Order Code RL30608
CRS Report for Congress
Received through the CRS Web
EU-U.S. Economic Ties:
Framework, Scope, and Magnitude
Updated January 17, 2006
William H. Cooper
Specialist in International Trade and Finance
Foreign Affairs, Defense, and Trade Division
Congressional Research Service ˜ The Library of Congress

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EU-U.S. Economic Ties: Framework, Scope, and
Magnitude
Summary
The United States and the European Union (EU) economic relationship is the
largest in the world — and it is growing. The modern U.S.-European economic
relationship has evolved since World War II, broadening as the six-member
European Community expanded into the present 25-member European Union. The
ties have also become more complex and interdependent, covering a growing number
and type of trade and financial activities.
In 2004, $966 billion flowed between the United States and the EU on the
current account, the most comprehensive measure of U.S. trade flows. The EU as a
unit is the largest merchandise trading partner of the United States. In 2004, the EU
accounted for $172.6 billion of total U.S. exports (or 21.1%) and for $282.6 billion
of total U.S. imports (or 19.2%) for a U.S. trade deficit of $110.0 billion. The EU
is also the largest U.S. trade partner when trade in services is added to trade in
merchandise, accounting for $115.6 billion (or 34.0% of the total in U.S. services
exports) and $108.7 billion (or 37.3% of total U.S. services imports). In addition,
in 2004, a net $83.8 billion flowed from U.S. residents to EU countries into direct
investments, while a net $48.2 billion flowed from EU residents to direct investments
in the United States.
Policy disputes arise between the United States and the EU generating tensions
which sometimes lead to bilateral trade disputes. Yet, in spite of these disputes, the
U.S.-EU economic relationship remains dynamic. It is a relationship that is likely
to grow in importance as the trends toward globalization and the enlargement of the
EU continue, forcing more trade and investment barriers to fall. The expanded
relationship will bring economic benefits to both sides in the form of wider choices
of goods and services and greater investment opportunities.
But increasing economic interdependence brings challenges as well as benefits.
As the U.S. and EU economies continue to integrate, some sectors or firms will “lose
out” to increased competition and will resist the forces of change. Greater economic
integration also challenges long-held notions of “sovereignty,” as national or
regional policies have extraterritorial impact. Similarly, accepted understanding of
“competition,” “markets,” and other economic concepts are tested as national borders
dissolve with closer integration of economies.

U.S. and EU policymakers, therefore, will continually face the task of how to
manage the increasingly complex bilateral economic relationship in ways that
maximize benefits and keep frictions to a minimum. For Members of Congress it
means weighing the benefits of greater economic integration against the costs to
constituents in the context of overall U.S. national interests. This report will be
updated as events warrant.

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Contents
U.S. Interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
The Framework of U.S.-EU Economic Ties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
U.S.-EU Trade in Goods and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
U.S.-EU Investment Flows and Positions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Conclusions and Policy Implications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
List of Tables
Table 1. U.S. Merchandise Trade with Selected Trade Partners, 2004 . . . . . . . . 4
Table 2. U.S. Trade with the European Union in Goods and Services,
1996-2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Table 3. U.S. Current Account Balance with EU, 2004 . . . . . . . . . . . . . . . . . . . . 7

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EU-U.S. Economic Ties:
Framework, Scope, and Magnitude
The bilateral economic relationship between the United States and the European
Union (EU) is the largest such relationship in the world — and it is growing.1 It is
a relationship forged over several centuries, since the European colonization of North
America.
The modern U.S.-European economic relationship has evolved since World War
II. It has broadened as the six-member European Community expanded into the
present 25-member European Union. The ties have also become more complex,
covering a growing number and type of trade and financial activities that intertwine
the economies on both sides of the Atlantic into an increasingly interdependent
relationship. For Members of Congress and other policymakers, the EU remains a
significant participant in the U.S. economy and a major factor in policy
considerations. For example, the EU and its members are influential members of the
World Trade Organization (WTO), the Organization for Economic Cooperation and
Development (OECD), the International Monetary Fund (IMF) and the World Bank,
and, together with the United States, play decisive roles in developing and
implementing the missions of those institutions.
Despite the tightness of the bilateral relationship, policy tensions arise
generating tensions within the relationship, sometimes leading to bilateral trade
disputes. The issues that arise are becoming more complex, reflecting the growing
integration of the U.S. and EU economies. Yet, in spite of these disputes, the U.S.-
EU economic relationship remains dynamic and one within which trillions of dollars
of economic activity transpire.
This report provides background information and analysis of the U.S.-EU
economic relationship. It examines the economic and political framework of the
relationship and the scope and magnitude of the ties based on data from various
sources. In addition, the report analyzes the implications these factors have for U.S.
economic policy toward the EU. The report will be revised as events warrant.
U.S. Interests
The United States has been a strong advocate for the construction of close
economic ties among the West European countries since the end of World War II.
1 The EU consists of Austria, Belgium, Cyprus (Greek), Czech Republic, Denmark, Estonia,
Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg,
Malta, Netherlands, Poland, Portugal, Slovakia, Slovenia, Spain, Sweden, and the United
Kingdom.

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CRS-2
During the Cold War, the European Community served U.S. foreign policy and
national security interests as a force of stability that drew former enemies — (West)
Germany and France — closer together and that helped to build Western Europe into
an economic bulwark against the Soviet Bloc.
The formation of an economically unified Europe has served U.S. economic
interests as well by accelerating European economic growth and development which
has opened trade and investment opportunities for the United States. Many studies
have concluded that the formation of the EU has had a net positive economic impact
on the world as a whole because it has led on balance to more trade creation than
diversion of trade from other countries.2
The EU continues to become a more closely knit entity with the formation of the
European Monetary Union comprising 12 of the 25 members of the EU and their
adoption of a common currency, the euro. These developments have already had an
impact on U.S.-EU trade ties.

The Framework of U.S.-EU Economic Ties
U.S.-EU economic relations exist within a framework of economic, political and
security factors. Some of these factors have promoted closer economic relationships,
while others have created tensions that have, at times, threatened to undermine the
relationship.
The U.S.-EU economic relationship dominates the world economy by the sheer
size of their combined economies. The combined population of United States and
the EU members exceeds 650 million people who generate a combined gross
domestic product (GDP) that is roughly equivalent to 57% of world GDP.3
Combined EU and U.S. world trade accounts for over half of all world trade. In other
words, the U.S.-EU economic relationship has clout.
The United States and the EU member countries are of roughly equivalent levels
of economic development and are among the most advanced in the world. As a
group they include the world’s wealthiest and most educated populations. The
United States and the members of the EU, with a few exceptions, are major producers
of advanced technologies and services. As a result U.S.-EU trade tends to be intra-
industry trade; that is trade in similar products, such as cars and computers, dominate
two-way trade flows. Furthermore, the United States and the EU have advanced and
integrated financial sectors which facilitate large volumes of capital flows across the
Atlantic. These capital flows account for a significant portion of the bilateral
economic activity.
2 Studies on the economic effects of the EU cited in CRS Report 97-663, Regional Trade
Agreements: Implications for U.S. Trade Policy, by George Holliday.
3 Based on data found in Standard and Poor’s DRI. The World Outlook: An Analytical
Guide to International Business. First Quarter 2000. p. B14.

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CRS-3
The dominance of security and defense matters is another factor influencing
U.S.-EU ties. Nineteen of the EU-25 are members of NATO, and represent a
majority of NATO’s 26 members. NATO members must deal with a number of
issues that pertain to foreign trade, such as defense-related government procurement,
product standardization, controls of exports of dual-use technologies and related
products, and economic sanctions. National security and foreign policy concerns
strongly dominated the U.S.-European relationship during the Cold War.4
The WTO (and its predecessor, the General Agreement on Tariffs and Trade
(GATT)) is a critical part of the EU-U.S. bilateral economic framework. The WTO
provides the principles and rules under which the U.S. and the EU conduct much of
their trade. The basic principles of most-favored-nation(MFN), or nondiscriminatory,
treatment and of national treatment of imports of goods and services and of foreign
investments, along with WTO rules on trade-related intellectual property rights,
investment, and trade remedy practices (antidumping and countervailing duties and
safeguards) are the foundation of U.S. and European trade and investment policies.
The WTO also provides the mechanism by which the United States and the EU
resolve many of their bilateral trade disputes.
To a lesser extent, the OECD is an important element in the U.S.-EU
framework. Largely consisting of fully industrialized countries, the 30-member
OECD coordinates economic policies and reviews economic conditions and polices
of its members and those of some non-members. The OECD also has some rules and
guidelines for trade and investment practices of its members. For example, the
OECD Arrangement on Official Export Credits curbs the subsidization of exports.

EU and U.S. policies and practices form another element of the bilateral
economic framework. The United States and the EU share a commitment to open
trade and investment. The United States and European countries were largely
instrumental in establishing the post-World War II foundation for an open
international economic system. This commitment has played a large role in the
strong economic ties between them. Yet, the two sides differ in some significant
policy areas, for example, the EU’s Common Agricultural Policy, conflicting
competition policies, and the U.S. extraterritorial application of economic sanctions
against Cuba and other countries. These policy differences have been a source of
sharp bitterness.
4 But even the dominance of national security concerns did not prevent at least some major
disputes to surface between the United States and the EU. For example, in June 1982, the
United States imposed controls on exports to the Soviet Union of oil and gas equipment
technology that was produced by U.S.-owned firms in foreign countries. The restrictions
were in response to Soviet support of martial law in Poland and to hamper the construction
of a natural gas pipeline that would deliver Soviet gas to Western Europe. The measures led
to an open confrontation with the European Community which argued that the United States
could not apply U.S. controls outside the United States. The United States rescinded the
controls in November 1982. Featherstone, Kevin and Roy H. Ginsburg. The United States
and the European Community in the 1990s: Partners in Transition. St. Martin’s Press.
United Kingdom. 1993. p. 179-180.

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CRS-4
U.S.-EU Trade in Goods and Services
The EU as a unit is the largest merchandise trading partner of the United States
(surpassed only by Canada). In 2004, the EU accounted for $150.5 billion of total
U.S. exports (or 21.1%) and for $244.8 billion of total U.S. imports (or 19.2%) for
a U.S. trade deficit of $110.0 billion. At the same time, the United States is the
largest non-EU trading partner of the EU as a whole. In 2003, EU exports to the
United States accounted for 22.9% of total exports to non-EU countries, while EU
imports from the United States accounted for 15.5% of total imports from non-EU
countries.5
Table 1. U.S. Merchandise Trade with Selected Trade Partners,
2004
(billions of dollars)
U.S. Trade
U.S. Trade
Partner
U.S. Exports
U.S. Imports
Turnover
Balances
EU-25
172.6
282.6
455.2
-110.0
Canada
190.2
255.9
446.1
-65.8
Mexico
110.8
155.8
266.6
-45.1
China
34.7
196.7
231.4
-162.0
Japan
54.4
129.6
184.0
-75.2
World
819.0
1,470.5
2,299.5
-651.5
Source: U.S. Department of Commerce. Bureau of the Census.

For a number of years, the United States realized trade surpluses with the EU.
However, since 1993, the United States has been incurring growing trade deficits
with the EU ($110.0 billion in 2004). The sharp increase in U.S. imports from the
EU in comparison with U.S. exports to the EU suggests that the robust economic
growth the United States has been experiencing is a significant factor in the growth
of the U.S. trade deficit.
Among the top U.S. exports to the EU have been aircraft, and machinery of
various kinds, including computers, integrated circuits, and office machine parts. A
large share of U.S. imports from the EU has consisted of passenger cars, machinery
of various types, including gas turbines, computers and components, office
machinery, and parts and organic chemicals. Within the EU, Germany, the United
Kingdom, and France are the leading U.S. trading partners, followed by the
Netherlands and Italy.
5 Calculations for U.S. trade based on data from the U.S. Department of Commerce. Bureau
of the Census. EU trade data found on EU website:[http://www.europa.eu.int].

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CRS-5
The EU is the largest U.S. trade partner when trade in services is added to trade
in merchandise. In 2004 the EU accounted for $115.6 billion (or 34.0% of the total
in U.S. services exports). Of this amount, $23.1. billion derived from receipts for
various travel services, $6.5 billion from payments for passenger fares, and $11.1
billion for other transportation fees (freight and port services). Another $21.3 billion
were in receipts for royalties and licensing fees and $51.0 billion derived from other
private sector services, including business, professional and technical services
(including legal services), and insurance. Also included under services are revenues
from transfers under U.S. military contracts which equaled $2.6 billion in 2004.
In 2004, the EU accounted for $108.7 billion (or 37.3% of total U.S. services
imports) — including travel services ($20.0 billion), passenger fees ($10.8 billion),
and freight and port fees ($17.2 billion). Royalties and licensing fees accounted for
another $9.4 billion. In addition, other private sector services accounted for $33.9
billion of imports. Also included were payments of $10.4 billion in defense-related
expenditures.6
6 U.S. Department of Commerce. Bureau of Economic Analysis. U.S. International
Transactions Accounts Data. March 16, 2005. [http://www.bea.doc.gov]

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CRS-6
Table 2. U.S. Trade with the European Union in Goods and Services, 1996-2004
(billions of dollars)
U.S. Exports
1996
1997
1998
1999
2000
2001
2002
2003
2004
Goods & Services
218.0
240.5
232.4
236.4
257.5
244.5
238.4
250.7
283.2
Goods*
137.2
153.0
145.9
148.9
162.3
155.8
140.4
147.6
167.6
Services
80.8
87.5
86.5
87.6
95.2
88.7
98.0
103.2
115.6
U.S. Imports
1996
1997
1998
1999
2000
2001
2002
2003
2004
Goods & Services
223.4
243.5
242.3
264.4
298.6
293.2
311.3
338.6
387.6
Goods*
161.6
175.8
176.1
194.5
219.9
219.5
225.4
244.9
278.9
Services
61.8
67.7
66.2
69.9
78.7
73.7
85.2
93.7
108.7
U.S. Trade Balances
1996
1997
1998
1999
2000
2001
2002
2003
2004
Goods & Services
-5.4
-3.0
-9.9
-28.0
-41.1
-48.7
-72.9
-87.8
-104.4
Goods*
-24.4
-22.8
-30.2
-45.6
-57.6
-63.7
-85.0
-97.3
-111.3
Services
19.0
19.8
20.3
17.7
16.5
15.0
9.7
9.5
6.9
Source: U.S. Department of Commerce. Bureau of Economic Analysis. Survey of Current Business. Various issues.
*The figures for goods trade while essentially equivalent to those for merchandise trade in Table 2, are slightly lower as they are measured on a balance of payments basis, rather than
a census basis.

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CRS-7
Table 2 indicates that the United States has consistently run surpluses in
services trade with the EU. Recently, these surpluses have been rather large and have
helped to offset the U.S. merchandise trade deficits.
A substantial amount of funds flows between the United States and the EU as
receipts of income derived from assets, including direct and portfolio investments
and government securities. In 2004, $141.4 billion flowed to the United States from
income earned on EU assets held by U.S. residents. In 2004, $152.8 billion flowed
to the EU as income earned on assets held in the United States by EU residents. In
addition, a net $0.4 billion flowed into the United States from the EU as unilateral
transfers. Trade in goods and services, plus income receipts and payments, plus
unilateral transfers, make up the U.S. current account, the most comprehensive
measure of U.S. trade flows. In 2004, the United States incurred a current account
deficit with the EU of $115.4 billion.7
Table 3. U.S. Current Account Balance with EU, 2004
(billions of dollars)
Exports Goods and Services
283.2
Imports Goods and Services
387.6
Income Receipts
141.7
Income Payments
153.2
Unilateral Transfers (Net)
0.4
Total Current Account Flows
965.7
Current Account Balance
-115.4
Source: U.S. Department of Commerce. Bureau of Economic Analysis. U.S.
International Transactions Accounts Data. March 16, 2005.
[http://www.bea.doc.gov]
In sum, the flows of merchandise or goods trade, services trade, and income
between the United States and the EU manifest a very active, strong, and large
7 U.S. Department of Commerce. Bureau of Economic Analysis. U.S. International
Transactions Accounts Data. March 16, 2005. [http://www.bea.doc.gov]

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CRS-8
economic relationship. In 2004 alone, a total of $965.7 billion flowed between the
EU.8
U.S.-EU Investment Flows and Positions
Transactions on the current account represented only a part of the volume of
international financial flows between the United States and EU in 2003. The
remaining transactions are on the capital account which derive from payments by the
U.S. government and residents to obtain assets in the EU and by EU residents to
obtain assets in the United States.9 These assets include government purchases of
gold and foreign currencies for their official reserves and government purchases of
other foreign assets. The capital account also includes payments by U.S. residents
for portfolio investments (including bank deposits, government securities, corporate
stocks, and bonds, and other private sector securities) and payments to obtain direct
investments (including real estate, plants, factories, and commercial establishments).
In 2004, the net flow of U.S. capital to EU members was $394.5 billion and the net
flow of capital from EU countries into the United States was $463.9 billion.10
Foreign direct investments (FDI) represent long-term commitments on the part
of the investor. In 2004, a net $83.3 billion flowed from U.S. residents to EU
countries into direct investments, while a net $48.2 billion flowed from EU residents
to direct investments in the United States.11 By the end of 2003 (latest data
available), the position of U.S. direct investment in EU countries stood at $844.7
billion, or 47.2% of all foreign direct investment by U.S. residents.12 Of that total,
$160.3 billion, or 19.0%, was in the manufacturing sector. Another 15.3% was in
banking and other financial establishments, and insurance firms. The United
Kingdom-accounting for 32.3%- is by the far the largest destination of U.S. FDI in
the EU followed by the Netherlands at 20.8%, Germany at 9.5%, and France at 5.7%.
At the end of 2003, EU residents had foreign direct investments in the United States
valued at $855.7 billion. The United Kingdom was the largest source of those
investments with 26.9% of the total in 2003.13
8 Ibid.
9 The Department of Commerce only reports net, rather than total, capital inflows and
outflows. The capital account is also the mirror image of the current account in U.S.
balance of payments accounts.
10 U.S. Department of Commerce. Bureau of Economic Analysis. U.S. International
Transactions Accounts Data. March 15, 2005. [http://www.bea.doc.gov]
11 Ibid.
12 The foreign investment position represents the value of total accumulated investments
in place and is valued on an historical-cost basis, that is, the value at the time of purchase.
Foreign investment flows represent the net value of investment transaction during a
particular year.
13 Survey of Current Business. September 2004.

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CRS-9
Conclusions and Policy Implications
Foreign trade and investment data depict a strong, interdependent, and
significant U.S.-EU bilateral economic relationship. It is a relationship that is likely
to grow in importance as advancements in technology and other forces of
globalization, plus the future enlargement of the EU, force more trade and investment
barriers to fall. The expanded relationship will bring economic benefits to both sides
in the form of wider choices of goods and services and greater investment
opportunities.
But increasing economic interdependence brings challenges as well as benefits.
U.S.-EU trade ties have been plagued by disputes that at times have reached the
highest levels of policymaking. While these disputes have covered a range of sectors
and issues, the most contentious and public have been related to trade in agricultural
and agricultural-related products. Recently, for example, the United States has taken
the EU to task for its ban on hormone-enhanced beef imports and for its policy
regarding banana imports.
Yet, the agriculture sector accounts for a very small portion of not only U.S.-EU
bilateral trade but also for the total world trade of the two entities. Agriculture
accounts for around 5% of total U.S. exports and imports with the EU. Similarly,
agriculture accounted for only about 7% of total U.S. world exports and for about 8%
of total EU world exports.14 It is beyond the scope of this report to analyze this
contrast between U.S. and EU trade policies and trade volume. But the contrast
suggests that the attention received by these disputes at the official level, as well as
from the press, reflects the domestic political salience of these issues to a much
further extent than their overall commercial or economic significance.
Greater economic integration also challenges long-held notions of
“sovereignty,” as national or regional policies have extraterritorial impact. For
example, the U.S. use of foreign policy trade sanctions against such “rogue states”
as Cuba and Iran affected EU firms and investors and caused sharp U.S.-EU friction.
Similarly, accepted understandings of “competition,” “markets,” and other economic
concepts are tested as national borders dissolve with closer integration of economies.

U.S. and EU policymakers, therefore, continually face the task of how to
manage the increasingly complex bilateral economic relationship in ways that
maximize benefits and keep frictions to a minimum. For Members of Congress it
means weighing the benefits and costs to constituents of greater economic integration
and placing this calculation in the context of overall U.S. national interests.
14 Calculations made on data obtained from the U.S. Department of Agriculture’s Foreign
Agricultural Service.

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