Keeping Trade and War Separate


European Trade Commissioner Pascal Lamy traveled to Washington on Mar. 3 to meet with the Bush Administration's top economic officials and key congressional leaders. His message: Play fair. America has lost a series of lawsuits brought by the European Union in the World Trade Organization, but U.S. law hasn't been changed to comply with the adverse rulings. The biggest setback: A $4 billion case, upheld on appeal, that found the U.S. tax code in violation of international trade laws. The offending provision gives American exporters a special cut on their income taxes through so-called foreign sales corporations. The ruling also allows Europe to impose $4 billion worth of tariffs on U.S. imports unless Washington changes its tax law.

Lamy heard plenty of complaints from U.S. lawmakers and U.S. Trade Representative Robert B. Zoellick that Europe is acting improperly by discriminating against $300 million worth of U.S. agriculture products that are grown with the aid of genetic engineering. In turn, the U.S. has demanded that Europe end its unofficial moratorium on genetically modified (GM) food or face a WTO lawsuit as well. Europe has a system for approving new imports of U.S. genetically engineered food, but member countries have balked at any new approvals. Lamy spoke about these issues with BusinessWeek Correspondent Paul Magnusson. Edited excerpts from their interview follow:

Q: There's an unusual amount of tension between the European Union and the U.S. now over the possibility of a war with Iraq. There are calls in Congress to boycott French wine. Some American businesspeople who go to Europe say their business meetings are taken up with a defense or explanation of the Bush Administration's policy on Iraq. Are trade tensions and diplomatic tensions spilling over into each other?

A: Maybe not at this stage, but we'd better be careful. Whatever happens with Iraq, the European Commission has no position on this.... Bob Zoellick [Lamy's U.S. counterpart] and myself consider it part of our duty to avoid increasing anger that might be there.

Three years ago, transatlantic relations were fine except for some trade disputes about bananas or steel. Now, [diplomatic relations are affecting trade patterns]. You can't isolate trade from the rest. But we want to limit the damage so that it doesn't make resolving the trade problems more difficult.

There's also an impact on multilateral trade. We need to make sure the Doha round [of international trade negotiations] is not slowed by things like this.... We need to send a signal that we jointly care about the multilateral trading system. It's an asset that we need to preserve.

Q: What about the effect on the dollar and its value relative to the euro?

A: This has more to do with fundamentals. The euro and the dollar are two big elephants. Both [the EU and the U.S.] run trade policy as a separate issue. Of course, it has some short-term effect on competitiveness. I always say the relationship between Europe and the euro is like a dog and its owner. You go for a walk in the morning, and sometimes he's ahead of you and sometimes behind, but in the end you go home together.

Q: The foreign sales corporation issue -- the subject of your lawsuit -- is an old one. The dispute over genetically modified food is relatively new, however. It looks as if the U.S. is now delaying bringing its case because of the need to retain more allied support within the U.N. on Iraq. Would there be a backlash against the U.S. if the case were brought?

A: We always said if the point is to increase purchases of GM food by the European consumer, we don't believe that litigation in the WTO makes things easier. We have a system in Europe that's different from the U.S. system.

We believe our system is WTO-compliant, but if the U.S. wants to litigate on this case, then that's another issue. And it's true that our system, as it is, has problems. There are problems with our member states.... We may have different views and cultural differences, but we have to make sure that the U.S. side doesn't have the view that we do this because of protectionism.

Q: There has been some talk in Congress about pulling out of the WTO. And now the reluctance of the Administration to bring the case on genetically modified food, which many in Congress want to pursue. Would this be a serious blow to the WTO if the U.S. were to quit?

A: Sure. But I don't think it will happen. Congress should just have a look at the numbers. The litigation record of the U.S. and the WTO is pretty clear, and it's a good one.

Q: But the U.S. wins the small cases and loses the big ones, right?

A: Well, if you look at the number of cases the U.S. started and won, it's a very reasonable proportion -- three-fourths. It's just that reactions of this kind stem more from unawareness of what this is about. Spreading the good information is the solution. The U.S., with a structural trade deficit of $300 million to $500 million, should realize that a good set of international trade rules is better for the U.S.

Q: Do you hear from European businesspeople that the tensions over Iraq are having an effect on their business?

A: I'm not aware of any numbers. But there's a danger. One-fourth of trade is trade within multinationals. I can understand their concern, as you could understand how steel tariffs are their own business here. It's a sensitive area, and of course it's much more sensitive when you trade a billion euros a day.

I think we public authorities have to make an effort at [stabilizing things]. You have to regulate fuel in an electric generator so that things don't overheat.

Q: Is the U.S. taking seriously Europe's complaints that Americans are improperly using such geographical terms as Parmesan cheese and Burgundy wine? Should the U.S. stop?

A: It's a big issue for us. We've had the last two centuries to send people abroad, so naturally they took these [geographic] names with them. But it's a big issue for us because we're trying to persuade our farming constituency to go for quality, not quantity. These geographical indicators are the sort of symbol of what we're talking about.

It's a very important thing for a number of our constituencies. I know it's difficult, but it's not going to be about each and every thing. There's some grandfathering. It's also about developing countries, too -- about Basmati rice and Kobe beef and a number of things Asian.

Q: You've met with many officials within the Administration and Congress. Have any of then brought up Iraq?

A: As far as I'm concerned, I deal with trade, not foreign and security policy. It's something where the EU really doesn't have its act together. I'm trying to make sure that cooperation on trade is still there. We have to handle it correctly so that it doesn't make things more complex. At end of the day, it translates to numbers and jobs.


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