EU Enlargement: Economic Implications for the United States
CRS Report for Congress
EU Enlargement: Economic Implications for
the United States
William H. Cooper
Specialist in International Trade and Finance
Foreign Affairs, Defense, and Trade Division
Summary
The United States strongly supported the formation of the European Economic
Community in the 1950s and has supported its subsequent expansions and evolution into
what is now the European Union (EU). Likewise, the United States, under both the
Clinton and Bush Administrations, welcomed the latest, and largest expansion of the EU
— the addition of 10 new members effective May 1, 2004, viewing it as helping to
promote stability and prosperity throughout the continent. The enlargement of the EU
will change U.S. economic ties with the EU with the 10 new members. This report
examines the changes and their potential economic impact on the United States. Many
Members of Congress have been monitoring the potential effects of enlargement on the
U.S. economy, particularly agriculture, and they will likely continue to do so during the
second session of the 109th Congress. This report will be updated as events warrant.
Scope of EU Enlargement
On May 1, 2004, after several years of negotiations, the European Union (EU)
completed the largest expansion of its membership since its inception as the European
Coal and Steel Community in 1952. It added 10 countries bringing its total membership
to 25.1 The enlargement increases the total EU population from about 380 million to
roughly 450 million people.
Perhaps more significant than the size of the new membership is its composition.
Eight of the 10 new members are former communist states and three of the eight (Estonia,
Latvia, and Lithuania) were part of the former Soviet Union. The eight former communist
states have been successfully making the transition from centrally-planned economic
1 The 10 new members are Cyprus, the Czech Republic, Estonia, Hungary, Latvia, Lithuania,
Malta, Poland, Slovakia, and Slovenia. They join Austria, Belgium, Denmark, Finland, France,
Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal, Spain, Sweden, and the
United Kingdom. For more background on the negotiations and political implications of the
enlargement, see CRS Report RS21344, European Union Enlargement, by Kristin Archick.
Congressional Research Service ˜ The Library of Congress
systems to market-driven economic systems, although some legacies of the old system
remain.
The 10 new EU members are on average poorer than the previous EU-15. Poland,
the largest of the10 new members, is substantially behind Portugal — the “poorest”of the
EU-15 in terms of per capita GDP measured on a purchasing power parity (PPP) basis.
Slovenia, the “richest”of the former communist states, is also among the smallest of the
10, and is slightly above Portugal in terms of per capita GDP.2 Thus, the addition of
the10 countries moves the EU further from its original configuration — a group of
relatively rich, industrialized West European economies. That trend creates challenges
for the new members and the other 15 members as they absorb the inevitable adjustment
costs of enlargement. At the same time, accession to the EU affirms the commitment of
the former communist states to building market economies.
In joining the EU, the 10 new members accede to a range of laws and regulations that
affect virtually every aspect of economic life. At the same time, EU membership accords
its members a number of benefits. In joining the EU, the 10 new members become
integrated into a large borderless market. Tariffs are eliminated on trade with the other
EU members. (Tariffs on EU trade with the new members were eliminated prior to
accession via pre-accession association agreements.) In addition, EU members adhere to
common legal and regulatory regimes — the same safety, health, professional
qualification, and other standards apply in all 25 countries. This means that goods and
services can flow freely throughout the EU area. The 10 new members also have
committed to join the Economic and Monetary Union (EMU) that requires close
coordination of economic and monetary policies. They have pegged their national
currencies to the euro and are to eventually adopt the euro as their national currency after
they have met the economic eligibility criteria. An important aspect of the EMU is the
free flow of capital among members, the objective of which is to create a stable economic
environment and efficient distribution of capital. Eventually, labor from the 10 new
members is to be able to move freely throughout the EU area, enabling a worker in one
member country to obtain work in another member country without restrictions other than
those that would apply to a local worker.
An important aspect of EU membership is the sometimes controversial Common
Agricultural Policy (CAP). The CAP is a set of laws and practices that are designed to
increase the supply of agricultural products at reasonable prices but also provide income
support to farmers. The CAP operates according to three basic principles: the free
movement of agricultural products within the EU at common prices, no national trade
barriers, and harmonized technical regulations; (2) preference for EU products enforced
through protectionist measures; and (3) financing of the CAP from the EU budget. In
order to maintain common prices and producer income support, the EU employs
commodity intervention — buying products to boost demand, and direct payments to
farmers.3 These programs account for a large share of the EU budget, forcing the EU to
consider CAP reforms. In addition, the EU’s trading partners, including the United
2 The analysis is based on data contained in The World Bank. World Development Indicators —
3 CRS Report RL30753, Agricultural Support Mechanisms in the European Union: A
Comparison with the United States, by Geoffrey Becker.
States, have strongly criticized the CAP, arguing that it distorts production patterns
creating agricultural surpluses that the EU dumps on the world market at the expense of
U.S. producers.
Along with the unified internal market, the 10 new members accede to a common
commercial policy. This policy includes a common external tariff regime. (Member
countries impose the same tariffs on imports from non-member countries.) The EU-10
members belong to the WTO and have been participating in the negotiated reduction in
tariffs.
EU members conduct trade policy as one. They negotiate bilaterally with non-
member trading partners and within the WTO; apply trade remedies, such as antidumping
duties and countervailing duties, in tandem and are themselves subject to similar trade
remedy measures imposed by non-member trading partners (what is imposed on one is
imposed on them all); and employ common trade preference programs, such as the EU
Generalized System of Preferences (GSP) program for developing countries.
While incurring these obligations requires the new members to surrender some
national control over their economic policies, they stand to reap a number of benefits. For
example, they receive EU structural funds to help develop transportation and other
infrastructure facilities and to modernize their agricultural sectors to bring them up to the
levels of development of other EU members. The new members will also receive
agricultural support funds as part of the Common Agricultural Policy (CAP). However,
they are to receive less than the full complement of CAP funds for the first ten years of
their membership but are to receive the full complement thereafter.
EU membership is expected to encourage economic growth and development of the
new member economies. The European Commission estimates that EU membership will
add one percent per year to the GDP growth rates of the new members during the first ten
years of their membership.4 The economic boost would result from a more efficient
distribution of resources with the removal of barriers to trade with the other 15 members
and from the economies of scale that producers in the new member countries would
realize by joining the large EU market.
U.S. Economic Ties with the EU
The United States has strong economic ties with the EU-15 countries that have
developed over many years. Its ties with the 10 new members are not as firm, having
largely developed since the end of the Cold War.
U.S. Ties with the EU-15. The United States has been a strong advocate for the
construction of close economic ties among the West European countries since the end of
World War II. During the Cold War, the European Community served U.S. foreign policy
and national security interests as a force of stability that drew (West) Germany and France
closer together and that helped to build Western Europe into an economic bulwark against
the Soviet Bloc.
4 European Commission. More Unity and More Diversity: The European Union’s Biggest
Enlargement. p.7. [http://europa.eu.int].
The formation of an economically unified Europe has served U.S. economic interests
as well by accelerating European economic growth and development which has opened
trade and investment opportunities for the United States. Many studies have concluded
that the formation of the EU has had a net positive economic impact on the world as a
whole because it has led on balance to more trade creation than diversion of trade from
other countries.5
The United States and the EU-15 have built a strong economic relationship grounded
in large flows of trade and investment in both directions that promote economic growth
and employment in both regions and rooted in the principles of open, market economies.
In 2003, $808 billion flowed between the United States and the EU-15 on the current
account, the most comprehensive measure of U.S. trade flows. In addition, U.S. residents
invested a net $71.7 billion in EU-15 countries in direct investments, while EU residents
invested $37.0 billion in direct investments in the United States.
A very large part of U.S.-EU economic ties operate smoothly with little friction or
hurdles. Nevertheless, disagreements over government policies and practices have arisen
between the two trading powers that have led, in some cases, to sanctions and created
political problems at the highest political levels. Currently the most visible issue pertains
to U.S. compliance with a World Trade Organization’s (WTO) ruling against the U.S.
foreign sale corporation program (FSC) and its successor program, the extraterritorial
income (ETI) program that provides tax incentives for exporting. 6 The EU is also a party
to a complaint brought to the WTO against the United States regarding the Continued
Dumping and Subsidy Offset Act of 2000 (CDSOA) that required revenues from
antidumping and countervailing duty orders to be redistributed to entities that were parties
to the original antidumping and countervailing duty cases and that fulfilled statutory
eligibility criteria. At the same time, negotiations with the EU over compensation to the
United States for the EU ban on imports of hormone-treated beef continue.7 The WTO
ruled that the ban violates the WTO Sanitary and Phytosanitary agreement.
U.S. Ties with the New Members. U.S. trade with the 10 new members of the
EU (EU-10) has grown substantially in the last decade, but nevertheless remains relatively
small. In 2003, total U.S. exports to the EU-10 totaled $3.6 billion or about 0.5% of total
U.S. exports to the world. U.S. imports from the group totaled $8.2 billion, about 0.7%
of total U.S. imports. U.S. imports from the EU-10 surged $1.7 billion, or about 26%, in
2003. About 46% of the increase was accounted for by the increase in imports from
Slovakia, from $261 million (2002) to $1,013 million, nearly all of which were passenger
cars. Slovakia is the home of a new Volkswagen production facility.
Hungary is the largest U.S. trading partner among the ten countries in terms of total
trade, Poland is second, and the Czech Republic is a close third. Largely because of the
association agreements that provide for mutual preferential trade treatment, the EU-10
5 Studies on the economic effects of the EU cited in CRS Report 97-663, Regional Trade
Agreements: Implications for U.S. Trade Policy, by George Holliday, p. 8.
6 For more information on the FSC/ETI issue see CRS Report RS21742, European Trade
Retaliation: The FSC/ETI Case, by Raymond J. Ahearn.
7 United States Trade Representative. 2004 National Trade Estimate Report: Foreign Trade
Barriers. Washington. April 2004. p. 143.
economies have become increasingly integrated with the rest of the EU, with at least half
of their total trade taking place with the EU-15 prior to accession. EU members have also
been the leading source of foreign investment in those economies followed by the United
States. For Estonia, Latvia, Lithuania, the Czech Republic, Slovakia, Hungary, and
Poland, this posture represents a significant re-orientation of their economies which had
been closely tied to the Soviet Bloc before the collapse of the Soviet Union.
U.S. exports to the EU-10 are led by computers and parts, office machinery and
electrical machinery, primarily integrated circuits. U.S. imports from the EU-10 are led
by cars, computers and parts, and electrical machinery.
Economic Implications of EU Enlargement for the United States
U.S. trade with the EU-10 has been small, dwarfed by the already strong EU-U.S.
trade relationship; therefore, the impact of enlargement on the overall U.S.-EU
relationship will be minimal. However, enlargement could change U.S. economic
relations with the 10 new member countries.
For example, EU accession is expected to result in additional economic growth in
the EU-10 which could translate into some increase in demand for U.S. exports. In
addition, the EU-10 countries’ adoption of the Common External Tariff changes the
tariffs U.S. exporters face in those markets. On average, EU tariffs are lower than the
original national tariffs of the new members. For example, tariffs on trucks and cars were
much higher in central and east European countries than in the EU.8 The lower tariffs
should improve the U.S. export opportunities in the EU-10 markets.
In some cases, tariffs under the common external tariff are higher. One study points
out, for example, that while tariffs in the largest EU-10 economies, notably Poland and
Hungary, were higher than EU tariffs, tariffs in some of the smaller countries, for
example, the Czech Republic and Estonia, were lower, reducing export opportunities in
those markets. 9 The United States claims it is entitled to compensation in those cases.
Article XXIV of the General Agreement on Tariffs and Trade (GATT 1994) states that
if the formation of a free trade area or customs union results in higher tariffs on imports
from countries outside the area, then the negatively affected countries are entitled to
compensation in the form of reductions in tariffs in other areas. The EU has begun
negotiations with the United States and other affected trading partners regarding
compensation. The United States submitted a list of products that it believes will be
adversely affected by enlargement. EU officials have argued, on the other hand, that the
benefits that non-EU trading partners will receive from enlargement will more than
outweigh the disadvantages, negating any need for compensation.10 The United States and
the EU are conducting talks to resolve the issues. The EU extended a WTO sanctioned
8 Crane, Keith. European Union Enlargement: Economic and Financial Implications for the
United States in The American Institute for Contemporary German Studies. EU Enlargement
and Transatlantic Relations: Background and Analyses. AICGS Policy Report no. 7. 2003. p.
9 Ibid., p. 68-69.
10 International Trade Reporter. May 6, 2004. p. 775.
deadline for WTO members to resolve the issues through consultation until May 1,
2005.11 On November 30, 2005, the EU and the United States announced an agreement
on compensation to the United States. Among other things, the EU has agreed to reduce
tariffs on imports of certain fish, protein concentrates, certain chemicals, and aluminum
tube and raise quotas on imports of boneless ham, poultry, and corn gluten.12
The United States removed the nine of the 10 countries (all but Slovenia) that were
eligible from its Generalized System of Preferences (GSP) program because U.S. law
prohibits EU states from eligibility. Therefore, their products are no longer eligible for
duty-free treatment from the United States. The United States negotiated with the new
members to ensure that rights U.S. investors had previously secured under bilateral
investment treaties (BITs) would be preserved afer enlargement.
Keith Crane, senior economist at RAND Corporation has identified other potential
advantages to the United States coming from EU enlargement:13 U.S. exporters will no
longer have to re-certify their products for sale in the EU-10, that are already eligible in
the EU-15; U.S. companies may be able to consolidate their operations in Europe since
they will be servicing one, larger market. Crane also identifies some possible problem
areas: EU subsidies under the CAP to agricultural producers in the new member countries
could lead to overcapacity and surplus production exacerbating U.S. concerns about EU
dumping of agricultural products in third country markets at the expense of U.S.
exporters; the new members will adopt the EU ban on imports of U.S. hormone-fed beef,
costing beef exporters those markets; and U.S. companies will no longer be able to benefit
from investment incentives offered by the governments of some of the new members
because the EU has prohibited such programs.
11 EU Gives U.S., WTO Members More Time for Enlargement Negotiations. Inside U.S. Trade.
October 8, 2004.
12 Washington Trade Daily. December 1, 1005. p. 5,6.
13 Crane. p. 71-75.