EUROPEAN UNION: Concerns about US trade policy

Analysis

The most significant imminent problem on the transatlantic trade agenda concerns the Foreign Sales Corporation (FSC)/Extra-Territorial Income Act (ETI Act) dispute. The EU is entitled under a WTO ruling to impose retaliation worth 4 billion dollars on US goods. A list of goods proposed has been discussed with EU member states and made public some time ago. The EU began preparing last year to impose an additional tariff of 5% on imports of selected US products as of March 1, and increase this tariff by 1% a month until it reaches a temporary ceiling of 17% in March 2005.

Despite the improved atmosphere in the aftermath of the decision by President George Bush to remove safeguard tariffs on most imported steel (see INTERNATIONAL: Overcapacity is root of steel problems - December 11, 2003), the EU has appeared determined to go ahead with retaliatory action at the beginning of March. However, lobbying from Washington is intensifying amid some signs of legislative momentum (even if the EU's deadline seems unlikely to be met) and there could be last minute restraint on the part of the EU.

EU trade preoccupations.Beyond possible FSC/ETI Act retaliation, the EU is preoccupied by a number of other issues:

• Byrd Amendment.The Byrd Amendment distributes anti-dumping taxes imposed by the United States to US petitioners and is incompatible with WTO rules. The EU, Japan and six other WTO members requested on authorisation from the WTO to impose sanctions on the United States in response to its failure to make the 'Byrd Amendment' conform with WTO rules. The amount of retaliation to be authorised was submitted on January 26 to arbitration.
• Zeroing dispute.The 'zeroing' dispute involves an EU complaint about the way in which the United States calculates its anti-dumping duties. The EU objects to the fact that the United States is not taking account of negative dumping margins (ie if the domestic price is lower than the export price) and that a number of EU export sectors, such as steel, ball bearings and chemicals, are suffering excessively high duties in consequence. The Commission is further concerned that the duties collected are then subject to the Byrd Amendment. Although the United States yesterday blocked a WTO panel on the zeroing issue, it will not be able to refuse a further request from the EU, which seems likely.

• Iraq contracts.Obstacles to French and German companies being considered for reconstruction projects have caused anger. The European Commission is examining the US decision to ban companies from 'non-willing countries' from reconstruction contracts.
• Boeing project.Europe will check that development of the new Boeing 7E7, whose launch was announced on December 16 (see UNITED STATES: Can Dreamliner deliver for Boeing? - December 17, 2003), complies with the 1992 EU-US agreement on trade in large civil aircraft.
• Doha fallout. At a general level, there is the question of the failure of Doha talks in Cancun, responsibility for restarting them successfully (see INTERNATIONAL: Zoellick letter brightens trade outlook - January 29, 2004), and whether the United States remains committed to a multilateral rather than bilateral approach. The EU is not particularly happy about the flourishing of bilateral and regional trade agreements in the wake of the Cancun failure.

Sources of transatlantic trade dispute are clearly not all on the European side. Most notably, the United States has asked for a WTO panel on GMOs, which has not yet been set. In the meantime, discussions continue on the slow track. While it is likely that that the EU moratorium on GMOs will go, the traceability and labelling requirements are likely to stay (see INTERNATIONAL: Washington raises stakes over GM food - May 27, 2003).

Other problems.Separate from trade issues, but related to them, are a number of other potential sources of dispute for the year ahead:

• After Kohlberg Kravis Roberts recently bought MTU, the aircraft engine division of Daimler-Chrysler, an increasing number of Europeans are concerned by the number of recent US acquisitions in the EU defence industry and the EU-US asymmetry in this field. Under the 1985 Exxon-Florio Amendment to the Defence Production Act, the US president can halt the acquisition of a US undertaking by a foreign firm for security reasons. Furthermore, even when the deals are not blocked, the Pentagon makes sure that EU companies benefit very little from the technology of their US subsidies, and companies such as BAE Systems are complaining increasingly loudly. Nothing comparable exists the other way around, and while real action is not on the agenda, 2004 could see the issue take a higher profile.
• The US Supreme Court accepted last December to hear a case (Empagran vs. Hoffman Laroche) whether non-US purchasers can recover treble damages under US law for uncompetitive action occurring entirely outside of US commerce. A decision is expected by the end of June. Should the Supreme Court upset the equilibrium found on extraterritoriality with the Foreign Trade Antitrust Improvements Act in 1982, which makes the US antitrust law (the Sherman Act) inapplicable to trade outside the United States unless the anticompetitive action concerned directly affects US domestic or export trade, the EU could go as far as forbid European companies from cooperating with US justice on investigations.
• Unless a settlement is found with Microsoft, which is very unlikely (see EUROPEAN UNION: Stakes are high in Microsoft case - August 12, 2003), the European Commission will probably adopt a tough negative decision against the software giant in March-April, which could go as far as imposing the compulsory licensing of interoperability technologies and some sort of unbundling of Media Player from Windows, combined with a heavy fine. What makes the Microsoft row potentially much more acute is a newspaper interview given by President of the Court of First Instance Bo Vesterdorp in December. He stated that it is not easy for the Court to grant interim relief in cases like Microsoft's where it seems hard to prove that there will be no irreversible damage. There is a risk that the tough remedies which the Commission may impose be of immediate effect.

Maintaining momentum.Faced with this substantial list of potential disputes and questions, the EU is looking for a way to keep some momentum in the general transatlantic economic dialogue. The answer in part is the so-called Positive Economic Agenda (PEA), which basically consists of an ad hoc list of pragmatic topics where practical progress can be achieved through appropriate top-down pressure on both sides. One area where EU trade Commissioner Pascal Lamy hopes to make progress is on air services, where the European Commission has finally got a mandate to open discussions aimed at replacing 'open skies' agreements between the United States and individual European countries through a single EU-US agreement. However, the United States, which is seen in Europe to have got a good deal from 'open skies' will only reluctantly come to the discussion table.