An Introduction to the Issues and Analyses

Robert E. Baldwin

1. The Importance of US-EC Trade Relations

A minimum requirement for a viable trading system is the active support of both the United States and the member countries of the European Community (EC). This is not only because their trade makes up about one-half of total world trade but because the United States and members of the EC have been the main architects and supporters of the post-World War II international trading regime. Other major trading groups have generally been willing to accept the leadership of the United States and the EC in initiating multilateral negotiations aimed at reducing protection and modifying the rules of the General Agreement on Tariffs and Trade (GATT).

In recent years a series of United States-European Community (US-EC) disagreements have developed that threaten the degree of consensus between these two trading blocs that is necessary for the maintenance of a stable international trading order. They are on such diverse matters as the consistency with current GATT rules of particular actions taken by one of the parties, the need for new rules and for changes in existing rules to cover forms of trade not now subject to GATT discipline, the adequacy of present dispute settlement procedures, the proper agenda and procedures in new multilateral trade negotiations, and the relationship of trade policies to balance-of-trade deficits.

As the some 90 members of the GATT embark on a new multilateral trade negotiation, the Uruguay Round, the United States and the European Community face an historic challenge. They can either use the occasion to move toward the resolution of their disputes and thereby strengthen the trading system or they can adopt inflexible negotiating positions with the likely result that, as others follow suit, the negotiations become the occasion for a further weakening of the rules and arrangements of the world trading system. Fortunately, the Ministerial Declaration adopted in Punta del Este in September 1986 gives some promise that the first course will be followed. Besides agreeing upon a standstill and rollback of traderestrictive measures inconsistent with the GATT, the participants included in the agenda as subjects for negotiation most of the issues on which US-EC disagreements have arisen.

The purpose of this volume is to facilitate the resolution of the two blocs' present differences by analyzing some of the most important issues of disagreement and considering alternative policy options to reduce tensions and lessen the risks of a breakdown of the trading system. In carrying out this objective, emphasis is placed on utilizing appropriate combinations of historical, theoretical, and empirical analyses. Each general subject is analyzed, in most cases, from both an American and a European perspective.

Of course, many US-EC disputes cover matters on which there is widespread disagreement within the entire trading system. Thus, the theoretical analysis in most of the papers, though not the institutional detail, is also relevant for studying trade policy in general, nonregional terms.

1.2 US-EC Litigation in the GATT

Under the GATT, if one member considers that any benefits accruing under the Agreement are being nullified or impaired as a result of the actions of another member, that member can request consultations with the other party to resolve the problem. Should the dispute not be settled through this procedure, the complaining party can request that a panel of appointed experts make a report to the general membership with their judgment on whether the GATT rules have been violated. The general membership then decides whether or not to accept the judgment of the panel. An appropriate place to begin an analysis of US-EC disputes, therefore, is to examine the nature and frequency of cases between these two parties that have been brought before such panels.

In part 1 of this volume, "The Legal Framework," Robert Hudec (chapter 2) examines the 80 GATT "lawsuits" filed between 1960, when the European Community became a full participant in GATT legal affairs, and 1985. Hudec finds that almost one-third of all the GATT lawsuits (26 of 80) during this period were between the United States and the Community. Furthermore, 45 of the remaining 54 cases involved either the United States or the European Community as one of the parties. The volume of US-EC litigation has increased in recent years, but so too has the volume of GATT litigation in general.

Most of the GATT lawsuits (43 of 80) have involved trade in agricultural products, and in most of these (25 of the 43), the EC has been the target of the complaint. Complaints about subsidies, both export and domestic production subsidies, and about tariffs, including the Community's variable levy on agricultural imports, dominate the list.

Hudec concludes that the United States has litigated in the GATT mainly to satisfy certain domestic political imperatives, while the Community has litigated primarily for defensive purposes, without really believing in the process. Nevertheless, he believes the lawsuits between the two trading blocs have provided a peaceful alternative to real economic warfare. Although he thinks there is some reason to wonder whether GATT litigation can retain political credibility, he is generally optimistic that political leaders will continue to strengthen the dispute settlement procedures of the GATT.

1.3 Current...