Trade tensions likely to sour the atmosphere as EU-US leaders meet

Date: 25/05/2000

By Peter Chapman

TRANSATLANTIC trade tensions will inevitably preoccupy minds when the leaders of the world's mightiest economic blocks meet next week.

Instead of patting each other on the back for presiding over 2-trillion-euro of unfettered bilateral trade and investment flows - and applauding the recent deal on data protection - the Union and US are more likely to engage in a diplomatic war of words over a niggling list of gripes which is growing by the day.

Top of the in-tray for Lisbon is likely to be the US' plan to continue its battle over bananas and beef by drawing up a fresh list of EU goods to be targeted by punitive measures. The move, tagged onto the bottom of a US-Africa trade bill by Congress, set pulses racing in Brussels when it was announced earlier this month.

European Commission officials described the plan - known in trade-speak as a 'carousel' - as "very regrettable", adding that it "fanned the flames" of trans-atlantic trade disputes rather than helping to solve them.

The US decision follows last year's World Trade Organisation ruling authorising sanctions on €117 million and €191 million of Union exports respectively because of the EU's failure to comply with WTO rulings on its ban on hormone-treated beef and its reformed banana regime.

The Union claims carousel trade measures are a particularly tough form of sanctions because they have a double effect, since the companies hit by the original penalties tend to find it difficult to get their old business back once the sanctions have been lifted.

Bananas and beef may be at the top of the league of EU-US gripes, but the Americans are equally likely to air their displeasure over new Union rules outlawing hush-kitted aircraft in EU airspace - a move they see as a clear breach of WTO rules and existing international agreements governing the industry.

Another burning issue which could sour the atmosphere at Lisbon is the US' controversial Foreign Sales Corporations (FSCs), although it remains to be seen to what extent the high-level delegates will have the stomach for tackling such a complex topic themselves.

The summit will provide an ideal opportunity for Washington to update Union leaders on its plans to replace FSCs - the offshore tax-break system used by American multinationals but deemed illegal by the WTO. The Geneva-based trade watchdog ruled earlier this year that the FSCs fell foul of its rule book and ordered Washington to devise an alternative system by October.

US trade officials argued that the scheme, which has been in operation for 16 years, was a counter-measure to similar tax breaks offered by the Union, to its firms covering the sale, lease or license of property or services for export. But the EU won its claim that the scheme, which granted special reduced tax rates to firms exporting via offshore bases in centres such as the Virgin Islands, amounted to an illegal subsidy to US firms such as aircraft maker Boeing and software giant Microsoft.

With all of this going on, sceptics could be forgiven for thinking that if Adam Smith and David Ricardo could hear the discussions in Lisbon, they would turn in their graves. The founding fathers of modern trade theory would hear little of their message - that free trade can be good, even for one country applying it unilaterally - among all the talk of retaliation and carousels.

But Trade Commissioner Pascal Lamy insists that things are not as bad as they seem, arguing that an impending transatlantic trade war is not about to break out. "The EU and the US have had, and will continue to have, an excellent working relationship," said the Union's trade supremo in a recent speech to German industrialists. "Disputes will inevitably arise, given the sheer volume of our bilateral trade and investment relationship, and we have to fix them in accordance with WTO rules."

On the positive side, optimists claim the Lisbon summit is likely to be used to boost understanding between the two blocs on a number of key issues - in particular, the booming but relatively under-regulated electronic commerce sector. The US is keen to ensure it stays that way, and is likely to re-iterate its laissez-faire approach to adding duties and trade tariffs to Internet sales.

Efforts to build on existing 'mutual recognition agreements' which allow companies to avoid sending samples of their products for conformance testing across the Atlantic are also likely.

But if anyone thinks Lamy will play softball with the US on the most contentious issues between the two sides, the Commissioner is keen to put them straight.

"I am no believer in megaphone diplomacy," he said recently. "But if the other side picks up the megaphone again - for instance by threatening rotating sanctions in the banana and hormone cases, which is quite counterproductive, I can assure you that we can also add some decibels to the debate, if need be."

Reporters in Lisbon have been warned - take your earplugs.