Europe’s ‘Sad Day’?

“A sad day for trade relations between the US and Europe”. This is how John Disharoon, vice president of the trade committee at the American chamber of commerce to the EU described the decision by the European Union to begin imposing trade sanctions on US goods as of today. Of course, the arguments about why this measure is totally justified (or conversly totally un-justified) will be legion. However, at the end of the day, I can’t help agreeing with the above-mentioned comment. With all the problems we face out there in front of us, with all the dangers of a renascent protectionism which we can clearly see inside the US itself, this, it seems to me, is the last thing we need right now. It wreaks of the worst kind of logic of bureaucratic decision making.

For the first time in the history of transatlantic trade relations, the European Union will on Monday impose trade sanctions on US goods, in an attempt to force Washington lawmakers to repeal controversial corporate tax breaks.

EU customs officials will levy an additional 5 per cent tariff on a wide range of American products. The duty on imports of natural honey, for example, will rise from 17.3 per cent to 22.3 per cent. Roller skates will be subject to a 7.7 per cent duty up from 2.7 per cent.

The punitive tariffs will also apply to textiles, agricultural products, steel and glass, books and newspapers, sugar and toys – even nuclear reactors. And they will rise, by 1 percentage point each month, until they affect US exports worth $666m a year.

The aim is to force the US Congress to change the foreign sales corporation provision (FSC), which grants tax breaks to US exporters and was ruled illegal by the World Trade Organisation in 2002.

But to John Disharoon, vice president of the trade committee at the American chamber of commerce to the EU, Monday is simply “a sad day for trade relations between the US and Europe”. He says: “Nobody wants to see sanctions. It adds to the negative climate.”

European companies share some of Mr Disharoon’s concerns. But according to one trade expert, there is “no sense of disaster” among European trade officials, business lobbies and observers. The European Commission is keen to play down the significance of the trade sanctions. It insists that Brussels has shown patience and diplomacy in the run-up to March 1, and that Washington as well as US companies have had ample warning and enough time to prepare for the sanctions.

“We’ve been extremely patient, but there is no way now we can avoid these sanctions, which hopefully will concentrate a few minds on the urgency of this legislation,” Pascal Lamy, EU trade commissioner, told reporters in Washington on Friday following two days of meetings with US lawmakers. He added: “The day the necessary legislation is there, I will remove the sanctions.” Officials close to Mr Lamy have argued for months that there would be no backlash from US lawmakers.

Monique Julien, a trade expert at Unice, a business federation that claims to represent some 16m European companies, says: “If you look at the record on the European side there has always been an attempt at conciliation. Sanctions were repeatedly postponed but at the end of the day, it is a question of [upholding] the credibility of the WTO dispute settlement system.”

But even Europeans admit that – at some point – the Commission and its counterpart in Washington might have to rethink the way they approach trade disputes. Like many trade experts, Ms Julien is worried about the “multiplication” of recent EU-US trade spats – of which the dispute over FSC is only the most visible example.

In the past two months the EU has moved closer to trade sanctions in a string of cases, many of which are linked to US anti-dumping legislation and practices. In a dispute over the so-called Byrd amendment, which allows US companies to keep the anti-dumping proceeds raised from foreign competitors, sanctions could come this summer.

Nick Clegg, a British Liberal Democrat member of the European Parliament and trade expert, warns that “everything is being shuffled off to the WTO, and if that trend continues it begins straining the credibility of the institution”.

Although he applauds Mr Lamy’s approach in the FSC case, Mr Clegg believes that at some point it could become necessary for the EU and the US to settle their disputes through direct negotiations. “If we continue along the same trajectory, there needs to be some kind of political decision to clear the decks in a comprehensive way.

“I think more and more businesses, especially big companies with transatlantic links, are asking: is this really the best way to handle the biggest trade relationship in the world?”
Source: Financial Times

22 thoughts on “Europe’s ‘Sad Day’?

  1. I am not sure if it’s such a sad day. It will make a big difference if the European politicians and officials can manage to deal with this in a most “clinical” way.
    In the long run it is nice that the WTO plays a crucial role in “correcting” the US administration. (Yes, I think I am a centrist, a radical centrist). It is absolutely nobody’s interest (except some cynical US billionaires and their supporters in the US administration) that the world has only one superpower. I hope we can witness all kinds of coalitions among several bigger players to put pressure on one or a few of the others to reach worldwide coordination on things that matter.

  2. Frans, actually, it’s not the US Administration that enacted the tax law in question: it is the US Congress, a long time ago. And there’s the rub. Congress has continued to procrastinate in coming up with a solution to the problem that’s palatable to both the Republican and Democratic parties. Perhaps this indeed will prod them into action. Perhaps not.

    In the same vein, however, the WTO certainly did a service to the US in punishing the EU for bogus health claims against hormonally-treated US beef. Retaliatory measures were taken by the US, – with the WTO’s blessings – and I believe European governments are still willing to pay for them, in order to sell agricultural subsidies to the electorate and protect the European farmers (the hormone-issue being just a good excuse).

    If excuses can be linked to non-economic, social issues, then you can rest assured that Congress will take a very long time to sort this thing out, as European intent will be thoroughly examined. Europe might be seen as having a sinister motive (not unlike the one you mention: “correcting” America). The tax issue will certainly strengthen the hand of unilateralists and protectionists. After all, the US Constitution grants Congress, – not the WTO – the exclusive right to enact tax laws…

    In either case, look for more acrimony and blame between the US and Europe, not less. And we’ll all get poorer together, although in the long run, Europe will get poorer first.

  3. “In either case, look for more acrimony and blame between the US and Europe, not less. And we’ll all get poorer together, although in the long run, Europe will get poorer first.”

    Frans, I rather agree with RSN here. I certainly agree with the first part of the quote, and I worry about the second half.

    I am not saying there are not legitimate issues here. What I am saying is that we need priorities, and representatives who know how to avoid confrontations on things which are not priorities.

    It all depends on how you read (and what happens with) the present US recovery. If the consensus pundits are right, and that little ‘hiccup’ will soon be sorted as the US goes steaming ahead (there is little evidence anywhere that Europe is about to go ‘steaming ahead’) then, of course, there will be plenty of room to negotiate.

    If all of this becomes more complicated, and protecting ‘US jobs’ becomes one of the big issues in the US elections, then we might begin to regret this decision.

    I am arguing that our priority should be to heal the wounds caused by the Iraq war, and get an agreement on the US dollar/euro situation (and indeed on the whole reserve currency thing), otherwise as RSN says “we’ll all get poorer together” and maybe “Europe will get poorer first.”

    It’s down to asymmetric risk again. Maybe the good and the bad outcomes are equally balanced, but the bad outcome would produce a much greater deterioration than the improvement associated with the good outcome. So it is better to play safe. This, at least, is how I try to live these days.

  4. although in the long run, Europe will get poorer first.

    What’s your basis for predicting this ?
    It’s not at all clear to me how Europe could plausibly get poorer first.

    Poorer worst is more plausible, but I don’t see it as a foregone conclusion either.

  5. I am of divided mind on whether or not putting the bad blood from the Iraq War behind us is even a good idea, let alone a priority. I think there are a number of senior US officials who feel the same way, although everyone is playing nice this election year.

    It’s a phenomenon very similar to the “tragedy of the commons”. Both France and Germany are to a large degree free to do whatever they like, because they do not have to deal with the mess. It is in the US interest to maintain some sort of global stability, and the US is the only one really equipped to do so. The US cannot simply say, “OK, France, you fix the problem if you don’t like our solution.” France can’t, and everyone knows it.

    It is also in French and German interests to maintain some sort of order. But while it is in their interest, it’s not their responsibility. In fact, many believe it is in the French and German interest to make the process as difficult for the US as possible, short of causing the US to fail. This weakens the US, and allows the French and Germans to pursue their own agendas with a greater degree of freedom. They have something to gain, and nothing to lose. Of course, Nero is supposed to have played a fiddle while Rome burned. Overconfidence in one’s security is notoriously lethal.

    It’s like a small child pulling his mother’s hair. To overextend the analogy, the child does this so that the mother is thankful when the child finally goes off somewhere else, and doesn’t look too closely at what else the child is doing. While never appropriate, this sort of behavior isn’t entirely unexpected and is usually afforded a degree of tolerance.

    Not, however, when mommie is driving the car down the highway at speed.

    At some point, the child has to be stopped. If the only way to stop the child from pulling the mother’s hair while in the car is to leave the child at home, then that is where the child stays. If giving the child a solid thrashing is the only way to prevent the behavior, then you are doing the child a favor. Most children would prefer a decent thrashing over being dead in an automobile accident.

    Allowing the child back in the car and pretending nothing is wrong or ever WAS wrong is the worst possible thing you can do. I cannot imagine a worser course of action.

  6. The US cannot simply say, “OK, France, you fix the problem if you don’t like our solution.”

    actually, that seems to be Bush’s Modus Operandi…in everything he does.

  7. Well, yeah, Patrick, but I meant it cannot be said as a serious proposition, not as a sarcastic taunt.

    As an aside, there was a very amusing article a few months ago in the NYT. Here’s an e-mail I sent at the time, as it has the links and direct quotes in it. I just checked the link, and while still good, the NYT requires that you pay for old articles. It isn’t worth it, as the interesting parts are quoted verbatim below:

    From today’s NYT,, last paragraph:

    >Mr. Chirac cited America’s insistence that Europe take charge of keeping the peace
    >in the Balkans, and said, “We can do this, but how? With a flute?”

    While that is a great quote with loads of potential, earlier in the article (third paragraph, first page) it says:

    >The French president added that if the Security Council, France included, could agree
    >on empowering Iraqis at once, France would be ready to train Iraqi police officers and
    >soldiers ? either in or out of Iraq. Mr. Chirac also said France had no intention of
    >sending troops to be part of the American-led occupation force, although he suggested
    >that circumstances could change.

    Exactly what troops is he proposing to send if we do meet his demands for a UN resolution? The same “flute” that is inadequate for the Balkans?

  8. A. Taylor,
    You’re right, France must not have anything it could contribute to a PeaceKeeping effort in Iraq.

    So what does the U.S. thinks it’s about, unilaterally pulling out from Iraq come June 30th, when clearly it’s the only country with the troops to keep the peace in Iraq ?

  9. Clearly, France has troops. “Can’t” and “won’t” remain two distinct words in the English language. I just liked the way Chirac talked from both sides of his mouth in the same interview.

    Short answer: don’t ask for an opinion from me unless you have a great deal of time. Longer answer follows.

    My understanding is that the US troops are supposed to stay. The problem with them remaining is that they need a soveriegn government to approve their presence. The Supreme Council (the only thing going in Iraq, at the moment) does not want to sign the open-ended (“any number of troops, for any length of time”) agreement the US has proposed. This is probably a negotiating stance on the Governing Council’s part. They probably want some sort of promised additional future economic assistance in exchange.

    I think the US Congress actually got something right last autumn when they wanted to make some $20B of the allocation for Iraq military operations a loan to Iraq. Then we would have something to negotiate with. We also could have used it as a negotiating tool with Iraq’s various other creditors, whom we were asking to forgive their loans at the same time (which is why the loan provision was eventually not included).

    I think the US will fold, will keep it’s troops there at Iraqi whim (i.e., unable to make any coherent plans), and bend over backward trying to accomodate everyone, including the European opinions. Eventually, the US will get shafted for this behavior. Just look at the initial UN response about elections/caucuses: “No, caucuses won’t work, and you can’t use elections, either. There is no solution, and it’s your problem.” Since then they have softened that to say that elections might be possible before the end of the year, but only if the US is very nice.

    I think this continuous game of “dump on the leader” will continue until the US stops barking at theoretical allies (and the UN), and starts to bite a few. It’s a drum I’ve been pounding since at least November of 2002 (about 18 months). It was the German and S. Korean election campaigns about that time that were the last straw.

    Which is another matter entirely.

    The S. Korean elections were a travesty of anti-Americanism with all the trimmings, including mass demonstrations for the removal of all US troops. Check the archives. Then N. Korea said it had a bomb. Check the archives: the US made an accusation they could build some, then N. Korea claimed they already had, a claim they later denied. Kim Jung Il gave that one to the US on a platter: we couldn’t have asked for a better chance. We should have unilaterally begun moving all our troops out of S. Korea right then. They serve no military purpose at all and are not bound by any treaty. It might have woken up a few S. Korean voters/politicians that a hostile attitude does not encourage friendly support. Instead the US made some half-hearted plan a few months later to relocate the troops within Korea. It encouraged the Koreans to continue protesting (they got an effect) without delivering the necessary message.

    I expect more of the same in Iraq. Eventually the US will simply pull out of Iraq (probably long after June 30th, but long before the country is stable), and the whole thing will fall apart. Then the entire matter can float back to the Security Council for a repeat. Every single politician involved was given a massive boost, and I am sure it is a ride to the top of the opinion polls they would all dearly love to take again.

    P.S.: Whenever I see one of those military spending charts, I always check the US percentage of the world total. In the one you referenced, it is 37.3%. Since a lot of French/German/non-UK military spending is skewed towards personel (i.e., it’s really another “employment” program) the US dominance is actually significantly greater than the mere numbers suggest. When you add in the technological edge (which should allow the US more literal bang for each literal buck), the difference is stark.

  10. Taylor, your comments are very interesting. I agree with your assessment of what’s transpired, but you seem to be more on the gloomy side as to how things might turn out.

    One interesting fact I’ve learned recently: should the US troops be pulled out of South Korea (and I think they should), Moody’s would downgrade the credit worthiness of not only all South Korean corporations, but also South Korean state securities, to such an extent as to send the entire South Korean economy into a tailspin.

    It would be a fitting lesson. Yankee go home, and we’ll take all our chips with us.

  11. I’m confused by your use of the terms “supreme Council” and “Governing council”.

    Are you perchance referring to the Interim Governing Council (IGC) ?

    They’re puppets. A do-nothing body with no real authority. Contrast with Sistani, who effectively holds veto power OVER [viceroy] Bremmer.

  12. Patrick, the IGC is the one I meant. The Supreme Council is the name for the Iranian body, I think. There’s admittedly not much similarity between the two.

    RSN, pulling out of Korea now would be highly counter-productive: it would look like we were simply abandoning them at a fairly bad time. We should have done it eighteen months ago.

  13. Patrick,

    “although in the long run, Europe will get poorer first.

    What’s your basis for predicting this ?
    It’s not at all clear to me how Europe could plausibly get poorer first.”

    Easy. Euro-zone consumers take the very first hit, as either US producers of Euro-zone imports either raise their prices or abandon market share to their Euro-zone competitors, allowing them room to maintain or even raise prices.

    Conversely, US consumers may see a bit of overcapacity in goods that are both exported and consumed at home.

    The gain to _producers_ is the opposite, with Euro-zone producers gaining some pricing power and US producers taking a hit, but the gains and losses to producers are spread out over a much smaller segment of the population than the price effect on consumers.

    Of course, in the end, comparative advantage implies that everybody loses (an idea I believe you’re onboard with.)

    Bernard Guerrero

  14. RSN: Thank you for pointing me to the role of the Congress. I do not understand how you link the “selling of agricultural subsidies to the electorate”with the hormone-issue.

    Of course all politics is intertwined but the comments on Iraq are a little bit off topic here. The way we go off topic here illustrats my previous point: only one superpower in the not very short term is in nobody’s interest. The more US the administration will act unilateral, in a way that CAN be percieved as an attempt to dominate the world the more hostility towards the US will rise.

    And to go off topic myself now: a little bit to my surprise I see Site-meter showing that AFOE now gets much mure visitor from the US than from Europe!

  15. Frans: the hormone issue was a manufactured excuse for the EU to restrict US beef imports (actually, I thought it was mostly an argument over poultry). While not really a “subsidy” per se, it is a protectionist move that the WTO felt had no valid basis.

    As I recall, the EU simply decided to accept the WTO-sanctioned US retaliatory tariffs. The political gain from continuing to restrict US beef imports was worth the economic price of increased US tariffs for EU products. There was a similar scuffle over GM crops last summer. The EU in that case decided to allow foods made with GM crops, but to insist they carry a separate warning label.

    I haven’t read much about GM crops lately, and do not know if that final decision was later changed prior to implementation.

  16. A.Taylor: To elaborate on my point “if the European politicians and officials can manage to deal with this in a most “clinical” way.” This should include US politicians and officials too of course.

    I live in the Netherlands where the hormone issue is not linked to import or export in the first place. For many people in Belgium and the Netherlands the first thing that comes to mind when the hormone meat issue is mentioned is the murder of a Belgian veterinarian some years ago. He exposed the illegal use of hormones and was killed by what we call the hormone-maffia.
    So when RSN claims that “..European governments are still willing to pay for them, in order to sell agricultural subsidies to the electorate and protect the European farmers (the hormone-issue being just a good excuse).” that hurts.
    That pain could easily stimulate trade-war-like discussions.
    I am in favor of abolishing the agricultural subsidies rapidly (of couse accompanied by a program to ease the consequences for the farmers) but I think it is a very good idea to demand very good labeling for all products; imported or not.
    In my opinion it is kind of ridiculous to suggest that for example demands on labeling can be seen as anti-free-trade (in the way of especially targeting imports) but we should keep on discussing this while (unhappy) paying for the retaliatory measures and not percieve it as part of a trade war that inevitably will worsen. In no way should we mix this discussion with the one on issues that have no relation to trade – like the war on Iraq or the way to deal with the North-Korean tiranny. Or gay-marriage…..

    BTW: The retaliatory measures on the hormone-beef issue amount to only a few million dollars or euros compared to the many billons of agricultural subsidies to both US and European farmers.

  17. A hopeful sign from the other side of the Atlantic

    “According to a statement released by the US Department of Commerce, the Administration said it is working with Congress “to work towards repealing the FSC/ETI provisions in order to achieve US compliance” with the World Trade Organization ruling.”

    Source: Californian Trade Report.

  18. We Americans are getting pretty tired of the rest of the world. I can feel the retreat to “Fortress America” coming on here. Americans at heart are isolationists.

  19. I enjoy watching the US government get spanked by the WTO over tax issues. A VAT would solve this for the US but the US is totally enslaved by the ideology that IBM made famous; not invented here syndrome.


    Alan Tomlinson

  20. Bernard,
    Easy. Euro-zone consumers take the very first hit, as either US producers of Euro-zone imports either raise their prices or abandon market share to their Euro-zone competitors, allowing them room to maintain or even raise prices.

    Makes sense, but I’m not sold.
    First off, this analysis ignores the relatively recent degradation of the U.S. dollar, which is potentially allowing U.S. manufacturers to undercut EU manufacturers…Strategic use of WTO tariffs would reduce U.S. manufacturer’s ability to take advantage of the weak dollar, thereby undermining the U.S.’s Manufacturing-sector recovery.

    I’m of the opinion that the U.S. needs its manufacturing sector to undergo an export-lead recovery far more than the E.U. needs cheaper U.S.-manufactured goods.

  21. Patrick,

    “I’m of the opinion that the U.S. needs its manufacturing sector to undergo an export-lead recovery far more than the E.U. needs cheaper U.S.-manufactured goods.”

    Given the trade deficit and slack in the manufacturing sector (given those nifty productivity numbers and stable unemployment @ 5%+), we might see an import-substitution driven recovery in manufacturing if the dollar remains weak long enough for managers to believe that it’s going to _stay_ weak.

    Of course, that amounts to a transfer of wealth from those who don’t work in manufacturing to those who do (and I’ve been in the former group for some time), but so would the protectionism that seems to be growing so quickly in the political sphere. Better an adjustment via the first method than the second, IMHO.


  22. stable unemployment @ 5%+

    Actually, I believe that the U.S. unemployment statistic has been trending lower rather than holding steady. Which would be a good thing if the workforce-to-population wasn’t decreasing faster…

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