In a historic ruling last week, the World Trade Organization sided with the European Union in its trade dispute with the United States and authorized the EU to impose up to $4 billion worth of penalties on American exports -- ten times the highest punitive measure ever previously granted by the WTO.
The Europeans brought their complaint to the WTO seeking to abolish an American export subsidy known as the "foreign sales corporation." They are unlikely to impose the sanctions any time soon, though. The United States has already tentatively acted to remove the illegal subvention.
As the EU sees it, the Bush administration seems to have taken a sharp U-turn from free trade rhetoric to unprecedented protectionism -- and back to free trade with the Trade Promotion Authority the president was granted last month.
For example, America has imposed quotas on steel imports -- and then exempted many European mills. It also passed a large farm support bill -- but pursues the phasing out of agricultural subsidies worldwide. It applied timber and lumber quotas while signing a flurry of bilateral free trade agreements and participating in the Doha round of multilateral trade negotiations.
Dan Horovitz, a partner in the century-old City of London law firm Theodore Goddard, told United Press International that the root of much of the trans-Atlantic trade friction lies in the political dynamics guiding policy makers on both sides.
"It often seems that the U.S. administration wishes to satisfy domestic constituencies and their colloquial political interest more than it cares to comply with its international obligations," said Horovitz, who heads the firm's international trade and competition practice in Brussels, and had represented both governments and business clients before the EU administration and its courts as well as the WTO.
Horovitz gave two reasons for America's trade problems.
"First, the leading global, sole superpower, role played by the United States enables it to pursue its self-interest while being largely oblivious to other constraints," he said. "Second, since the U.S. economy is much more dependent on its own home market than on exports, the United States is less sensitive to what other players in other markets think of its positions."
Horovitz argued that the European Union was far more outward looking and was largely dependent on exports.
"Moreover, ... (though) the EU, much like the United States, can sometimes be cynical about its WTO obligations, ... practice shows that in such instances the EU often resorts to one-sided interpretation of the existing rules rather than to their violation," he said.
Horovitz also said that U.S. ownership of foreign companies means it is not in America's interest to disregard trade rules.
"Consider steel. U.S. steel companies have important interests in certain central and east European steel enterprises. Thus, U.S. Steel, for instance, controls the successful Slovak Kosice mill and is also reportedly eyeing Polish and Czech mills. Slovak steel exports are in fact American exports."
The Doha round of multilateral trade negotiations is supposed to tackle hypersensitive issues -- such as agricultural subsidies and textiles -- massively promoted by domestic lobbies in both the United States and the EU. Traditional trade remedies, such as anti-dumping measures -- regularly deployed by the U.S. and, increasingly, by other governments -- are also on the table. Horowitz says a lot depends on collaboration between the EU and the United States because of the changed balance of power within the World Trade Organization.
"Developing countries already account for a majority of WTO membership. (In) the new round, the votes of the developing countries will be decisive. They will thus have a golden opportunity to translate their votes into tangible advantages.
"Moreover, China, which recently acceded to the WTO, is likely to defend the cause of the developing world. China already accounts for about one fifth of world trade and the developed world is expected to listen carefully to its views."
Critics of the EU often single out its Common Agricultural Policy, known as the CAP. Farmers across the European Union receive billions of dollars annually in subsidies. EU Countries like France, with a large--and politically influential--agricultural sector, have traditionally obstructed attempts to cut CAP subsidies.
The EU's enlargement to the east - encompassing at the very least Poland, Hungary, and the Czech Republic - would usher in millions of additional farmers. Even under the current phase-in schedules, CAP stands to apply to these newcomers within a decade. The cost to the EU could prove ruinous.
Horovitz says that the moment of truth is fast approaching.
"EU decision makers understand that, come enlargement, the EU would not be able to keep the same level of protection.
"Furthermore, particularly in view of WTO priorities and the need to satisfy developing countries who must find outlets for their agricultural products in order to undertake the liberalization of their less-developed industrial sector, the EU (as well as the United States and others) realize that they have to tackle this problem head-on. Agriculture will clearly be one of the toughest issues of the new round."
In the meantime, trade wars proliferate. While the Americans often resort to classic trade barriers -- such as quotas -- European import restrictions tend to be non-quantitative.
The refusal to admit American genetically modified food into Europe -- though it reflects the real concerns of European consumers and health authorities -- is viewed in some quarters as a protectionist ploy. The French erected barriers against American culture products, especially films, citing concerns for their domestic culture industries and the preservation of their language and heritage.
Horovitz admits that "both real concern and real protectionism play a role. As a lawyer dealing with such cases, I can sometimes see that the EU regulator seriously believes that he is protecting EU consumers.
"Luckily, in today's WTO world, regulators cannot hide behind health or technical reasons and get away with a trade restriction, however genuine their intentions are."
He says WTO rules "require ... members to base their restrictions on objectively established norms. Failure to respect such norms can lead to a WTO violation and risk retaliatory measures. Problems arise when clear-cut objective norms cannot be easily obtained. These are the cases you tend to hear about most."
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