Trade Conflict and the U.S.-European Union Economic Relationship

Trade Conflict and the U.S.-European Union
Economic Relationship
Updated April 11, 2007
Raymond J. Ahearn
Specialist in International Trade and Finance
Foreign Affairs, Defense, and Trade Division

Trade Conflict and the U.S.-European Union
Economic Relationship
The United States and the European Union (EU) share a huge, dynamic, and
mutually beneficial economic partnership. Not only is the U.S.-EU trade and
investment relationship the largest in the world, but it is also arguably the most
important. Agreement between the two partners in the past has been critical to
making the world trading system more open and efficient.
Given the high level of U.S.-EU commercial interactions, trade tensions and
disputes are not unexpected. In the past, U.S.-EU trade relations have witnessed
periodic episodes of rising trade tensions and conflicts, only to be followed by
successful efforts at dispute settlement. This ebb and flow of trade tensions occurred
again in 2006 with high-profile disputes involving the Doha Round of multilateral
trade negotiations and production subsidies for the commercial aircraft sector.
Major U.S.-EU trade disputes have varied causes. Some disputes stem from
demands from producer interests for support or protection. Trade conflicts involving
agriculture, aerospace, steel, and ‘contingency protection’ fit prominently into this
grouping. These conflicts tend to be prompted by traditional trade barriers such as
subsidies, tariffs, or industrial policy instruments, where the economic dimensions
of the conflict predominate. Other conflicts arise when the U.S. or the EU initiate
actions or measures to protect or promote their political and economic interests, often
in the absence of significant private sector pressures. The underlying cause of these
disputes over such issues as sanctions, unilateral trade actions, and preferential trade
agreements are different foreign policy goals and priorities of Brussels and
Washington. Still other conflicts stem from an array of domestic regulatory policies
that reflect differing social and environmental values and objectives. Conflicts over
hormone-treated beef, bio-engineered food products, protection of the audio-visual
sector, and aircraft hushkits, for example, are rooted in different U.S.-EU regulatory
approaches, as well as social preferences.
These three categories of trade conflicts — traditional, foreign policy, and
regulatory — possess varied potential for future trade conflict. This is due mostly to
the fact that bilateral and multilateral agreements governing the settlement of disputes
affect each category of disputes differently. By providing a fairly detailed map of
permissible actions and obligations, trade agreements can dampen the inclination of
governments to supply protection and private sector parties to demand protection.
In sum, U.S.-EU bilateral trade conflicts do not appear to be as ominous and
threatening as the media often portray, but they are not ephemeral distractions either.
Rather they appear to have real, albeit limited, economic and political consequences
for the bilateral relationship. From an economic perspective, the disputes may also
be weakening efforts of the two partners to provide strong leadership to the global
trading system.

In troduction ......................................................1
Sources of Trade Conflict...........................................6
Traditional Trade Conflict: Producer Protection......................6
Agriculture ...............................................7
Aerospace ................................................9
Steel ...................................................11
Contingency Protection....................................11
Foreign Policy Conflict: Clashing State Interests....................12
EU Concerns............................................13
U.S. Complaints..........................................14
Regulatory Policy Conflict: Social and Environmental Protection.......16
Beef Hormones..........................................17
Genetically Engineered Crops...............................18
Audio-Visual Sector.......................................19
Aircraft Hushkits.........................................20
Conflict Management..............................................21
Traditional Trade Conflict......................................22
Foreign Policy Conflict ........................................23
Regulatory Policy Conflict......................................25
Trade Conflict in Perspective........................................27
Relationship Impact...........................................28
Leadership Impact............................................30
List of Figures
Figure 1. U.S. Exports of Services by Region/Country, 2005...............2
Figure 2. U.S. Exports of Goods by Region/Country, 2005.................2
List of Tables
Table 1. World Merchandise Trade, 2004..............................4
Table 2. World Gross Domestic Product, 2003..........................4

Trade Conflict and the U.S.-European Union
Economic Relationship
The bilateral economic relationship between the United States and European
Union (EU) is shaped by two outstanding trends. On the one hand, the two
transatlantic economies share a high degree of commercial interaction, most notably
a huge trade and investment relationship and a growing number of corporate mergers.
Cooperation between the two partners has been critical to the promotion of world
trade. On the other hand, the bilateral economic relationship is subject to limited, but
increasingly contentious, trade conflicts that potentially could have adverse political1
and economic repercussions. These include a weakening of shared interests and
bonds as well as an undermining of the credibility of the World Trade Organization.
The dimensions of the mutually beneficial side of the economic relationship are
well known. The United States and EU are parties to the largest two-way trade and
investment relationship in the world. Annual two-way flows of goods, services, and
foreign direct investment exceeded $1.3 trillion in 2005. This sum means that over
$3 billion is spent every day on transatlantic purchases of goods, services, and direct2
The European Union as a unit is the second largest (next to Canada) trading
partner of the United States in merchandise or goods. In 2005 the EU accounted for

20.6% (or $186 billion) of U.S. exports and 18.5% (or $309 billion) of U.S. imports.

The EU is also the largest U.S. trading partner in services. In 2005, the EU
purchased slightly over 34% of total U.S. services exports (or $130 billion). But the
United States since 1993 has been importing more goods from the EU than it has
been exporting. In 2005, the resulting U.S. trade deficit with the EU totaled $122
billion or 16% of the U.S. merchandise trade deficit with the world. This trade
deficit is partially offset by U.S. surpluses in services trade which have averaged
around $10 billion dollars over the 2002-2005 period.

1 For the purposes of this report, the term “conflict” is used broadly to include U.S.-EU
disagreements on issues that may not have been raised in formal World Trade Organization
(WTO) proceedings. The term “dispute” is used more narrowly for issues that have been
subject to WTO consultations, including those requests which have led to panel and
appellate review proceedings. Unless referring to a particular dispute, the two terms,
however, are often used interchangeably.
2 Data sources for this section, unless otherwise noted, are drawn from the following
sources: Cooper, William H., EU-U.S. Economic Ties: Framework, Scope, and Magnitude,
CRS Report RL30608; the European Union’s profile of facts and figures on the EU-U.S.
economic relationship found on-line at []; and various
editions of the Survey of Current Business, Department of Commerce.

Figure 1. U.S. Exports of Services by
Region/Country, 2005
(Billions of U.S. Dollars)
EU-25 (130)
Canada (33)
Latin Am. (62)
Other (33)
Australia (8)
Other Asia (53)Japan (43)
Source: U.S. Department of Commerce.
Figure 2. U.S. Exports of Goods by
Region/Country, 2005

(Billions of U.S. Dollars)
EU-25 (187)
Canada (212)
Mexico (120)
Other (78)
Australia (12)
Latin Am. (72)China (42)
Asia, Pacific Rim Except Japan & China (72)Japan (15)
Source: U.S. Department of Commerce.

Based on a population of some 457 million citizens and a gross domestic
product of about $13.4 trillion (compared to a U.S. population of 298 million and a
GDP of $12.5 trillion in 2005), the twenty-five members of the EU combine to form
the single largest (in terms of GDP) market in the world.3 Given the reforms entailed
in the introduction of the European single market in the early 1990s, along with the
introduction of a single currency, the euro, for twelve members, the EU market is
also increasingly open and standardized.
The fact that each side has a major ownership stake in the other’s market may
be the most remarkable aspect of the commercial relationship. At the end of 2004,
the total stock of two-way direct investment reached $1.9 trillion (composed of $942
billion in EU investment in the United States and $965 billion in U.S. investment in
the EU), making U.S. and European companies the largest investors in each other’s
market. Roughly 60% of corporate America’s foreign investments are located in
Europe, while almost 75% of Europe’s foreign investments are based in the United
States. This massive amount of ownership of companies in each other’s markets
translates into billions of dollars of sales, production, and expenditures on research
and development. In addition, an estimated 6-7 million Americans are employed by
European affiliates operating in the United States and almost an equal number of EU
citizens work for American companies in Europe.4
Foreign direct investment also serves to spur international trade flows. This is
due to the fact that trade taking place within the same company (imports by U.S.
affiliates from their EU parent firms and exports by U.S. companies to their EU
affiliates) accounts for around one-third of U.S. total trade with the EU. The trade
and employment linkages associated with foreign direct investment engender strong
and politically active interest groups that lobby on both sides of the Atlantic in favor
of maintaining friendly bilateral ties, reducing regulations, and in opposing
protectionist proposals.
The United States and the European Union, acting in concert, are the
superpowers of the world trading system. As shown in Tables 1 and 2, together they
accounted for 35% of world merchandise trade in 2004 and 60% of the world’s
production of goods and services in 2003. Cooperation and joint leadership between
the two partners have historically been the key to all efforts to liberalize world trade
on a multilateral basis, including the creation of the General Agreement on Tariffs
and Trade (GATT) in 1948 and the World Trade Organization (WTO) in 1995.

3 The addition of Bulgaria and Romania in January 2007 makes the EU a 27 country
grouping with a population of nearly 500 million.
4 Hamilton, Daniel S. and Joseph P. Quinlan, Partners in Prosperity: The Changing
Geography of the Transatlantic Economy, The Johns Hopkins University, 2004.

Table 1. World Merchandise Trade, 2004
(Excluding intra-EU trade)
(Billions of U.S. Dollars)
Imports and Exports% of Total
United States2,34317.2
U.S. and EU-254,82635.4
Source: WTO.
Table 2. World Gross Domestic Product, 2003
(Billions of Dollars)
Region/CountryGDP% of World Total
United States10,94930.0
EU-25 plus United States21,90860.0
Latin America & Caribbean1,7404.7
East Asia and Pacific2,0336.6
China + Hong Kong1,5745.6
Middle East and N. Africa7452.0
South Asia7652.0
Sub -Saharan Africa 4391.2
Source: World Bank, World Development Indicators - 2005.
Trade tensions, disputes, and rivalry coexist alongside and, in part, result from
these cooperative and generally positive currents. Bilateral trade disputes have been
an important part of the relationship during the Cold War as well as after. They are
nothing new nor unexpected given the huge volume of commercial interactions.
Historically, with the possible exception of agriculture, the disputes have been
managed without excessive political rancor, perhaps due to the balanced nature of the
trade and investment relationship. Policymakers and many academics often
emphasize that the U.S. and EU always have more in common than in dispute, and
like to point out that trade disputes usually affect a tiny fraction (often estimated at

1-2 percent) of the trade in goods and services.

All In the Family?
The notion that trade disputes with the European Union generally have engendered
less political rancor and bitterness than U.S. trade disputes with a number of developing
countries and Japan is a popular one. Whether the proposition is valid or not, the most
common explanation put forth relates to the view that transatlantic trade relations are
underpinned by comparable levels of socioeconomic development and by more balanced
economic interactions.
EU member states, unlike many developing countries, have wage rates and labor
and environmental standards that equal or exceed U.S. standards. From one perspective,
this fact shields Europe from charges of “cutthroat” competition and “unfair” trade that
are often directed at low-wage developing countries possessing relatively low labor and
environmental standards.
Several indicators support the argument that trade between the United States and
EU takes place on a “level playing field.” As measured by the value of imports and
exports of goods and services as a percentage of GDP, for example, a case can be made
that both economies are similarly open to trade. In 2005, the trade openness ratios of both
trading partners ranged between 25 and 30 percent.
The composition of trade and pattern of trade deficits are also used to illustrate that
U.S.-EU trade ties are balanced and non-adversarial. Unlike U.S. trade with China, U.S.-
EU trade is characterized by a high level of intra-industry trade, where both sides import
and export similar products such as cars, computers, aircraft, and integrated circuits. Nor
have U.S. merchandise trade deficits with the EU given rise to the same kind of concern
that U.S. trade deficits with China have sparked. Macroeconomic factors, such as
differential economic growth rates and the exchange rates, are generally thought to
explain most of the fluctuation in the U.S.-EU bilateral deficit, rather than trade barriers
or other structural attributes.
In the middle of this decade, however, Washington and Brussels are still at
loggerheads over a number of issues, ranging from bio-engineered food products and
aircraft to the treatment of agriculture in the Doha Round of multilateral trade
negotiations. The conflicts have not been easy to resolve, and some of the efforts at
dispute resolution have led to escalation and tit-for-tat retaliation. Instead of
compromising in an effort to find solutions, policymakers on both sides sometimes
appear more interested in getting even.
Congress has been in the middle of many of the trade disputes. By both crafting
and passing legislation, Congress has supported the efforts of U.S. agricultural and
industrial interests to gain better access to EU markets. Congress has pressured the
executive branch to take a harder line against the EU in resolving a number of
disputes, but has also cooperated with the Administration in crafting compromise
Combined with a growing value of trade now being disputed, the political and
economic effects of trade discord between Brussels and Washington are important
questions. Why are many disputes so difficult to resolve? What can be done to
improve dispute resolution efforts? Are the disputes undermining business
confidence or efforts at economic policy coordination? Are the disputes weakening
the credibility of the WTO dispute settlement system? Do the political disputes

reflect differences between the two partners in terms of basic values and orientations?
If so, could the disputes force a fundamental re-evaluation of the importance of the
bilateral relationship? In short, what is the significance of trade conflict to the
bilateral relationship?
This report considers these overriding questions in three parts. The first part
categorizes and evaluates the trade conflicts according to their underlying causes and
characteristics. In light of the causes and dimensions of the disputes, the second
section examines the potential for conflict management. A final section assesses the
role that trade disputes may be playing in the U.S.-EU economic relationship.
Sources of Trade Conflict
Changes in government regulations, laws, or practices that protect or promote
domestic commercial interests at the expense of foreign interests are at the heart of
most trade conflicts. While governments are the sole providers or suppliers of trade
protection, there are a range of parties or interest groups that demand or request
measures that result in protection for domestic parties. These include producers and
workers, as well as consumer and environmental interest groups. Governments may
also be the primary demanders or initiators of actions that have trade protectionist
U.S.-EU trade conflicts vary according to the nature of the demand for
protection. Many of the major U.S.-EU trade conflicts are classified and discussed
below according to the nature of the demand for protective action. While many of
the conflicts are spurred by multiple demanders and causes, an attempt is made to
classify disputes according to categories that seemingly account for the overriding
cause or demand for government action.
As most trade conflicts embody a mixture of economic, political, and social
dimensions, there is ample room for disagreement over the dominant cause of any
particular dispute. By and large, this report classifies most of the conflicts according
to American perspectives. U.S.-European disagreements over the cause and nature
of the controversy, of course, provides the basis for many of the conflicts. Whether
the conflict is propelled by protectionist or other domestic aims remains a key
question in some disputes as well.
Traditional Trade Conflict: Producer Protection
Some conflicts stem primarily from demands from producer or vested interests
for protection or state aids. These kinds of disagreements arise when both
transatlantic trade partners, in support of vested interests and key industries, craft
policies that try to open markets for exports but keep markets protected from imports
as much as possible. Trade conflicts involving agriculture, aerospace, steel, and
‘contingency protection’ fit prominently in this grouping. These are examples of
traditional trade conflicts, prompted by trade barriers such as tariffs, subsidies or
industrial policy instruments, where the economic dimensions of the conflict

Agriculture. Agricultural trade disputes historically have been major sticking
points in transatlantic relations. Accounting for a declining percentage of output and
employment in both the EU and United States, the agricultural sector has produced
a disproportionate amount of the trade tension between the two sides. In the past, the
majority of what can be called traditional conflicts stemmed primarily from
government efforts to shield or protect farmers from the full effects of market forces
(non-traditional agricultural disputes involving food safety and the application of
biotechnology to food production are discussed below under Regulatory
From the U.S. perspective, the restrictive trade regime set up by the Common
Agricultural Policy (CAP) has been the real villain. It has been a longstanding U.S.
contention that the CAP is the largest single distortion of global agricultural trade.
American farmers and policymakers have complained over the years that U.S. sales
and profits are adversely affected by (1) EU restrictions on market access that have
protected the European market for European farmers; (2) by EU export subsidies that
have deflated U.S. sales to third markets; and (3) by EU domestic income support5
programs that have kept non-competitive European farmers in business.
Agricultural conflict, particularly over the decline in U.S. exports to the EU and
growing EU competition for sales in third markets, was intense in the 1980s. During
this period, the majority of U.S. Section 301 cases were directed at the CAP and
fierce subsidy wars were waged over third country markets. Acrimonious
agricultural subsidy disputes over canned fruit, oilseeds, wine, wheat flour, pasta,
sugar, and poultry between the two sides tested the GATT dispute settlement system6
to its limits in the 1980s.

5 For a comparison of agricultural programs, see Becker, Geoffrey S. Agricultural Support
Mechanisms in the European Union: A Comparison with the United States. CRS Report
6 Section 301 of the Trade Act of 1974, as amended, requires the United States Trade
Representative to take all appropriate action, including retaliation, to obtain the removal of
any act, policy, or practice of a foreign government that violates an international agreement
or is unjustifiable, unreasonable or discriminatory, and burdens and restricts U.S. commerce.
In practice, it has been employed mostly on behalf of American exporters fighting foreign
import barriers or subsidized competition in third-country markets.

What Is The CAP?
The Common Agricultural Policy of the EU is a domestically-oriented farm policy
whose primary objective is supporting farm income. Since its inception in 1962, the CAP
has been guided by three principles: (1) a free flow of agricultural commodities within
the EU; (2) community preferences whereby EU products have priority in the internal
market over imports; and (3) common financing of agricultural programs.
Historically, the high support prices of the CAP have provided strong incentives for
investing in EU agriculture. Since 1970, the EU has shifted from being a net importer to
one of the world’s largest net exporters of wheat, sugar, beef, pork, poultry, and dairy
One effect of the CAP has been to raise overall food prices for consumers in the EU.
Most U.S. farm programs, in contrast, support farm income without raising food prices
to the consumer.
Spending on the CAP accounts for over 50 percent of the EU budget. High budget
outlays in the past have caused several budget “crises,” leading to policy reforms aimed
at curbing agricultural expenditures. EU enlargement to include a number of East
European countries that have large agricultural sectors is providing additional pressures
for reforming the CAP.
Tensions, however, have moderated markedly since the completion of the
Uruguay Round in the mid-1990s. The 1994 Uruguay Round Agreement on
Agriculture defined more clearly what both partners can do in their agricultural and
trade policies, as well as defined more clearly the quantities of agricultural products
that countries can export with subsidies and strengthened the procedure for settling
disputes involving those rules. The agreement also contained a nine-year “peace
clause” whereby WTO members agreed not to challenge other countries’ subsidies7
with domestic cases or WTO challenges.
For the most part, the U.S. and EU have honored their Uruguay Round
agricultural commitments, including ‘due restraint.’ Scope for future conflict has
been constrained, or perhaps redirected into areas not so clearly covered by the
Agreement of Agriculture. These included a number of non-traditional disputes over
beef hormones, bio-engineered food products, and geographical indicators — none
of which involved domestic subsidies.8
Negotiations on agriculture in the Doha Round have continued to divide the two
economic superpowers. The United States has proposed substantial reductions in
domestic subsidies, expanded market access through both tariff reduction and

7 Tangermann, Stefan. “The Common and Uncommon Agricultural Policies,” In
Transatlantic Relations in A Global Economy, Mayer, Otto and Scharrer, Hans-Eckart, eds,
Nomos Verlagsgesellschaft, 1999, p. 143.
8 T. Josling and S. Tangermann, “Production and Export Subsidies in Agriculture: Lessons
from GATT and WTO Disputes Involving the US and the EC,” In Ernst-Ulrich Petersmann
and Mark A. Pollack, Transatlantic Economic Disputes: The EU, the US, and the WTO,
Oxford University Press, 2003. p 224.

expansion of market access quotas, and the elimination of export subsidies. The EU,
for its part, has called on the United States to increase its offer to reduce trade-
distorting domestic support but has not been willing to improve its offer to expand
market access. Unless these positions can be bridged, the negotiations may remain
Aerospace.9 Claims and counter-claims concerning government support for
the aviation industry have been a major source of friction in U.S.-EU relations over
the past several decades. The fights have focused primarily on EU member state
support for Airbus Industrie, a consortium of four European companies that
collectively produce Airbus aircraft. According to the Office of the U.S. Trade
Representative (USTR), Airbus member governments (France, U.K., Germany and
Spain) have provided massive subsidies since 1967 to their member companies to aid
in the development, production, and marketing of the Airbus family of large civil
aircraft. The U.S. has also accused the EU of providing other forms of support to
gain an unfair advantage in this key sector, including equity infusions, debt
forgiveness, debt rollovers, marketing assistance, and favored access to EU airports
and airspace.10
For its part, the EU has long resisted U.S. charges and argued that for strategic
and economic purposes it could not cede the entire passenger market to the
Americans, particularly in the wake of the 1997 Boeing-McDonnell Douglas merger
and the pressing need to maintain sufficient global competition. The Europeans
have also counter-charged that their actions are justified because U.S. aircraft
producers have benefitted from huge indirect governmental subsidies in the form of
military and space contracts and government sponsored aerospace research and11
The most recent round of this longstanding trade dispute stems from a May 30,

2005 WTO filing by the United States alleging that European Community (EC)

Member States provided Airbus with illegal subsidies giving the firm an unfair
advantage in the world market for large commercial jet aircraft. The following day
the EC submitted its own request to the WTO claiming that Boeing had received
illegal subsidies from the U.S. government. Two panels were established on October
17, 2005 (one handling the U.S. charges against Airbus and the other handling the
EU’s counterclaims against Boeing), and both panels have begun hearing the cases.
Final panel rulings are not expected to be handed down until October 31, 2007, at the
Much of the ongoing debate about the Airbus/Boeing relationship stems from
Airbus’s December 2000 launch of a program to construct the world’s largest
commercial passenger aircraft, the Airbus A380. The A380 is being offered in

9 This section was written by John W. Fischer, Specialist in Transportation, Resources,
Science, and Industry Division.
10 USTR National Trade Estimates Report: 2000, pp. 102-104.
11 Burger, Bettina. “Transatlantic Economic Relations: Common Interests and Conflicts in
High Technology and Industrial Policies,” In Transatlantic Relations in A Global Economy,
p. 110.

several passenger versions seating between 500 and 800 passengers, and as a
freighter. At the end of 2005, Airbus was listing 159 firm orders for the aircraft from
16 different airlines.12 The project is believed to have cost about $13 billion, which
includes some significant cost overruns identified by Airbus in 2005. Airbus expects
that its member firms will provide 60% of this sum, with the remaining 40% coming
from subcontractors. State-aid from European governments is also a source of
funding for Airbus member firms. State-aid is limited to one-third of the project’s
total cost by the 1992 Agreement on Government Support for Civil Aircraft between
the United States and the European Union (EU) (now repudiated by the United
States, but not by the EC).
Shortly after the A380 project was announced, Boeing dropped its support of a
competing new large aircraft. Boeing believes that the market for A380-size aircraft
is limited. It has, therefore, settled on the concept of producing a new technology

250-seat aircraft, the 787, which is viewed as a replacement for 767-size aircraft.13

The 787 is designed to provide point-to-point service on a wide array of possible
international and domestic U.S. routes. The aircraft design incorporates features such
as increased use of composite materials in structural elements and new engines, with
the goal of producing an aircraft that is significantly more fuel efficient than existing
aircraft types. Boeing formally launched the program in 2004 and obtained 56 firm
orders during the remainder of 2004. By the end of 2005 the order book for the 787
had expanded dramatically to 291 aircraft.
To construct this aircraft Boeing is proposing to greatly expand its use of non-
U.S. subcontractors and non-traditional funding. For example, a Japanese group will
provide approximately 35% of the funding for the project ($1.6 billion). In return
this group will produce a large portion of the aircraft’s structure and the wings (this
will be the first time that a Boeing commercial product will use a non-U.S. built
wing). Alenia of Italy is expected to provide $600 million and produce the rear
fuselage of the aircraft. In each of these instances, the subcontractor is expected to
receive some form of financial assistance from their respective governments. Other
subcontractors are also expected to take large financial stakes in the new aircraft.
The project is also expected to benefit from state and local tax and other incentives.
Most notable among these is $3.2 billion of such incentives from the state of
Washington. Many of these non-traditional funding arrangements are specifically
cited by the EC in its WTO complaint as being illegal subsidies.
Whether the WTO litigation provides an incentive for the United States and the
EU to resolve the dispute bilaterally remains to be seen. To date the two sides have
wrangled over a host of procedural issues, but have not been negotiating on a
possible settlement to the dispute. Some analysts believe that as long as the dispute
is not resolved, Boeing can use Airbus subsidies as an argument for securing a
lucrative U.S. Air Force contract for refueling tankers. Other analysts speculate that

12 []
13 Boeing has rethought its position on the large aircraft market. On November 14, 2005
Boeing launched the 747-8, a new stretched derivative of the venerable 747. It has received
18 orders for the aircraft in freighter configuration, but is expected to produce a passenger
version of the aircraft as well.

Airbus’ weakened business condition brought on by the delivery delays of its jumbo
A380 plane may also be a reason why Boeing may not be pressing the U.S.
government to settle the case.
Steel. Conflict over trade in steel products has occurred sporadically over the
past two decades. Although the EU industry has undergone significant consolidation
and privatization in the 1990s, the U.S. government in the past has alleged that many
EU companies still benefit from earlier state subsidies and/or engage in dumping
steel products (selling at “less than fair value”) in foreign markets. U.S. steel
companies also have aggressively used U.S. trade laws to fight against EU steel
imports by filing antidumping and countervailing duty petitions that include imports
from EU countries. In return, the EU has countered with numerous challenges in the
WTO against the alleged U.S. misuse of its countervailing duty and antidumping
In addition to “unfair” trade disputes, President Bush in June 2001 requested the
U.S. International Trade Commission (ITC) undertake a new Section 201 trade
investigation on the steel industry.14 The petition had broad support from Congress,
the steel industry, and labor unions. The ITC subsequently ruled that much of the
industry was being injured by increased imports and recommended relief measures
to President Bush. On March 5, 2003, the President decided to impose three-year
safeguard tariffs with top rates of 30%. He imposed the restrictions for three years
on all major steel exporting countries except U.S. free trade partners such as Canada
and Mexico.
The U.S. decision raised cries of indignation and protectionism from European
leaders, and prompted a quick response. On March 27, 2002, citing a threat of
diversion of steel from the U.S. market to Europe, the EU announced provisional
tariffs of 15% to 26% on 15 different steel products. The EU and a number of other
countries adversely affected by the U.S. tariffs also formally challenged the U.S.
action as being inconsistent with WTO rules.
In early 2003 a WTO panel determined that the U.S. action had a number of
shortcomings. The panel found that the United States had failed to adequately
demonstrate that rising imports were injuring the U.S. industry. In September 2003,
the ITC issued its mid-term report of the safeguards, and determined that termination
of the measures was warranted. This determination, in turn, provided President Bush
with leeway to avoid further international conflict by terminating the steel safeguard
measures on December 5, 2003.
Contingency Protection. A variety of legal procedures, sanctioned by the
WTO, provides domestic producers temporary protection against both “fair” and
“unfair” trade practices. These include safeguard or import relief procedures for fair

14 Section 201 relief, often referred to as “safeguard,” provides for temporary restrictions on
imports that have surged in such quantities as to cause or threaten to cause serious injury to
a domestic industry. The procedure is compatible with the rules of the WTO. A Section
201 case does not in itself need to demonstrate dumping, subsidization, or other unfair
practices by U.S. trading partners.

trade and anti-dumping and countervailing procedures for unfair trade practices.
While these procedures are sanctioned by the WTO, and often referred to as
contingency protection, either side’s implementation of these procedures is often
A case in point has been the Continued Dumping and Subsidy Offset Act
(CDSOA), or Byrd Amendment. Enacted by the U.S. Congress in October 2000, this
provision required that the proceeds from antidumping and countervailing duty cases
be paid to the U.S. companies responsible for bringing the cases, instead of to the
U.S. Treasury. Soon after enactment, the EU and eight other parties challenged the
statute in the WTO on the grounds that the provision constituted a “non-permissible
specific action against dumping or a subsidy” contrary to various WTO agreements.
Basically, the plaintiffs argued that the action benefitted U.S. companies doubly:
first, by the imposition of the antidumping or countervailing duties and, second, by
receiving the duties at the expense of their competitors.
The WTO in January 2003 concluded that the Byrd Amendment was an
impermissible action against dumping or subsidization and gave the United States
until December 23, 2003, to comply with the WTO ruling. When the United States
did not comply with the ruling, the complaining members requested authorization to
impose retaliatory measures. A WTO arbitrator determined in August 2004 that each
of the eight complainants could impose countermeasures on an annual basis in an
amount equal to 72% of the CDSOA disbursements for the most recent year in which
U.S. data are available.
Canada and the EU began retaliating on May 2, 2005, by placing a 15%
additional duty on selected U.S. exports. Mexico imposed higher tariffs on U.S. milk
products, wine, and chewing gum, and Japan placed an additional tariff of 15% on

15 steel and industrial products.

Despite strong congressional support for the Byrd Amendment in both
chambers, a provision repealing the CDSOA was included in the conference report
to S. 1932, the Deficit Reduction Act of 2005, and approved in February 2006. The
repeal however, allowed CDSOA payments on all goods that enter the United States
to continue through October 1, 2007. As a result, the EU, Canada, and Mexico
indicated their intention to keep the sanctions on U.S. imports in place as long as the
disbursements continue. The EU, in particular, elected to increase the amount of
retaliation by nearly $9 million (from $27.8 million to $36.9 million) and expand the
list of products that will face punitive duties. U.S. trade officials and some Members
of Congress have expressed disappointment and frustration that retaliation was not
lifted in the wake of the Byrd repeal.15
Foreign Policy Conflict: Clashing State Interests
This category comprises conflicts where the United States or the European
Union has initiated actions or measures to protect or promote their political and

15 Inside U.S. Trade, “EU Expands Byrd Retaliation Duties; Canada Undecided On
Options,” April 28, 2006.

economic interests, often in the absence of significant private sector pressures. The
underlying causes of these disputes are quite different foreign policy goals and
priorities, if not interests. Most of these conflicts have important economic interests
at stake, but seldom are the economic stakes viewed as the overriding cause or
explanation of the action that ostensibly precipitated the disagreement.
From the EU perspective, extraterritorial provisions of U.S. sanctions
legislation and unilateralism in U.S. trade legislation are concerns that fit into this
category. From a U.S. perspective, the EU’s preferential dealings with third
countries, the Foreign Sales Corporation (FSC) export tax-rebate dispute, and
challenges to varied U.S. trade laws could be said to be driven primarily by EU
foreign policy priorities.
EU Concerns. U.S. legislation which requires the imposition of trade
sanctions for foreign policy or non-trade reasons has been a major concern of the EU.
While the EU often shares many of the foreign policy goals of the United States that
are addressed in such legislation, it has opposed the extraterritorial provisions of
certain pieces of U.S. legislation that seek to unilaterally regulate or control trade and
investment activities conducted by companies outside the United States. Although
these issues have been relatively quiet in recent years, a number of the provisions
remain U.S. law, including the Cuban Liberty and Democratic Solidarity Act of 1996
(so-called Helms-Burton Act) and the Iran Libya Sanctions Act (ILSA), which
threaten the extraterritorial imposition of U.S. sanctions against European firms
doing business in Cuba, Iran, and Libya.16 Other EU concerns about different
instances of U.S. extra-territoriality relate to various environmentally driven
embargoes, export control legislation, and sub-federal (states) procurement17
provisions or boycott activities.
The Helms-Burton Act, passed in 1996 after the Cuban military shot down two
small U.S. based civilian planes, led to a firestorm of protest in Europe. Perhaps not
since the U.S. imposed sanctions against companies doing business on a Russian
pipeline in the early 1980s had the European outcry been so vociferous. The bill,
which was designed to further isolate Cuba economically, imposed a secondary
boycott against foreign nationals and companies that “traffic “in Cuban-expropriated18
properties formerly owned by U.S. nationals.
Maintaining that Helms-Burton is extraterritorial and a violation of WTO rules,
the EU passed countervailing legislation against its enforcement and initiated a WTO
panel investigation. The U.S. responded by claiming the WTO lacked competence

16 The application of ILSA with respect to Libya was terminated by President Bush in April


17 The EU has been particularly critical of efforts by U.S. states and cities to limit
government procurement opportunities as a result of the companies’ business links with
particular foreign countries. A law adopted by Massachusetts focused on corporate
involvement with Burma had been a considerable concern until it was overturned by the
Supreme Court on June 19, 2000.
18 This provision has been waived by Presidents Clinton and Bush annually since its

to investigate the matter because Helms-Burton is a “national security” issue and
therefore should qualify for a waiver under section 21 of the GATT. After a year of
high-level political negotiations, an understanding was reached in April 1997 that
charted a longer-term solution through negotiation of international disciplines and
principles for greater protection of foreign investment, combined with the proposed
amendment of the Helms-Burton Act. At the May 1998 EU-U.S. Summit, the United
States agreed to either implement or seek measures that would protect EU companies
from any penalties called for in Helms-Burton and Iran-Libya Sanction Act.19 Formal
implementation of the Understanding, however, still awaits legislative action by
Closely related to EU concerns about extraterritoriality are complaints about
U.S. trade laws and procedures that allow for the “unilateral” imposition of trade
sanctions against offending countries or companies. Most EU complaints relate to
the “Section 301” family of trade provisions which authorize the executive branch
to impose trade sanctions in an effort to enforce U.S. rights under international trade
agreements and to combat foreign unfair trade practices. In addition to general trade
barriers which the U.S. government deems discriminate against or burden U.S.
commerce, other more specialized provisions dealing with government procurement
barriers (often legislated by states) and intellectual property rights violations are also
subject to EU charges as examples of U.S. unilateralism.
Additionally upsetting to some American interests, the EU during the 1997-
2000 period filed a number of mostly technical challenges in the WTO to a variety
of U.S. trade statutes, including Section 301, a law (section 337) dealing with the
protection of intellectual property rights, and the U.S. antidumping laws. Some
Americans view these WTO challenges as part of a systematic and concerted EU
strategy to weaken or gut U.S. trade laws, perhaps in an effort to gain negotiating
leverage that could be used in future efforts to arrive a transatlantic consensus on the
agenda for a new round of multilateral trade negotiations.21
U.S. Complaints. The United States in the past has expressed concerns about
the discriminatory impact of preferential agreements the EU has negotiated with third
countries. These include preferential trade agreements with prospective EU members
in Eastern and Central Europe and with developing countries in Africa and the
Caribbean. As a result of these agreements, only eight countries including the United
States, Japan and Canada, now receive MFN treatment for their exports to EU.
Some U.S. observers have also worried that enlargement and institutional
deepening have become EU policy goals that are limiting its commitment to global
trade liberalization. Under this view, the EU’s “internal” preoccupation translates
into less interest in negotiating any new MFN or WTO obligations because such

19 “EU, Spain Warn U.S. of Action Over Helms-Burton Cuba Measure,” International
Trade Reporter, August 18, 1999, p. 1364.
20 EU Annual Report on U.S. Trade Barriers, 2005, p.1.
21 Statement of Senator Max Baucus, “Improving U.S. Trade Law,” Conference on
America’s Trade Agenda After the Battle in Seattle, July 20, 2000.

obligations could intensify adjustment pressures EU firms are experiencing as a
result of the drive toward a single market and the heightened import competition
resulting from preferential tariff agreements negotiated with various regional trading
partners. At the same time, the United States has also supported both enlargement
and deepening in the political interest of “European stability,” thus raising a question
concerning the compatibility of U.S. political and trade goals.
For its part, the EU has expressed fears that free trade agreements being pursued
by the United States could lead to discrimination against its exports. Specifically, the
EU is concerned that U.S. efforts to negotiate free trade agreements with Asia
through the Asian Pacific Economic Cooperation (APEC) process and with Latin
America through the Free Trade Area of the Americas (FTAA) could lead to
discrimination against EU exports. This, in turn, has been a spur for the EU to
negotiate its own free trade accords with Mexico, and the Mercosur countries of
Latin America.
A different U.S. concern relates to the Foreign Sales Corporation (FSC)
provisions of the U.S. tax code. This provision allowed U.S. firms to exempt
between 15% and 30% of export income from taxation by sheltering some income
in offshore foreign sales corporations. General Electric, Boeing, Motorola,
Caterpillar, Allied Signal, Cisco, Monsanto, and Archer Daniels Midland were
among the top beneficiaries of this arrangement.22
The FSC was enacted in 1984 to replace the Domestic International Sales
Corporation (DISC) — a different tax benefit for exporting that the EU had
successfully challenged in the GATT. Both provisions were designed to stimulate
the U.S. economy through increased exports. While the European officials may not
have been fully satisfied that the FSC was fully GATT legal, they nevertheless waited
thirteen years (until November 1997) to take the first steps to challenge the scheme
under the WTO dispute settlement system.
The EU argued that it challenged the FSC because it violated WTO subsidy
obligations, distorted international competition, and provided U.S. exporters unfair
advantages. Yet, with the possible exception of Airbus, the Brussels challenge
appeared to have very limited backing from European business.23 A number of
European subsidiaries operating in the United States, in fact, benefitted from the
A more common explanation is that the EU challenge had more to do with an
attempt to gain negotiating leverage over the United States, as well as with getting
even for U.S. pressures over beef and bananas, than to redress a perceived
commercial disadvantage. A Financial Times editorial viewed the challenge as “tit-
for-tat retaliation for U.S. bullying in trade disputes over bananas and beef. Having

22 CRS Report RS20746, Export Tax Benefits and the WTO: The Extraterritorial Income
Exclusion and Foreign Sales Corporations, by David L. Brumbaugh.
23 One source cites Airbus Industrie’s concerns in the early 1990s over the FSC benefits
Boeing was receiving. See Airline Business, “Flying FSCs Anger Airbus,” May 1993, p.


won its point, the EU now seems determined — in the name of upholding trade rules
— to make the U.S. squirm.”24
The EU challenge was successful, with the requirement that the United States
bring the FSC provisions in conformity with the WTO by October 2000. Following
the ruling, Congress passed the replacement extraterritorial income (ETI) tax
provision, but this law was also found inconsistent with WTO obligations in 2002.
Subsequently, the WTO authorized the EU to retaliate in the absence of U.S.
compliance, and the EU began imposing escalating retaliatory duties (starting at 5%)
on $4 billion of U.S. exports on March 1, 2004. After reaching 14% in December
2004, these sanctions were lifted in January 2005 subsequent to congressional repeal
of the FSC/ETI provisions in the American Jobs Creation Act (P.L. 108-357) of
October 2004. But a WTO ruling of February 13, 2006, determined that the act
perpetuated the illegal subsidies with a two-year phase-out of the tax breaks and a
grandfather clause covering exporters that had sales contracts dated before September

17, 2003.

In announcing the EU’s decision to reimpose sanctions, Peter Mandelson, the
EU’s top trade official, said that “the EU will not accept a system of tax benefits
which give U.S. exporters, including Boeing, unfair advantage against their European
competitors.” But the reimposition of the tariffs was avoided when President Bush
on May 17, 2006, signed a tax bill that among other things repealed the grandfathered
FSC/ETI benefits.
Regulatory Policy Conflict: Social and Environmental
This category of conflict deals with an array of domestic policies, including
regulations and standards, that produce conflict by altering the terms of competition
in the name of promoting social, cultural, or environmental objectives. Often
domestic producers benefit, either intentionally or inadvertently, at the expense of
foreign producers. Many of these clashes have occurred as a result of efforts by both
partners to strengthen food safety and environmental standards; others have occurred
as a result of the EU’s need to harmonize standards in support of its drive towards
a single market. Still others have occurred as a result of a drive to maintain or
promote cultural values and distinctiveness.
These disputes tend to involve complex new issues that have arisen as a result
of increased economic interdependence and of significant U.S.-EU differences in
regulatory approaches. The EU approach to regulation is based on the notion that
every important economic activity should take place under a legal framework,
whereas the central premise of the U.S. approach is that government does not need
to regulate unless a problem arises.
While the impact on trade may be the same as in other disputes, these conflicts
are often characterized by delicate considerations of motives. Parties that have
initiated the action, often consumer or environmental groups, tend to view the

24 “Taxing the WTO to the Limit,” Financial Times, September 4, 2000, p. 8.

protective impact as an indirect consequence of an attempt to attain some valid
domestic objective. Trade barriers motivated by food safety, for example, may be
considered more legitimate by the public than barriers motivated by economic
protectionism. If food safety is perceived as being sacrificed to free trade, support
for free trade would erode. Similarly, if food safety is used as a disguise for
protectionism, support for free trade could also erode.
The four disputes summarized below are rooted in different regulatory
approaches and public preferences. Disputes over beef hormones and genetically
engineered crops stem primarily from stronger European societal preferences for high
food safety standards. A longstanding dispute over the EU’s audio-visual sector has
a strong cultural basis, steeped in a perceived need to preserve West European society
from U.S. dominance. And a clash over an EU regulation banning airplanes outfitted
with “hushkitted” or retooled engines ostensibly was driven by environmental
demands to reduce noise pollution surrounding European airports.
Numerous other disputes could also be included in the following discussion.
For example, a dispute over data privacy reflects very different approaches between
the U.S. and EU, as well as popular attitudes, towards the protection of personal
information that is transmitted electronically. The issue of “multi-functionality” in
agriculture, where the Europeans claim agriculture is more than just another industry,
has deep cultural roots that divide the two sides. Disputes involving environmental,
wildlife, and animal welfare protection, such as U.S. restrictions on imports of tuna
from Europe and EU efforts to ban fur imports from the United States, also reflect
competing social and cultural differences.
Beef Hormones. The dispute over the EU ban, implemented in 1989, on the
production and importation of meat treated with growth-promoting hormones has
been one of the most bitter and intractable trade disputes between the United States
and Europe. It is also a dispute that, on its surface, involves a relatively small
amount of trade. The ban affected an estimated $100-$200 million in lost U.S.
exports — less than one-tenth of one percent of U.S. exports to the EU in 1999. But
the dispute has played off each side’s sovereign right to regulate the safety of its food
against its WTO obligations.25
The EU justified the ban to protect the health and safety of consumers, but
several WTO dispute settlement panels subsequently ruled that the ban was
inconsistent with the Uruguay Round Sanitary and Phytosanitary (SPS) Agreement.
The SPS Agreement provides criteria that have to be met when a country imposes
food safety import regulations more stringent than those agreed upon in international
standards. These include a scientific assessment that the hormones pose a health risk,
along with a risk assessment. Although the WTO panels concluded that the EU ban
lacked a scientific justification, the EU refused to remove the ban primarily out of
concern that European consumers were opposed to having this kind of meat in the
m arket pl ace.

25 Pollack, Mark A. “Political Economy of Transatlantic Trade Disputes,” in Transatlantic
Economic Disputes, p. 75.

In lieu of lifting the ban, the EU in 1999 offered the United States compensation
in the form of an expanded quota for hormone-free beef. The U.S. government,
backed by most of the U.S. beef industry, opposed compensation on the grounds that
exports of hormone-free meat would not be large enough to compensate for losses
of hormone-treated exports. This led the way for the United States to impose 100%
retaliatory tariffs on $116 million of EU agricultural products from mostly France,
Germany, Italy, and Denmark, countries deemed the biggest supporters of the ban.
These tariffs, in turn, sparked protests among French and European farmers, who
seized on the beef hormones case as a symbol of the threat pose by Americanization
and globalization to European regulations and traditions.26
The U.S. hard line was buttressed by concerns that other countries might adopt
similar measures based on health concerns that lack an objective scientific basis
according to U.S. standards. Other U.S. interest groups are concerned that non-
compliance by the EU undermines the future ability of the WTO to resolve disputes
involving the use of SPS measures.
In October 2003, the European Commission notified the WTO that it had
changed its hormone ban legislation in a way that it believes complies with
international trade rules. The legislation made provisional a previous permanent ban
for five growth hormones used to raise beef and keeps in place a permanent ban on
the use of oestradiaol 17 on the basis that it is a carcinogen. As a result, the EU
argued that it should no longer be subject to punitive trade sanctions by the United
States (as well as by Canada), and on November 8, 2004, took the initial step in the
WTO to challenge the U.S. and Canadian sanctions still in effect. The U.S. and meat
industry, however, argued that making a ban provisional for the long term does not
meet WTO obligations. Nevertheless, in February 2005, the EU secured the
establishment of a panel to determine whether the United States and Canada were in
violation of WTO rules by maintaining punitive tariffs on a number of EU products
in the dispute. A WTO dispute panel hearing on this issue was held on August 1,
2005. A second hearing was scheduled for November 2005 but later was postponed
to September 2006. Agreement on the selection of scientific experts has been
elusive, making process of settling the dispute even more difficult. Thus, so long as
th EU refuses to eliminate or modify the ban, U.S. retaliatory tariffs are likely to
remain in effect.
Genetically Engineered Crops.27 Differences between the United States
and the EU over genetically engineered (GE) crops and food products that contain
them pose a potential threat to, and in some cases have already disrupted, U.S.
agricultural trade. Underlying the conflicts are pronounced differences between the
United States and EU about GE products and their potential health and
environmental effects.

26 Pollack, Mark A. “Political Economy of Transatlantic Trade Dispute,” in Transatlantic
Economic Disputes, p. 76.
27 Prepared by Charles Hanrahan, Specialist in Agriculture, Resources, Science, and
Industry. For further discussion, see CRS Report RS21556, Agricultural Biotechnology:
The U.S.-EU Dispute.

Widespread farmer adoption of bio-engineered crops in the United States makes
consumer acceptance of GE crops and foods at home and abroad critical to
producers, processors, and exporters. U.S. farmers use GE crops because they can
reduce input costs or make field work more flexible. Supporters of GE crops
maintain that the technology also holds promise for enhancing agricultural
productivity and improving nutrition in developing countries. U.S. consumers, with
some exceptions, have been generally accepting of the health and safety of GE foods
and willing to put their trust in a credible regulatory process.
In contrast, EU consumers, environmentalists, and some scientists maintain that
the long-term effects of GE foods on health and the environment are unknown and
not scientifically established. By and large, Europeans are more risk averse to the
human health and safety issues associated with bio-engineered food products than
U.S. citizens.
In 1999 the EU instituted a de facto moratorium on any new approval of GE
products. The moratorium halted some $300 million in annual U.S. corn shipments.
EU policymakers also moved toward establishing mandatory labeling requirements
for products containing GE ingredients.
For several years, U.S. trade officials refrained from challenging the EU
moratorium in the WTO, partly out of fear that the EU, if it lost the case, would not
comply due to public opposition. But in May 2003, facing the potential spread of the
EU approach to third countries, the United States (along with Canada, and Argentina)
challenged the EU de facto moratorium in the WTO.
Although the EU effectively lifted the moratorium in May 2004 by approving
a genetically engineered corn variety, the three complainants pursued the case, in part
because a number of EU member states continued to block approved biotech
products. On February 7, 2006, the WTO, in an interim confidential report, ruled that
a moratorium had existed, that bans on EU-approved genetically-engineered crops
in six EU member countries violated WTO rules, and that the EU failed to ensure
that its approval procedures were conducted without “undue delay.” Some other
claims by the United States were rejected. With the legal battle likely to continue for
several years, this dispute still has considerable potential to adversely affect
transatlantic relations.
Audio-Visual Sector. This dispute dates back to 1989 when the EU issued
a Broadcast Directive that required that a majority of entertainment broadcast
transmission time be reserved for programs of European origin “where practicable”
and “by appropriate means.” All EU member states, including the ten new Member
States, have enacted legislation implementing the Broadcast Directive.28
Implementation of the directive has varied from country to country. In general,
efforts to strengthen European content quotas have failed to materialize, but a
number of countries have passed specific laws that hinder the free flow of
programming. France, for example, has prime time rules that limit the access of U.S.

28 Office of the United States Trade Representative, 2005 Trade Barrier Report, p. 264.

programs in prime time. Radio broadcast quotas also limit broadcasts of American
music. Italy also has a European content prime time rule, as well as requirements
that large movie theaters show EU films on a “stable” basis.
Within the EU, the Broadcast Directive has been controversial. Efforts to
tighten restrictions have been opposed by Germany and Britain and by some elements
of the European industry. Moreover, consumer demand for foreign movies, coupled
with technological innovation through the introduction of cable and satellite
television, have undermined movement in the direction of increased protection.
The dispute highlights European concerns, particularly in France and Italy,
about creeping “Americanization” threatening to undermine their national identities
and cultures. It also underlines a fundamental U.S.-EU divide over the role of
cultural and social issues in trade disputes. While the U.S. tends to assign priority
weight to maximizing the economic value of efficiency in trade negotiations, the EU,
by attitude and law, places more weight on environmental and cultural values.
Aircraft Hushkits. European skies are quite crowded with aircraft, airports
tend to be situated in heavily populated areas, and there is a serious noise problem.
Public concerns about aircraft noise are combined with environmental policy
discussions about emissions and greenhouse gases. To deal with this problem, the
EU attempted in 1997 to develop an EU-wide noise standard. When it became clear
that any such standard would likely impose high economic costs on European
manufactures and airlines, the EU advanced a regulation that would limit the
operation of “hushkitted” aircraft in European skies.
Hushkitting is a process that involves a combination of strategies, including
renovated engine enclosures and replacement engine components, designed to reduce
aircraft noise. Under standards adopted by the EU, it did not provide major
reductions in noise levels.29
As formally implemented by the EU on May 4, 2000, the vast majority of
aircraft affected by the regulation were of U.S. manufacture. Also adversely affected
were mostly U.S. manufacturers of noise reduction technology and new engines for
older aircraft. Conversely, all European Airbus aircraft are unaffected and there were
no major European hushkit producers. The U.S. aerospace industry estimated that
the regulation has cost its airlines and manufacturers $2 billion.
On March 14, 2000, the United States filed a motion with the International Civil
Aviation Organization (ICAO) seeking relief from the EU’s regulation. The U.S.
case maintained that the regulation did not comply with ICAO regulations and
discriminated against U.S. interests. Proceedings were suspended pending settlement
negotiations. In early 2002, a settlement was reached under which the EU repealed
the regulation and the U.S. withdrew its complaint.30

29 For a full discussion, see CRS Report RL30547, Aircraft Hushkits: Noise and
International Trade, by John W. Fischer.
30 Abbott, Kenneth W. “U.S.-EU Disputes Over Technical Barriers to Trade and the

Conflict Management
The three categories of trade conflicts — traditional, foreign policy, and
regulatory — appear to offer different possibilities for conflict management. This is
due not only to the fact that the causes and dimensions of these categories of conflicts
differ, but also because the institutional relationships and forces that affect the supply
of and demand for protection are operative in varying degrees from category to
category. These factors include the presence or absence of bilateral or multilateral
agreements and rules that govern the settlement of the disputes, the extent to which
the disputes fit into the standard free trade versus protectionism dichotomy, the
relevance of underlying economic and political trends, and the effectiveness of other
institutional arrangements designed to prevent or resolve the disputes.
!Bilateral and multilateral trade agreements can dampen the
inclination of governments to supply protection and the private
sector to demand protection by providing a fairly detailed “road
map” of permissible actions and obligations. While often litigated
and disputed, the obligations tend to be relatively clear-cut and help
resolve disagreements. When new spats arise, built-in procedures
of many agreements can facilitate a settlement or help avoid
!Conflicts that fall into the standard free trade versus protectionism
dichotomy also have a built-in potential for undercutting any
rationale governments may have to supply protection or private
parties may use in demanding protection. This happens due to an
ideological consensus in both the U.S. and EU in favor of resisting
protectionism on both economic and political grounds. As a result,
most demands for protection from producer interests must be
justified as exceptions to the generalized support for freer trade
arrangements and policies.
!Diverse economic and political trends can also suppress the supply
and demand for protection. For example, declining support for
industrial policy initiatives, as has been the case in both the U.S. and
EU, could make industry-specific pleas for government assistance
less compelling. High priority political commitments, such as the
EU’s policy towards enlargement, may also create incentives for
reform and liberalization as opposed to protection.
!Both formal and informal cooperative arrangements have
proliferated over the past decade to better manage transatlantic trade
disputes. These have included efforts to strengthen regulatory co-
operation and the establishment of forums for bilateral consultations.
By attempting to incorporate the views of a wider range of domestic

30 (...continued)
‘Hushkit’ Dispute, In Transatlantic Economic Disputes, pp. 247-280.

interest groups, these efforts have also aimed at preventing disputes
from arising.
Applying these factors to the three categories of trade disputes, there are grounds
for judging that traditional trade conflicts may become less disruptive to the bilateral
relationship in the future, but more limited grounds for projecting a diminution of
foreign policy induced friction. The prospects for future domestic-policy related
trade disputes fall somewhere in between these two extremes, with reasons for
foreseeing a reduction in friction associated with some disputes, but not all. The
basis for this assessment is presented below.
Traditional Trade Conflict
Traditional trade conflicts, involving demands from producer interests for
protection or state aids, by definition raise fairly routine commercial questions that
have been addressed by governments for decades. As a result, most are governed by
some bilateral or multilateral agreement or understanding. The WTO in particular
provides a body of multilateral rules governing the use of tariffs and other restrictive
trade practices and a forum for consultation and dispute resolution. And in the event
of non-compliance with WTO rulings, retaliation can be authorized to provide
incentives for compliance with WTO rulings. Disputes involving agriculture,
aerospace, steel, and contingency protection have all been tempered by the WTO
framework of rules and obligations.
The Uruguay Round Agreement on Agriculture significantly dampened trade
conflict in the areas of EU home market protection and export subsidy wars for third
country markets. The multilateral agreement on subsidies provides the terms of
engagement for the current clashes over “launch” aid for the A380. Steel trade
conflict in recent years has pivoted around the utilization of anti-dumping and
safeguard laws, procedures that both the U.S. and EU employ with considerable
frequency and which both sides in the past have considered legitimate. The fact that
the steel trade battle in 2002 was so heated may stem from a mutual perception that
each side did not adhere to the letter or spirit of the safeguards agreement.
Traditional trade conflicts also tend to fit into the standard free trade versus
protectionism dichotomy. As in the case of agriculture, aerospace, steel, and the
Byrd Amendment, proposals or requests for additional protection or promotion will
be subject to full transparency, investigation, and debate. Given that both the United
States and European Union have open societies with an ideological consensus in
favor of competition and open markets, petitioners for protection will have the
burden of arguing that their request merits being excepted from the dominant policy
Several economic and political trends may also serve to limit future disputes
involving producer protection. These include a decline of support for industrial
policy in both Brussels and Washington, budgetary pressures in the EU, and a rising
level of foreign direct investment and corporate mergers.
Support for industrial policy initiatives, mostly efforts to use state aids to boost
the competitiveness of specific sectors or build up national champions in particular

industries, were considerable in the late 1980s and early 1990s in both the EU and
United States. Based on new rationales for targeted assistance from states, the
support for industrial policies posed new challenges to the maintenance of free trade
orthodoxy. For a variety of reasons, such policies today are viewed more skeptically
in both Brussels and Washington, thereby lessening pressures for what many
observers construed as a new and disguised vehicle for protectionism.
The issue of subsidies or state aids is closely related to the industrial policy
debate. In Europe, with the movement towards a single market that is deregulated
and more competitive, subsidies and state aids to individual companies have been
increasingly challenged, scrutinized, and curtailed. This trend, which is reenforced
by budgetary constraints associated with fiscal targets required of member states
participating in the European Monetary Union, could serve not only as a strong force
for reducing conflict in aviation and steel, but in other sectors as well.31
A rising level of foreign direct investment and a wave of new corporate mergers
are also forces for dampening demands for protection. As these trends accelerate,
many formerly domestic or nationally-based industries will become increasingly
globalized. As transatlantic merger and acquisition activity picks up, the answer to
the question of ‘who is us?’ becomes increasingly blurred. Even in the production
of a new Airbus plane, it is estimated that American suppliers will provide a
considerable amount of the sourcing of the parts. These developments, in turn, tend
to create forces that may moderate demands for protection.32
A number of cross currents, of course, could create a much different outlook.
Historically, many industries have been quite creative and successful in justifying
demands for protection based on some unique argument. This has been particularly
true in the area of agriculture where both sides have argued that agriculture is not just
another industry. The strength of the European agricultural lobby rests in part on
public support for it as a means of preserving a way of life and a particular kind of
environment perceived as worth preserving. On-going efforts in Brussels to reform
the CAP must deal with this challenge.
Morever, fundamental economic conditions can change rapidly. Bumper world
crops creating an oversupply of basic agricultural commodities or an economic
downturn creating an over-supply of steel could ignite old trade battles in steel and
agriculture once again.
Foreign Policy Conflict
Unlike traditional trade conflicts, foreign policy inspired trade squabbles tend
to lack the same kind of institutional arrangements and pressures that dampen the
supply of and demand for protection. Nor are these conflicts easily framed along free
trade and protectionism lines. Some of these conflicts, but not all, may be moderated

31 Kahler, Miles. Regional Futures and Transatlantic Economic Relations, European
Studies Association, 1995, p. 50.
32 Kahler, Miles. Regional Futures and Transatlantic Economic Relations, European
Studies Association, 1995, p. 51.

in the future by lobbying efforts of big business on both sides of the Atlantic to
maintain stable commercial ties. However, if Brussels or Washington is determined
to use trade to achieve foreign policy objectives, lobbying efforts are unlikely to be
successful in the absence of a transatlantic agreement to treat these issues in a more
consistent fashion.
In most U.S.-EU sanctions conflicts, there are no bilateral or multilateral
understandings that can help resolve very basic foreign policy differences over how
to respond to violations by third countries of international norms affecting human
rights or security. Many trade measures taken in a foreign policy context are either
exempt from WTO disciplines because they are either mandated by the United
Nations or applied against non-WTO countries, or only very loosely regulated by the
WTO. The latter arises because the national security provision of GATT (Article 21)
provides wide latitude for countries to pursue sanctions if they deem the measures
to be in their national security interest.33
WTO rules also provide little guidance and “rules of the road” concerning
preferential regional agreements. While the WTO set up a new Committee on
Regional Trade Agreements in 1995 to highlight abuses of Article 24 provisions that
allow regional agreements to deviate from the non-discrimination principle of the
WTO, few challenges have been launched. A major obstacle has been the difficulty
of measuring the value of trade diverted from efficient producers to the beneficiaries
of preferences granted. As a result, the drive to cut preferential deals continues to
grow (along with mistrust) while the ability to challenge deals that raise new trade
barriers remains quite weak. As the U.S. and EU embark on even more aggressive
efforts to negotiate preferential trade agreements, increased conflict in this area may
develop. 34
While the U.S. pursuit of market opening through unilateral means has declined
since passage of the Uruguay Round Agreements in 1995, pressures in the United
States to revisit this issue could grow. The EU’s refusal to implement WTO panel
findings on bananas and beef hormones, coupled with continued attacks on U.S. trade
laws, could lead U.S. policymakers to reconsider this Uruguay Round bargain of
limits imposed on unilateralism in return for a more binding dispute settlement
The dispute over the U.S. export tax benefit program raises a different issue.
It can be argued that the WTO was not the proper forum in which the dispute should
have been pursued. But existing WTO “rules of the road” evidently presented a
target of opportunity for achieving other foreign policy goals, namely enhancing the
EU’s negotiating leverage vis-à-vis Washington.
Pressures and temptations to apply sanctions against countries that violate
international norms, to cut preferential trade deals, to act unilaterally in the pursuit
of national trade interests, and to use the WTO to achieve foreign policy objectives

33 Schott, Jeffrey, “Whither U.S.- European Trade Relations?,” p. 59.
34 See CRS Report RL33463, Trade Negotiations in the 110th Congress, by Ian F. Fergusson,
and CRS Report RS22547, Europe’s New Trade Agenda, by Raymond J. Ahearn.

are unlikely to go away. Nor are efforts of big and pro-trade business lobbies to curb
future actions along these lines likely to be successful in the absence of a broad
diplomatic undertaking or a pledge committing both sides to refrain from such
actions. Such a pledge or non-aggression pact has been suggested as a way to bring
greater coherence in areas of disagreement and in helping to achieve shared goals in
a less contentious atmosphere. But little progress has been made, perhaps due to the
high level of mutual suspicions, differences in diplomatic approaches, and foreign
policy-making machinery.35
Regulatory Policy Conflict
U.S.-EU trade disputes have focused increasingly on differences in regulation,
rather than traditional barriers such as tariffs or subsidies. Regulatory requirements
established primarily with legitimate domestic concerns of consumer and
environmental protection or public health in mind do not discriminate (at least
directly) between domestic and imported goods and services. But they may have the
secondary effect of distorting or discriminating against the free flow of international
trade, which in turn leads to disputes. For this reason, transatlantic regulatory
disputes can be more bitter and difficult to resolve than traditional trade disputes, in
so far as both sides feel their actions are justified by democratically derived
decisions. In this context, such disputes are often difficult to resolve within the
context of the WTO because they require a balancing of domestic concerns with
international obligations.36
In trying to resolve or prevent most regulatory disputes, the United States and
the EU have tended to rely more on bilateral cooperation and negotiation than on the
WTO dispute resolution system. The two sides have made much progress bilaterally
in mitigating divergent standards and certification systems as a source of bilateral
trade conflict.
Bilateral efforts to promote regulatory cooperation have been a top priority in
both governments and private sectors since the signing of the “New Transatlantic
Agenda” (NTA) and “Action Plan” in late 1995. The creation of the Transatlantic
Business Dialogue (TABD), a multinational corporation-led initiative to lower trade
and investment barriers across the Atlantic, spearheaded efforts to focus particular
attention on problems posed by divergent standards and certification systems. In
addition to promoting convergence in regulatory systems through the principle of
“approved once, accepted everywhere,” efforts were undertaken to negotiate mutual
recognition agreements (MRAs) covering key sectors such as pharmaceuticals and
medical devices, and telecommunications equipment.37

35 Frost, Ellen L. Transatlantic Trade: A Strategic Agenda. Institute for International
Economics, 1997, pp. 54-64.
36 Mark A. Pollack, “Political Economy of Transatlantic Trade Disputes,” in Transatlantic
Economic Disputes, p. 71.
37 Schott, Jeffrey. “Whither U.S. -European Trade Relations,” p. 56.

In June 1997, the two sides reached agreement on a package of MRA’s affecting
six sectors, including electrical equipment, pharmaceutical products,
telecommunications and information technology equipment. Each side basically
accepted the others’ inspection, testing, and certification standards in these sectors.
The agreements, which covered around $50 billion in U.S.-EU trade, allowed
European companies to sell products directly into the U.S. market after they have
been tested and certified to U.S. health and safety standards, and vice versa.38
Under the 1998 Transatlantic Economic Partnership (TEP), the two sides agreed
to begin negotiation of MRA’s in other sectors, including regulatory processes
connected with biotechnology. But negotiating and implementing these agreements
have proven difficult due to very different industry interests and regulatory
approaches of the United States and the EU.39
More recently, German Chancellor Angela Merkel in January 2007 proposed the
creation of a Transatlantic Free Trade Area (TAFTA). With Germany having
assumed the Presidency of the EU for the first six months of 2007, Merkel’s initiative
aims to harmonize regulations across the Atlantic and reduce non-tariff barriers that
constrain the free flow of capital, goods, and services.
There are numerous challenges raised by the application of modern
biotechnology to food production. The Uruguay Round Sanitary and Phytosanitary
Standards (SPS) Agreement was designed to deal with this issue. It requires
countries that impose regulations or trade bans to protect the health of plants,
animals, and people to base such decisions on risk assessments on sound scientific
evidence.40 But the SPS requirement of a sound scientific basis is open to varying
Ambiguities in the SPS agreement are complicated because many European
consumers may believe that avoidance of production practices associated with
biotechnology is a value in itself. For these consumers, scientific studies showing
that such technologies do not result in threats to human or animal health may not be
convincing. Given these strong views, many European officials want leeway to
impose trade restrictions on a “precautionary basis” and others want to renegotiate
the SPS agreement. Both avenues could open up a large loophole for discriminatory
trade barriers.
More ominously, some analysts are concerned that European agricultural policy
makers may be “under pressures to guarantee higher levels of safety than strictly is
necessary in order to maintain consumer confidence in the food system.”41 Even if

38 Frost, Ellen. Transatlantic Trade: A Strategic Agenda, p. 6.
39 Mark A. Pollack, “Political Economy of Transatlantic Trade Disputes,” in Transatlantic
Economic Disputes, p. 98.
40 A related multilateral code, the Agreement on Technical Barriers to Trade (TBT), covers
other types of regulations such as labeling and packaging.
41 Josling, Tim. “Comment on Stefan Tangermann,” in Transatlantic Relations in a Global

these conflicts are not primarily due to the deliberate use of health, safety, or
environmental standards as trade barriers, mistrust grows in terms of how much
effort government authorities may have put into managing public concerns through
educational efforts. Under these circumstances, one analyst has argued that trade
disputes resulting from such differences are unlikely ever to be resolved; at best they
can be contained.42
On the other hand, transatlantic consumer views may be converging in some
areas. For example, while U.S. consumers generally have been quite receptive to
genetically modified organisms (GMOs), Kraft Foods’ nationwide recall in 2000 of
taco shells that contained a genetically engineered corn not approved for human
consumption indicates some underlying discontent. The recall was initiated by a
coalition of environmental and consumer groups critical of bio-engineered food.43
Others argue that in a number of other areas, including corporate mergers and
Internet privacy, the European Union’s more active role in protecting consumers will
gain growing appreciation and support in the United States.44 At the same time, the
European Commission is seeking actively to recreate an approval process for GMO
crops, moving to establish a pan-EU food agency, and proposing action to provide
consumers with more information on GM foods.
In other disputes, technological progress can be a force for change. The audio-
visual dispute is a case in point where EU efforts to increase protection of this sector
have faced growing technological obstacles, as well as consumer resistance. Rapid
technological innovation in the form of cable and satellite television, innovations
strongly supported by consumers, offer new products that are difficult to block or
regulate. Regulations in this environment often are too complex to enforce or, if
enforced, prove adverse to the interests of European producers.45
Trade Conflict in Perspective
Mark Twain reportedly once said of Wagner’s music that “it is not as bad as it
sounds.” Similarly, U.S.-EU trade conflicts may not be as ominous and threatening
as they appear. Despite the rise in trade tensions and episodes of tit-for-tat retaliation
over the past few years, the notion that the relationship between the world’s two most
powerful economic powers is constantly teetering on the brink of a transatlantic
trade war seems a stretch. Nor does it appear that the trade conflicts represent or

41 (...continued)
Economy, p. 166.
42 Vogel, David. Barriers or Benefits?, Brookings Institution, 1997. p. 62.
43 Pollack, Andrew. “Kraft Recalls Taco Shells With Bio-engineered Corn,” Washington
Post, September 23, 2000, p. B1.
44 Richter, Stephan-Gotz, “The U.S. Consumer’s Friend,” New York Times, September 21,

2000, p. A31.

45 Kahler, Miles. Regional Futures and Transatlantic Economic Relations, Brookings
Institution, 1997, p. 53.

symbolize any kind of fundamental rift that is possibly developing between the
United States and Europe.
At the same time, the disputes do not appear to be ephemeral distractions or
mere consequences of a mass media that tends to sensationalize and define the
relationship unfairly. Nor are they products of trade negotiators, who like generals,
are often accused of fighting the last war. Nor are they trivial or silly squabbles
because they represent a mere 1-2% of transatlantic trade.
Trade conflicts rather appear to have real, albeit limited, economic and political
consequences for the bilateral relationship. Perhaps more significantly, trade
disputes may also pose very real obstacles for the two partners in their efforts to play
a leadership role in promoting a more open and prosperous world economy. This is
particularly evident in the way bilateral trade disputes may be testing the functioning
of the World Trade Organization.
Relationship Impact
The economic and political impacts that result from U.S.-EU trade disputes can
be easily identified, but are much harder to quantify. In both cases, a variety of forces
effectively contains the economic and political costs from rising or getting out of
The $300 million in retaliatory U.S. tariffs levied on European exports over the
banana and beef disputes and the over $2 billion in EU tariffs imposed on U.S.
exports over the FSC (now suspended) and Byrd Amendment disputes provide the
most visible economic costs of trade conflict. The retaliatory tariffs are designed to
dramatically increase the costs of selective European and U.S. products, making it
much more difficult for those “targeted” foreign producers to sell in the U.S. or EU
markets. In theory, foreign exporters denied access to markets are expected to
pressure their respective governments to change the policies that are in violation of
WTO rules.
Retaliation is not, however, cost-free. The process also hurts importers,
consumers, and firms dependent on those imports as inputs in their production
process. These entities intensively lobby Congress and the European Commission
to keep their products off any retaliation list that is drawn up. Domestic political
pressures, thus, limit the scope and flexibility trade officials on both sides of the
Atlantic have in devising a retaliation list. As a result, most retaliation lists tend to
be dominated by luxury items or high value-added agricultural items that are
produced by both economic superpowers. Under these conditions, coming up with
a list of products whose export value matches the relatively small sum of a few
billion dollars is no easy task.46

46 The task is further complicated by the incomes and tastes of American consumers. The

100% tariffs levied against European products such as truffles, jams, Roquefort cheese,

chicory, specialized mustard, and biscuits have had very little impact in cutting back on sales
in the United States over the past year. “Administration Still Uncertain on Carousel,”

Attempts by either Brussels or Washington to retaliate on a much larger value
of trade could be expected to ignite a firestorm of political opposition. The huge
stake each side has in the other’s market through foreign direct investments, merger
and acquisition activity, combined with “globalized” patterns of production, would
likely serve as major counter-forces to any rise in trade warfare. These trends create
extensive overlapping interests among companies and strong incentives to contain
disputes. In globally traded sectors, mass production in a single location is becoming
rare as companies source inputs, research, design, and marketing strategies from all
over the world. This, in turn, shrinks the scope of, as well as complicates, the
definition of what is domestic production or a domestic company.
In terms of political impacts, trade disputes likely have some effect on public
opinion and attitudes, as well as connect in some way to other transatlantic problems.
Polls indicate that there is a great deal of fear in Europe that the United States, due
to the strength of its economy, has the ability to impose both economic and social
changes on the rest of the world. This fear and perhaps frustration may translate into
antipathy to the United States, often expressed as anti-Americanism. U.S. retaliation
against Europe for not accepting hormone-enhanced beef, for example, may only fuel
these generalized anti-American feelings that the United States is a bully.47
The reaction to U.S. retaliation may be even more acute among some European
policymakers. By selectively targeting only those EU members that have clearly
benefitted from WTO illegal policies, many European policymakers view retaliation
as a frontal assault on European unity — an old-fashioned divide-and-conquer
strategy.48 Commenting on the U.S. proposal to rotate items under trade sanctions
from product to product and country to country, French President Chirac complained
bitterly that carousel retaliation is “much closer to 19th Century gunboat diplomacy
than to 21st Century diplomacy.”49
Whether or how these reactions affect cooperation in other problem areas is
difficult to know. Clearly, if trade tensions work to undermine the notion that the
United States and Europe share common interests or lead to a view that a weaker
Europe or a weaker America is in the other’s interest, then the consequences could
be major. But there is no evidence to suggest that this is happening as the United
States and the EU to date have been able to compartmentalize trade problems to a
remarkable degree.

46 (...continued)
Washington Trade Daily, September 26, 2000.
47 Daly, Suzanne. “More Vehemently Than Ever, Europe Is Scorning the United States,”
New York Times, April 9, 2000, p. 1.
48 Ironically, some observers see trade disputes as an instrument for promoting EU unity.
This view is that trade conflict with the U.S. may provide EU policymakers with a
convenient “enemy” that can help divert attention from internal problems and
disagreements. While this may be true for some disputes where there is a unified EU view,
on most trade disputes there are often different views and positions among the member
49 Trade Reports International Group, Washington Trade Daily, September 8, 2000.

Leadership Impact
Trade disputes may have discernible impacts on U.S.-EU efforts to provide
leadership of the world economy. The disputes absorb a significant amount of time
and energy of key policymakers at the expense of efforts to pursue common interests
and objectives, such as completing the Doha round of multilateral trade negotiations.
Moreover, the two powers need to set an example of cooperation and adherence to
WTO rules if the whole system is not to unravel.
The credibility of the WTO depends critically on a prompt, effective, and fair
dispute-settlement mechanism. Unfortunately, the EU is seen by U.S. policymakers
and interest groups affected by the beef and banana cases as having used every
loophole to delay decisions and then refuse to comply with panel decisions.
Similarly, U.S. compliance efforts in FSC and Byrd Amendment disputes are found
wanting by EU policymakers. While only a handful of U.S.-EU WTO disputes have
ended in withdrawal of concessions (i.e. retaliation) since 1995, non-compliance by
a key member arguably weakens the authority of the WTO and serves as a poor
model for the rest of the world.50 Why should we comply with WTO panel decisions
if the EU does not have to, many countries ask. Non-compliance by one of the two
leading economic powers is also said to diminish the perceived value of negotiating
new trade agreements.51
Both the U.S. and EU (bananas in the case of the U.S. and the FSC in the case
of the EU) have brought complaints to the WTO that may have been motivated more
by a desire to score points with domestic political interests or to rack up negotiating
leverage by successfully prosecuting cases than to address serious trade problems.
To the extent that a charge of capricious use of the dispute settlement process is
valid, the WTO as an institution may also be weakened. Some may argue that no
institution can survive for long this kind of treatment by the body’s two biggest
To deal with the problem of non-compliance, the U.S. and EU have legalistic
and diplomatic options. In the area of some of the most bitter U.S.-EU
disagreements, particularly over GMOs, the WTO may be asked to make decisions
on very complex issues that go deep into the domestic social and the environmental
life of each side. Binding rulings in areas that have strong domestic roots can raise
sovereignty issues and court a public backlash. Under these circumstances, where
the formulations of right and wrong are increasingly blurred, it may be legitimate to
question whether WTO panels should be asked to clarify vague rules where there is
little U.S.-EU consensus, or whether trade officials should attempt to negotiate
diplomatic solutions to disagreements that are so difficult to resolve.

50 “Transatlantic Trade Tensions,” Financial Times, May 17, 2000, p. 8.
51 Schott, Jeffrey. “After Seattle,” The Economist, August 26, 2000, p. 66.