Is Europe an Economic Friend or Foe?

Undeniably, there are deep social, cultural and economic ties between the United States and the European Union. In fact, most Americans are descended from immigrants who came from Europe.

In the economic realm, the United States and Europe are both commited to market economics and share most assumptions about economic and trade policy. The United States and the EU can fairly be called the leaders of the world economic and trading system. But despite this considerable basis for kinship and cooperation, the United States and Europe are drifting into serious international trade conflicts.

There are now 15 trade challenges pending against the United States at the World Trade Organization. Surprisingly, the European Union has brought -- either directly or in conjunction with other countries -- 11 of these challenges.

Sometimes statistics like this can be deceiving. But, in this case, the EU has also brought the most serious WTO complaints against the United States. Last fall, the EU successfully challenged a provision of the U.S. tax code known as the Foreign Sales Corporation provision. In brief, FSC provides some benefits for exporting companies that a WTO panel recently found -- at the behest of the EU -- to constitute subsidies.

This decision is particularly troubling because the FSC rule was established in large part to put U.S. exporting companies on an equal footing with European companies, which benefit from significant European tax rebates. There had reportedly been a ""gentleman's understanding'' between the United States and Europe to cease attacks on each other's tax laws. U.S. tax officials and corporations have expressed understandable consternation over Europe's decision to scrap the understanding and open what will likely be an extended battle over each other's tax laws.

In another important complaint, the EU has challenged the United States' practice of calculating subsidies in cases involving privatization. The EU and the WTO panel took the almost incomprehensible position that even if an industry was literally created by government subsidies, privatization had the effect of washing away the subsidy. How could a paper transaction such as an overnight sale wipe away subsidies on the very same plants and equipment that all agree were subsidized the previous day?

The EU's position on this issue is all the harder to explain because its own rules on subsidies both within the EU and with respect to imports do not assume that privatization extinguishes subsidies! For the United States, this is not a trivial matter -- 15 of the 26 U.S. countervailing (anti-subsidy) investigations brought and completed since the creation of the WTO involve privatization. Ultimately, the privatization ruling could tear a gaping hole in efforts to curb trade-distorting subsidies.

Unfortunately, countervailing duty laws are not the only U.S. trade law under European attack. U.S. anti-dumping laws -- Section 201 (temporary import relief), Section 301 (unfair trade practices), and Section 337 (intellectual property protection) -- have all been the subject of EU complaints to the WTO. The EU also joined with Japan and other countries to try to reopen WTO negotiations on anti-dumping laws. Europe took this step even though the current WTO rules are not fully implemented and the EU actually employs anti- dumping laws more aggressively than does the United States.

Some argue that this was entirely a political move by the EU. Because of the resistance of French farmers, the EU did not want a new round of WTO talks. Threatening to reopen anti-dumping laws -- a step the United States simply could not take in the wake of the steel import crisis -- provided a convenient opportunity to stymie the talks and put the blame on the United States. Ironically, the likely result of the effort to undermine U.S. trade laws, which are legitimate WTO legal measures to address trade problems, is exactly what the EU and other countries should not want: a decrease in support for the WTO and free trade in the United States and a likely accompanying rise in protection.

Some Europeans point out that the United States has brought needless complaints against the EU on bananas and meat from animals treated with growth hormones. The United States may well have erred by needlessly pressing the so-called banana case. The hormone case is, however, legitimate. Although it is a difficult issue, there is nothing duplicitous or contradictory about the United States raising this matter before the WTO.

Whatever the cause, the United States and the EU would do well to de- escalate this growing conflict. Both should consider dropping some of their peripheral complaints and suspending further action on others. These matters are likely to prove much easier to resolve in an atmosphere of cooperation than in one of confrontation.