Transatlantic Trade: Towards a North Atlantic Economic Community

Mr. Chairman, and members of the Subcommittee, thank you for inviting me to testify on trade aspects of the New Transatlantic Agenda. This topic does not grab headlines, but it richly deserves Congressional involvement and support.

I am currently a Senior Fellow at the Institute for International Economics, headed by C. Fred Bergsten. The Institute is a private, non-profit, non-partisan research institution devoted to the study of international economic policy. The Institute has just published my new book, entitled Transatlantic Trade: A Strategic Agenda. My most recent government job was in the Office of the U.S. Trade Representative, where I served as Counselor — a position roughly analogous to director of policy planning and economic analysis — from 1993 to 1995.

Ever since World War II, the United States and Western Europe have been at the forefront of efforts to promote an open, rules-based, market-oriented global economic system. This leadership has been uneven, to be sure, but it is impossible to imagine a major breakthrough in the global trading system without the agreement of the two main trading powers. Leadership of the global economic system still falls implicitly and primarily — though not exclusively — on American and European shoulders. This is why the proposed Transatlantic Marketplace, the activities of the Transatlantic Business Dialogue, and the negotiation of Mutual Recognition Agreements (MRAs) have global significance.

After quickly sketching the Transatlantic trade and investment relationship, I will comment on the Transatlantic Marketplace in its current form. I will then address a problem that poisons the atmosphere and undermines the heroic efforts of public and private sector negotiators alike — the proliferation of U.S. unilateral sanctions with extraterritorial (non-U.S.) application. Against this backdrop, I will propose an ambitious trade and investment initiative that might be called a North ATlantic Economic Community or "NATEC."

I. Profile of Transatlantic Trade and Investment

The United States and the European Union (EU) have the largest combined trade and investment relationship in the world. If intra-EU trade (trade among EU members) is included along with the EU's external trade, the United States and the European Union account for more than half of world trade in goods. They also account for more than half of world GDP.

As traders, however, the United States and the European Union account for only about one-fifth of each other's exports and imports. 1995 U.S. trade with the EU-15 was slightly below trade with Canada. In recent years the two sides have become less important to each other as trade with developing countries has mushroomed.

With certain important exceptions, Transatlantic tariffs are low. Once the Uruguay Round is implemented, U.S. exports to the European Union will face average tariffs of 6.36%; the corresponding figure for U.S. imports from the EU is only 3.19%. Average EU tariffs on agriculture, however, will still be 75%, and corresponding U.S. tariffs will be about 30%.

What makes the Transatlantic economic relationship unique is not trade but investment. In 1995 EU companies accounted for about 58% of total foreign direct investment (FDI) in the United States. About 44% of U.S. FDI went to the EU. By contrast, in 1995 Asia Pacific companies accounted for only 22% of FDI in the United States, and only 18% of U.S. FDI went to the Asia Pacific region. In 6 of the last 7 years, Transatlantic FDI has grown faster than trade. In some sectors there is a substantial degree of market integration.

The combination of extensive cross-investment and relatively low tariffs means that competitive conditions in domestic markets are of key importance. If we define "globalization" as the dispersal of the various phases of the production cycle around the world, how a company is treated in domestic markets is a key determinant of worldwide competitiveness.

What shapes the form of domestic competition, in large part, is regulatory policy — including technical standards, competition policy, health and safety measures, labor standards, environmental protection, and other forms of regulation. Just as the drive toward a European Single Market led decision-makers to promote regulatory harmonization, so the Transatlantic Business Dialogue is correct to focus on the removal of regulatory barriers to Transatlantic trade and investment.

In theory, harmonization of regulatory policy should be easy to achieve, since West Europeans share more or less the same values as Americans and have a high standard of living. In practice, however, mutual acceptance of each other standards and procedures has proven to be extremely difficult. Members of Congress could ease the process by taking the time to become familiar with the issues and helping to bring about, where appropriate, needed changes in regulatory legislation.

II. The Transatlantic Marketplace

At the 1995 Madrid Summit, the centerpiece of the economic component of the New Transatlantic Agenda was a commitment by Presidents Clinton and Santer to create a "Transatlantic Marketplace." This Marketplace is to be achieved by "progressively reducing or eliminating barriers that hinder the flow of goods, services and capital" across the Atlantic.

Thus far the most significant negotiating achievement of the Marketplace initiative has been agreement on a package of Mutual Recognition Agreements (MRAs). These agreements have to do with the development and content of standards and the way a given product is judged on whether it meets those standards (conformity assessment). As the name implies, MRAs provide for mutual acceptance of such procedures.

The elimination of duplicative test and conformity assessment procedures in selected sectors is a big step forward. Standards affect perhaps half of U.S. exports to the European Union. Estimated savings to companies are in the range of tens of billions.

The most impressive procedural innovation associated with the Transatlantic Marketplace has been the prominent role of the Transatlantic Business Dialogue (TABD) throughout the MRA process — and, more generally, in the design of the trade-related negotiating agenda as a whole. I applaud both the MRAs and the ongoing partnership between the public and private sectors that made them possible.

III. Limitations of the Current Approach

At the same time, the Transatlantic Market place in its current form does not go far enough.

Despite the broad language of the 1995 Madrid summit, it is fair to say that the drive to create a Transatlantic Marketplace has been channeled into relatively narrow grooves. The Marketplace initiative features no specifically defined outcome, no commitment to comprehensive coverage, no guarantee against unilateral remedies, and — a key omission — no overarching deadline by which the Marketplace should be achieved. As a consequence, there are few if any opportunities for political breakthroughs. This is one reason why negotiating each MRA is like pulling teeth.

** Meanwhile, the Transatlantic economic relationship is currently plagued by a number of irritants. Chief among them at present are unilateral U.S. economic sanctions, including state and local measures; the planned merger of Boeing and McDonnell-Douglas; and a variety of trade disputes, ranging from the treatment of fur from animals caught in leghold traps to labelling requirements for agricultural biotechnology products. Quarrels between two major trading partners are inevitable, but at present they are so all-consuming that they drain political energy and attention from the larger task of shared management of the post-Cold War global political-economic order. The two sides can do better.

** the European Union is preoccupied with a number of internal decisions of historic importance: European monetary union, the expansion of EU membership, budget reforms, and the reform of decision-making institution, to name the most important. The United States has an enormous stake in the outcome of these decisions. NATEC would both reflect and encourage the openness and outward orientation that Americans would like to see emerging from a more integrated Europe.

**Since Transatlantic trade is already relatively free, the Transatlantic partners have more to gain from global trade liberalization than from any bilateral free trade arrangement. In much of the developing world, tariffs can range from 20% to 100% or higher. Moreover, growth in Latin America and the Asia Pacific regions is proceeding rapidly. The most sophisticated economic analysis to date, conducted by economists Richard Baldwin and Joseph Francois, concludes that the benefits of global liberalization outweigh those associated with Transatlantic trade liberalization by as much as 5 to 1.

IV. The Problem of U.S. Unilateral Economic Sanctions

The number one dispute dividing the Transatlantic powers stems from the extraterritorial provisions of the Helms-Burton Act and the D'Amato legislation. The former mandates restrictions on companies that have trafficked in expropriated U.S. property in Cuba; the latter requires the President t impose sanctions against companies undertaking further investments of more than $40 milion in Iran and Libya. These two pieces of legislation have brought down a shower of European anger and resentment on American heads, with serious consequences not only for Transatlantic business but also potentially for the World Trade Organization.

Studies on economic sanctions have recently been released by the Institute for International Economics (IIE), the President's Export Council (PEC), and the National Association of Manufacturers (NAM). Papers supporting the conclusions of these studies have been issued by the American Enterprise Institute, the Heritage Foundation, and the business coalition called USA*Engage. The main conclusions are:

1. U.S. economic sanctions impose significant costs on U.S. firms and workers. The new IIE study found that at the 1995 level, sanctions reduce U.S. exports by $15-19 billion each year, reducing employment in the high-wage export sector by more than 200,000 jobs and cutting wage premiums by nearly $1 billion. Sanctions penalize U.S.-based workers and firms by imposing a form of "taxation without representation" for foreign policy purposes without corresponding compensation or success — an unfunded mandate, as it were.
2. Unilateral economic sanctions usually fail to change the behavior or the government of target countries. A separate IIE study found that U.S. sanctions had positive outcomes in fewer than 1 in 5 cases in the 1970s and 1980s, when the United States exerted a more dominant role in the global economy than it does today. The overwhelming majority of those "successes," measured in terms of an economic cost imposed on the targeted country, did not produce changes in the regime's offensive behavior. Sanctions may temporarily placate domestic constituencies and interest groups, but most of the time they just don't work.
3. Unilateral sanctions tarnish the image of U.S. companies and individuals as reliable suppliers, thereby eroding U.S. credibility and undermining U.S. leadership. U.S. companies report that rivals are quick to take advantage of unreliable U.S. behavior. Foreign competitors with no prior foothold in U.S.-dominated global markets take advantage of U.S. sanctions to gain entry, thereby gaining experience and economies of scale that facilitate future success. Examples of lost or foregone markets span the globe: oil drilling equipment in the Caspian Sea and the Gulf of Thailand, power plants in Colombia and China, and water purification equipment in Vietnam are but a few examples.
4. Unilateral sanctions violate Transatlantic norms and expectations, thus undercutting cooperation in support of U.S. interests. Americans have the most to gain from a rules-based, market-oriented trade and investment system. Together with the European Union, the United States makes the most use of the dispute settlement system established by the Uruguay Round of trade negotiations. Unilateral sanctions fly in the face of the encouraging trend towards widely accepted trade rules. Not only do sanctions sour good will towards Americans in the targeted countries; they also strain relations with allies. In the case of Europe, sanctions have a high political cost because they consume high-level attention and stifle cooperation on other fronts.
5. Despite these disadvantages, unilateral U.S. sanctions have been proliferating dramatically, affecting 35 countries accounting for one almost fifth of the world's export markets. In just a 4-year period (1993-96), a NAM inventory counted no fewer than 61 U.S. laws and executive actions authorizing unilateral economic sanctions for foreign policy purposes. 35 countries were targeted, representing 2.3 billion consumers of U.S. goods and services (42% of the world's population and almost 20% of the world's export markets. These measures are seemingly random, reactive and ad hoc in nature. Their supporters say, "I realize that unilateral economic sanctions don't work, but for the sake of principle there has to be an exception for country X or issue Y."

V. Towards a North Atlantic Economic Community?

In light of all of these limitations and problems, I propose something far more ambitious than the Transatlantic Marketplace in its current form: a non-preferential, globally oriented initiative that might be called a North Atlantic Economic Community ("NATEC").

My proposal is best understood not as an alternative to the present approach, but rather as an effort to inject high-level political momentum and strategic purpose into the Transatlantic economic relationship. This process will take time.

NATEC would not be a new organization, but rather a framework combining APEC-like trade and business initiatives with a NATO-like strategic, political-economic orientation. It would establish a deadline for free and open Transatlantic trade and investment (say, 2010) on a Most Favored Nation Basis. (To avoid the "free rider" problem, it would draw in other major suppliers in a process similar to the negotiation of the Information Technology Agreement.)

A significant portion of NATEC's agenda would be devoted to strengthening the existing multilateral system. At the same time, it would commit the two powers to a pioneering role in areas not yet covered by WTO rules. The inclusion of trade-related foreign policy issues would stimulate more Transatlantic coherence and help restore much-needed Transatlantic leadership. NATEC would specifically address such Transatlantic trouble spots as economic sanctions, competition in third-country markets, and the treatment of Japan and China.

Ideally, a NATEC should span not only trade and investment but also macroeconomic coordination, monetary policy, exchange rates, and other financial aspects of the Transatlantic relationship, as well as trade and investment. Assuming that steps toward a common European currency do not falter, the impending creation of the euro will soon justify new currency management arrangements between the European Union and the United States (and Japan). **I will explain how my proposal would relate to both the World Trade Organization (WTO) and other regional trade initiatives such as the Asia Pacific Economic Cooperation forum (APEC).