=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-= NORTH ATLANTIC ASSEMBLY *** ECONOMIC COMMITTEE *** N.A.A. =-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-= /pub/history/military/nato/naa/ec File: ak238ec.e THE EC-US TRADE RELATIONSHIP: THE CHALLENGE OF THE FUTURE Draft General Report Mr. Jorgen ESTRUP (Denmark) General Rapporteur* International Secretariat October 1993 * Until this document has been approved by the Economic Committee, it represents only the views of the Rapporteur. TABLE OF CONTENTS Page EXECUTIVE SUMMARY ii I. INTRODUCTION 1 II. MEASURING THE EXTENT OF INTERDEPENDENCE 2 III. THE CHANGING ENVIRONMENT OF THE RELATIONSHIP 3 IV. ORIGINS AND OUTGROWTHS OF TRADE DISPUTES 5 V. SYSTEMIC DIFFERENCES 7 VI. COMMITMENT TO MULTILATERALISM 9 VII. STRUCTURAL WEAKNESSES AND FUTURE CHALLENGES TO THE GATT PROCESS 11 VIII. TRANSATLANTIC CO-OPERATION 14 CONCLUSION 15 NOTES 17 Annex 1: Disputes Under the General Agreement 18 Annex 2: Comments from the European Commission 21 Annex 3: Declaration on US-EC Relations 25 EXECUTIVE SUMMARY The United States and Europe will continue to be each other's most important ally. However, the end of the Cold War will bring challenges to policy-makers from both sides of the Atlantic in the realm of economic policy. The introduction of the common market in Europe and the desire of both to attend to domestic needs with greater intensity have highlighted the fundamental differences in economic structures and philosophies. The US and the EC are currently working on the conclusion of the Uruguay Round of the multilateral trade talks under the auspices of the General Agreement on Tariffs and Trade. The success or failure of these talks will most likely either chart a course of continued and strengthening co-operation or represent the beginning of a new and dangerous era of isolated trade policies that could be the harbinger of the end of economic detente. The multilateral trade negotiation process has been under significant strain over the past few years. In fact, over the past decade, a rapid rise in the use of bilateral and unilateral initiatives to gain "market fairness" has been associated with the inability to finalize or enforce multilateral agreements and decisions. The manifestations of the weaknesses in the current system have been shown in the increasing use of non-tariff barriers and trade sanctions. The United States and the European Community have a responsibility to the multilateral trading system, as well as to the future prosperity of the developing world, to find common ground on trade and investment disputes. For the past 2 1/2 years, the rest of the world has waited for the two sides to reach accord in several areas of international trade activity that in many instances have little or no effect on their economies. As Director General Peter Sutherland stated recently, "if the Europeans and the Americans had gotten their act together, this agreement would have been sewn up a long time ago. It's time that was said bluntly, so I am saying it." Trade negotiators, politicians and academics have begun to search for more effective ways to initiate, conclude and enforce trade agreements between the EC and the United States inside or outside the current system. A recent report issued by the General Agreement on Tariffs and Trade has illustrated that high costs associated with the current tariff and non-tariff barriers to trade affect consumers around the world. Other studies have shown that $200 billion in increased economic activity would be derived from a successful Uruguay Round. The multilateral trading system is an indispensable structure for the present and future of the global economy. Now is not the time for the world's most powerful economic powers to abandon this process. The United States and the European Community have shown a stronger commitment to this process over the past few months to achieve a successful conclusion to the Uruguay Round. It is the hope that with a successful conclusion, the two will continue to work to find ways to improve the system and to ensure that the frustrations and agonizingly long processes associated with the current round of negotiations can be avoided in future rounds. I. INTRODUCTION 1. With the rapid changes in the security and political landscape over the past few years and an increasing interdependence on economic issues, the traditionally strong working relationship between Europe and America will be tested. In order to comprehend the immense challenges this new role encompasses, greater understanding of the institutional and political developments between Europe and America is critical. In the broad context, the United States has begun to implement a new phase of global economic policies to address trade, monetary and industrial priorities within the security framework. US President Bill Clinton has identified economic security as an integral part of America's foreign policy. In contrast, Europe is in the process of addressing security issues within the Communities' developing economic institutions through the mandates contained in the Maastricht Treaty. While these changes do not necessarily work in cross directions, they do create a more complex environment for the co-ordination of economic and security issues. 2. There must also be a realization of the significant systemic differences in the way America and Europe address economic security policies. While trade and investment have increased between Europe and America, recent trade tensions may continue if political isolation occurs within the economic interdependence of the global economy. This interdependence, while promoting economic growth and security, may give way to pressures from domestic constituencies for protectionist unilateral action. This is already seen by the increasing hesitancy of national governments in Europe to accept European Commission policies. National governments within the European Community will continue to address and fulfil their obligations to ensure the preservation of their national democratic rights and cultural roots through subsidiarity within the European Communities confederation system before negotiation may begin externally. Louder and stronger voices coming from the US electorate to put "America First" has placed new regional and national interests at the forefront for US lawmakers. 3. In fact, it can be argued that while events dictate the need for identifying and meeting common goals, the changes taking place both in Europe and America create additional pressures to pursue independent economic, and possibly in the future, security policies. In many instances, multilateral and bilateral negotiations have given way to unilateral measures. Monetary policy coordination, never highly effective, has continued to lack co-operation. And lastly, joint research and development between Europe and America has become relatively non-existent, withstanding the obvious benefits. 4. The identification of mutual interests and subsequent co-operation on economic issues is more important today than at any time in the past. The irony of this conclusion is that it will be more difficult and complex to satisfy these goals than at any other time since the onset of the Atlantic alliance. II. MEASURING THE EXTENT OF INTERDEPENDENCE 5. While some will argue otherwise, North America and Europe are inextricably tied through their common goals of global economic growth and peace. A strong America and Europe, both within the security and economic realms, are in the best interests of both. Although security issues will remain an overarching link between the two continents, rapid changes to the geographic and political climates within Central and Eastern Europe and the former Soviet Union have facilitated a process of greater independence. However, within the growing global economy, interdependence has become the prominent outgrowth between Europe and North America. This fact is illustrated by the large increases in trade and investment over the past decade. 6. The European Community has always been, and will continue to be, one of America's most active and important trading partners. American trade to the EC grew from $83 billion in 1989 to $103 billion in 1991, accounting for over 25 per cent of the EC's total imports and approximately 25 per cent of all US exports. The United States is Europe's largest trading partner with total imports of $86 billion in 1991. 7. Foreign direct investment between the two areas has risen substantially over the past few years. The United States increased total direct investment in Europe by $24 billion during the 1989-1991 period. An additional measurement of interdependence is the percentage of total foreign investment in each area. The United States maintains an estimated 40 per cent of all foreign investments in Europe. Europe is responsible for approximately 50 per cent of the total foreign investment in the United States. In both instances, these strong investment ties and continued purchasing of US government bonds to aid in financing America's debt payments have provided crucial flows of capital during difficult economic times in the United States and will correspondingly be important for Europe as it experiences a current downward trend in economic growth. 8. In the final analysis, monetary, trade and investment policies of the United States and Europe will continue to have corresponding reciprocal effects on one another. As the relationship changes with a larger and stronger Europe, a degree of interdependence will remain. As the two largest economies in the world, it is not hard to understand this corollary. Although the United States has begun to concentrate on economic relationships in the Pacific and the Western Hemisphere over the past two decades, Europe will continue to be the dominant partner. The Gross National Product of Europe is roughly twice the size of the "five tigers" in the Asian countries of Japan, South Korea, Singapore, Taiwan and Hong Kong combined. In population, the EC states, EFTA states and Eastern Europe are almost twice as large as the United States and four times larger than the Asian countries. Simply, the traditional and expanding markets of Europe will continue to lure American businesses to the European continent. 9. However, there are some important new trends that have developed over the past decade which could alter this increasing interdependence. Trade growth within the European Community increased at a higher rate than between Europe and the United States over the past decade. Europe's understandable preoccupation with the building of the Community has created a more provincial trade strategy. As US trade and industrial strategies have concentrated more to the North and South in Mexico and Canada, they have become America's largest trading partners. A potential united Europe, both politically and economically, and a possible future North American Free Trade Agreement will provide an even stronger pull in both of these directions. These "economic unions", along with the emergence of Japan, has spurred the recent debate over the "tri-polar economic blocks". However, it can be argued that these debates are predicated more on a lack of knowledge of the future roles for each economic superpower than if measured by investment and trade statistics. 10. A realization must be made that the global economy will continue to become more interdependent. In fact, the European Community and America have worked together to promote this atmosphere through their bilateral trade, work within the GATT and their continuing assistance to the world's developing economies to enable them to grow and compete. In this new economic world order, interdependence is too strong for either side of the Atlantic to construct isolationist policies that would be in its best interests. The continuing decentralization of global economic activity prevents the EC, the United States or Japan from imposing unilateral economic policies that will achieve its objectives without the support of the others. 11. The United States has already had the ability to influence the development of the EC through bilateral negotiations at governmental level and by increased Euro-Atlantic business consultation. The same is true for European influence on business investments and government initiatives in the United States. The governments and parliaments of the United States and Europe must understand these facts and promote stronger bilateral relationships in policy-making to bring consensus to international issues. The first requirement must be a greater understanding of the evolving differences between European regulatory and government structures and those of the United States. III. THE CHANGING ENVIRONMENT OF THE RELATIONSHIP 12. The relationship between Europe and the United States is changing in its perceptions both internally and externally. The days are gone when the United States could set and implement the agenda on issues ranging from global trade to peacekeeping. The United States will continue to cast a large presence on every negotiating session, but many nations do not view the US system as the idyllic structure of the past. The continuing budget deficits and debt within the United States has created a sense of lost credibility with many of the world's trading partners. Decreases in productivity and education have strengthened this impression. This has had profound effects on America's negotiating ability and has given rise to defensive unilateral actions rather than working through multilateral institutions. As the United States has become in a period of ten years the world's largest lender to its largest debtor, diplomats have come to realize this sense of weakness in negotiations, primarily in the monetary policy areas. Treasury Secretary Lloyd Bentsen, during his first G-7 meeting acknowledged these perceptions when he delightedly announced the Administration's budget deficit reduction plan. 13. The change in the international perception of America's relative stature in the world is also mirrored domestically. President Clinton received strong support from the traditionally Republican business sector during the 1992 campaign. American businesses have also recognized the declining US prominence in global business activity and their resulting effects on the domestic economy, adding a new and important interest group in America calling for more forceful governmental intervention both domestically and internationally. 14. The origins of the European Community were built on the realization that Europe must coalesce to promote efficiencies and better its trading position. The Single European Act of 1986 implemented several changes to bring greater competitiveness by increasing joint research and development programmes and bringing down non-tariff barriers to trade. The evolution of the European Community is based on domestic agendas and priorities, whether in dealing with issues of internal or external trade. 15. Since the signing of the Treaty of Rome, the European Community has quickened the pace of full implementation of the common market envisioned by such forward-thinking theorists as Jean Monnet and Robert Schuman. The United States has traditionally supported European integration on the basis that it would provide more attractive investment areas as well as political stability in meeting common objectives. Critical decisions made by the Community with regard to policies in agriculture, steel and telecommunications have had profound effects on US interests and has created additional issues of contention between diplomats in Washington and Brussels. 16. Possibly the most important change occurring within the alliance is the return to a strong commitment to domestic policy and its relationship within international agreements. Domestic priorities have always had a role in international economic negotiations; however, the mutual security blanket has traditionally snuffed-out most of the flames. The Tokyo Round in the 1970s is a good example of regional interests giving way to what was considered more important at the time, the introduction of tactical nuclear missiles. This is only one of many examples of security considerations taking precedence over domestic economic priorities since the beginning of the North Atlantic Alliance. 17. Domestic priorities will be better represented on both sides of the Atlantic in the 1990s and beyond. This will add further pressures not to cede territory in negotiations on trade, commercial activity and monetary policy. The European Commission will have to answer to national governments and the United States will have to please Congressional oversight committees and special interests in order to achieve a workable formula. Obviously, this presents a much larger challenge to negotiations than in the past. This is compounded by the fact that there is a greater realization in both Europe and North America that international agreements will have vast impacts on domestic prosperity. As President Clinton stated in his address of 26 February 1993, "Every billion dollars of our exports creates nearly 20,000 jobs here, and we now have over seven million export-related jobs in America. They are exactly the kind of jobs we need for a new generation of Americans." He added, "Our trade policy will be part of an integrated economic program, not just something we use to compensate for the lack of a domestic agenda. We must enforce our trade laws and our agreements with all the tools and energy at our disposal." IV. ORIGINS AND OUTGROWTHS OF TRADE DISPUTES 18. What must be understood is that European Community directives, prominent in several US objections, were created to address domestic strengths and weaknesses. While many of these eventual directives adopted by the European Council were developed to avoid subsequent confrontation with the United States, many were not, as in the areas of electronics and automobiles. Strong domestic interests will always take precedence over global economic management. This is true in the United States as well as in Europe. US government intervention in the areas of automobiles, aerospace, semi-conductors and a tougher trade stance of the Clinton Administration reflects those same pressures. 19. The daunting challenges posed by creating a community encompassing twelve countries with different and distinctive cultures, political systems and economic philosophies are immense. The multitude of variables associated with each community directive makes policy formulation especially difficult. Obviously, the most prominent example of this diplomatic balancing act is the Common Agricultural Policy (CAP). While the CAP is only one of many hurdles European diplomats have been forced to jump over to achieve a unified position, it reflects the sometimes contradictory policy decisions of sustaining global economic relations and attending to domestic priorities. With roughly eight per cent of the population working in the agricultural sector within the EC, these domestic forces are extremely strong in Europe. The United States, with only three per cent of the population in agriculture, has significant, but lesser pressure emanating from US farmlands. This is reflected in the differing subsidy positions between the two with regard to agriculture. 20. Many in the United States cite these contentious issues as examples of the EC's inability to be a reliable partner in attending to the global economy. Officials in Washington fear that the EC will become so preoccupied with internal developments that the global trade and monetary system will become secondary in its priorities. Additionally, some believe that the building of the European Community will make negotiations in the critical areas of trade and monetary policy almost impossible as twelve different voices will have to be unified before consensus is reached. Even with the qualified-majority rule in the European Council, pressures by individual countries will be difficult to ignore. 21. By design, the structure of the European Community is centralized and also decentralized. The nature of a system based on a "confederation" of twelve sovereign countries is predicated on the ability for national governments to continue to have significant levels of discretion on policy formulation. The European Commission has the responsibility to build consensus among the Twelve and effectively present a unified policy to domestic and international interests. While this flexible approach to policy-making is essential to attain the necessary coordination, it does promote a rather difficult task to effectively negotiate within this complex system. The United States learned the difficulties of success of an integrated policy apparatus within a confederation prior to the US Civil War. In fact, while the United States system is constructed on a federalist platform, there is still considerable discretion awarded to individual states in many areas of public policy, not the least of which, in commerce. 22. Obviously, the concern is that the EC will be unable to achieve the necessary consensus, and therefore, bring even greater international gridlock to agreement. Again, the agricultural subsidies' issue within the Uruguay Round of the GATT negotiations is used as an example of the European Communities' inability for consensus-building. While the United States has long used bilateral negotiations with European countries to achieve multilateral agreements, a future politically and economically unified EC will make it more difficult to implement this strategy with success. 23. However, many of the same arguments and frustrations launched against the Community could also be applied to the United States. Buy American laws, high tariffs on glassware and textiles and farm subsidies have been introduced to create and protect domestic economic growth and employment. Rather than individual countries as in the case of the EC, individual states have played an important role in drafting Administration and Congressional initiatives on issues across the board. With the Congress many times at odds with itself and also on the proper role of the Executive Branch on trade and commercial policy negotiations, many of the same difficulties in developing a coalition arise as in the case of the EC. The increasing use of codification of US trade policies have further blurred the role of US Administrations to work on specifics within international negotiations, promoting frustration on the other side of the Atlantic. 24. When policy is considered in Europe, the question is always how will it affect a particular country or region. In the United States, the same considerations are applied with regard to states and regions of the country. The strengthened political clout of the South and Western parts of the United States has had a significant impact on policies implemented by Washington. The North American Free Trade Agreement, while not universally supported in these regions also encompasses its largest supporters, is one example within the United States of these regional influences. The strong concerns and interests in the North American Free Trade Agreement by border states, and the corresponding supplemental agreements, are examples of their growing political clout. 25. The Clinton Administration has now initiated a new emphasis on domestic policy-making within the framework of international agreements. This policy is predicated on the acknowledgement that future economic prosperity will determine the success of the Administration. These are precisely the same considerations used in Brussels when constructing EC policy. However, the difference in perspectives is primary to many of the difficulties of reaching agreements in the new economic environment. The United States has always maintained a strong commitment to a laisser-faire approach to global economic issues. While President Clinton has begun to usher in new governmental intervention, as in the case of a potential research and development partnership in automobile manufacturing, it is still far from the strong ties between the central governments and the private sector characterized in Europe. Thus, the differences between Europe and North America are not the mutual goals of stronger economic growth but the systems that have been created to achieve them. V. SYSTEMIC DIFFERENCES 26. Throughout the history of the Atlantic alliance, the common resolve to fight communism blurred much of the differences in economic and political systems in Europe and America. With the dissolution of the Soviet Union, these differences are now accentuated and threaten to create a climate in which it will be difficult to resolve economic disputes. Europe will no longer put parochial interests aside in the name of the alliance as in the case of the Tokyo Round. The United States is actively re- evaluating its priorities and presence in Europe with calls for greater independence from European commitments, whether they are economic, political or military. For instance, during the 1992 United States Presidential campaign, there was strong rhetoric for an "America First" policy, with proponents arguing that the United States had artificially subsidized EC economies to build opposition to communism and that the time had come to reassert "fairness" in the global economic system. 27. Obviously, the events of the last three years has provided an opportunity for both Europe and America to redirect energies in meeting domestic concerns. However, the important aspect of these new-found freedoms is the manner in which they are approached. The United States will continue to push for trade and commerce policy based on its strong commitment to free-trade and non-governmental interventionism within the private sector. The European Community will continue to pursue global economic agreements with more reliance on social market principles. The differences between these two philosophies of economic management are significant and could be the basis of future tensions within the alliance. 28. European Community economic policies are based primarily on a desire to bring social consensus and partnership. For example, EC tax and investment policies are more closely geared to equal income distribution than in the United States, as illustrated by the rapid rise in income disparities within the United States over the past decade. Strong partnerships between government and labour are deemed essential to the effectiveness of issues ranging from industrial policy to trade strategies. More informally, the member nations of the EC have used partnerships and joint research and development projects on a far greater scale than US private/public sector relationships such as the Defense Advanced Research Projects Agency (DARPA) and the Semiconductor Manufacturing Technology Initiative (SEMATECH). The emphasis of governmental intervention in private sector development within Europe will likely always be greater as opposed to the US system that generally regards governmental intervention as more of a nuisance than a benefit. More generally, systemic differences include the much higher proportion of GDP spent on social programmes in the EC than in the US. The EC spends approximately 35 per cent of GDP, whereas, the US spends 22 per cent. 29. US Trade Representative Mickey Kantor recently stated in Brussels that he was not interested in debates over "theology" but in "pragmatic" and "results-oriented" negotiations. Unfortunately, the lack of debate and understanding over the differences between European and North American economic philosophies and structures are very much at the heart of the confrontations, particularly with regard to trade and investment policies. The United States has traditionally negotiated on a simple set of "rules" that call for free-trade and market-led economic policies. However, with or without US backing, Europe is changing the "rules" and institutionalizing them at the same time through Community structures and directives. 30. The Single European Act recognized the need for a flexible approach to trade and investment policies. Thus, a system of mutual recognition of national priorities and systemic differences to build an eventual coalition was devised. The traditional conceptualization of trade and investment policies based on harmonization was abruptly disbanded due to the impracticalities of developing a cohesive policy position between twelve countries. Therefore, the Single European Act attempts to ensure consensus building without building a structure that would create additional tensions. 31. The United States continues to follow the harmonization theory of global trade and investment laws. By attempting to negotiate universal standards within the EC's flexible framework, the United States is fighting a losing battle. While the EC will be willing to compromise and significantly reduce tariffs and non-tariff barriers to United States trade in many areas, the United States can not expect the full adoption of its international economic programme. 32. This has led to increased frustration on the part of US negotiators and has promoted additional pressure from the Congress and special interests to meet what is considered EC intransigence with unilateral measures. The outgrowth was the prior adoption of Super 301 legislation and the use of bilateral agreements such as the Strategic Impediments Initiative. This analysis is not intended to place blame, but create additional understanding in an effort to co-ordinate economic agreements. Without the greater understanding of underlying systemic differences between both sides of the Atlantic, a larger degree of unilateral action may prevail in trade and investment negotiations. This will only end up weakening the alliance and promoting future trade wars. 33. The critical point is that there is no common set of rules that are applicable to all countries and economic systems. Neither the United States nor the EC will be able to negotiate in international forums entirely within its own economic philosophies and structures. VI. COMMITMENT TO MULTILATERALISM 34. In the highly interdependent world of global economics, great benefits could be achieved through co-ordinated agreements, both inside and outside of the alliance. However, these are more difficult to achieve and therefore have not been given the prominent place in negotiations they deserve. A strong transatlantic relationship is the key to successful economic co-ordination between Europe and America which also brings economic growth and prosperity around the world. Thus, the multilateral process must not be jeopardized by meat hormones, oilseeds or aircraft subsidies which have little impact on the economic opportunities around the globe. It is the responsibility of the United States, Europe, and Japan to work within a framework of fair and co-operative negotiations for the benefit of each other and the rest of the world. The result will be higher growth rates and increased economic and political stability in developing countries. 35. Traditionally, Europe and America thought of themselves as partners in meeting the goals of world peace and global economic growth. The fear for the future is that in the growing competitive economic environment, the relationship will take on a role more of assessing individual actions in order to produce independent initiatives and counter-measures rather than consensus-building predicated on achieving common goals. The question arises, why not work independently to meet individual objectives? This is at the heart of the current re-evaluation of the transatlantic relationship. As President Clinton pointed out in his economic address of 26 February 1993, "Could it be that the world's most powerful nation has also given up a significant measure of its sovereignty in the quest to lift the fortunes of people throughout the world?" These feelings are also felt on the other side of the Atlantic. A report released on 15 June 1993 by the Delegation of the National Assembly of France to the European Communities stated that "states can remain stonily indifferent to all but force or the show of force. The Community should equip itself with deterrents and no longer confine itself to bilateral or multilateral discussions. Strong in the knowledge of its economic strength, the Community can, if the will and determination are there, brandish the threat of unilateral measures."(1) The past and possibly future policy actions illustrated by these two quotations will only further destabilize the multilateral process. Simply, to provide essential multilateral co-operation within an interdependent global economy, the building of isolationist economic policies within "protective zones" is not in the best interests of either continent. 36. While at the present, the United States and the European Community are working within the GATT process to finish the Uruguay Round, they have generally been less active in the pursuit of multilateral agreements over the past decade. For instance, it was against the EC's best interests to sign-off on a multilateral agreement while it was constructing the common market due to the fact that many of the same issues would be covered in the global agreement, therefore restricting the flexibility of the European Commission to independently devise internal regulatory and investment policies. Unfortunately, this precluded effective negotiation of community policy with trading partners and restricted the ability of the EC to make concessions at the international trade table. An obvious example, but not the only one, is the current predicament the EC finds itself facing with regard to the Common Agricultural Policy. The CAP was developed after lengthy discussions between EC members that brought painful reductions in agricultural assistance to domestic farmers. Thus, achieved independently from the Uruguay Round negotiations, member states have had the unenviable task of attempting to implement this policy while also negotiating tariff reductions as part of the Blair House accords. 37. The United States believes that it carries far more weight when working in a unilateral manner than when attempting to work in a multinational forum that has had decreasing interest in US structures and strategies. The laborious negotiating sessions, as in the case of the six-year Uruguay Round, has brought to light the difficulties of multilateral economic agreements and has promoted stronger pressures from domestic constituencies for immediate action. Hence, the US has increasingly used tariffs imposed unilaterally to accelerate multilateral negotiations within its perceived best interests. 38. Additional difficulties to effective transatlantic economic co-operation is created by the current complexity and multitude of multinational forums and their lack of universal participation. Other than within the OECD, representation by all European Community members and North America is absent. The European Commission is formally represented only in GATT. The GATT, composed of 116 countries and several different regional points of view, must combine these perspectives in a document to be passed unanimously. Several problems are associated with the G-7 process due to the fact that while the EC may have a common policy position, individual member states represented will often provide multiple voices as the European Commission has only observer status. This is at the core of the structural weaknesses of the international economic forums and adds to the interpretations of some countries that multilateral negotiations have relatively little value. However, it is clear that the multilateral framework is absolutely critical to achieve fair and comprehensive trade and investment rules. Certainly the lack of political will and diverging interests have much to do with the inability of the process to work effectively, but the current trade negotiation structure also contains several systemic problems that impede fair and binding trade pacts. VII. STRUCTURAL WEAKNESSES AND FUTURE CHALLENGES TO THE GATT PROCESS 39. The primary concerns of many contracting partners of the General Agreement on Tariffs and Trade are the widely believed ineffectiveness of the disputes settlement process. The process has been universally described as unwieldy, unfair and ineffectual. The current disputes process begins with a request for a review panel by the complainant, which must be approved by all members. After a determination has been rendered by the panel, it must be subsequently approved by all members, including the violator, before implementation. If the report of the panel is accepted (more frequently than not it fails to produce the unanimity of votes required) the future surveillance of its implementation simply calls for the issue to be discussed at each Council meeting where an update is provided by the party found violating the GATT. Many cases are never cleared by the panel or are subsequently acted upon by the offending country. Please see Annex I for an illustration of this process. 40. The Uruguay Round, if excepted under the Dunkel Draft, would drastically change these provisions and provide for strong enforcement procedures and adoption of all panel reports. Final reports are automatically put into effect unless NOT agreed to by ALL parties. This new provision prevents countries which have been determined to have violated GATT provisions to veto the adoption of a report under the current unanimous consent rules. Several trade experts believe that the simple adoption of these dispute settlement amendments would automatically make the Uruguay Round a success. 41. However, even with a new and improved disputes settlement body, there will remain several areas of trade that are immune to such oversight. The Kennedy and Tokyo Rounds of the 1960's and 1970's provided substantial reductions in tariffs on several sectors of the world economy. The Uruguay Round is attempting to continue those reductions and, in some sectors, eventually bring them to zero. A success of the Uruguay Round would be a significant achievement in promoting free trade. However, the growing threat to fair trade is the increasing use of non-tariff barriers (NTBs). According to the 1992 annual report of the General Agreement on Tariffs and Trade, over 200 "limitation arrangements" or bilateral import quotas affecting trade are currently in force. The Organization of Economic Cooperation and Development released a report in spring 1993 citing 289 limitation agreements. Importantly, the OECD states that these NTBs are either not covered by the GATT or are in a "grey area" which are inadequately defined within GATT statutes and therefore not subject to panel reviews. The agreements and protectionist devices include, the Multi Fiber Agreement, voluntary export restraints, orderly marketing agreements and cartels. 42. While the number of NTBs is cause for concern, the percentage of goods which are affected by these agreements is even more enlightening to the extent of these barriers to fair and open trade. The tables below show the vast increases in NTBs and the value of these goods. Statistics make the case that NTBs will be the new test for trade negotiators to implement a fair and transparent global trading system. While some of these areas may be resolved through the Uruguay Round, many will remain untouched. 43. Why the steep increases in these trade restrictive instruments? The spring 1993 OECD report states "the lack of international microeconomic policy harmonization, the differences in the degree of structural openness of domestic markets' imports and capital flows, the presence of multinational oligopolies, the growing importance and costs of technological progress, etc., all challenge the classical model of international trade and the fundamental principles of multilateralism and non-discrimination that underlie the GATT. >From this vantage point, then, export restraints and other policies can be viewed as strategic instruments for shifting world monopoly profits, for providing advantage to home firms in long-term competitive races (such as development of new products and technologies), and for prying open foreign markets that for various reasons are protected from imports."(2) The concern of many economists is as the traditional obstacles to free trade are phased-out - tariffs and quotas, non-tariff barriers will simply replace them. NTBs are far less transparent and are more difficult to address. More importantly, there are strong political reasons not to do so. Most NTBs are concentrated in sectors that are either considered vitally important for cultural or employment reasons or are in areas that will be competitive in the future, such as high-technology. While domestic considerations may warrant the protection of industry, trade negotiators should address this potentially strong deterrent to fair trade. The French Assembly's delegation to the European Communities suggested that all NTBs be measured and calculated in the form of tariffs to improve transparency and the ability to reduce trade barriers. The Uruguay Round is moving in this direction, but most members oppose such a proposal as an infringement on their national rights to protect strategic industries. 44. The United States and the European Community share the common goals of economic growth and reduced unemployment. The recent problems have been how to achieve these goals. Possibly, work within the areas of obvious common interest will bring positive effects on the multilateral economic relationship that could be utilized as the basis of renewed co-operation. Europe and America have relatively similar views with regard to the environment, space exploration and technological advancement, where continued co-operation and future co-ordination will be less obscured. As strong advocates of democracy, human rights and the development of the Third World, these common bonds take on even deeper relationships. (*) Table 1 and Table 2: See file 'ak2380.tif' Table 1: Trade Indices for Major Product Groups "Affected" by Developed Country NTBs (1966 index expressed as a percentage of imports affected by NTBs, per cent change in import coverage between 1966 and 1986) Table 2: Changes in Developed Country Imports Facing Non-tariff Barriers: 1966-1986 Imports Affected by Non-tariff Barriers VII. TRANSATLANTIC CO-OPERATION 45. The disbandment of the multilateral trading system would have severe consequences for both Europe and America. Instead, what is urgently needed is greater understanding of the root causes of these trade disputes and to consider improvements to existing fora or a supplemental forum. Political, military and economic co-operation is essential to the continuity and strength of the alliance. However, with the reduced reliance on military security pacts, governments in Europe and America have turned inward to address domestic economic concerns. Thus, transatlantic relations will come under increasing strain as bilateral consensus will be more difficult without the threat of a common enemy and a global economy which does not define winners or losers by political ideology. An additional challenge is posed by sharp differences in the economic systems of both Europe and the United States that are now more transparent and are producing disagreements on issues that would have been ultimately ignored just a few years ago. 46. The increasingly complex and interdependent global economic environment has prompted the need for greater understanding of the systems and motives of economic policy development in both Europe and America. Politicians, trade negotiators and leading academics have searched for different ways to streamline and improve trade and investment discussions between the United States and the EC. While several proposals have been put forward, none have been implemented to date. 47. In 1989, the US Congress and the European Parliament proposed a bilateral disputes body that would reduce trade frictions in areas of a more technical nature, thereby, providing the needed resources at both ends of the Atlantic to work on issues in the larger context. The US-EC Transatlantic Declaration of 1990 called for greater economic co-ordination with formal and regular contacts between the United States and the EC. Several members of the European Parliament and commercial businesses have developed the Transatlantic Policy Network with their US counterparts to facilitate greater co-operation between Euro-Atlantic governmental policies and international business interests. European Commission President Jacques Delors recently called for an Economic Security Council that would be composed of not only the EC and the US but also Japan, China, Russia, and regional organizations of Asian and African countries to co-ordinate global economic policy. 48. As mentioned before, trade negotiators point to the need for a strong disputes body either within or outside GATT auspices to make binding determinations on trade and investment disagreements. In addition, US and EC diplomats are currently at work in developing an "early warning system" to extinguish potential trade disputes before they reach the ministerial level. GATT Director General Peter Sutherland has been very outspoken over what he perceives as the problems and solutions to the Uruguay Round. On 22 August 1993, Director General Sutherland stated, "if the Europeans and the Americans had gotten their act together, this agreement would have been sewn up a long time ago. It's time that was said bluntly, so I'm saying it."(3) 49. Academics on both sides of the Atlantic point to the need to improve existing institutions and supplement those discussions with regional and bilateral consultations to ensure the continuing functioning of the multilateral process. Trade expert Gary Hufbauer of the Institute for International Economics recently stated that "the enduring role for bilateral talks among the "big three" is that of sorting out their basic systemic differences, addressing issues that are outside the GATT agenda, reaching accommodations which fall well short of regional co-operation, and avoiding a lapse into full-scale commercial warfare". A recent report released by the Carnegie Foundation for International Peace advocates additional bilateral contact, both formally and informally, between the United States and the EC to assist the effective management of the multilateral process. 50. A Presidential Task Force of the North Atlantic Assembly has recently called for the development of a new bilateral structure, the Transatlantic Economic Co-operation Council to promote trade co-operation both bilaterally and multilaterally in its Report on the current state of the Atlantic alliance. The proposed Council would include trade experts from both North America and the European Community, thereby, providing structural teeth within the US-EC 1990 Declaration. A permanent secretariat would be constructed to ensure year-round policy co-ordination and provide an early-warning system of potential trade disputes by reviewing pending US legislation and EC directives before their adoption. The TECC would also include a binding internal disputes panel that would be overseen by a GATT delegation to ensure conformity to international trade agreements. The European Commission has made an initial evaluation of this proposal (see Annex II). 51. While it is certainly possible that none of these proposals are the answer to providing a fair and open multilateral trading system and a stable and strong transatlantic relationship, they do show the broad concern that the current system is inadequate. The success or the failure of the Uruguay Round may forecast the need or the lack thereof of institutional changes to the multilateral trading system. As seen by the rise in non-tariff barriers, even with a successful conclusion of the Uruguay Round, additional issues will have to be addressed. CONCLUSION 52. North America and the European Community will continue to go through internal changes that will put additional stress on their relationship. The continued building of an economic union in Europe, the possible development of a North American Free Trade Area and the need to fight national recessions, will challenge the ability of the United States and the EC to provide effective leadership and co-operation. Europe and the United States share common values and principles that will always facilitate strong and stable relations. However, those solid foundations will have to be relied upon to ensure a commitment to multilateralism in the face of difficult times economically. 53. All agree that it is imperative that there is a consensus between the two to preserve multilateralism for all of the contract member countries of GATT. A successful conclusion of the Uruguay Round will provide a much-needed stimulus to the transatlantic relationship. However, strong domestic concerns due to the ongoing global recession and a difference in economic systems and philosophies could bring loud calls for retrenchment and isolation with respect to international trade agreements in the future. Leaders from both Europe and the United States must address these concerns and differences. It is the hope that the European Community and the United States will continue to subscribe to their stated intentions encompassed within the Economic Declaration of the Tokyo Summit. "Maintaining and expanding the multilateral trading system is essential for world growth. We are determined to curb protectionism in all its manifestations and agree that no recourse should be made to initiatives and arrangements that threaten to undermine the multilateral open trading system. We also confirm that any regional integration should be complementary to and supportive of the system."(4) 54. There is much work left to be done. The percentage of trade activity currently being discussed within the Uruguay Round is approximately three per cent of the total global activity. In addition, additional trade practices and industries will not be addressed during the Uruguay Round and thus could be points of future contention. Therefore, the ongoing studies and improvements to the multilateral trading system should be continued. Europe and North America should build on the promises contained in the 1990 Transatlantic Declaration. If the lofty goals of true partnership and co-operation are fulfilled, the economies of not only Europe and America will benefit, but of the new democracies of Central and Eastern Europe and the underdeveloped countries of the world as well. NOTES (1) Informamtion Report No.348, by th eFrench National Assembly's Delegation for the European Communities, 15 June 1993 (2) Obstacles to Trade and Competition, OECD 1993 (3) International Herald Tribune, 24 August 1993 (4) Agence Europe, 11 July 1993 ANNEXES: Annex 1: Disputes under General Agreement. Source: GATT Activities 1992, GATT (Geneva 1993) See file: ak238a.tif ak238b.tif ak238c.tif Annex 2: A "Trade" organization for the core of the Globalized System. See file: ak238d.tif ak238e.tif ak238f.tif ak238g.tif Annex 3: Declaration on US-EC relations. See file: ak238h.tif ak238i.tif ak238j.tif (*) The Tiff images will be soon available on our Telnet/FTP Sites.