Order Code IB10087
CRS Issue Brief for Congress
Received through the CRS Web
U.S.-European Union Trade Relations:
Issues and Policy Challenges
Updated January 26, 2006
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
Major Issues and Policy Challenges
Complying With WTO Rulings
U.S. Tax Benefits for Exports
Byrd Amendment
Resolving Longstanding Disputes
Airbus-Boeing Subsidy Tensions
The Boeing View
The Airbus View
Beef Hormones
Dealing with Different Public Concerns Over New Technologies and New Industries
Bio-technology
E-Commerce and Data Privacy
Fostering Cooperative Competition Policies
GE-Honeywell Case
Microsoft Case
Strengthening the Multilateral Trading System
FOR ADDITIONAL READING
CRS Reports

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U.S.-European Union Trade Relations:
Issues and Policy Challenges
SUMMARY
The United States and European Union
ences, particularly over agriculture, now
(EU) share a huge and mutually beneficial
complicate and threaten progress in the ongo-
economic partnership. Not only is the U.S.-EU
ing Doha Round of world trade negotiations.
trade and investment relationship the largest in
the world, it is arguably the most important.
The biggest dispute in terms of the
Agreement between the two economic super-
amount of trade involved relates to allegations
powers has been critical to making the world
that each side provides their civil aircraft
trading system more open and efficient.
producers, Airbus and Boeing, with illegal
production subsidies. Both the EU and U.S.
Given a huge level of commercial interac-
filed formal complaints with the WTO in May
tions, trade tensions and disputes are not unex-
2005 to this effect, and two separate WTO
pected. In the past, U.S.-EU trade relations
panels are scheduled to begin hearing the
have witnessed periodic episodes of rising
cases this year. However, panel rulings in
trade tensions and even threats of a trade war,
these cases are not expected to be handed
only to be followed by successful efforts at
down until early 2007, thereby giving the
dispute settlement.
United States and the EU ample opportunity
to try to resolve the dispute bilaterally.
Resolution of U.S.-EU trade disputes has
become increasingly difficult in recent years.
On a second dispute, the EU may have to
Part of the problem may be due to the fact that
decide this spring whether to reimpose sanc-
the U.S. and the EU are of roughly equal eco-
tions on U.S. exports in the ongoing Foreign
nomic strength and neither side has the ability
Sales Corporation (FSC)-Extraterritorial (ETI)
to impose concessions on the other. Another
export subsidy dispute. Congress thought it
factor may be that many bilateral disputes now
had brought U.S. law into conformity with
involve clashes in domestic values, priorities,
U.S. WTO obligations when it repealed the
and regulatory systems where the international
FSC-ETI as a provision of the American Jobs
rules of the road are inadequate to provide a
Creation Act of 2004. But an EU challenge to
sound basis for effective and timely dispute
several transitional provisions of the new law
resolution.
was upheld by the WTO, thereby setting the
stage for a possible reimposition of sanctions
The two sides face difficult challenges in
this spring.
keeping the relationship on an even keel in
2006. A number of bilateral trade disputes
Major U.S.-EU trade challenges can be
have been carried over from 2005 and are
grouped into five categories: (1) complying
expected to be considered by the World Trade
with WTO rulings; (2) resolving longstanding
Organization (WTO). These include disputes
trade disputes involving aerospace production
on production subsidies for aircraft manufac-
subsidies and beef hormones; (3) dealing with
turers, the EU’s treatment of bio-engineered
different public concerns over new
foods, compliance in the long-running battle
technologies and new industries (4) fostering
over tax breaks for U.S. exporters, and the
cooperative competition policies; and (5)
continuing ban on beef treated with growth
strengthening the multilateral trading system.
hormones. In addition, critical U.S.-EU differ-
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MOST RECENT DEVELOPMENTS
European Trade Commissioner Peter Mandelson stated on January 16, 2006, that he is
prepared to accept failure of the Doha Round rather than accept a deal that offers no benefits
to Europe.
The European Commission on January 4, 2006, presented to member states a new
regulation to amend its system for protecting products under geographical names in response
to a WTO panel decision. The panel determined that two aspects of the current system for
protecting products such as Champagne or Roquefort were not consistent with the EU’s
obligation to treat trading partners no less favorably than its own nationals.
House and Senate conferees on December 19, 2005, concluded a provision in the budget
reconciliation conference agreement (S. 1932) to repeal the Byrd Amendment, despite an
overwhelming Senate vote on December 15 to oppose such a move. The House has to vote
on the reconciliation bill again because the Senate on December 19, 2005, struck two
provisions from the conference approved bill. This vote is expected to take place during
February 2006.
The U.S. and EU announced agreement on November 30, 2005, on a package of trade
benefits designed to compensate the United States for tariff increases put in place by the EU
following its enlargement to include 10 new member states in May 2004.
The WTO on October 17, 2005, appointed panelists to consider cases brought by the
United States and EU against each others’ alleged subsidies to their commercial aircraft
manufacturers.
The United States and EU initialed on September 14, 2005, a “first-phase” agreement
on wine labeling standards, but final approval by the EU may be in doubt due to opposition
from Germany, Italy, and Spain.
The WTO issued an interim ruling on July 22, 2005, that a provision contained in a U.S.
tax law, the American Jobs Creation Act, violates international subsidies rules. This U.S.
law had been intended to end the long-running FSC-ETI tax and trade dispute with the EU.
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.
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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 occurred again last year with high-profile
disputes involving tax breaks for U.S. exporters and production subsidies for the commercial
aircraft sector.
The two sides still face difficult challenges in the months ahead in keeping the
relationship on an even keel. A number of bilateral trade disputes have been carried over
from 2005 and are expected to be considered by the WTO dispute settlement bodies. These
include disputes on production subsidies for aircraft manufacturers, the EU’s treatment of
bio-engineered food, compliance in the long-running battle over tax breaks for U.S.
exporters, and the continuing EU ban on beef treated with growth hormones. In addition,
critical U.S.-EU differences , particularly over agriculture, now complicate and threaten
progress in the ongoing Doha Round of WTO negotiations.
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 $1.3 trillion in 2004. 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 455 million citizens and a gross domestic product of
about $10.3 trillion (compared to a U.S. population of 289 million and a GDP of $10.6
trillion) in 2003, the twenty-five 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.

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 2002, the total stock of two-way
direct investment reached $1.67 trillion (composed of $964 billion in EU investment in the
United States and $708 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 5-6 million Americans who
are employed by European companies and almost 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.
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Over the last 5-6 years, however, trade relations are being strained by the nature and
significance of the disputes. Former 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
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, by Raymond J. Ahearn.)
The United States and European Union currently 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. Resolution of disputes involving alleged government subsidies
for Boeing and Airbus, the Byrd Amendment, and the EU ban on imports of genetically
modified organisms (GMOs) are at the top of the list of bilateral challenges.
Major Issues and Policy Challenges
Major EU -U.S. trade and investment issues and policy challenges can be grouped into
six different categories: (1) complying with WTO rulings; (2) resolving longstanding trade
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disputes; (3) dealing with disputes involving new technologies or industries; (4) fostering
cooperative competition policies; and (5) strengthening the multilateral trading system. A
summary and status update of each challenge follows.
Complying With WTO Rulings
Some of the more serious trade disputes that currently cloud the bilateral relationship
deal with WTO dispute compliance. While the United States has complied with adverse
rulings in most WTO disputes, there are a number of outstanding disputes where this has not
been the case. The same can be said of the EU compliance record (see treatment of the beef
hormone dispute below). U.S. tax benefits for exporting and the Byrd amendment are two
key compliance disputes that involve retaliation or threats of retaliation.
U.S. Tax Benefits for Exports. The EU on March 1, 2004 began imposing
retaliatory duties of 5% on selected U.S. exports in the dispute over U.S. compliance with
a WTO ruling involving the Foreign Sales Corporation (FSC) and its successor
Extraterritorial Income Exclusion (ETI) export tax regime. Although Congress passed
legislation (H.R. 4520) on October 11, 2004 that repeals the export tax regime, the EU did
not lift the trade sanctions it was imposing on U.S. exports until January 21, 2005. On that
date, a regulation adopted by the member lifted retaliatory duties retroactively to January 1,
2005. The regulation, however, also calls for a possible reimposition of punitive tariffs on
$2.4 billion of U.S. goods if a WTO dispute panel rules against several provisions of the law
(the American Jobs Creation Act -P.L. 108-357) passed by Congress to bring the United
States into compliance with the WTO ruling on the FSC-ETI case. The Commission had
proposed automatic imposition of sanctions if the WTO finds in Brussels’ favor, but member
states agreed only to give the Commission discretion — in close consultation with the
member states — to retaliate on U.S. exports again if the WTO rules against the U.S. tax law.
The two provisions of the American Jobs Creation Act being objected to by the EU are
a two-year transition period lasting until 2006 and the grandfathering of the FSC benefits for
certain contracts that were in place on September 17, 2003. The EU claims the latter
provisions will benefit companies such as Boeing, Microsoft, and Catepillar.

U.S. reaction to the EU’s challenge of the new tax law and threat to reimpose sanctions
if it wins its new WTO case has been almost uniformly negative. An official for the Office
of the U.S. Trade Representative stated that “it is harmful for the EU to needlessly prolong
this matter in the face of Congress’s good faith action.” Senate Finance Committee
Chairman Charles Grassley stated that he remains frustrated and troubled by the actions of
the EU. (For further discussion, see CRS Report RS20746, Export Tax Benefits and the
WTO: The Extraterritorial Income Exclusion and Foreign Sales Corporations, by David L.
Brumbaugh.)
The dispute entered a new stage on July 22, 2005, when the WTO issued an interim
ruling indicating that provisions of the American Jobs Creation Act still violate international
subsidy rules which state that signatories should remove without delay any subsidies found
to be prohibited by the WTO. The United States, in turn, appealed the adverse WTO panel
decision in November 2005. The WTO Appellate Body is expected to rule on the U.S.
appeal by February 13, 2006.
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If the U.S. appeal is denied, the EU can reimpose sanctions against U.S. exports that it
had suspended in January 2005. As noted above, the EU directive calls for retaliation to be
reimposed 60 days after the Appellate Body rules.
Byrd Amendment. The Continued Dumping and Subsidy Offset Act (CDSO), or
Byrd Amendment, enacted in October 2000, requires the annual disbursement of
antidumping and countervailing duties to qualified petitioners in the underlying trade remedy
proceedings. Soon after enactment, the EU and seven other parties successfully challenged
the statute in the WTO on the grounds that the Byrd Amendment constitutes a “non-
permissible specific action against dumping or a subsidy” contrary to various WTO
agreements. Because the United States did not comply with the ruling by the arbitrated
deadline of December 27, 2003, the eight complaining members requested authorization
from the WTO in January 2004 to impose retaliatory measures. A decision by a WTO
arbitrator on the amount of retaliation U.S. trading partners can impose was handed down
on August 31, 2004. The arbitrator determined that each of the eight complainants could
impose countermeasures on an annual basis in an amount equal to 72% of the CDSO
disbursements for the most recent year in which U.S. data are available.
Canada and the EU began retaliating on May 2, 2005, by placing a 15% additional duty
on selected U.S. exports. Mexico imposed higher tariffs on U.S. milk products, wine, and
chewing gum as of August 18, 2005, and Japan placed an additional tariff of 15% on 15 steel
and industrial products as of September 1.
Despite strong congressional support for the measure in both chambers, a provision
seeking to repeal the CDSOA was included in the conference report to S. 1932, the Deficit
Reduction Act of 2005. The language in the provision, however, would allow CDSOA
payments on all goods that enter the United States to continue through October 1, 2007.
As of this writing, the Byrd repeal has not been signed into law yet. A final House vote
on the reconciliation bill is expected to take place in February. If the Byrd amendment is
repealed, it is not clear whether the EU, Mexico, Japan, and Canada will lift the sanctions
or not.
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. President Bush
in an August 13, 2004 speech raised the stakes of the Airbus-Boeing dispute by stating that
Airbus production subsidies are unfair. In October 2004, this long simmering dispute
reignited when both sides took their complaints to the WTO. Tensions were somewhat
diffused by a January 11, 2005 agreement to try to reconcile differences through a
three-month period of bilateral negotiations. But negotiations stalled in April and the two
sides filed complaints in the WTO over their respective government’s alleged subsidies, thus
creating the largest trade dispute in value terms ever considered by the WTO. The beef
hormone dispute also heated up when the EU in November 2004 took the first steps to
challenge in the WTO the sanctions the United States and Canada are imposing on EU
exports.
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Airbus-Boeing Subsidy Tensions.1 The United States and the EC have now each
filed complaints with the World Trade Organization (WTO), thus creating a major trade
confrontation between these two trade superpowers. At the same time, U.S. and EU trade
officials stated on June 17, 2004, that they would still search for a negotiated settlement of
this aircraft subsidy dispute between Boeing and Airbus. However, on July 20, 2005, the
WTO agreed to establish two dispute settlement panels to begin investigating the competing
U.S. and EU complaints. Two panels were established on October 17, 2005 (one handling
the U.S. charges against Airbus and the other handling the EU's counterclaims against
Boeing), and both panels are scheduled to begin hearing the cases this year. Beginning this
March, the two sides will begin filing and rebuttal submissions, providing the first public
glimpse into the arguments that will be made and evidence that will be presented. However,
panel rulings are not expected to be handed down until early 2007. Whether the WTO
litigation provides an incentive for the United States and the EU to resolve the dispute
bilaterally remains to be seen.
This dispute had its beginnings on October 6, 2004, when the United States requested
consultations with relevant parties pursuant to the World Trade Organization’s (WTO)
Understanding on Rules and Procedures Governing the Settlement of Disputes. At the same
time the United States terminated a 1992 agreement between itself and the European
Communities (EC) on Government Support for Civil Aircraft. Later in the same day, the EC,
acting on behalf of itself, and the member states filed a separate request for consultations
under the WTO dispute resolution process. Separately, the EC rejected the U.S. termination
of the 1992 agreement.
In the 13 years since the 1992 Agreement was signed, the long-standing competitive
relationship between the two major producers of large commercial aircraft has changed.
Airbus, which was the number two producer for most of the 1990s, now leads Boeing in both
new annual aircraft deliveries and orders. Boeing, although a strong competitor in this
market, has experienced a number of high profile problems, most recently with its now on
hold plan to sell/lease tankers to the Air Force.
Much of the ongoing discussion about the Airbus/Boeing relationship stems from
Airbus’s December 2000 launch of a program to construct the world’s largest commercial
passenger aircraft, the Airbus A380. Many observers believed then, that the A380 action
could reopen a long-standing trade controversy between the United States and Europe about
alleged subsidization of commercial aircraft projects that compete directly with non-
subsidized U.S. products. It now appears that these concerns have come to fruition.
The market for large commercial aircraft (jet aircraft with 100 or more seats) 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, the firm is now owned by just
two firms, EADS and BAE Systems. Airbus itself is now a public firm operating under the
Airbus name (also know as Airbus SAS).
1 Prepared by John W. Fischer, Specialist in Transportation, Resources, Science, and Industry
Division.
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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 the
U.S. trade policymakers contend, Airbus is a successful participant in the market for large
commercial jet aircraft not because it makes good products, which by all standards it does,
but because it has received significant amounts of governmental subsidy and other assistance,
without which it is unlikely to have been able to enter and participate in the market.
The source of most recent controversy over subsidies, the Airbus A380, is being offered
in several passenger versions seating between 500 and 800 passengers, and as a freighter.
The project is believed to have cost about $13 billion, which includes some significant cost
overruns identified by Airbus earlier this year. Airbus expects that its member firms will
provide 60% of this sum, with the remaining 40% coming from subcontractors. State-aid
from European governments are also a source of funding for Airbus member firms. State-aid
is limited to one-third of the project’s total cost by a 1992 Agreement on Government
Support for Civil Aircraft between the United States and the European Union (EU).
At issue in the A380 development is at least $3.2 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 have likely been provided to subcontractors by
other European nations. Also at issue are large dollar infrastructure improvements provided
by state and local governments that directly benefitted the A380 project.
Shortly after the A380 project was announced, Boeing dropped its support of a
competing new large aircraft. Boeing believes that the market for A380 size aircraft is
limited. It has, therefore, settled on the concept of producing a new technology 250-seat
aircraft, the 787, which is viewed as a replacement for 767 size aircraft. Boeing formally
launched the program in 2004.
To construct this aircraft Boeing is proposing to greatly expand its use of non-U.S.
subcontractors and non-traditional funding. For example, a Japanese group will provide
approximately 35% of the funding for the project ($1.6 billion). In return this group will
produce a large portion of the aircraft’s structure and the wings. Alenia of Italy is expected
to provide $600 million and produce the rear fuselage of the aircraft. In each of these
instances, the subcontractor is expected to receive some form of financial assistance from
their respective governments. The project is also expected to benefit from state and local tax
and other incentives. Most notable among these is $3.2 billion of such incentives from the
state of Washington.
The Boeing View. Boeing has long contended that Airbus has benefitted greatly from
direct assistance from the member states. It is Boeing’s view that several of Airbus’s aircraft
projects, especially the A380, would not have been able to obtain financing in commercial
markets because of their large risks. The view is that Airbus’s corporate decision-making
is largely influenced by the knowledge that the firm ultimately cannot fail financially and
because a large portion of the risk is borne by European partner governments.
Since early 2004, Boeing’s management has continuously raised the subsidy issue with
the Bush Administration and with Congress. As it has become apparent that Airbus might
launch a new aircraft project, the A350, in response to the 787, with launch aid from the
member states, Boeing’s concerns have increased.
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The Airbus View. Airbus does not accept the U.S. view of the reasons for its success.
Although admitting to, but not completely disclosing, prior levels 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 to its governmental sponsors over the last
several years as proof of its long-term intent to operate in a market environment. Airbus also
contends that its loans are, contrary to Boeing claims, at commercial rates. Airbus counters
the U.S. argument that subsidies are the principal reason for Airbus’s 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.
Europeans are also likely to contend that the 787 will receive a level of subsidy that they
believe might proportionately exceed the subsidy levels received by the A380. To support
this claim, they point to the aforementioned publically announced subsidies from
Washington state, and the large amount of government assistance by Japan and Italy to firms
that will serve as major subcontractors on the aircraft.
On April 11, 2005, the Senate passed a concurrent resolution calling for the Bush
Administration to move the Airbus-Boeing dispute to the WTO if the EC and/or its Member
States provide launch aid for the Airbus A350 aircraft (S.Con.Res. 25). Although the
resolution has no force in law, the 96-0 vote in favor of the resolution demonstrates a clear
Senate consensus that the issue is important to national policy.
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. Canada imposed $9.4 million in sanctions.
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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 was faced with a divided
industry position. The American Meat Institute and the American Farm Bureau preferred
carousel retaliation to settle the dispute while the American Cattlemen’s Beef Association
supported 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 October 2003, the European Commission notified the WTO that it has changed its
hormone ban legislation in a way that it believes complies with international trade rules. The
legislation makes provisional a previous permanent ban for five growth hormones used to
raise beef and keeps in place a permanent ban on the use of oestradiaol 17 on the basis that
it is carcinogen. As a result, the EU argued that it should no longer be subject to punitive
trade sanctions by the United States (as well as by Canada).
On November 8, 2004, the EU took an initial step in the WTO to challenge the U.S. and
Canadian sanctions still in effect. According to the EU, its October 2003 actions making the
ban provisional for five growth hormones complies with WTO rules, which means the U.S.
and Canada are no longer entitled to retaliate against its exports. The U.S. and meat industry,
however, argue that making a ban provisional for the long term does not meet WTO
obligations. Nevertheless, in February 2005, the EU secured the establishment of a panel to
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determine whether the United States and Canada are in violation of WTO rules by
maintaining punitive tariffs on a number of EU products in the dispute. A WTO dispute
panel hearing on this issue was held on August 1, 2005, and a second hearing is scheduled
to be held in March 2006. (For further discussion, see CRS Report RS20142, The European
Union’s Ban on Hormone-Treated Meat, by Charles E. Hanrahan.)
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.2 Another dispute that is likely to reappear this year involves the
EU’s de facto moratorium on the approval of bio-engineered foods, also commonly referred
to as products containing genetically modified organisms (GMOs). This long-running
dispute goes back to October 1998 when the United States, Argentina, and Canada alleged
that the EU was applying a moratorium of the approval of bio-engineered or GMO products
without any scientific justification, blocking a number of marketing applications already in
the pipeline. The three also accused Austria, France, Greece, and Italy of prohibiting the
importation and marketing of GMO products, even though these products had already been
approved for sale within the EU.
The WTO panel, which was established in August 2003, is expected to release a
preliminary and confidential ruling on February 1, 2006. A final report is expected to be
released in March 2006. This dispute is one of the longest in the history of the WTO. Some
of the delay has resulted from the EU's insistence on the appointment of scientific experts
to help the panel deal with technical issues.
In November 2005 the European Commission gave market approval for the use of a
corn crop known as 1507 as animal feed, the fourth occasion the Commission has authorized
the sale of a GMO produced in the EU since Brussels formally lifted its moratorium on GMO
approvals in 2004. The moratorium was formally lifted after the EU adopted new labeling
and traceability rules for bio-engineered foods, but 11 member states including France,
Germany, Austria, and Belgium have continued to impose their own moratoriums on the
approval of new GMOs. The European Commission has brought a case against the member
states at the European Court of Justice over implementing the directives.
But the U.S. government has argued that the EU has continued to impose a moratorium
on approval of GMOs in violation of the WTO Agreement on Sanitary and Phytosanitary
(SPS) measures. The EU has argued that the SPS agreement only addresses measures to
protect human, animal, or plant life or health, which does not cover all issues the EU says
are raised by GMO applications. Some questions on GMO applications, the EU argues, deal
2 Prepared by Charles E. Hanrahan, Senior Specialist in Agricultural Policy, Resources, Science, and
Industry Division.
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with non-living components of the environment and cannot be found in violation of the SPS
agreement.
E-Commerce and Data Privacy. On July 1, 2003, the EU began requiring U.S. and
other non-EU firms to pay value added tax (VAT) on the sale of goods and services digitally
delivered to individual consumers in the EU. The new tax rules apply to the supply over
electronic networks (digital delivery) of software and computer services generally, plus a
wide array of information services. U.S. and other non-EU firms are required to register in
one country but pay the VAT at the rate applicable to each customer’s country. In contrast,
EU firms pay tax at the single rate of the country in which they are located.
EU taxation of digital transactions raises several policy issues for the United States.
These include the taxation of digital commerce, unequal taxation of EU versus non-EU
firms, high tax compliance costs, EU competition with the Organization for Economic
Cooperation and Development’s (OECD’s) multilateral discussions of the taxation of e-
commerce, and the possibility of a complaint to the WTO. The issue of requiring a foreign
firm to collect tax on sales at multiple rates depending on the customer’s country of residence
is similar to the domestic issue, raised in connection with the Internet tax moratorium, of
possibly requiring U.S. sellers to collect tax on interstate sales based on the tax in the
customer’s state of residence. (For further discussion, see CRS Report RS21596, EU Tax on
Digitally Delivered E-Commerce, by Martin A. Weiss and Nonna A. Noto.)
The related issue of data privacy rights has also been a source of some 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 in 1995
adopted a directive forbidding the export of personal information outside EU member states
unless the privacy laws in the country to which the information is to be received are deemed
“adequate” by the EU. The fact that this list of countries did not include the United States,
combined with the need for U.S. companies to be able to move date from Europe to the
United States, prompted the creation of the “Safe Harbor” agreement of 2000. This
mechanism allows U.S. companies within the jurisdiction of the Federal Trade Commission
to comply with the EU Directive if they enroll with the Commerce Department, publicize
that they will comply with the safe harbor rules, and recertify their compliance annually. As
of December 2005, 837 U.S. companies were certified to the safe harbor program. (For
further discussion, see CRS Report RS20823, The EU-US “Safe Harbor” Agreement on
Personal Data Privacy, by Martin A. Weiss.)
Fostering Cooperative Competition Policies
In recent years the EU and the United States have sparred over competition policies.
Known as anti-trust policy in the United States, these laws provide remedies to deal with a
range of anti-competitive practices, including price fixing and other cartel arrangements,
abuses of a dominant position or monopolization, mergers that limit competition, and
agreements between suppliers that foreclose markets to new competitors.
While regulators on both sides share much information and seek to collaborate in ways
that provide for consistent policies, two high-profile cases have raised questions about the
need to improve cooperation. These cases are the European Commission’s July 2001
decision to block the merger of General Electric and Honeywell and the Commission’s
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March 24, 2004 decision to impose remedies and fines on Microsoft for alleged violation of
European competition laws.
GE-Honeywell Case
As M&A activity has accelerated in the 1990s 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 2001 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
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
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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.
Microsoft Case
After a five-year investigation of Microsoft Corporation’s alleged leveraging of its near
monopoly in the market for personal computer operating systems and for media players, the
European Commission on March 24, 2004, fined Microsoft $612 million and ordered the
company to disclose to its competitors the interfaces required for their products to “talk” with
the Windows operation system. In addition, Microsoft is required to offer a version of its
Windows operating system without Windows Media Player to PC manufacturers or when
selling directly to end users.
The order effectively puts Microsoft on notice that future attempts to add features to
Windows would be challenged in Europe if the additions put rival products at competitive
disadvantage. The ruling is intended to ensure that “anyone who develops new software has
a fair opportunity to compete in the marketplace,” EU competition commissioner Mario
Monti said in Brussels. Microsoft called the EU’s decision “unwarranted and ill-
considered,” and said it expected to appeal the order in European courts.
The penalties go well beyond the terms of a settlement Microsoft reached with the U.S.
Justice Department and several states in 2001. A Justice Department official criticized the
EU’s decision to adopt separate mandates, and several members of Congress warned that the
ruling could widen trade and diplomatic rifts between the U.S. and Europe.
R. Hewitt Pate, Chief of the Justice Department’s Antitrust Division, criticized the
approach taken by the EU in requiring code sharing as part of its remedy for protecting
“competitors, not competition.” Pate also expressed concern that the EU decision could
“dull lawful innovation ... and hurt consumers.”
The reaction from Congress was mixed. Senator Herb Kohl, ranking minority member
of the Senate Judiciary Committee’s Antitrust, Competition Policy and Consumer Rights
Subcommittee, stated that “much of the EU’s decision” reflects his subcommittee’s
recommendation to the Justice Department when it settled its case against Microsoft. House
Judiciary Committee Chairman F. James Sensenbrenner said the decision “raises important
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questions concerning the extraterritorial application of foreign antitrust law.” And Senate
Majority Leader Bill Frist stated that “I now fear that the U.S. and EU are heading toward
a new trade war and the Commission’s ruling against Microsoft is the first shot.”
A number of antitrust lawyers argued that the decision highlights fundamental
differences between the U.S. and EU in dealing with monopoly abuse. Efforts to harmonize
the U.S. approach to antitrust with authorities in the EU are, thus, likely to continue.
On December 22, 2004, a senior European judge upheld the implementation of the
March sanctions. The Court of First Instance said that Microsoft had failed to demonstrate
that imposing Commission penalties might cause it serious and irreparable damage.
Microsoft says it would still prefer a negotiated settlement to a continuing legal challenge to
the sanctions. Nevertheless, Microsoft is still in the process of appealing the decision. Most
recently, on November 14, 2005, Microsoft confirmed that it is trying to persuade the U.S.
Justice Department to participate in its appeal. A decision in the appeal could take up to two
years.
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 also 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. Then-USTR Zoellick and then-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.
Subsequent negotiations proceeded at a slow pace and eventually broke down at the
Cancun Ministerial Conference held September 10-14, 2003. At this meeting, trade
negotiators were unable to reach agreement on the course of the multilateral trade
negotiations. The immediate cause of the collapse was disagreement over launching
negotiations on investment and competition, but agriculture and industrial market access
were also sources of contention.
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After the collapse of the Ministerial Conference, Brussels and Washington explored
different ways in getting the Doha Round restarted. On December 2, 2003, the European
Commission approved a white paper on reviving the Doha talks. Then-USTR Robert B.
Zoellick outlined his proposals for moving the round forward in a letter to trade ministers
dated January 11, 2004. On April 16, 2004, the EU withdrew its previous demand that
member countries of the WTO agree to negotiate new rules on the so-called Singapore issues
of investment, government procurement, competition policy, and trade facilitation. And on
May 16, 2004, the EU announced that it is prepared to negotiate the elimination of all export
subsidies as part of an effort to inject new momentum in talks.
The EU concessions, in turn, helped trade ministers conclude on August 1, 2004, an
agreement setting the broad policy framework for the Doha negotiations. The framework
agreement also pledges to substantially reduce domestic supports and significantly expand
market access for farm products. Members also agreed to hold the next ministerial meeting
of the WTO in Hong Kong in December 2005.
At the Hong Kong meeting, Peter Mandelson, who replaced Lamy as EU Trade
Commissioner in November 2004, and former Congressman Robert Portman, who replaced
Zoellick as U.S. Trade Representative, had difficulty in finding common ground. The fact
that U.S. and EU negotiating priorities in some key areas, particularly agriculture, differ in
significant ways has made progress difficult. In agriculture, the EU has called on the U.S.
to make concessions on cutting domestic agriculture subsidies in return for flexibility on its
part in market access. But the U.S. has made it clear that it will not make additional
concessions on domestic subsidies without EU concessions on market access. Unless this gap
can be narrowed, it may be difficult to move the Doha talks forward. The next ministerial
meeting is scheduled for April 30, 2006.
FOR ADDITIONAL READING
CRS Reports
CRS Report RS21556. Agricultural Biotechnology: The U.S.-EU Dispute, by Barbara A.
Johnson and Charles E. Hanrahan.
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 RS21372. The European Union: Questions and Answers, by Kristin Archik.
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