The June G8 conference in Evian, France, offers the opportunity to prevent the severe strains in the US-Europe political relationship over the Iraq war from polluting our mutually profitable economic relationship. The conference could heal political wounds and provide momentum for economic growth on both sides of the Atlantic.
During my years as US ambassador to the European Union (1993-1996), a transatlantic crisis was defined as a disagreement over the EU’s banana regime or its ban on hormone-fed American beef. We can only wish that this were the nature of the crisis today. In fact, we have the most serious European-US political division since the end of World War II, and it will take major efforts on both side of the Atlantic to solve it and to contain any economic spill-over effect.
Coming after the Bush administration’s unilateral withdrawal from the Kyoto Protocol on Global Warming, the ABM Treaty, and the International Criminal Court, and other international conventions, the war in Iraq has severely strained political relations. It has exposed a profound difference with Europe over threat assessments regarding weapons of mass destruction; the proper way to handle “rogue” nations such as Iraq and Iran which act contrary to international norms; the role of multilateral institutions such as the United Nations; and the use of military force. These will not be easily overcome. But it is crucial that while efforts are made to repair the damaged political bridge, our economic and trade relationships do not suffer.
Ominous signs
In the early stages of the Iraq confrontation, there were ominous signs. Leaders in the US House of Representatives talked openly of a government-endorsed economic boycott of French products and threatened to propose a resolution to deny post-war reconstruction projects to countries which failed to support the coalition war effort in Iraq.
A recent poll by Fleischman-Hillard and Wirthlin Worldwide indicates that a US consumer-led boycott of French and German products is possible, with a majority of Americans indicating that they feel less favourable toward French and German companies and their products. While there is yet little evidence this has been translated into consumer behaviour, it is a worrying sign. There is more concrete evidence that some US companies operating in the Middle East have been subject to consumer boycotts.
The US business community is greatly concerned about limiting the damage. And well it should be. The economics of the US and Europe are remarkably integrated and mutually dependent. Through their respective affiliates, US and European companies each employ over one million workers in the other’s market. The US has over a $1000bn annual trade and investment relationship with Europe. Over 60% of US exports to Europe are from US parent companies to their European affiliates. And the fate of major companies depends upon healthy relations.
There is no evidence to date that political differences have led to changes in private sector capital flows or trade and investment decisions. And yet, consumer and corporate behaviour is influenced by external events. Uncertainties over our political relationships can dampen the confidence needed to achieve growth on both sides of the Atlantic.
Just as Iraq has brought into sharp relief major differences in our approach to solving major political crises, so too our economic views seem to be diverging. A less business-friendly European economic environment – from high labour costs and inflexible markets to rigid top-down regulation – imposes a greater challenge to Europe’s ability to attract American investment than political differences over American foreign policy.
Europe has taken a sharply different approach from the self-regulatory regime in the US. The EU’s heavy-handed regulatory approach is exemplified by the proposed Chemical Directive, which would subject thousands of chemicals to registration and testing, even when incorporated into end-user products. The EU’s moratorium on US agricultural exports containing genetically modified organisms (GMOs) – well accepted for use on American tables – reflects giving in to scientifically unfounded European public fears of what they call Frankenstein foods. On competition policy, the European Commission takes a more suspicious view of mergers, as shown by the denial of the US-government approved GE-Honeywell deal, looking more at the impact on competitors, while the US focuses on efficiencies to consumers.
Trade sanctions
Political differences will complicate the ability of the US government and the European Commission to solve long-standing conflicts over trade and regulations. We are fortunate that the president’s special trade representative, Ambassador Robert Zoellick, understands Europe as well as the EU’s trade commissioner, Pascal Lamy, understands America. Both are trying to calm troubled political waters by looking for ways to co-operate on trade and economic issues. But a combination of domestic pressures, and a poor post-Iraq political climate will complicate their task.
On the US side, the huge subsidy-laden farm bill and the imposition of tariffs on European steel products still hang as impediments to improved trade relations. The Bush administration has taken the first step in what will be a politically charged WTO case to void the EU moratorium on GMOs. Pascal Lamy has threatened a September 30 deadline to begin imposing up to $4bn in trade sanctions against US imports unless Congress passes an acceptable replacement for the WTO-inconsistent Foreign Sales Corporation tax benefit – hardly the way to repair frayed transatlantic ties.
There is much that policy makers on both sides of the Atlantic must do to create a better political and economic climate. The June G8 summit in France is just the place to begin. First, it is essential to lift the pall over our tattered political relationships by co-operating closely in the reconstruction of Iraq. Both sides will need to bend and there is reason to believe that this will happen. The US may have been able to win the war largely by itself (with significant help from Britain), but it cannot avoid co-operation with Europe to achieve peace. The restructuring of Iraq’s debt, held significantly by Russia, France and Japan, must be done through the Paris Club of industrial nations. The future of the United Nations Oil for Food programme and the full lifting of UN sanctions against Iraq require agreement with Europe and Russia. Decisions on the use of future oil revenues should not be made by the US alone. Contracts for reconstruction should be based upon open and transparent procurement rules, not given solely to US companies with political ties to the administration.
More will be needed than convergence over Iraq reconstruction. It is time for the Bush administration to reassert a policy every US administration has held since the end of World War II: supporting greater European unity. The divide and conquer strategy used to win support in the Iraq war is ultimately self-defeating. Eastern European nations will soon become members of the EU. With the development of a common market and a common currency, there will be a gradual convergence on a common and foreign security policy, despite the internal rupture over Iraq. The US task is to assure that Europe’s emerging policy is convergent with US interests, rather than impeding them. The road map to peace in the Middle East, developed by the US together with the EU, is a good step forward.
Second, trade policy should be used to restore trust, rather than widen it. Both sides should declare a moratorium on provocative trade actions at this difficult moment. Nothing would be more helpful than the US and EU jump start the moribund WTO Doha round by reaching agreement on industrial tariff reductions and on mutually reducing trade and growth distorting agricultural subsidies.
Harmonisation
We should also work toward a more harmonised anti-trust approach to avoid different outcomes by competition authorities on major cases. We should try to achieve more convergence on regulatory approaches, and revive the mutual recognition agreements we reached in the 1990s in areas such as pharmaceuticals, so that products approved for sale in one market are accepted in the other, without further tests.
Third, the G8 provides a platform to agree upon mutually reinforcing growth strategies, powered by lower interest rates in Europe (which the European Central Bank has maintained at unnecessarily high levels, retarding European exports and growth); liberalisation of European markets; and deficit reducing measures in the US.
In the end, there is no substitute for closer consultation, mutual respect, and a renewed recognition that we need each other to provide both a freer, more secure world, and a more vibrant world economy. These ingredients necessary for political and economic co-operation have been in far too short supply recently.
Stuart E Eizenstat held a number of senior positions with the Clinton Administration, he is the head of the international trade practice group at the law firm of Covington & Burling, and he is the author of “Imperfect Justice: Looted Assets, Slave Labor, and the Unfinished Business of World War II”, which was published this year.
