In the 108th Congress, two different bills have been introduced to comply with the WTO
rulings on FSC-ETI. One approach (H.R. 1308), introduced by Rep. Bill Thomas, the
Chairman of the House Ways and Means Committee, would repeal the FSC-ETI statutes and
use the funds generated to rewrite international aspects of the tax code. These provisions
would include expansion of foreign source income on which companies could defer paying
taxes immediately. A different bill, H.R. 1769, introduced by Reps. Phil Crane and Charles
Rangel, would use funds generated by the repeal for a manufacturing tax credit and would
reduce corporate taxes by 10% for companies that produce exclusively in the United States.
Because these two approaches have a differential impact on large corporations (the Thomas
approach arguably could favor companies such as General Motors and Coca Cola that have
major overseas operations, while the Crane-Rangel approach could favor companies such as
Caterpillar and Boeing that have operations primarily in the United States), Congress has
so far been unable to reach a consensus on one approach or the other. (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
3 Prepared by John W. Fischer, Specialist in Transportation, Resources, Science, and Industry
Division.
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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 2003,, after two decades of trying, Airbus is likely to
deliver more commercial airplanes than 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
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
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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
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
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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
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.
4 Prepared by Charles E. Hanrahan, Senior Specialist in Agricultural Policy, Resources, Science, and
Industry Division.
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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
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. Most recently, Senate Finance
Committee Chairman Chuck Grassley demanded on May 7, 2003 that the White House set
within the next two weeks a “date certain” for filing a WTO challenges against the
moratorium. On May 13, 2003, the Bush Administration requested consultations with the
EU under the auspices of the WTO. Unless the EU lifts the moratorium before the 60-day
consultation period is over, the U.S. is likely to proceed with a panel in the WTO against the
EU. In addition, President Bush in a May 21, 2003 speech blamed the EU ban and EU
export subsidies for hindering the fight against hunger in Africa. (For further discussion, see
CRS Report 98-861, U.S. -European Agricultural Trade: Food Safety and Biotechnology
Issues).

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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
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 2000, 60 deals
in excess of $1 billion were completed, with over two-thirds involving a European
acquisition of an American company. 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.
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
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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.
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.
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.
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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.
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