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When he alighted from Air Force One on June 6, after a Lisbon summit meeting with European leaders, President Clinton had precious little to show for his exertions. The exception was a nice ornament for his mantelpiece -- the Charlemagne prize. The award, bestowed for extraordinary actions to advance the cause of European unity, had never been given to an American head of state.
Trouble is, Clinton may have also succeeded in unifying the Europeans in their hostility to U.S. trade policy. And the enmity is mutual. Even as the red carpets were being rolled out in Lisbon, European bureaucrats prepared to slap their value-added tax on U.S. exports of entertainment and software delivered mostly over the Internet and pay-per-view TV channels. Deputy Treasury Secretary Stuart E. Eizenstat denounced the "unilateral" move and charged that it violated a moratorium on new Net taxes, as well as attempts by the Organization for Economic Cooperation & Development (OECD) to fashion a unified approach to Net taxation. Europeans countered that they were simply trying to harmonize tax treatment between goods and services and, furthermore, that the VAT tax is an internal matter.
So it goes these days with the two stiff-necked trading giants: one more issue to squabble over. In addition to Net taxes, bones of contention range from aircraft subsidies and engine-noise standards to biotech and bananas. No sooner is one issue resolved than two more disputes pop up. Now, the biggest confrontation of all is nearing the crisis stage: the foreign sales corporation tax credit, a $4 billion-a-year tax break for U.S.-based exporters that the World Trade Organization has branded an illegal export subsidy. The U.S. has until Oct. 1 to scrap it or face retaliatory European tariffs on billions of dollars worth of U.S. exports.
LIP SERVICE.
Rather than deal with the WTO ruling or negotiate directly with the Europeans in good faith, the Clinton Administration has proposed a rather phony "fix." The White House wants to extend the questionable tax credit to cover all overseas earnings by U.S. multinationals -- whether they're derived from U.S. exports or sales abroad by foreign affiliates. The Europeans aren't buying it. Expanding the tax credit that the WTO has ruled illegal is akin to a hunter responding to a ban on elephant killing by adding giraffes to his list of targets, scoffs EU Trade Commissioner Pascal Lamy.
Here's the bigger question: Why are the U.S. and Europe at each other's throats when both pay so much lip service to the benefits of international trade? Both sides like the concept of a global trading cop, but neither side likes being charged with rule-breaking. That's understandable. But neither side is pursuing the logical purpose of the WTO either: using the organization to directly negotiate compromises before reaching the point of levying retaliatory tariffs. Both sides seem to be relying on lawyer-gladiators in the WTO arena to address a growing list of trade disputes.
"This WTO system is not going to survive if we treat it as a courthouse, instead of using it as a negotiating forum to solve problems," says Jeffrey Lang, a prominent Washington trade attorney and former Deputy Trade Representative in the Clinton Administration. That's why, after all, the founders of the WTO chose to refer to their judicial branch as "dispute-settlement panels."
BEEF BAN.
The real solution is to find a table big enough to hold most, or all, of the disputes between the U.S. and the EU and then to start dealing. Take just one obvious potential compromise: Europe and the U.S. once agreed in the 1980s that they could adopt their own systems of taxation as long as the taxes applied equally to domestic and foreign corporations alike. That's a good basis for reopening talks, rather than waiting for issues to come before the WTO for resolution. Just because the U.S. exempts e-commerce from taxes doesn't mean the Europeans must follow suit. Likewise, each side should be able to adopt its own methods of taxing exports.
If such negotiations were held, they would need to be broader in scope than addressing disputes sector by sector. In reality, all these trade disputes are connected. After all, the foreign sales tax fracas began after Europe lost two high-profile agricultural cases before the WTO -- and then refused to implement the rulings. Europe still bans U.S. beef treated with growth hormones and discriminates against bananas sold by American-based fruit companies. Rather than comply with WTO rulings on beef and bananas, Europe raised the foreign sales corporation tax credit case in hopes of upping the ante.
Europe's gambit is also an attempt to gloss over the real issue behind the beef-hormones case and the refusal to accept the products of U.S. biotechnology: Europe has no regulatory authority to match that of the U.S. Food & Drug Administration. Food-contamination scares are far more common in Europe. And so European politicians, including some who privately acknowledge that there's no evidence that beef-growth hormones or bioengineered vegetables are a health risk, say they can't simply defy popular fears without losing their jobs. The answer would seem to be some agreed-upon regulatory body with similar rules for Europe and the U.S. But such a solution will never emerge from a WTO tribunal.
POOR SUBSTITUTE.
Occasionally, some trade agreements between the U.S. and the EU are reached separately. Case in point: a recent deal on Internet-data privacy in which the U.S. accepted stricter European privacy standards in return for a European agreement to allow the U.S. industry to police itself. But that has been the exception.
Breaking the pattern of sending every dispute to a WTO panel may take something akin to the global round of trade negotiations that was proposed at the failed WTO talks in Seattle last year. But the effort has to be made. So far, the WTO's dispute panels are proving to be a poor substitute for good-faith efforts at compromise.
Magnusson covers international trade and economics from Washington
EDITED BY BETH BELTON
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