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Enhancing U.S.-EU Trade Relations:
Structures and Processes for the Future

Testimony by Frances G. Burwell
Vice President, Atlantic Council
Before the Subcommittee on Trade, Ways and Means Committee
U.S. House of Representatives
Tuesday, July 27, 2010

Chairman Tanner, Mr. Brady, other distinguished members of the Subcommittee, let me thank you for this opportunity to appear before you. The health of the transatlantic economy is a matter of great importance to both the prosperity and security of this country. A strong European economy is critical for the long-term growth of the U.S. economy. Around the world, a prosperous Europe, along with a prosperous United States, is an essential validation of our model of democracy and market capitalism. Today, as many developing countries weigh the merits of different economic and political systems, the United States and Europe together can provide a powerful advertisement for democracy through the strength of our economies. Too often, however, the transatlantic economy is overlooked, with attention instead focused on our ties with the so-called rising economic powers. Thus, I applaud this Subcommittee’s decision to focus on our most important economic partnership.

As has been well documented, the economic relationship between the European Union and the United States is the biggest in the world. The total value of U.S. exports to and imports from the EU was more than $500 billion in 2009 (which was a significant drop from 2008), and comprised 18 percent of U.S. imports and 21 percent of all U.S. exports. In comparison, of the BRICs, only China comes anywhere near this, also with 18 percent of U.S. imports (but only 6 percent of U.S. exports). Brazil is the only other BRIC to appear among the top ten export markets for the U.S., at about 2 percent. The difference is even more marked on investment, with EU FDI in the United States totaling almost $1.5 trillion (63 percent) and U.S. investment in the EU at $1.7 trillion. None of the BRICs appear among the top ten investors in the U.S. or among the top ten destinations for U.S. investors.

The size of the transatlantic market means that the United States and the European Union together must play a leadership role in the global economy, especially as we work our way out of the current economic malaise. In many respects, the economic crisis of 2008 originated in the United States and then the EU, and it is in our interests to ensure that such disruptions cannot happen again, or — at the least — that we are better prepared for the next time. But neither can we be exclusive: we must include those who represent the future of the global economy and begin to share with them both the opportunities and the burdens of global economic leadership.

The question before us is whether we have the appropriate mechanisms for this challenge. In particular, the United States and the EU must enhance the processes and institutions that will allow them to achieve two goals: 

• To ensure the continued economic growth and prosperity of the transatlantic economy; and

• To generate effective U.S.-EU leadership in the global economy, in collaboration with those who will inevitably have a leadership role in the future.

To complicate matters, we must undertake this task at a time of change in the U.S.-EU relationship. With the adoption of the Lisbon treaty, the EU will have new processes in several policy areas, including trade, and the European Parliament will have a greater say in most legislation. Exactly how this will work is far from clear, and much will have to be established through negotiation and precedent over the next couple years. And, just as in the United States, European governments — including the EU institutions — are in the midst of developing new laws and regulations concerning the financial sector. These could have far reaching impacts, affecting the types of financial instruments available, the location of financial firms, and their decisions on where to invest.

At first glance, it may seem that the U.S.-EU economic relationship is riven with disagreements and disputes. From beef hormones to genetically modified foods, and from bananas to chlorine washed chickens, certain disputes have persisted for many years, and have gathered much of the attention paid to the transatlantic trading relationship. The parallel complaints at the WTO on state support for Boeing and Airbus provide further demonstration of the rivalries that can develop across the Atlantic. The recent bailouts of large corporations, especially car companies, will provide many opportunities in the future for additional accusations of unfair practices if we do not figure out how to deal with such subsidies.

In fact, however, these disputes also demonstrate the strength of the U.S.-EU relationship. First, they affect a relatively small portion of the transatlantic economy, in some estimates as little as three percent. Second, they reflect the deep integration of our economies — it matters to us that the EU has different perceptions and rules related to food safety, for example, or to state support of manufacturing and other enterprises. Such rules in some countries would be considered inconsequential to U.S. exporters, but the U.S. and EU markets are significant enough that access is important to the other. Third, the size of these markets means that the rules established in each has influence beyond their borders. When the U.S. and EU have different rules, disputes arise and corporations and other countries must figure out how to reconcile competing circumstances. But when the U.S. and EU have compatible rules, the strength of their markets means that these rules are likely to become the global norm. This may not always be the case: in time, the Chinese or wider Asian economy may provide a basis for an alternative set of commercial norms (imagine how the Boeing – Airbus dispute will look when confronted with state support for a Chinese airplane manufacturer). So we must act now to enhance the transatlantic economic partnership.

But to move forward, we must understand that disputes have been, and always will be, a part of the U.S.-EU economic landscape. Governments have the right to set standards for products reaching their citizens, and we will sometimes differ over whether a standard or other requirement is necessary and fair. But this does not mean that we are without response. On the contrary, we have developed a sophisticated and effective dispute resolution process through the WTO. It may not always be pretty, and the disputes may persist for a long time while various WTO panels consider the issues, but sending a dispute to the WTO does provide an orderly, legitimate process that keeps matters from escalating further. As we consider whether we have adequate mechanisms for strengthening the U.S.-EU relationship, we should certainly not weaken the WTO dispute process, but rather look for ways to ensure its continued legitimacy.

The success of the dispute resolution process does not mean, however, that the WTO itself is now an adequate mechanism for enhancing the U.S.-EU economy. It is of course a multilateral organization with more than 190 members giving it a global reach. Over the years, it has been of enormous benefit to the U.S. and EU economies, providing a framework in which to work towards liberalization, even in farm trade. But as the Doha Development Round demonstrates, the traditional WTO trade round is now seriously broken. Too many participants have too little stake in the outcome, yet must still agree to everything before anything is settled. The current stalemate is due less to differences between the U.S. and Europe, and more to differences between both and the emerging economies. Yet in trade policy today, we continue to put our energies into completing a round that —if completion is possible — will offer less benefit to our economies that previous rounds.

The other global “institution” (in reality more of a network) that may enhance the transatlantic economic partnership is the G7/8 and G20. More focused on financial and macroeconomic issues rather than trade policy, it has no secretariat and little capacity for real policy innovation, not to mention implementation. The G7/8 remains the primary forum for U.S.-EU interaction, along with Canada and Japan (and Russia in the G8). The expansion to the G20 diffused this grouping further, while also creating more demand within Europe for separate national representation. It has not noticeably boosted any U.S.-European cooperation; in fact the meetings so far seem to have been characterized by transatlantic disagreement, most recently over whether stimulus or austerity is the appropriate response to the current situation. The G20 may eventually become an effective forum for coordination between the U.S., EU, and rising economic powers, but that day is not here yet.

One transatlantic institution rarely mentioned in the context of the U.S.-EU economy is NATO. Article 2 of the Washington treaty does emphasize the role of economic cooperation among allies. For the most part, NATO has used this article to stress to prospective members the importance of having a market economy. But NATO could be more ambitious and play a role in energizing a debate over the need for a truly transatlantic defense market. All the NATO allies will face the prospect of defense budget cuts in the next few years, and many will be forced to rationalize defense procurement and consolidate multiple national manufacturing lines (for armored personnel carriers, for instance) to a much more limited number. Under these constrained circumstances, there must be more partnerships between U.S. and European defense firms. Difficult questions about technology transfers, export controls, state funding, and other issues, must be overcome. The U.S.-UK defense trade agreement is a step in the right direction, but unless similar arrangements include other allies, it may prove to be more divisive within the Alliance.

Even in the area of defense trade, however, NATO is not the primary channel for U.S.-European interaction on trade. The European institution with responsibility for trade policy is the European Union. Thus, to assess the effectiveness of mechanisms to enhance transatlantic trade, we must turn to the U.S.-EU arena. The European Union has long had a major role in European trade policy, and that responsibility has been strengthened by the Lisbon Treaty. In the past, the national governments retained control over some elements of trade policy (such as some services and trade –related aspects of intellectual property). Trade is now exclusively an EU matter, and although member states can vote against a particular trade accord in the Council of Ministers, a veto is only allowed in a few areas, such as cultural exclusions and audio visual materials. The Lisbon Treaty has also given the EU responsibility in most areas of investment policy, simplifying a situation in which competence over regulations governing FDI in the EU was split between the EU institutions and member-state governments.

The U.S.-EU trade and economic relationship has been governed on two basic tracks, the USTR and DG Trade link, and, more recently, the Transatlantic Economic Council. In the post-Lisbon environment, however, it is very clear that we desperately need a third track — one that links the U.S. Congress and the European Parliament.

The first track — the relationship between DG Trade in the European Commission and the office of the U.S. Trade Representative — has long been central to the governance of U.S.-EU trade. But both offices have been primarily oriented toward enhancing trade in a multilateral framework, especially through the GATT and now WTO Doha Round. Both have also negotiated multiple free trade agreements with third states. The EU, for example, used FTAs as part of the accession process for the Central European states, and has also negotiated FTAs with some developing country partners as part of its assistance strategy. FTAs with other, more significant countries include those with Mexico, South Africa, and Chile, while talks are currently underway for FTAs with South Korea, Canada, India, and Japan. The United States also has a number of FTAs in force, including the NAFTA accord with Mexico and Canada, and additional agreements are under negotiation or pending ratification. As for U.S.-EU bilateral trade negotiations, the priority for DG Trade and USTR has been to pursue trade disputes. These have often dominated the headlines, but as pointed out earlier, given the tremendous volume of trade, they have not created an obstacle to the growth of the transatlantic economy. On the other hand, the focus on disputes has sometimes led to a strained USTR-DG Trade relationship that inhibits the exploration of more positive steps to enhance U.S.-EU trade.

The second track has focused less on reduction of tariffs and quotas, and more on creating regulatory consensus across the Atlantic, whether through harmonization of rules or mutual recognition. For some time, it has been clear that most of the “trade disputes” between the U.S. and EU were in fact differences over regulations, ranging from food safety and product standards to investment rules and standards in services such as accounting. Several U.S.-EU summits have attempted to grapple with this issue by establishing the “High Level Regulatory Cooperation Forum” and other mechanisms, but without much success. These efforts were often led by the State Department and DG RELEX in the Commission, with little ownership by the regulatory agencies that would be critical to any transatlantic efforts. In 2007, at the initiative of German Chancellor Angela Merkel, the Transatlantic Economic Council was created, bringing together top Cabinet officials and European Commissioners, and perhaps most importantly, on the U.S. side, it has been run by the White House. The TEC has struggled, however, to establish itself as an effective mechanism in resolving U.S.-EU regulatory differences. By the end of the Bush administration, it had reverted to discussing long-standing trade disputes, including differences of opinion over whether chickens should be washed in chlorine. The initial meeting of the TEC during the Obama administration was mistimed, as many of the European participants were effectively “lame ducks” as the first Commission under President Barroso wound down and the members of the new Commission were due to be announced shortly afterwards. The White House officials responsible for the TEC have also been the same individuals playing leading roles in the Obama administration’s response to the global financial crisis, and this has limited the amount of attention available for the TEC. The U.S. and EU have struggled to find a date for the next TEC, but it now looks as though a meeting will happen in the fall.

If the TEC is to regain its initial promise and become an effective mechanism for reducing regulatory differences across the Atlantic, the agenda for the next meeting must be chosen with great care. The issues selected must resonate with key stakeholders on both sides of the Atlantic so that the TEC can begin building supportive constituencies. To do this, the TEC should focus on three strategic issues:

• Promoting economic recovery and growth, with a focus on building a green economy and boosting innovation. The TEC should ensure that government interventions are well coordinated, mutually supportive, and of limited duration. The TEC should help coordinate “exit strategies” if necessary, and be a watchdog on protectionist impulses.

• Coordinating approaches to global economic governance, effectively becoming an informal G2 for U.S.-EU discussions prior to the G20 meetings. Although this may seem outside the TEC’s regulatory purview, financial regulation will be key, and with the future of the G7/8 unclear, there are few opportunities left for the U.S. and EU to develop a strategic approach to the new, larger institution and the issues of global economic management.

• Advancing efforts to create a barrier-free transatlantic market, including through pursuit of several regulatory “lighthouse” projects. These could include financial services regulation, e-health regulation, intellectual property rights, and many others. Of particular interest might be those emerging industries and technologies where little regulation yet exists.

If, however, the TEC is to succeed at such an agenda, it must also expand the circle of those engaged, especially by bringing in key legislators, including not only representatives of the Transatlantic Legislators’ Dialogue, but also relevant committee and subcommittee leadership.

This brings me to the third, currently non-existent, track that must be created if we are to enhance U.S.-EU economic relations — a strong and cooperative relationship between the European Parliament and the U.S. Congress. In the past, both the Congress and the European Parliament have passed measures that created barriers to transatlantic economic interaction; Sarbanes-Oxley is a prominent but not isolated example. The very dense nature of transatlantic economic relations means that efforts to regulate on one side of the Atlantic may have adverse — even if unintended — consequences on the other side. Furthermore, none of the existing obstacles that must be overcome ― tariffs, regulations, investment barriers ― can be addressed without the cooperation of legislators. This is particularly true in the post-Lisbon environment, because the European Parliament has been given substantial new powers in the area of trade, as well as in some key sectors, including agriculture. EU legislation in these areas will now be subject to European Parliament approval, as well as agreement by the member state governments. National parliaments will become increasingly irrelevant on these matters, mostly having the obligation to transpose EU regulation into national formats. Trade agreements with other countries will require European Parliament approval without possibility of amendment; an arrangement very similar to the U.S. “fast track” or “trade promotion authority” under which Congress has reviewed such accords in the past.

Since the passage last fall of the Lisbon Treaty, and the beginning of the European Parliament’s current five-year term, some initial steps toward closer Congress – EP relations have been taken. There have been numerous European Parliament delegations visiting Washington, putting forward their own perspectives on issues ranging from civil liberties and privacy to financial services reform. They have sought to establish closer links with their congressional colleagues, largely on an ad hoc basis. In addition, the European Parliament has established a small office in Washingto, charged with building stronger Congress – EP relations. To build on these initial steps, some additional measures should be taken. Trade and economic policy can provide a strong focus that will make Congress-EP interaction consequential from the beginning. Some additional measures are:

• As the European Parliament office in Washington takes shape, Congress should strongly consider whether to establish an office in Brussels (which would move to Strasbourg when the Parliament is in session there). Congress should obviously not continue to rely on the U.S. Mission to the EU as its interlocutor with the EP (USEU is obviously first and foremost, responsible to the State Department). If the only institutionalized presence of the Congress – EP relationship is the Parliament office in Washington, attention will naturally gravitate to issues of concern to the EP (which will have staff to push those forward) with less attention given to Congressional priorities. Of course, Congress cannot establish multiple offices with parliaments around the world. However, a case can be made that the European Parliament, which represents 500 million people producing $14.5 trillion in GDP is developing into a unique institution (the comparable figures for the United States are 310 million in population and $14.26 trillion in GDP purchasing power parity). Certainly, in trade, economic, and regulatory policy, the Parliament is establishing a role comparable to Congress. And given the strength of the transatlantic market, Congress should view the European Parliament as its partner in creating the basis for regulations and standards that will drive the global economy. Parliament is in the midst of negotiations with the EU member states over a financial reform package, establishing rules on oversight for hedge funds and other financial instruments. In combination with the financial reform passed in the U.S. Congress, this measure — and the regulations that will flow from both — will define the global financial market for some time to come. This cannot be said of the Indian Parliament or any other.

• The Transatlantic Legislators’ Dialogue needs to be enhanced. The co-chairs, Rep. Shelly Berkley and Elmar Brok, should be applauded for bringing new energy to the dialogue. There is certainly a continuing need for a forum in which members of Congress and the EP can talk about foreign policy issues of mutual concern. But this should be supplemented by a committee-to-committee structure with an emphasis on non-foreign policy matters, in which the chairs of relevant committees in Washington and Brussels regularly consult. The committee structures of the House of Representatives and the European Parliament are similar, with both covering many of the same topics, such as agriculture, energy, international trade, civil liberties, homeland security, transportation, infrastructure, and research.

• The Congress and European Parliament should become an integral part of the TEC. Legislators could develop a regular mechanism for identifying pending legislation that might have an extraterritorial impact and that should be examined more closely in the TEC. These same legislators could provide a regular assessment of TEC progress in priority areas and build this into their oversight procedures of relevant regulatory agencies. Having European Commissioners and U.S. Cabinet and White House officials meet regularly to tackle regulatory issues is an enormous step forward. Legislators have proven that they can be part of the problem by creating regulatory difficulties in the U.S.-EU arena. Making them an essential part of the TEC dialogue could make them part of the solution.

But the evolution of the Congress – European Parliament relationship cannot simply rest on process. If the U.S.-EU economic relationship is to be enhanced, these two legislative bodies must work together on projects that seek to overcome existing obstacles to the development of an even closer and more prosperous transatlantic economic space. Giving legislators an integral role in the TEC will not be productive if they see themselves as protectors of existing barriers rather than partners in finding solutions that will further economic growth in both the EU and the U.S. Four areas in particular offer opportunities for Congress – EP cooperation in the area of international trade and investment:

• Support an effort to negotiate a U.S.-EU bilateral Free Trade Agreement aimed at eliminating all tariffs and quotas on traded industrial and agricultural products. Given that most transatlantic tariffs are low and often simply have nuisance value, a focused market access free trade agreement could be achieved relatively quickly. It is likely to enjoy a broader base of domestic political support since the EU has high-wage labor and stringent environmental and labor safeguards. Such an accord is likely to have immediately beneficial effects on investment, profits and jobs, since two-third of U.S.-EU trade is intra-firm, i.e. companies trading intermediate parts and components among their subsidiaries on both sides of the Atlantic. Removal of these barriers could reduce costs for many transatlantic manufacturing companies. If these negotiations succeed, removing barriers to trade in services may be a good next step. Tariffs on agriculture have always been the major problem, but with agricultural trade growing across the Atlantic, now may be the time to take a bold step forward. Where agricultural tariffs are high, phase-out periods could be longer. Moreover, European and American agricultural sectors would still remain implicitly protected by a range of non-tariff barriers that are far more important, lessening the political concerns that might accompany a complete liberalization. Finally, a bilateral U.S.- EU accord has often been seen as a threat to the multilateral process, but we are clearly at a point in the Doha Round where an incentive is needed to move negotiations forward; U.S.-EU accord may provide just that push. Although actual negotiations will be conducted between USTR and DG Trade, legislators on both sides of the Atlantic can provide essential support and even establish a roadmap for the way forward.

• Focus on removing the remaining barriers to mutual investment, while supporting the development of reasonable and compatible guidelines for national security reviews. Ownership restrictions on marine shipping, airlines, and infrastructure should be removed in most cases. In those situations where national security considerations might apply, there should be an appropriate review process. CFIUS, in the United States, has no EU equivalent, although several member states do have similar processes. Now is an opportune time to move forward, as the EU will seek a project that can demonstrate its new competence over investment policy, gained under Lisbon. The U.S. and EU should develop guidelines for allowing foreign investment to flourish with reasonable national security safeguards. In time, such guidelines might become a global standard as other countries grapple with the balance between prosperity and security.
   
• Support the development of a transatlantic defense market by reducing obstacles to collaboration between U.S. and European defense firms and barriers to trade involving high technology goods. The transatlantic defense market is changing, and will become even more challenging as European governments reduce defense budgets in a time of budgetary austerity. In addition, the European Commission has succeeded in partially eroding the national security exclusion that has exempted defense trade from the Single Market, so that by 2012, many defense procurement tenders must be open to competitive bids from across the EU. U.S. firms are not excluded, but neither are they privileged. Under these circumstances, an open conversation between members of Congress and the European Parliament about the future of defense trade and how some obstacles might be reduced could be a constructive way forward.

• Begin a discussion about agricultural policy, including subsidies and trade-related regulatory barriers. Given budgetary challenges in Europe, support for the Common Agricultural Policy CAP) is weakening within the EU. While there is likely to be little discussion of reform before the French presidential election in spring 2012, negotiations over the EU’s next seven -year financial perspective must be concluded the next year. As the CAP is the largest part of the EU budget, there is likely to be a lively debate about continuation at the existing level of support. With the European Parliament having gained a larger role in agricultural policy, and keen to use its budgetary authority to steer policy, now may be a goo d time for members of Congress and the EP to trade perspectives on agricultural policy and its future on both sides of the Atlantic. Such a discussion could also be helpful in negotiating a U.S.-EU free trade agreement, as suggested above.

Again, many thanks for the opportunity to put a few ideas before this Subcommittee; I look forward to your questions.