CHAPTER IV

U.S. Economic Diplomacy Towards European Union

INTRODUCTION

The United States supported the development of what is now the

European Union (EU). 1 As former U.S. National Security Adviser

Zbigniew Brzezinski has stated, "America's stake in democratic Europe

is enormous."2 For U.S. economic diplomacy, Europe is both a key

market and a competitor. In fact, the EU is America's largest export

market, absorbing $129 billion annually in U.S. goods and services,

slightly more than Canada and twice as much as Japan.3 For more

than half a century, Europe has been America's closest political ally and

global partner in shaping the multilateral trade regime and creating new

foreign-market openings. With America and Europe as its central poles,

the international trading system has been bipolar since the 1950s.

The 15 countries that currently make up the EU together

constitute the world's largest economy and America's largest economic

partner. 4 About 44% of total U.S. direct investment overseas is in the

EU, with the stock of American investment there growing much faster

1 The European Union (EU) came into being on November 1, 1993.

2 Zbigniew Brzezinski, "A Geostrategy for Eurasia," Foreign Affairs, Vol. 76, No. 5 (September/October 1997). p. 53.

3 David Rothkopf. Acting U.S. Under Secretary of Commerce for International Trade, StatementofDecember 14, 1995, in U.S. Congress, House Committee of International Relations, U.S. -Europe: Prospects for Transatlantic Economic Cooperation, Hearings, December 14, 1995 (Washington, DC: Government Printing Office. 1996). p. 39.

4 The members of the European Union, all highly-developed West European states, are Austria, Belgium, Britain, Denmark, Finland, France, Germany, Greece. Ireland. Italy, Luxembourg, the Netherlands, Portugal, Spain and Sweden. Three of these states. Austria, Finland and Sweden, became EU members from the beginning of 1995.

126

than the value of exports to Europe since 1960.5 Sales by U.S. affiliates

in Europe add to $810 billion, surpassing America's total $700-billion

exports of goods and services to the whole world. 6 This indicates that

more than trade links, increased American business presence,

particularly in financial services, matters more for U.S. economic

diplomacy towards Europe. The "New Transatlantic Marketplace"

(NTM), announced at the Madrid Summit in late 1995, will help deepen

the close U.S.-EU economic bonds by reducing or dismantling non-tariff

barriers (NTBs). 7

The EU and the United States both play dominant global

economic roles, although the former is statistically stronger as the table

below shows. America's unrivalled militmy power and its global political

and economic leadership, however, give it far more international clout

than the EU. Its deeply-rooted commitment to defend Europe arms the

United States with economic leverage, including in trade-related

matters.

TABLE I

Comparative figures 1995-96

Share of world output Share of world trade Total external trade Total GDP

United States

27% 18%

$1.7 trillion $7.2 trillion

31% 20%

EU

$1.9 trillion $8.4 trillion

Sources: WTO, UNCTAND, World Bank

5 See Gary Clyde Hufbauer (ed.), Europe 1992: An American Perspective (Washington, DC: Brookings Institution, 1990), pp. 23-24.

6 Rothkopf in U.S. Congress. U.S.-Europe: Prospects for n-ansatlantic Economic Cooperation, op. cit., p. 40.

7 White House. A National Security Strategy of Engagement and Enlargement (Washington, D.C.: The White House. February 1996), p. 29.

127

The EU wields considerable supranational authority over its

member-states, which have ceded to it increasing control over their

economic policies, especially with the 1985 "Single Market" plan and the

1993 "Maastricht" amendments to the 1957 Treaties of Rome. A long­

standing customs union, the EU formally launched its "1992" Single

Market on January 1, 1993, with the elimination of most intra-Union

border controls on movement of goods, services, capital and people.

Member-states have completed the legislative process to remove non­

tariffbarriers (NTBs) within the EU and harmonize their domestic laws.

The EU's influence over member-states' fiscal and monetary

policies, now limited and indirect, will grow with the establishment of

the Economic and Monetary Union (EMU). 8 As per the Maastricht

Treaty, an EMU is to be created by January 1, 1999,9 but only for those

member-states that satisfy strict convergence criteria with respect to

interest rates, inflation, size of budget deficits, etc. Even an

introductory EMU comprising only half a dozen states that meet the

criteria will constitute an economy the size of Japan's and about two­

thirds as large as America's. The success of the Single Market and EMU

"should generally promote European growth and the demand for U.S.

goods," 10 but U.S. policy-makers appear concerned about certain

political and financial implications of the monetary union.

The introduction of a single European currency, the euro, in 1999

will have a profound impact on the dollar-centred international

monetary regime and is likely to spur a significant shift in global

8 The EU, however, will not have independent taxing authority, with tax policy remaining the preserve of individual members.

9 Britain and Denmark have "opt-out" options.

10 U.S. Department of State, The European Union-- Economic Policy and Trade Practices Report, Submitted to the Senate committees on Foreign Relations and Finance and House committees on International Relations and Ways and Means in Accordance with Section 2002 of the 1988 Omnibus Trade and Competitiveness Act, March 1996 (Washington, DC: Government Printing Office. 1996). p. 112.

128

financial holdings. "As much as $1 trillion of international investment

may shift from dollars to euros." 11 As a competitor to the greenback.

the Euro will pose new interesting challenges to U.S. foreign economic

policy and diplomacy.

The dollar, with a share of up to 60% of world finance. is

currently running strong. "With Asian financial markets in turmoil,

Europe in an economic funk and the price of just about everything

falling around the world, it seems everyone wants to have and hold

dollars." 12 The euro's rise, especially if coupled with revival of economic

growth in Europe, could make the new European currency popular with

many investors, eating into the dollar's special place in the world

economy. The international monetary system. with the dollar and the

euro competing, could become truly bipolar like the world trading

regime.

U.S. ROLE IN EUROPEAN INTEGRATION

The United States was clearly motivated by strategic considerations to

promote West European integration. By the time it established the

Federal Republic of Germany in 1949 by merging the three western

Trizonian zones, the United States was actively spearheading the

political and economic integration of West Europe. It believed a

cohesive and united Europe would be a far more reliable ally than one

divided along national lines. Attempts to create a European Defence

Community and a Political Union. however. floundered in 1954. This

convinced the United States that European integration had to be first

economic and then political. The "economic integration was to lay the

11 C. Fred Bergsten. 'The Dollar and the Euro," Foreign Affairs, Vol. 76, No. 4 (July I August 1997). p. 83.

12 Steven Pearlstein. "Asia's Problems Give the Dollar New Status as World Currency," InternationaL HeraLd Tribune, January 16. 1998, p. 1.

129

groundwork for political integration." 13 It spurred the U.S.-backed

strategy of building a European Economic Community (EEC) or

Common Market, with open movement of goods, services, capital and

labour. Thanks to the early U.S. initiatives, American business

flourished in the Common Market and West Europe emerged as a solid

political and military ally of the United States. 14

Besides being crucial for US trade and investment, West Europe

was deemed to be central to America's post-war strategy to keep

communist expansion in check. 15 An economically viable and politically

stable West Europe was critical to the U.S. strategy of containing the

Soviet Union, advancing a Franco-German rapprochement and

preventing a Third European War. 16 Two U.S. initiatives unveiled in

194 7, the Truman Doctrine and the Marshall Plan, were driven by these

vital strategic considerations. Underscoring America's economic

hegemony in the post-war period, U.S. President Harry S. Truman

declared in 194 7: 'We are the giant of the economic world. Whether we

like it or not, the future pattern of economic relations depends upon us.

The world is waiting and watching to see what we will do. The choice

is ours. We can lead the nations to economic peace or we can plunge

them into economic war."

The Truman Doctrine, with its central emphasis on the

containment of Soviet expansionism, set the stage for the launch of the

13 Elke Thiel, "West Germany's Role in the International Economy: Prospects for Economic Policy Coordination," Journal of International Affairs, Vol. 42, No. 1 (Fall 1988). p. 58.

14 Stanley Hoffmann, 'The EC and 1992," Foreign Affairs, Vol. 68 (Fall 1988), pp. 27-47.

15 See Norman D. Palmer and Howard C. Perkins, International Relations (Boston, MA: Houghton Miflin Company, 1985), p. 654.

16 For details, see Finn B. Jensen, The Common Market -- Economic Integration in Europe (New York: Lippincott Company, 1965).

130

Marshall Plan and the North Atlantic Treaty Organization (NATO). 17 The

doctrine was unveiled at a time when corrective measures had become

inevitable to deal with the so-called "dollar-gap" crisis: Europe's

demands for U.S. imports were being constrained by its declining ability

to pay for them. 18 The process of decolonization had been eroding West

Europe's traditional access to raw materials and profit-making overseas.

The NATO, established in 1949 through the Washington Treaty, 19

was designed primarily to provide an American security umbrella to

West Europe and institutionalize U.S. strategic dominance over the

trans-Atlantic region. As a logical corollary to the earlier European

Recovery Programme (ERP), or Marshall Plan, 20 the NATO was intended

to provide security cover to West Europe's reindustrialization and serve

America's direct strategic goals, which included establishing a U.S.

military presence in Europe, bringing Russian targets within the range

of American conventional and non-conventional weapons, and taming

Germany. According to Article 2 of the Washington Treaty, the parties

"will seek to eliminate conflict in their international economic policies

and will encourage economic collaboration between any or all ofthem."21

The Marshall Plan, which served as the "economic and political

17 See Robert Gilpin, War and Change in World Politics (Cambridge, U.K.: Cambridge University Press, 1981).

18 Thomas J. McCormick, America's Half-Century: United States Foreign Policy in the Cold War (Baltimore, MD: Johns Hopkins University Press, 1989). pp. 72-75.

19 The treaty was signed by Belgium, Britain, Canada, Denmark, France. Iceland, Italy, Luxembourg, the Netherlands, Norway, Portugal and the United States. Greece and Turkey were admitted as parties to the Washington Treaty in 1952, West Germany in 1955 and Spain in 1982.

20 The plan was publicly articulated at the June 194 7 Harvard commencement by Secretary of State George Marshall. who had served as chief of staff of the U.S. Army during World War II. After inter-European negotiations and modifications by the Truman administration. the plan was submitted to Congress in late 1947 and passed in March 1948.

21 Text cited in John Paxton (ed.). The Statesman's Year-Book, 1990-91 (London: Macmillan. 1990). p. 37.

131

foundation for the Western alliance that waged the Cold War,"22 was an

ingenious U.S. foreign-policy programme that sought to achieve a host

of important strategic objectives with an investment of $17 billion

spread over four years. 23 Among the objectives of the Marshall Plan

were the integration of West Europe into a U.S.-led economic order, an

American role in shaping Europe's political make-up and its domestic

public policy, and the promotion of U.S. commercial interests. The plan

was also intended to move West Europe away from nationalism towards

multilateralism and integration. In return for short-term help, the

Europeans accepted America's long-term economic and trade

prescriptions. 24

The economic successes of the Marshall Plan have been

reappraised by contemporary analysts after being overrated by

American historians, who extolled the programme as Europe's "great

leap forward" and its "real foundations for later prosperity."25 In reality,

the Marshall Plan had a greater political than economic fallout. While

it helped West Europe to bridge the dollar gap and revive growth

without depressing wages, Marshall aid actually began flowing when the

first signs of European recovery had already surfaced. The plan's

22 Diane B. Kunz, 'The Marshall Plan Reconsidered: A Complex of Motives," Foreign Affairs, Vol. 76, No.3 (May/June 1997), p. 162.

23 Considering that the United States had already pumped $9 billion into Europe in the preceding two years to aid Britain, reinforce its occupation of Germany and assist UN relief agencies, the commitment to spend $17 billion between 1948-52 under the Marshall Plan was not lavish.

However, only $12.5 billion was disbursed under the Marshall Plan until June 30, 1951, when the remaining funds were folded into the Mutual Defence Assistance Programme. By then, U.S. attention was firmly focused on military rather than economic aid. Alan S. Milward, The Reconstruction of Western Europe, 1945-51 (Berkeley, CA: University of California Press, 1984), p. 94.

24 See Michael J. Hogan, The Marshall Plan: America, Britain and the Reconstruction ojWestem Europe (Cambridge, UK: Cambridge University Press, 1987).

25 See, for example. Richard Mayne. The Recovery of Europe, 1945-1973 (Garden City, NY: Anchor Books. 1973). p. 132.

132

political impact, however, was decisive in shaping West Europe largely

in the way wanted by U.S. policy-makers.

As the end of World War II had left the United States economically

and politically supreme, it alone had the capacity to extend significant

economic assistance to other states and shape a world order to its liking

by employing aid to buy diplomatic success. In assuming an important

role in the economic rehabilitation of West Europe through direct loans,

grants and other forms of assistance, the United States bypassed the

United Nations and its new Economic Commission for Europe (UNECE)

and set up an exclusively American agency, the all-powerful Economic

Cooperation Administration (ECA). to implement the Marshall Plan. 26

Through its control over "counterpart funds," or matching funds in local

currencies deposited by each European state, the ECA exercised

influence on domestic policies and implicitly built public support for

Christian Democratic-style parties favouring fiscal conservatism and

U.S.-inspired multilateral trading rules. 27 As the ECA reported,

communism had been "called back throughout Western Europe". 28

The Marshall Plan helped advance West European integration,

although it was also responsible for laying the foundation of the Cold

War and solidifying the division of Europe. 29 Marshall aid forced West

26 The ECA was established under the 1948 U.S. Foreign Assistance Act. The 16 participating states pledged under the ECA's European economic cooperation convention to work together. See Hadley Arkes, Bureaucracy, the Marshall Plan and the National Interest (Princeton, NJ: Princeton University Press, 1972).

27 McCormick, America's Half-Century, op. cit, pp. 78-79.

28 Economic Cooperation Administration, The Marshall Plan: Where We Are and Where Were We Going (Washington, DC: ECA. March 1950). p. 1.

29 See David Reynolds (ed.). The Origins of the Cold War in Europe: International Perspectives (New Haven, CT: Yale University Press. 1994); and Louis J. Halle, The Cold War as History (New York. NY: HarperCollins Publishers. 1991).

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Europeans to "think cooperatively."30 As part of the U.S. strategy

to help establish a single, transnational market enjoying the benefits of

economies of scale, the ECA conditioned its disbursal of Marshall aid on

each state's willingness to promote European cooperation. The

Organization for European Economic Cooperation (OEEC). formed in

1948 to serve as an instrument of European economic integration,

carried out an annual review of each state's macroeconomic policies and

goaded the various nations to move towards regional cooperation. 31

The United States encouraged the formation of supranational

institutions to weaken European nationalism and build closer political

and economic integration.32 ECA's push for a multilateral payments

system to replace West Europe's post-war bilateral trade structure lead

to the 1950 agreement on a European Payments Union, a pioneering

venture that lasted eight years until the introduction of full currency

convertibility. U.S.-supported negotiations among Belgium, France,

Italy, Luxembourg, the Netherlands and West Germany culminated in

the signing of the 1951 Paris Treaty establishing the European Coal and

Steel Community (ECSC), which came into force in 1952.

Two other communities, also designed to promote economic and

political integration of these six states, came into being at the beginning

of 1958 following the signing of the Treaties of Rome: the EEC and the

European Atomic Energy Community (EAEC or Euratom). While the

establishment of the Euratom was linked to the American "Atoms for

Peace" programme, the U.S.-backed EEC, with the same original

members as the ECSC, was aimed at permitting free movement of

30 David Reynolds, 'The European Response," Foreign Affairs, Vol. 76, No. 3 (May/June 1997). p. 181.

31 After 13 years, the OEEC was replaced by the Organization for Economic Cooperation and Development in September 1961. The name change was necessitated by the fact that with the accession of the United States and Canada as full members, the OEEC was no longer a purely European body.

32 See Stanley Hoffmann and Charles Maier (eds.). The MarshaLl Plan: A Retrospective (Boulder, Colo.: WesMew, 1984).

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goods, services, capital and labour,33 promoting agricultural

productivity, and creating a customs union.

The EEC, together with the ECSC and Euratom, came to be

collectively known as the European Community (EC), or the Common

Market. 34 The progression of the Cold War, which imposed an "iron

curtain" running from the Baltic to Trieste on the Atlantic and divided

the Communist world from the non-Communist world, increased West

Europe's political and economic reliance on the United States. The

West Europeans had little choice but to deepen their strategic links with

the United States. At the same time, the United States, with its

economic hegemony in the world, employed its clout to advance its

commercial interests and achieve political and security objectives. 35

The economic supremacy, however, made the United States not

seek reciprocity in its dealings with West Europe even after the region's

economic revival had taken roots. It believed that European prosperity

would create tremendous new opportunities for American businesses.

When U.S. corporate giants like Ford and IBM began to base their

operations on a continental spectrum, West European firms were still

bound to the age-old concept of national markets and did not

assertively seek to create market openings beyond them. Since many

U.S. firms had plants in Europe, they felt they would benefit

significantly from greater European economic integration. 36

Europe offered such a vast economic potential that the United

States was willing to bear with even protectionist measures. such as

33 These came to be known as the "four freedoms." Michael Calingaert. The 1992 Challenge from Europe: Development of the European Community's Internal Market (Washington: National Planning Association 1989). p. 1.

34 The separate councils and commissions of the ECSC, EEC and Euratom were merged in July 1967.

35 See David A. Lake. Power, Protection and Free Trade (Ithaca, NY: Cornell University Press. 1987).

36 Hufbauer, Europe 1992: An American Perspective, op. cit., p. 3.

135

those contained in the EC's Common Agricultural Policy (CAP). U.S.

commercial interests in Europe grew at such an immense pace that

American businesses there became "the second largest industrial force

in the world, second only to America's own. "37 Speaking about West

Europe, President John F. Kennedy declared in 1962:

For the first time as the world's greatest trading nation, we can welcome a single partner whose trade is even larger than our own-- a partner no longer divided and dependent, but strong enough to share with us the responsibilities and initiatives of the free world ... The success of our foreign policy depends in large measure upon the success of our foreign trade, and our maintenance of Western political unity depends in equally large measure upon the degree of Western economic unity. An integrated Western Europe, joined in trading partnership with the United States, will further shift the world balance of power to the side of freedom. 38

The guiding principles of the Common Agricultural Policy (CAP),

laid down in late 1960, included a single market with common prices

and financing, stable currency parities and harmonized health and

veterinary laws.39 They also called for protectionist measures to shield

the single market from imports. The EEC's Customs Union was

achieved in 1968 after internal customs tariffs and quantitative

restrictions disappeared in the Community and the Common External

Tariff (CET) was set up. 40 Monetary cooperation led to the

establishment of the European Monetary System (EMS) in 1979.

37 Jean-Jacques Servan-Schreiber, The American Challenge (New York, NY: Atheneum, 1968).

38 John F. Kennedy, "Special Message to the Congress on Foreign Trade Policy," in Public Papers of the Presidents: John F. Kennedy, 1962 (Washington. DC: Government Printing Office, 1962). pp. 68-77.

39 European Communities Commission, Steps to European Unity -­Community Progress to Date: A Chronology (Luxembourg: European Communities Commission, 1987).

4° For details, see E.J. Kirschner, Decision-Making in the European Community: The Council Presidency and European Integration (Manchester. UK: Manchester University Press. 1992).

136

Earlier, the European Free Trade Association (EFTA).41 set up

under the 1960 U.S.- supported Stockholm Convention, eliminated all

inter-EFTA tariffs at the end of 1966, three years ahead of schedule.

Two EFTA members, Britain and Denmark, became members of the

EEC at the beginning of 1973, while seven other EFTA states, Austria,

Finland, Iceland, Norway, Portugal, Sweden and Switzerland signed

free-trade agreements (FTAs) with the expanded EEC between 1972-

73.42 The United States espoused the broadening and deepening of the

EC. The moves to form an EEC-EFTA industrial free-trade zone led to

the 1984 Luxembourg Declaration, which sets the guidelines for

broadening joint cooperation. A treaty to establish the European

Economic Area (EEA) was approved by member-states of EEC and EFTA

in 1991.

The EC's Common External Tariff (CET). from its inception.

agitated U.S. policy-makers, who believed it would adversely affect

American exports to the Community. The Kennedy administration came

to believe that the way to a lower CET was a reciprocal cut in US import

duties. The resulting 1963-67 Kennedy Round of multilateral trade

negotiations under the General Agreement on Tariffs and Trade (GATT)

slashed tariffs across the board on internationally traded manufactured

goods, with U.S. import duties falling by an average of 35%.43 The

Kennedy Round was a thumping success in trimming the CET but it

was unable to do anything about the Common Agricultural Policy,

which had been steadily eroding U.S. agricultural exports to the

Community.

The 1970s were a trying time for the EC. The post-war U.S.

41 With its principal members having joined the EU over the years, EITA is now made up only of Iceland, Liechtenstein, Norway and Switzerland.

42 See D.W.P. Lewis, The Road to Europe: History, Institutions and Prospects of European Integration (Berne, 1994).

43 John W. Evans, The Kennedy Round in American Trade Policy: The TwiLight of the GATT? (Cambridge, Harvard University Press, 1971). p. 7.

137

generosity towards Europe began wilting under trade and monetary

pressures with the relative decline in America's economic power. The

U.S. action in scrapping the Bretton Woods arrangements in 1973 and

the two major two oil crises in the 1970s jarred the European

economies. By the late 1970s, non-tariff barriers (NTBs) emerged as a

major barrier in world trade even as the 1973-79 Tokyo Round persisted

With GAIT's tariff-cutting exercises. 44 Protectionism began rearing its

head with a vengeance in the United States.

Stanley Hoffmann described the period between 1973 and 1984

as the dark age of the Community.45 The metaphors, "Eurosclerosis"

and "Europessimism," epitomized the mood prevailing in West Europe

then. However, easing the bleak picture was the accession of Greece to

the Community in 1981 and the establishment of the EMS along with

its for main components: The Exchange Rate Mechanism (ERM), the

European Currency Unit, the ecu (XEU). credit facilities, and transfer

arrangements. 46 The Community's membership was further boosted to

12 with the addition of Spain and Portugal at the beginning of 1986.

A major milestone in the EC's history was the decision to achieve

an integrated "Single Market" by 1992. The Community's executive

agency, the European Commission, prepared a time-bound programme

on the completion of the internal market by December 31, 1992. The

Commission's 1985 'White Paper" detailing the plan was adopted by the

European Council. The document identified the remaining barriers to

44 Jadish N. Bhagwati, Protectionism (Cambrtdge, MA: Cambridge University Press, 1988). pp. 43-59.

45 Hoffmann, "The EC and 1992," op. cit., pp. 27-47.

46 The EMS and ERM have sought to promote monetary, price and exchange rate stability in the Community by limiting the fluctuations of national currencies within a certain range. Foreign-exchange market pressures in 1992 prompted Britain and Italy to suspend their participation in the ERM. Britain spent nearly $6 billion in an unsuccessful bid to prop up the pound, while Germany spent as much as $14 billion in an equally fruitless effort to support the Italian lira. The currency crises forced the widening of the fluctuation band from 2.25% to 15%.

138

the "four freedoms" -- the open movement of goods, services, capital,

and people -- and listed some 300 legislative proposals (later reduced

to 279) to help create a unified market. 47 The While Paper, prepared by

the EC Commissioner, Lord Cockfield, along with Commission

President, Jacques Delors, listed separate physical, technical and fiscal

barriers to an integrated market that needed to be specifically

dismantled. 48

An important legislative step to implementation of the 1992 Single

Market plan was the December 1985 Single European Act of

Luxembourg. 49 The Act, which amended the unanimous-voting

requirement of the Treaties of Rome and was drafted in conjunction

with the White Paper, came into force on July 1, 1987. Extending the

use of "qualified majmity" voting50 to most internal-market issues, the

Single Act limited unanimity to only sensitive matters such as taxation,

the rights and movement of employees, and the environment. The Act

also expanded the EC role to environmental regulation and research

and development.

U.S. foreign economic policy saw in "Europe 1992" both

opportunities and aP..xieties. American diplomacy got to work to ensure

that a "Partnership Europe," not a "Fortress Europe," emerges. 51 The

47 European Communities Commission, Completing the Internal Market: White Paper from the Commission to the European Council (Luxembourg: European Commission, 1985).

48 Calingaert, 1992 Challenge from Europe: Development of the European Community's Internal Market, op. cit., pp. 8-9.

49 See ''The Changing Map of Europe," Harvard Business Review, No. 3 (May-June 1989).

50 Under the "qualified majority" principle, it will generally take three (two large and one small) or four (one large and three small) countries to block a policy action. See European Communities Commission. Steps to European Unity -- Community Progress to Date: A Chronology (Luxembourg: European Commission, 1987).

51 See U.S. Chamber of Commerce, Europe 1992: A Practical Guide for American Business (Washington. DC: Chamber of Commerce, 1989).

139

European Commission clarified in 1988 that. 'The abolition of physical

and technical frontiers, coupled with faster economic growth, will

benefit both the EC and its trading partners. The Community will

respect all international commitments, multilateral and bilateral.

However, in areas where international obligations do not presently exist,

the EC will not unilaterally extend the benefits of internal liberalization

to third countries. Instead, the EC will seek comparable liberalization

on the part of its major trading partners."52

The United States had major stakes in the Single Market. 53 After

all, the United States and EC together accounted for nearly half of the

world's GDP and about one-third of the global trade when the "Single

Market" strategy was launched. 54 Each has been the other's most

important trading partner and foreign investor. U.S. policy-makers and

analysts closely examined the likely impact of Europe 1992 on American

interests, probing both the direct effect on U.S. trade and investment

and, more broadly, the role the Single Market would play in the U.S.

global economic strategy. 55 The American stakes in Europe 1992 went

far beyond the direct commercial impact: A continuing U.S.-EC

partnership was essential to the preservation of the global economic

order, while discord would undermine the bipolar multilateral trading

system. 56

52 See Glennon J. Harrison, European Community: Issues Raised by 1992 Integration, CRS Report for Congress, May 31. 1989 (Washington, DC: Congressional Research Service).

53 See Gregory F. Treverton (ed.), Europe and America Beyond 2000 (New York, NY: Council of Foreign Relations, 1990).

54 U.S. Central Intelligence Agency, Handbook of Economic Statistics (Washington, DC: CIA, 1987); and International Monetary Fund, International Financial Statistics (Washington, DC: IMF, July 1988).

55 Richard Schwartz, "U.S. Interest in Europe's 1992 Process: An Analytic Survey", Washington Quarterly, Vol. 12, No. 3 (Summer 1989). p. 207.

56 See "Europe in 1992: Obstacles or Opportunities?", International Business (January 1989).

140

It became evident to U.S. policy analysts that the United States

would gain significantly from the Single Market. The Congressional

Budget Office said that "large overall effects" on the U.S. economy were

unlikely. 57 Principal U.S. business organizations, such as the Business

Round Table, Council for International Business, National Association

of Manufacturers, and Chamber of Commerce, began viewing the Single

Market as "Opportunity Europe," not "Fortress Europe."

U.S. multinational corporations (MNCs) were greatly enthused by

Europe 1992 since it offered tremendous new business opportunities

and would help simplifY corporate legal life. American MNCs had

already been major beneficiaries of the advancement of the EC into a

largely barrier-free market from separate national entities. 58 With their

global approach to markets and their international experience, the U.S.

MNCs found the EC market the most alluring. Studies showed that the

elimination of internal barriers to the movement of goods, services,

capital and labour by the Single Market would provide enormous new

opportunities to large- and medium-size U.S. firms. 59 Only fledgling

U.S. companies which would have to bear the brunt of stiffer

competition if they did not engage in alliances, mergers or

acquisitions. 60

57 Congressional Budget Office, How the Economic Transformations in Europe Will Affect the U.S. (Washington, DC: Congressional Budget Office, December 1990), p. xi.

58 See Robert Gilpin, U.S. Power and the Multinational Corporation (New York, NY: Basic Books, 1975). ·

59 Schwartz, "US Interest in Europe's 1992 Process," op. cit., p. 207.

60 Donald T. Regan, "A Look Ahead: America's Economy and 1992," European Affairs, Vol. 4, No. 1 (Spring 1990), p. 122.

Coca-Cola Philip Morris Merck DuPont

141

TABLE II

European revenues of major U.S. firms as a percentage of global revenues. 1992

30.5% Pepsico 29.4% Chevron 44.1% GM 36.7% Mobil

Proctor&Gamble 28.5% Amoco Bristol-Myers 28.4 Microsoft IBM 40.5% Ford Johnson&Johnson 30.9% Intel

Sources: Annual company reports

6.1% 28.9% 21.8% 34.6% 4.2% 25.7% 24.8% 25.4%

The net effect of the Single Market, which took effect on January

1, 1993, has been the greater consolidation of European markets and

removal of most intra-EU border controls and non-tariff barriers (NTBs).

The EU collectively represents all its 15 member-states in the World

Trade Organization's Committee on Trade in Goods. The Single Market

has been significantly aiding U.S. commercial interests. although

American exporters and officials have raised concern over certain issues,

including directives on procurement for utilities and on television

broadcasting. 61

Another important milestone in the EC's history has been the

December 1991 Maastricht Summit, which agreed to further

amendments to the Treaties of Rome. The Maastricht Treaty mandates

an "economic and monetary union," with a common currency, and gives

the European Union (EU) a role in policy formulation concerning

rd Office of the United States Trade Representative. IdenUJJcaUon ol Trade Expansion Priorities Pursuant to Executive Order 12901 (Washington. DC: USTR October 1, 1997).

142

investment from third countries. The United States, while supportive

of the process in principle, misjudged the tempo of the negotiations

leading to the Maastricht Treaty, only to object later to certain features

that could potentially impact on transatlantic commercial ties. 62

However, Washington did hold negotiations prior to Maastricht over the

Western European Union (WEU). the existing European military

alliance, and its future relationship to NATO.

The EU came into being on November l, 1993, after a turbulent

process involving ratification of the Maastricht Treaty by member­

states.63 The Danish electorate rejected the treaty in a June 1992

referendum but reversed the decision in a second referendum about 11

months later. Britain, which like Denmark has an "op-out" clause in

the EMU section, ratified the treaty as late as August 1993. The EU's

membership has swelled to 15 with the inclusion of Austria, Finland

and Sweden on January 1, 1995.64 The greater European integration

has also been underscored by the growth of the European Court, the

rise of the European Parliament as a directly-elected body with real

powers, and the extension of majority voting at the Council of Ministers.

While the United States has zealously backed and, in important

cases, also helped initiate Europe's integration moves since after World

War II, some of the plans of the EU and its principal members are

spurring disquiet in Washington. With almost 300 million people and

a consolidated Single Market, the EU has an economy virtually equal in

size to the United States. The EMU,65 which will replace all the

62 C. Randall Henning, "Europe's Monetary Union and the United States," Foreign Policy, No. 102 (Spring 1996), p. 84.

63 The conclusion of the Maastricht Treaty itself entailed a lot of backpedaling and compromise.

64 However, Norwegians rejected EU membership in a 1994 referendum.

65 The EMU goal was first envisioned at the European summit at The Hague in 1969, and reconfirmed by the European Council in Hanover in 1988. Thiel, 'West Germany's Role in the International Economy," op. cit., p. 58.

143

individual national currencies with the euro by 2002 and arm the new

European Central Bank (ECB) with monetary powers over member­

states, will challenge the present American hegemony in the

international monetary system. 66 According to Professor Martin

Feldstein, President of the U.S. National Bureau of Economic Research,

the EMU will "change the political character of Europe in ways that

could lead to conflicts in Europe and confrontations with the United

States."67

The EMU, if successful, would pave the way for a political union

with possibly an independent military and foreign policy. This will

conflict with America's resolve to keep Europe under its security

tutelage. The retention of NATO, "a child of the Cold War,"68 is intended

to maintain U.S. strategic hold over Europe, while the alliance's

expansion is designed to bring East Europe into America's security fold

at a time when Russia is too weak to do anything. 69 However, for the

transatlantic security alliance to survive, the United States will

eventually have to accept a shared leadership in an expanded NATO and

a greater European role in Europe's security and Middle Eastern and

African affairs. 70 European allies have already won the right to use

NATO forces and equipment under European control without U.S.

participation. The United States, however, has opposed the Franco­

German demand for the merger of the WEU with the EU as that would

create a non-NATO framework for European military coordination.

America wants the 54-nation Organization for Security and

66 Bergsten, 'The Dollar and the Euro," op. cit., p. 92.

67 Martin Feldstein, "EMU and International Conflict," Foreign Affairs, Vol. 76, No. 6 (November/December 1997). p. 60.

68 Richard N. Haass, "Fatal Distraction: Bill Clinton's Foreign Policy," Foreign Policy, No. 108 (Fall 1997). p. 119.

69 Brahma Chellaney. "A New Nuclear Dividing Line," Pioneer, June 4, 1997.

70 Brzezinski, "A Geostrategy for Eurasia," op. cit., pp. 53-54.

144

Cooperation in Europe (OSCE). the successor to the Conference on

Security and Cooperation in Europe (CSCE), to serve as the framework

for European security cooperation. 71 The United States has "taken the

lead in pursuing innovations within the OSCE," which it has made an

integral part of its global security architecture and whose consultative

and conflict-prevention mechanisms it has sought to strengthen. 72 By

seeking to build new forms of consensus-based security cooperation,

the OSCE prevents challenges to the existing security structure and

complements U.S. strategic objectives in Europe.

The ongoing efforts among France, Germany and Italy to

consolidate their conventional-military strategies and the Anglo-French

moves to integrate their nuclear doctrines undergird the European

aspiration for greater independence from the United States. 73 An

economically and politically unified Europe will not only be more

assertive in its dealings with America but will allow Germany-- which

has the globe's second-largest trade surplus and is the world's second­

largest creditor country after Japan -- to be at the centre-stage. It will

also enable France to play a larger role in Europe. America's long-term

interests, however, demand that it continue to lead Europe. Its military

presence in Europe as designed to deter the rise of any regional

hegemons and provide it the economic leverage from security

commitments.

71 Bom out of the 1975 Helsinki Accords involving both NATO and the Warsaw Pact, the CSCE changed its name to OSCE on January 1, 1995.

72 Richard Holbrooke, "America, a European Power," Foreign Affairs, Vol. 74, No.2 (March/April 1995). pp. 47-49.

73 France and Germany have also supported a merger of the existing military alliance, the Western European Union (WEU), with the EU. NATO continues to serve as the umbilical cord attaching Europe to the United States.

The West Europeans have since the 1980s been seeking to assert a distinct political identity of their own and have desired greater autonomy and freedom of manoeuvre on the geopolitical front. See Valery Giscard d'Estaing, ''The Two Europe's East and West." Intemationa[ Affairs, Vol. 65, No. 4 (Autumn 1984); and Christopher Layne. "Atlanticism Without NATO," Foreign PoUcy, No. 67 (Spring 1987-88).

145

SECTORAL TRADE ISSUES

U.S. economic diplomacy has over the years sought to aggressively

create new market openings in West Europe. The United States and EC

account for 38% of world trade, with their own two-way trade totalling

$200 billion annually. Non-tariff barriers (NTBs) remain the main

hindrance to the further expansion ofU.S.-EU trade. Through bilateral

negotiations as well as through enforcement actions, the United States

has sought to increase market access for its goods and services in

Europe in specific sectors.

I. Agriculture

Agriculture has been a major battlefield in U.S.-EU trade diplomacy.

This is because U.S. and European domestic policies have spawned a

common problem: 'The overproduction of ag1icultural commodities such

as wheat and feedgrains, dairy products and sugar has led to a rash of

trade disputes concentrated on export subsidies, but extending more

broadly to a range of programmes."74 A difficult-to-break political link

between farm subsidies and farm output has exacerbated

overproduction and fomented agricultural trade wars between the two

sides. The glut of wheat production, for example, has made both sides

over the years to engage in subsidized wheat export competition,

depressing the eamings of other major exporters such as Australia and

Canada.

The policies of profligate farm subsidies maintained by the two

sides is evident from the fact that between 1979-86, the European

Community subsidy for agriculture was $39.8 billion a year or 37% of

the domestic price while the American subsidy was $30.8 billion or 28%

74 Gary C. Hufbauer and Jeffrey J. Schott, "Improving U.S. Trade Performance: The Outlook to 1990," in John Yochelson (ed.). Keeping Pace: U.S. Policies and Global Economic Change (Cambridge, MA: Ballinger, 1988). p. 230.

146

of the domestic price. 75 Such policies have also contributed to

"undermining production incentives in many Third World nations,

where agriculture is important for the growth of income and

employment, as well as food consumption needs."76

Europe's Common Agricultural Policy (CAP). with its Community

preference protecting the single market from imports. has been a

constant source of concern to U.S. foreign economic policy and

diplomacy. 77 The Europeans, always seeking export outlets for excess

farm production ensuing from high internal producer prices, have

preserved the CAP system, fully established in 1967 on the basic

principles of price support through import levies and export refunds.

CAP's goals have included guaranteeing food supplies at reasonable

prices, improving productivity, supporting farm incomes and stabilizing,

through market intervention, Community agricultural markets against

world price fluctuations. High internal price supports under CAP have

resulted in European consumers paying, according to some estimates,

up to 50% more for beef and 40% more for wheat than world prices. 78

West European surpluses of price-supported milk products, barley, pork

and sugar have been sold on world markets at heavily subsidized prices.

The CAP subsidies have been a major drain on the EU budget.

Overproduction and the application of artificial currency levels after the

disappearance of stable currency parities have resulted in the CAP

consuming almost two-thirds of the Union budget. France, Europe's

75 Cited in Times of India. April 28, 1993.

76 Stuart K. Tucker. "Reforming U.S. Agricultural Trade Policy" (Washington, DC: Overseas Development Council, 1987).

77 Glennon J. Harrison and M.E. Sharpe (eds.). Europe and the United States: Competition and Cooperation in the 1990s (New York, NY: Armonk, 1994). p. 234.

78 Seymour J. Rubin and Thomas R. Graham (eds.). Managing Trade Relations in the 1980s -- Issues Involved in the GATT Ministerial Meeting (Princeton, NJ: Princeton University Press, 1984). pp. 11-12.

147

agricultural powerhouse, tumed the CAP into "one of the most complex

and expensive systems of agricultural protectionism in human

history."79 The large surpluses generated by the CAP have tended to

distort or destabilize the agricultural-commodities markets. Seeking to

address this problem under U.S. diplomatic pressure, a CAP refonn

package was agreed to by the EC in 1992 under which overproduction

would be reduced by cutting the price support to farmers by 29% for

cereals, 15% for beef and 5% for dairy products and providing

compensatory grants to the affected growers. 80

Competing with Europe, which over the years succeeded in

enlarging its share of the world agricultural market mainly at American

expense, the United States also boosted its subsidy levels in the 1980s

after the reversal of the dramatic export growth of the 1970s. America's

commercial windfall from international grain trade in the 1970s

occurred b~cause it captured three-fourths of the new openings in a

market where sales doubled in a decade. The U.S. farm trade surplus

jumped from less than $2 billion in 1971 to more than $25 billion by

the end of that decade. 81

After that farm export boom, U.S. international sales plummetted,

depressing domestic prices and farm income. American share of global

farm exports dropped from 19.3% in 1981 to 16.6% by 1985, prompting

the Reagan administration to boost export subsidies on wheat, rice and

sugar and to supplement direct payments to farmers for grain storage.

The EC, meanwhile, increased the value-added tax (VAT) contribution

to its farm programmes. By 1986, farm-support programmes were

79 Noel Malcolm, "The Case Against 'Europe'," Foreign Affairs, Vol. 74, No. 2 (March/ April 1995). p. 56.

80 Brian· Hunter (ed.), The Statesman's Year-Book. 1997-98 (London: Macmillan, 1997). p. 49.

81 Robert L. Paarlberg, "U.S. Interests in International Agricultural Policy," in Yochelson (ed.), Keeping Pace: U.S. Policies and Global Economic Change, op. cit., p. 239.

148

costing the United States between $26 and $30 billion and the EC

about $22 billion. 82 Farm trade became a hot political issue in the

United States. 83

The CAP came under increasing attack84 from the United States

and the farm-produce exporters that made up the so-called Caimes

Group. 85 The reintroduction of export subsidies on grains under the

U.S. 1985 Food Security Act and other farm-support measures as well

as a decline in the value of the dollar lowered world-market prices and

increased the EC's budgetary burden for exporting its grain surpluses.

However, the United States also came to realize that it could not prevail

in a farm-trade war with the EC since it would have to outspend the

Community by a wide margin on export subsidies to hold on its 50%

larger share of global wheat exports than the Europeans. A trade war

that triggered tit-for-tat import restrictions would also hurt the United

States as it exported 50% more farm products to the EC market than

its imports from the Community.86

It was against this background that after being successfully

82 Usha Menon, "'Licence to Plunder? - The Proposals on Farming are Ruinous," Frontline, February 28, 1992, pp. 26-30; and Hufbauer and Schott, "Improving U.S. Trade Performance," op. cit., p. 230.

83 Harold F. Breimyer. "The Farmers' Split Personality on Trade," Challenge, Vol. 30 (July-August 1987), pp. 56-59.

84 An Organization for Economic Cooperation and Development (OECD) study showed that more than half of the global expenditure on farm-income support resulted from the efforts of rival states to offset each other's subsidies. While all major exporters were to be blamed, the CAP, according to the study, contributed more to distorting global agricultural production, trade, prices and incomes.

85 The formation of the "Cairnes Group of Fair Traders in Agriculture" brought the EC under pressure not only from America, but also from a coalition of exporters of agricultural products.

86 U.S. exports to the EC totalled $5.3 billion every year, while imports aggregated $3.6 billion. Paarlberg, "U.S. Interests in International Agricultural Policy," op. cit .. p. 24 7.

149

frustrated in GATI negotiations for more than a quarter century.87 the

issue of market-oriented farm policies came up in a big way in the

Uruguay Round. 88 For U.S. economic diplomacy, a global reform of

agricultural trade policies became a major objective both at the bilateral

and multilateral levels. 89 The Uruguay Round negotiating mandate on

agriculture was to "achieve greater liberalization ... and bring all

measures affecting import access and export competition under

strengthened and more operationally effective GATI rules and

disciplines."

The Uruguay Round negotiations were difficult and tortuous.

After concrete negotiating offers were finally tabled in Geneva in 1990,

the United States, backed by the Cairnes Group, found the EC's offers

inadequate90 and pulled out of the negotiations. Pinning the blame on

the EC, the Bush administration appeared "willing to risk the collapse

of the Uruguay Round at its 1990 deadline."91 The disruption of the

Uruguay Round was unprecedented in the history of the GAIT. U.S.

diplomacy was intent on undercutting the advantages enjoyed by its

87 For details, see Gilbert R. Winliam in International Trade and the Tokyo Round Negotiations (Princeton, N.J.: Princeton University Press, 1986).

88 See R. Tyers and K. Anderson, "Liberalizing OECD Agricultural Policies in the Uruguay Round: Effects on Trade and Welfare," Journal of Agricultural Economics, Vol. 39, No. 2 (1988), pp. 197-216.

89 Department of State Bulletin (January 1989). p. 25.

90 America and the Cairnes Group wanted a 75% reduction in trade­distorting internal supports and market-access barriers and a 90% cut in export subsidies over a 1 0-year period. They also proposed converting all non­tariffborder measures into tariffs. The EC, however, offered to lower its overall level of support by 30% and that too only if it was allowed to step up market protection against grain and oilseed imports. In response to intense U.S. diplomatic pressure, the EC agreed a month later to improve its offer and grant imports a minimum 3% share of its internal market, exclude oilseeds from its protectionist measures and consider quantitative export limits. This still did not satisfy the United States.

91 Michael Mastanduno. "Preserving the Unipolar Moment: Realist Theories and U.S. Grand Strategy after the Cold War," International Security, Vol. 21, No. 4 (Spring 1997). p. 80.

150

chief rival in the agricultural sector, France. The bone of contention

was agricultural subsidies in general and oilseeds in particular. The

influential U.S. soybean lobby also pressed for a more open European

market.

The United States masterminded a gameplan. at the Uruguay

Round that made it difficult for the EC to remain unyielding. It linked

agricultural-trade liberalization to other issues where the EC had a

higher stake, include trade-related investment measures and

intellectual property rights and services. This strategy helped present

the CAP as a threat to the Uruguay Round and the future of the

intemational trading system. It also helped sow dissension in the EC

ranks over a sector which accounted for only 3% of Community output

and 8% of employment and exports. 92 Agriculture was brought to the

centre-stage of the GATI negotiations.

As a result of the international pressure built up on Europe by

U.S. economic diplomacy, the EC agreed to compromise. The 1991

MacSharry Plan, named after Agriculture Commissioner Ray

MacSharry, was unveiled by the EC to reform CAP. This was followed

by the 1992 Blair House Accord between the EC and America that

called for a gradual reduction of farm subsidies. The United States

agreed to limit its export of duty-free soybean and cereal substitutes to

the EC in retum for the Community removing 15% of its land from

oilseeds production. The EC also agreed to reduce its subsidized farm

exports by 20% over a six-year period from 1994.93 The deal enraged

farmers in France.94 Paris saw a cut in the $7.7 billion it received

annually in EC price supports as a threat to its status as the world's

92 T.K. Warley, "Europe's Agricultural Policy in Transition," International Journal, Vol. 47 (Winter 1991-92), pp. 112-35.

93 Paul Magnusson, "GATT is on Its Feet But Far From Steady," Business Week (December 7, 1992). p. 36.

94 Stewart Tey, 'The Coup de Grace for France Farmer?", Business Week (December 7. 1992). p. 37.

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second largest food exporter after the United States.

The eventual Uruguay Round Agreement (URA) on Agriculture

was less liberal than the United States had desired. It amended the

Blair House Accord by allowing an extra 8 million tons of cereals and a

higher level of subsidized agricultural exports than the 36% reduction

proposed for the EC. 95 Under the URA, the EU can spend more than

$10 billion and the United States $500 million a year in farm export

subsidies. 96 Farm income support will be reduced. Non-tariff barriers

(NTBs) converted to imported tariffs will be scaled down by 36% by

developed economies and 24% by developing economies over a 1 0-year

period. The partial farm trade liberalization agreed upon is likely to

make up a significant share of the increase in global GDP resulting from

implementation of the Uruguay Round, "with OECD countries receiving

$120 billion of the agricultural benefits."97

Despite the URA, farm-trade disputes continue to rage between

the United States and the EU. The disputes of recent years can be

placed in six categories: (a) EU's hormone ban; (b) EU restrictions on

genetically-modified foods; 98 (c) EU ban on Bovine Somatotropin (BST),

a synthetic protein to increase cow-milk production; (d) EU wine

certification and enological practices; (e) EU veterinary standards; and

95 The adjustment in the Blair House accord was necessitated by the French threat to veto EU approval of the URA.

96 Norbert Wieczorek, The Uruguay Round and the Next Agenda for Global Trade, Draft General Report (Brussels: North Atlantic Assembly, May 1994). p. 6.

97 Ian Goldin, Odin Knudsen and Dominique van der Mensbrugghe, Trade Liberalization: Global Economic Implications (Washington, DC: OECD /World Bank. 1993), p. 7.

98 The United States has complained about EU procedural delays in approving genetically-modified bulk commodities. such as soybeans, which it has certified as safe.

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(f) EU banana-import regime. 99 U.S. diplomacy has sought to boost

American farm sales to the EU by breaking down the various

restrictions.

U.S. economic diplomacy won an important battle at the wro in

1998 against the EU's 1989 ban on hormone-treated beef that cut off

American beef exports valued at $97 million a year. 100 The United

States, in quick retaliatory action, imposed 100% tariffs on imports of

EU farm products valued at $97 million. When America later resumed

partial exports of beef not treated with hormones, its reprisal action was

also reduced in value content. The wro appeals body sustained a

ruling of a wro dispute-settlement panel that the EU ban on the use

of six hormones to promote cattle growth was not based on scientific

evidence as required under the URA's ancillary accord on sanitary and

phytosanitary (SPS) measures. 101

The United States also received a ruling in its favour by the WfO

panel and Appellate Body in 1997 in a case against the EU banana­

import regime. 102 The banana case focused on distributors, not

producers, with Washington complaining the EU regime discriminated

against U.S. marketing firms and in favour of European companies. 103

The EU import programme had resulted in French and British

99 The 1993 EU banana-import regime superseded the import policies of individual member-states.

100 Wendy Lubetkin. "USTR: WTO Decision Means EU Must Accept Beef Imports," USIA Wireless File, January 16, 1998, p. 46.

101 U.S. Trade Representative Charlene Barshefsky, "Appellate Body Finds EC Hormone Ban Inconsistent with WTO Obligations under SPS Agreement," Press Statement, January 15, 1998 (Washington, DC: USTR).

102 Office of the United States Trade Representative, Annual 'Super 301' Review, Press Release (Washington, DC: October 1, 1997).

103 Ecuador, Guatemala, Honduras and Mexico also challenged the EU import regime. The WTO found that the EU banana import rules violated two URAs -- the General Agreement on Trade in Services and the General Agreement on Trade in Goods.

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distribution companies acquiring a big share of the EU market

traditionally controlled by U.S. firms. In yet another case. America

invoked its Section 301 as well as wro dispute-settlement procedures

over the EU's alleged failure to live up to its URA commitment to limit

subsidized exports of processed cheese. Such exports, which adversely

affect U.S. exports to third countries, have been made by the EU by

allegedly counting them "against its limits on powdered milk and

butterfat to avoid the limits on subsidies to cheese." 104 The United

States has pressed the EU to remove SPS barriers facing U.S.

agricultural exports. including two 1997 European Commission

directives. one banning the sale in Europe of cosmetics containing

tallow, and the other governing the production of some materials

associated with the transmission of the "mad cow" disease. Bovine

Spongiform Encephalopathy (BSE).

2. Technical barriers

An important issue for U.S. economic diplomacy since the creation of

the EU has been standards-related barriers to trade. According to a

U.S. government report. "Technical barriers to trade are of particular

concern in our relationship with the EU. In successive meetings of the

WfO Committee on Standards, and other WfO bodies, the United

States and other nations have flagged concerns that standards,

certification and testing requirements in the EU can sometimes pose

technical barriers to trade." 105 The conclusion of a U.S.-EU Mutual

Recognition Agreement (MRA) on testing procedures in 1997 has helped

ease concerns of many American exporters as the accord covers six

industrial sectors. including the key fields of telecommunications,

104 Office of USTR Identification of Trade Expansion Priorities, op. cit.

' 105 Office of USTR Identification of Trade Expansion Priorities, op. cit.

154

pharmaceuticals, medical devices and electrical machinery. 106 A

number of U.S. companies, however, remain concerned about certain

aspects of EU standards, testing, labelling and certification

requirements. American diplomacy has also endeavoured to harmonize

U.S.-EU automobile safety standards, testing, and pollution and noise

requirements. 107

The harmonization of technical standards was an important

challenge for the EU. Since EU laws and regulations concerning

standards, testing, labelling and certification would cover about half of

all U.S. exports to Europe, the harmonization process did generate

concern among American exporters, particularly about certain design­

restrictive standards. MRAs became necessary for U.S. exporters as

only notified institutions in EU are empowered to grant final product

approvals. MRAs will allow U.S. authorities to "test and certify to

European standards prior to export, which could lead to substantially

reduced costs for the introduction of American goods into Europe and

vice versa." 108 Harmonization by itself would help U.S. companies to

achieve greater cost -effectiveness by having to meet only one set of

common standards instead of 15 separate national standards. U.S.

firms can now route any complaints through the American National

Standards Institute (ANSI), which is represented both in the European

Committee for Standardization (CEN) and the European Committee for

Electrotechnical Standardization (CENELAC).

While raising its concerns over certain elements of the standards­

making process in the EU, U.S. economic diplomacy has also focussed

106 White House, "Fact-Sheet on U.S.-European Union Relations" (Washington, DC: White House, December 5, 1997).

107 Rothkopf in U.S. Congress, U.S.-Europe: Prospects for Transatlantic Economic Cooperation, op. cit.. p. 47.

108 Department of State. European Union -- Economic Policy and Trade Practices Report. op. cit., p. 114.

155

attention on the union's ecolabelling scheme introduced in 1992. 109 EU

members grant voluntary environmental labels based on an

environmental-impact criteria set for each product. wro member­

states want to ensure that ecolabelling does not tum into a process for

erecting disguised barriers to trade. 110 Despite greater transparency in

the EU ecolabelling procedures, Washington has expressed

apprehension that the ecolabelling programme "favours European

industry, thus leading to trade concems." 111 U.S. diplomacy is closely

monitoring the programme to ensure that it does not create "de facto

trade barriers." 112 EU ecolabels on paper products have already become

controversial. America also contends that the EU directive requiring

that all product labels fron1 the year 2000 indicate measurement only

in metric units are "unnecessary and burdensome, and will affect many

U.S. companies." 113

3. Other issues

The 1993 U.S.-EU Memorandum of Understanding (MOU) on

Government Procurement opened the way for American businesses to

crack the $600-billion European procurement market traditionally

closed to outside suppliers. 114 Through their "buy national" policies,

109 Ecolabelling is a process of attaching a label to a product providing consumers with environmental information.

110 Arlene Wilson and George Holliday. The World Trade Organization and the Singapore Ministerial, CRS Report for Congress. October 29, 1996 (Washington. DC: Congressional Research Service). p. 6.

111 Office of USTR, Identification of Trade Expansion Priorities. op. cit.

112 Department of State. European Union -- Economic Policy and Trade Practices Report, op. cit., p. 114.

113 Office of USTR, Identification of Trade Expansion Priorities, op. cit.

114 See U.S. International Trade Commission. The Effects of Greater Economic Integration Within the European Community on the United States (Washington. DC: USITC, July 1989). pp. 4-7; and Guy de Jon Quierers, "Hurdles Too High," Financial Times. November 13. 1989, p. 20.

156

West European states used to patronize their own national firms. Less

than 2% of government contracts in the 1980s went to firms in other

states. 115 The EU, however, has liberalized government procurement.

Under the MOU, U.S. firms are entitled to receive national treatment in

some areas. However, a EU Utilities Directive provision allowing

discrimination against non-EU bidders for government procurement in

the telecommunications sector has drawn Washington's ire.

The United States has also expressed concern over requirements

that, in order to benefit from the EU maritime and aviation transport

directives, firms be majority owned and controlled by EU nationals. 116

However, the EU's wide-ranging telecommunications-policy reforms and

liberalization and its support for the 1997 WfO Agreement on Basic

Telecommunications have helped eliminate the simme1ing trade

disputes with the United States in that sector. 117

A major area of continuing U.S.-EU dispute is audiovisual

services. The Uruguay Round could be completed only after the

Americans reluctantly agreed to the French demand to exclude

audiovisuals from the final package. 118 The Uruguay Round

negotiations were under way when the EC unveiled its 1989 'Television

Without Frontiers" directive requiring a majority of television

transmission time to be reserved for European programmes. The United

States has contended that such broadcast quotas violate EU member-

115 "Survey of Europe's International Market." The Economist, July 8, 1989, p. 16.

116 Department of State, European Union -- Economic Policy and Trade Practices Report. op. cit., p. 117.

117 European market fragmentation and government controls over telecommunications helped build a consensus in favour of deregulation and market integration much before the EU was born. Calingaert, The 1992 Challenge from Europe, op. cit, p. 114.

118 Richard P. Cronin and Paul E. Gallis, The GAIT Accord: Implications for U.S. Foreign Policy, CRS Report for Congress. February 23, 1994 (Washington. DC: Congressional Research Service). p. 4.

157

states' obligations under the GATT. U.S. diplomacy continues to press

for open trade in audiovisual services.

NEW TRANSATLANTIC MARKETPLACE (NTM)

The initiative to create a "New Transatlantic Marketplace" (NTM) carne

after an earlier U.S. proposal for a transatlantic free-trade agreement

(FTA) failed to take off. The United States had proposed in May 1995

a "new economic architecture" across the Atlantic 119 to cement ties with

Europe at a time when its economic diplomacy appeared enthralled by

the new market opportunities in Asia and Latin America and by the

potential of the Asia Pacific Regional Cooperation (APEC) forum and the

Free Trade Area of the Americas (FTAA).

U.S. policy-makers initially thought that an FTA encompassing

EU and NAFTA members would bridge growing trade regionalism on

either side of the Atlantic and help preserve the traditionally close

transatlantic ties. 120 It was felt that a NAFTA-EU economic alliance

would also lay a lasting foundation for the U.S.-European relationship

in the post-Cold War period. The idea of a transatlantic free-trade

agreement (TAFT A) had already been publicly broached by America's EU

ambassador, Stuart Eizenstat, Canadian Prime Minister Jean Chretien

and the head of the European Commission delegation to the United

States, Andries Van Agt. 121 It also received support from many

influential U.S. policy analysts. In the words of three analysts, 'The

future of U.S.-European economic relations and of the broader

119 Steven Greenhouse, "U.S. to Seek Stronger Trade and Political Ties with Europe," New York Times, May 29, 1995, p. A3.

120 Thomas J. Duesterberg, "Prospects for an EU-NAFfA Free Trade Agreement," Washington Quarterly, Vol. 18, No.2 (Spring 1995), pp. 71-72.

121 See "Euro-American Trade Pact Urged," Wall Street Joumat December 5, 1995, p. All; Nathaniel Nash, "Showing Europe That U.S. Still Cares," New York Times, December 3, 1995, p. A20; and Washington Post, November 18, 1994, p. Bl.

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transatlantic relationship may depend heavily on creating the economic

equivalent of the kinds of institutions and arrangements that preserved

Westem unity through the tension-filled Cold War era. TAITA would

represent a major step towards that vital goal." 122

A TAFTA would be a unbeatable superbloc controlling a huge

proportion of world trade and investment, although it would inevitably

draw flak for being a club of the rich bringing together white nations but

with a small Hispanic element. However, it did not take much time for

the enthusiasm for a TAITA to dissipate as "both U.S. and EU officials

conceded that they were not quite prepared for the arduous negotiations

that would be required to launch a free-trade agreement. "123 Instead of

a TAFfA, the United States and the EU agreed to focus on the more

modest goal of creating a New Transatlantic Marketplace (NTM) to help

dismantle non-tariff barriers (NTBs) and other obstacles impeding the

faster expansion of trade between them.

The commitment to form an NTM was incorporated in the "New

Transatlantic Agenda" unveiled at the December 1995 U.S.-EU summit

at Madrid. The Transatlantic Business Dialogue 124 is playing a key role

in the process. For example, its meeting at Seville in November 1995

122 Clyde V. Prestowitz, Jr., Lawrence Chimerine and Andrew Szamosszegi, 'The Case for a Transatlantic Free Trade Area," in U.S. Congress, House International Relations Committee, Hearings, U.S.-Europe: Prospects for Transatlantic Economic Cooperation, 104th Congress, 1st Session, December 14, 1995 (Washington, DC: Government Printing Office, 1996), p. 65.

123 Mastanduno, "Preserving the Unipolar Moment," op. cit., p. 84.

124 First proposed by U.S. Commerce Secretary Ron Brown in late 1994, the idea of a Transatlantic Business Dialogue was accepted with some initial hesitation by the EU. European Commission Vice President Leon Brittan and Industry Commissioner Martin Bangemartn joined Secretary Brown as co­conveners of the dialogue. co-chaired by Xerox CEO Paul Allaire and Ford CEO Alex Trotman, on the American side, and BASF CEO Juergen Strube and Goldman Sachs International Chairman Peter Sutherland, on the European side. The idea behind the dialogue was that to expand U.S.-EU commercial relations, the two sides needed to involve the business leaders who were actually doing the exporting and who would be better able to identify mutual problems in trade and investment and suggest remedies.

159

helped shape the Madrid Summit's Joint Action Plan, which focuses on

the need to identifY and reduce trade and investment barriers. 125 The

Business Dialogue recommendations which were incorporated in the

Madrid Action included the following: (i) Joint efforts to conclude an

Information Technology Agreement (ITA) under the WfO auspices; (ii)

Explore further industrial product tariff cuts and acceleration of

Uruguay Round cuts; (iii) Combat trade-related corruption and bribery;

(iv) Conclude MRAs on product approvals and extend them to more

sectors; (v) Seek transparency, non-discrimination and U.S.

participation in standards-setting bodies; 126 (vi) Jointly improve

intellectual-property protection throughout the world; (vii) Strengthen

regulatory cooperation; and (viii) Conclude a customs cooperation and

mutual-assistance agreement. It marked the first time that

recommendations formulated by U.S.-EU business leaders were

immediately incorporated in the action plan of government leaders. 127

Since the Madrid Summit, the New Transatlantic Agenda has

served as the framework for enhanced U.S.-EU political and economic

cooperation, with the American president meeting semiannually with

the EU leadership. 128 The development of a closer and even stronger

business relationship, led by the private sector, is at the heart of the

New Transatlantic Agenda. 129

Dedicated to the progressive lowering or removal of barriers that

125 White House. A NationaL Security Strategy for a New Century (Washington. D.C.: The White House. May 1997). p. 16.

126 The Seville meeting had specifically recommended the establishment of a Transatlantic Advisory Committee on Standards. Certification and Regulatory Policy made up of U.S. and EU representatives of government bodies and industry.

127 Rothkopf in U.S. Congress. U.S.-Europe: Prospects for TransatLantic Economic Cooperation, op. cit .. p. 46.

128 White. "Fact-Sheet on U.S.-EU Relations," op. cit.

129 "Fact-Sheet: The 'New Transatlantic Marketplace'," in U.S. Congress, U.S.-Europe: Prospects for Transatlantic Economic Cooperation, op. cit., p. 60.

160

hinder the flow of goods, services and capital, the NTM provides U.S.

foreign economic policy an important mechanism to create new market

openings in Europe and secure EU cooperation in global-liberalization

efforts. When the commitment to form an NTM was made, the two sides

agreed to carry out a joint study of tariffs and non-tariff barriers to

trade as well as options for their elimination, and to work together in

the OECD and WfO to achieve agreements on investment and

services. 130 Since then, U.S. diplomacy has enlisted EU cooperation in

some successful international enterprises. These include the trio of

WTO agreements in the services sector -- the Information Technology

Agreement, the Agreement on Basic Telecommunications, and the

Agreement on Financial Services. They form the "triple play" of solid

global market openings in fields where the United States dominates. 131

The U.S.-EU initiatives at the WfO "complement" the NTM. 132

The NTM provides the framework for greater U.S.-EU cooperation.

The 1997 conclusion of an MRA with the EU covering $50 billion in

American exports in six sectors marked an important step in U.S.

efforts to minimize standards-related problems. The United States and

the EU have also agreed on guidelines and a work plan to foster the

growth of an important and innovative sector, electronic commerce. 133

The U.S.-EU Science and Technology Agreement, signed in December

1997 prior to the opening of the Washington Summit, is designed to

facilitate collaboration between leading American and European

research institutions and scientists, including on leading-edge

technologies relating to environment, agriculture, information,

130 White House. Strategy of Engagement and Enlargement, op. cit., p. 29.

131 Deputy U.S. Trade Representative. Speech to the Coalition of Service Industries (CSI). Washington. DC, January 13, 1998 (Washington. DC: USTR).

132 Department of State. European Union -- Economic Policy and Trade Practices Report, op. cit., p. 113.

133 This agreement was reached at the December 1997 Washington Summit of the U.S. and EU leaders.

161

biomedicine, health and manufacturing processes. 134 The agreement

establishes "a common ground for handling the allocation and

protection of intellectual property rights (IPR) resulting from joint

research." 135 America and EU have also launched the Internet-based

Transatlantic Information Exchange Service, a digital library project and

an exchange programme involving the U.S. Congress and European

parliaments.

EMU AND BEYOND

After consolidating its Single Market and breaking down most intra-EU

border controls, Europe may be headed for greater independence in

regional and global matters. The ongoing process of Economic and

Monetary Union (EMU) 136 carries important implications for U.S. foreign,

economic and defence policies. A successful EMU, especially one that

sets the stage for a political union, is unlikely to be in harmony with

long-term U.S. interests. The Maastricht Treaty clearly calls for the

evolution to a future political union. According to Brzezinski, "America

can obstruct the emergence of a more united Europe, (but) that could

prove calamitous for Eurasian stability and America's interests. Unless

Europe becomes more united, it is likely to become more disunited

again."t37

European cooperation is critical for the United States to preserve

134 The accord will allow greater cooperative activities between EU scientific institutions and a number of U.S. government agencies, including Commerce, Energy, Agriculture. Transportation. the National Science Foundation (NSF), NASA, and the National Institutes of Health (NIH).

135 'The U.S.-EU Science and Technology Agreement," Joint Statement, Washington. DC. December 5. 1997 (Washington, DC: Department of State).

136 Before the Maastricht Treaty embraced monetary union. the 1988 Jacques Delors Report. along with the Single Market programme. laid the basis for the EMU.

137 Brzezinski. "A Geostrategy for Eurasia," op. cit., p. 53.

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the present security order and the multilateral trade and monetary

regimes. The relationship with the EU helps underpin America's global

security and economic relations. According to former U.S. Assistant

Secretary of State for European and Canadian Affairs Richard

Holbrooke, "the United States has become a European power in a sense

that goes beyond traditional assertions of America's 'commitment' to

Europe." 138 America, according to another analyst, is "a power whose

interests in Europe are such as to make it difficult, even impossible, to

leave their protection to others. In a real sense, the United States has

become a non-member of the EU." 139 In the words of Henry Kissinger,

"without Europe, America could tum, psychologically as well as

geographically and geopolitically, into an island off the shores of

Eurasia." 140

The present political unipolarity in an economically multipolar

world can be sustained only if Europe continues to be under U.S.

security cover and accepts America as its leader in world affairs. The

EMU process and the European interest in a political union signify a lot

to the United States. America will definitely seek to employ its political

and economic leverage to shape European integration in ways that its

interests are not seriously undermined.

U.S. diplomacy will strive to reinforce commercial ties with the

EU, which will in the foreseeable future remain America's largest global

competitor, the biggest market for U.S. companies, and the most

important partner in upholding the world trading system. Washington

was successful in persuading the EU to drop its objections to the

merger of Boeing and McDonnell Douglas. The U.S.-EU trade, which

totalled $270 billion in 1996, up from $256 billion in 1995, already

138 Holbrooke, "America, A European Power," op. cit., p. 38.

139 Simon Serfaty, "Half Before Europe, Half Past NATO," Washington Quarterly, Vol. 18, No. 2 (Spring 1995), p. 56.

140 Henry Ki:;;singer, Diplomacy (New York, NY: Simon and Schuster, 1994), p. 822.

163

supports siX million jobs on both sides of the Atlantic. 141 The $320

billion invested by American companies in the EU supports hundreds

of thousands of U.S. manufacturing jobs. The table below provides

figures for U.S. investment in selected industries in the EU. EU firms

rank as the No. 1 foreign investor in 41 of the 50 American states and

No. 2 in the remainder. 142

TABLE ill

Extent of U.S. Investment in Selected Industries in EU 1994 (in billions of dollars)

Petroleum 20.6 Total manufacturing 101.0 Wholesale Trade 23.6 Banking 10.4 Finance/insurance 76.2 Services 12.8 Other industries 6.6 TOTAL 251.2

Sources: Commerce Department, Bureau of Economic Analysis

The economic bonds between the United States and the EU are

"massive and growing" 143 and very difficult to alter without causing

tremors on both sides of the Atlantic. This means that any change in

the U.S.-EU political-security relationship can come about only slowly

and gradually.

Monetary union will considerably expand EU's transnational

141 White House, "Fact-Sheet on U.S.-EU Relations," op. cit.

142 The comparative official figure for EU investment in the United States up to the end of 1995 is $315 billion, just $5 billion less than the reverse flow of investment.

143 Robin Gaster and Clyde Prestowitz, Shrinking the Atlantic: Europe and the American Economy (Washington, DC: North Atlantic Research. Inc., June 1995). p. 77.

164

authority over its members, with responsibility for monetary and

exchange-rate policy shifting from national central banks to the new

Frankfurt-based European Central Bank (ECB). 144 In the interim,

member-states will continue to coordinate their exchange-rate policies

through the European Monetary System (EMS) and its Exchange Rate

Mechanism (ERM). To join the EMU-- which could prove a big boon to

European economies -- EU states were required to meet rigidly-fixed

convergence criteria: Deficits of 3% of GDP; gross national debt of 60%

of GDP; 145 inflation and interest rate levels no more than 1.5% above the

average of the three lowest rates among the member-states; and two

years of relative exchange-rate stability as reflected in a government

keeping its currency with the "normal" EMS bands. But the fiscal

requirements have been so tough that without flexibility perhaps only

Luxembourg would be able to pass the test. 146 Eurostat, the EU's

statistical authority, has now allowed one-off measures to count

towards reduced deficits.

The approaching introduction of the euro will mark the advent of

a global competitor to the dollar, which through much of the 20th

century has overshadowed other national currencies. With the dollar

and the euro competing, the EU will be able to counterbalance the

United States in the international monetary system. The current dollar­

centred global financial holdings provide the United States, with more

than $4 trillion in external liabilities, virtually interest-free money to

manage its large external deficits. 147 The euro's rise would curtail

144 The Maastricht Treaty also gave the EU a policy role on investment matters.

145 When the Maastricht Treaty was signed, average national indebtedness in the EU was about 57% of GDP, but by end of 1997 that average was approaching 75%.

146 "What Price EMU?" (editorial), Asian Wall StreetJoumal, January 16-17, 1998, p. 14.

147 Bergsten. "The Dollar and the Euro," op. cit., p. 93.

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America's present seignorial access to foreign funds at zero (or

extremely low) interest rates.

Despite the profound scepticism with which American policy­

makers treated the monetary-union plan, 148 the EMU will have a

profound impact on the United States. According to an American

specialist, the euro will "strengthen Europe's bargaining position vis-a­

vis the United States and other countries and would profoundly affect

transatlantic relations." 149 The more fundamental impact of the euro's

rise, in the words of another U.S. scholar, "would be the creation of a

political union, a European federal state with responsibility for a

Europe-wide foreign and security policy as well as for what are now

domestic economic and social policies." 150

The transition from the dollar-dominated monetary regime of the

20th century to a stable dollar-and-euro system in the early 21st

century demands close U.S.-EU cooperation, 151 without which serious

monetary instability could ensue and wreak havoc on large economies,

particularly the U.S. economy. The EMU will trigger shifts in the

currency patterns of investment portfolios in Europe and other parts of

the world, with the new demand for financial assets denominated in

euros possibly producing an unwanted appreciation of the euro and

depreciation of the dollar. The EMU could divert capital flows from the

United States and swell the American inflation rate. 152

In addition to ensuring global exchange-rate stability under EMU,

148 The 1990s' economic downturn in Europe, labour problems in France, and several European currency crises that forced the widening of the ERM fluctuation band contributed to the U.S. scepticism.

149 Henning, "Europe Monetary Union and the United States," op. cit., p. 83.

15° Feldstein, "EMU and International Conflict," op. cit., p. 60.

151 Bergsten. "The Dollar and the Euro," op. cit., p. 95.

152 Arlene Wilson. "Economic ad Monetary Union," in Harrison and Sharpe, Europe and the United States: Competition and Cooperation in the 1990s, op. cit., p. 95.

166

U.S. economic diplomacy can also be expected to address the so-called

"dollar overhang." The disposal of the excess dollar reserves held by the

European central banks 153 would become inevitable under the EMU

since all foreign-exchange transactions would vest with the new ECB.

The United States would demand that the excess dollar reserves be

disgorged by the Europeans in a manner that its economy is not

adversely affected by volatility and misalignments in the exchange

market. This will necessitate innovative arrangements, such as a

structured exchange-rate regime, and close U.S.-EU cooperation. 154

The EMU would also necessitate the consolidation of

representation strengths of EU states in the international financial

institutions and the regional development banks. The shift from

individual European quotas to a consolidated EU quota would see the

rise of a new single force that could challenge the traditional dominance

of the United States in the Bretton Woods institutions. International

Monetary Fund (IMF) quotas, for instance, are based on national trade

and financial flows, but since "intra-EU transactions would be excluded

when calculating a consolidated quota," the collective EU quota "would

be substantially less" than the sum of the present individual quotas. 155

As quotas determine voting strength, the EMU will likely trigger a new

round of struggle over the reapportionment of quotas.

Despite the important issues it raises, Europe and the United

States are both likely to reap economic dividends from the EMU. U.S.

MNCs like IBM and General Motors which presently have to deal in

several national currencies will cut their transaction costs with a single

153 About $180 billion of the $300 international reserves held by individual EU central banks at the beginning of the 1990s were in dollars. See International Monetary Fund, International Financial Statistics (Washington. DC: March 1991). pp. 19 and 40.

154 Bergsten, "The Dollar and the Euro," op. cit.. p. 94.

155 Henning, "Europe Monetary Union and the United States." op. cit., pp. 98-99.

167

EU currency, but financial behemoths such as Citibank and American

Express are bound to lose revenue with the erosion of the dollar­

dominated monetmy system. 156 The EMU, however, should help boost

U.S. exports to Europe. The more difficult questions relate to the EMU's

likely political fallout. Neither the EU nor the EMU provides a legitimate

way for a member-state to withdraw as it is supposed to be "a marriage

made in heaven that must last forever." 157

A new White House report has listed fostering a "peaceful,

undivided, democratic Europe" as America's first priority for advancing

its national-security interests. "\-\Then Europe is stable and at peace,

America is more secure. When Europe prospers, so does America,"

according to the report, underlining NATO enlargementi 58 as a key U.S.

undertaking. 159 While determined to keep Europe in its security grasp,

the United States has also supported the expansion of the EU to East

and Central Europe as that would weaken the evolution of a political

union. "A larger Europe will expand the range of American influence

without simultaneously creating a Europe so politically integrated that

it could challenge the United States on matters of geopolitical

importance, particularly in the Middle East." 160

The EU is critical to America's political and economic reach into

central and eastern Europe and Russia. The EU also serves as the base

156 "U.S. Firms See Both Sides of Coin in Unified Monetary System," Washington Post, December 26, 1991, pp. D1-D2.

157 Feldstein, "EMU and International Conflict," op. cit., p. 72.

158 The July 1997 NATO Madrid Summit named the Czech Republic, Hungary and Poland as the first new members of the alliance. The action followed the NATO-Russia "Paris Agreement" that will govern Moscow's relationship with the U.S.-led alliance. The agreement promises Russia an important role in European security through a new consultative body, the NATO-Russia Council, but operationally it could mean little.

159 William J. Clinton, "Preface" in White House, National Security Strategy for a New Century. op. cit., p. i.

160 Brzezinski, "A Geostrategy for Eurasia," op. cit., p. 53.

168

for American commercial entry into two of the U.S.-identified Big

Emerging Markets (BEMs) -- Poland and Turkey. 161 A number of ex­

East bloc states, including Hungary, the Czech Republic, Poland,

Romania, Slovakia, Latvia, Estonia and Lithuania, have applied for EU

membership. The United States has an important political and

commercial stake in the reforming economies of East and Central

Europe that together constitute one of the world's growth markets. The

EU's associate membership accords (the so-called "Europe Agreements")

with a number of East and Central European states 162 fortify U.S.

political and economic endeavours in a region of 120 million people that

already has a market worth $500 billion. 163 U.S. companies, quick to

realize the economic potential of this region, have emerged as the

largest investors there.

Trade and investment will continue to be at the heart of America's

relationship with the EU. For the United States, European cooperation

remains indispensable in safeguarding and reinforcing the process of

global liberalization, which helps underpin U.S. economic and military

might. The EU's sizable foreign aid, budgeted at more than $36 billion

for 1995-98, "reinforces many important U.S. interests," 164 as the Union

is the largest donor of grant assistance to central and eastern Europe

and has a large assistance programme for the Soviet Union to help

promote free-market reforms and democracy. The United States has a

vested interest in higher European growth: A one-percentage point

higher EU growth would translate into $50 billion worth of more

161 An EU customs union with Turkey came into force at the beginning of 1996.

162 EU associate members include Bulgaria, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, Slovakia and Slovenia.

163 This market, projected to grow at 5% annually, will swell to a $900-billion market in 10 years. Rothkopf in U.S. Congress. U.S.-Europe: Prospects for Transatlantic Economic Cooperation, op. cit., p. 48.

164 White House, "Fact-Sheet on U.S.-EU Relations," op. cit.

169

American exports a decade from now. However, America would not

want European economic and political integration to create new trade

barriers or engender a geopolitical challenge to U.S. interests. Despite

the potential challenge from the EMU, the United States cannot seek to

thwart that process as the failure of the monetary union could unravel

European unity and unleash the historical monsters of European

nationalism that would devour the transatlantic alliance. The Europe

that finally takes shape will be the product not of an American vision,

but of forces within.