U.S.-European Union Trade Relations: Issues and Policy Challenges


 

Publication Date: May 2006

Publisher: Library of Congress. Congressional Research Service

Author(s):

Research Area: Trade

Type:

Abstract:

The United States and European Union (EU) share a huge and mutually beneficial economic partnership. Not only is the U.S.-EU trade and investment relationship the largest in the world, it is arguably the most important. Agreement between the two economic superpowers has been critical to making the world trading system more open and efficient.

Given a huge level of commercial interactions, trade tensions and disputes are not unexpected. In the past, U.S.-EU trade relations have witnessed periodic episodes of rising trade tensions and even threats of a trade war, only to be followed by successful efforts at dispute settlement.

Resolution of U.S.-EU trade disputes has become increasingly difficult in recent years. Part of the problem may be due to the fact that the U.S. and the EU are of roughly equal economic strength and neither side has the ability to impose concessions on the other. Another factor may be that many bilateral disputes now involve clashes in domestic values, priorities, and regulatory systems where the international rules of the road are inadequate to provide a sound basis for effective and timely dispute resolution.

The two sides face difficult challenges in keeping the relationship on an even keel in 2006. A number of bilateral trade disputes have been carried over from 2005 and are expected to be considered by the World Trade Organization (WTO). These include disputes on production subsidies for aircraft manufacturers, the EU’s treatment of bio-engineered foods, compliance in the long-running battle over tax breaks for U.S. exporters, and the continuing ban on beef treated with growth hormones. In addition, critical U.S.-EU differences, particularly over agriculture, now complicate and threaten progress in the ongoing Doha Round of world trade negotiations.

The biggest dispute in terms of the amount of trade involved relates to allegations that each side provides their civil aircraft producers, Airbus and Boeing, with illegal production subsidies. Both the EU and U.S. filed formal complaints with the WTO in May 2005 to this effect, and two separate WTO panels are scheduled to begin hearing the cases this year. However, panel rulings in these cases are not expected to be handed down until early 2007, thereby giving the United States and the EU ample opportunity to try to resolve the dispute bilaterally.

On a second dispute, the EU plans to reimpose sanctions by mid-May on U.S. exports valued at $2.4 billion in the ongoing Foreign Sales Corporation (FSC)-extraterritorial income (ETI) export subsidy dispute. Congress thought it had brought U.S. law into conformity with U.S. WTO obligations when it repealed the FSC-ETI as a provision of the American Jobs Creation Act of 2004. But an EU challenge to several transitional provisions of the new law was upheld by the WTO, thereby setting the stage for a reimposition of sanctions this month.

Major U.S.-EU trade challenges can be grouped into five categories: (1) complying with WTO rulings; (2) resolving longstanding trade disputes involving aerospace production subsidies and beef hormones; (3) dealing with different public concerns over new technologies and new industries; (4) fostering cooperative competition policies; and (5) strengthening the multilateral trading system.