Posted on 23-6-2003
When
two tribes go to war
by Faisal Islam, Sunday June 22, 2003, The
Observer
As is the fashion with real wars these days, there was no formal
declaration of this 'economic war'. But in the eyes of a senior
member of the French cabinet, it came in an unprecedented American
snub to last week's Paris Air Show. It was just the latest front
of a transatlantic trade battle. Top executives from Boeing
and Lockheed Martin boycotted the prestigious show after the
US military greatly scaled down its presence at the biennial
event. Just another move in this intricate game of snub, spin
and sideline.
'The American defence secretary believes the US is the only
military, economic and financial power in the world. We do not
share this vision,' defence minister Michele Alliot-Marie told
Le Monde, calling on European defence firms to combat 'American
industrialists pursuing a logic of economic war'.
She will soon issue a report questioning the influence of US
shareholders over European defence companies. In a mirror image
of these moves, US legislators are attempting to put a de facto
bar on the award of military contracts to foreign transport
firms.
But the skirmish over defence is only the latest development
of a bad month for US-European trade relations. First, the EU
acquired the right to issue $4 billion of trade sanctions by
the World Trade Organisation in response to a long-running dispute
over US tax subsidies to exporters through Foreign Sales Corporation
(FSC) measures.
A week later, the US took its dispute over an EU ban on imports
of genetically modified foods to the WTO.
American aviation companies were left smarting after suggestions
that Airbus blackballed a $2.8bn US bid to supply engines for
the Europrop plane, thereby allowing the European consortium
to re-tender with a lower bid. President Bush is being lobbied
to issue retaliatory sanctions if international trade laws have
been broken.
Last week, the EU referred the US back to the WTO over measures
that stop products being sold below cost price, known as antidumping
duties. And then there are large-scale disputes looming over
US steel tariffs and Europe's agricultural subsidies.
Throw in the fact that many in Europe believe that the US has
unleashed the weapon of mass devaluation - a falling dollar
- on the world economy and there's a whiff of the 1930s. Of
beggar-thy-neighbour devaluations. Of disastrous Smoot-Hawley
tariffs. Of the globalisation process tripping up and the dreaded
deflationary spiral.
'We haven't been here before; the probability of a catastrophe
has increased markedly,' says Alan Winters, a leading trade
economist from Sussex University. 'When the sympathy disappears
from international trade talks then out come these weapons.
I'd have no doubt that if the Americans push hard on GM, the
EU will push right back over FSC. It's close to that really
nasty scenario.'
Both parties can resort to a 'nuclear' option. The EU's weapon
- its $4bn list of WTO-approved sanctions to compensate for
the FSC - is loaded and ready to fire at will. The US arsenal
- similar 'counter-measures' to compensate for Europe's GM ban
- is being prepared.
Fear of mutually assured destruction will prevent either side
firing, it is said. But there are signs that the nuclear analogy
is not quite on the money. The truth is that both sides are
developing their alternatives to genuine multilateralism. If
the impasse continues, both have fallback options based on regionalist
free trade areas.
Jagdish Bhagwati, the Columbia University economist considered
high priest of free trade, has long argued that soundbite-loving
politicians attach too much weight to the first two words of
the phrase 'free trade area'. He says: 'These blocs do not mean
free trade.'
But the US has, in the words of Robert Zoellick, the US trade
representative, been pursuing a policy of 'competition in liberalisation'
of trade. It has been striking deals bilaterally and regionally
as well as through the multilateral WTO framework. Recently,
special free trade deals have been signed with Singapore and
Chile. This weekend, the US is pushing proposals for a free
trade area, linked to the US, in the Middle East. These sweetheart
agreements with favoured nations are a threat to more generalised
free trade.
'It could end up with little happening in Geneva and the world
carved up into regional blocs and overlapping agreements that
encourage firms to invest for legalistic reasons rather than
specialising based on comparative advantage,' says Philippe
Legrain, a former special adviser at the WTO.
A much bigger game is being played out by the US negotiators.
The menu of different side deals offers the US enhanced leverage
over Europe. Zoellick believes that it was the establishment
of North American and Asia-Pacific free trade areas in 1994
that forced Europe to close the Uruguay Round of trade talks,
although that is disputed in Europe.
Europe, too, has been puffing up its regional base, either through
expansion to eastern Europe, or through preferential trade treatment
around the Mediterranean rim.
'Each of the two sides is now building up its own bloc with
regional client states. Regionalism could undermine the multilateral
system,' says Winters.
The military analogy stretches to the manner in which the US
has attempted to 'internationalise' its dispute over GM. Australia
and Argentina were brought on board for its attack on Europe's
attitude to GM.
Legrain believes that the US attitude to the GM dispute is merely
a warning shot to other would-be biotechphobes. Even if Europe
opened the gates to GM foods, our consumers would not buy them.
In turn, Europe's attitude to the FSC, a complaint that was
hardly a cause célèbre of Europe's hard-pressed businessmen,
is commonly assumed to be no more than a negotiating position.
But the disputes have come much further than many expected.
There are moves in the US Congress to redraft the US tax code
to make it compliant with the WTO. And the EU is in the throes
of reviewing its moratorium on GM food. But goodwill is in short
supply. And the EU-US spat promises to scupper September's crucial
trade talks in Cancun, Mexico - which were tricky enough even
before the trade difficulties.
'It is possible that the EU and US will be so absorbed by their
own fight that Cancun just withers amid deep running frictions,'
says Winters. 'We've moved into much more dangerous waters.
The Americans have to realise that backing the French right
into a corner will not work, because they'll walk.'
Ultimately, trade talks have been an expression of politics.
It has worked within Europe, because it was seen as a route
to help prevent France and Germany warring with each other.
'In the current disputes, we appear to be heading in the other
direction. The GM dispute threatens to reinforce and institutionalise
where they are already going on the politics,' says Winters.
The key question is whether a Europe emboldened by its increasingly
popular currency, and an imminent eastward expansion, feels
it can credibly fall back on its regional strength. Or perhaps
the US will call Europe's bluff, and bank on the likes of Britain
and Spain creating enough internal discord for the Continent
to back down. Chancellor Gordon Brown, for example, has been
pushing for free trade between the US and the EU, claiming that
they would gain by £46bn and £72bn a year, respectively.
That ideal has never seemed further away. Just stopping each
continent adding to their existing tariffs seems challenging
enough.
Currencies: spectre of devaluation
It has been called the weapon of mass deflation by European
wags. However, the apparent ditching of the US 'strong dollar'
policy has got the continent's exporters concerned about competitiveness.
A stronger euro is also pushing down inflation - ordinarily
considered a good thing. In the German context, however, even
lower inflation means a serious risk of a deflationary spiral.
As Japan has intervened to keep the yen down, most of the upward
pressure has been felt by the euro - up 20 per cent in less
than a year.
There is a real risk that, in a time of sluggish growth, major
trading nations all revert to the same tactic. Last year, Morgan
Stanley's chief economist, Stephen Roach, predicted as much.
'It's times like this that bring out the worst in xenophobic
policies. Just the mere suggestion of reflating through currency
depreciation conjures up the perils of competitive currency
devaluation,' he said.
And in the past, competitive devaluations have gone hand in
hand with increased protectionism and then depression. The clear
hope is that existing economic co-operation mechanisms, such
as the G7 meetings, will be enough to avoid a beggar-thy-neighbour
free-for-all.
So far, the danger has not materialised. The strong euro has
given the ECB room to cut rates by 0.5 per cent, and it has
stabilised at around $1.17. The danger will come if the dollar
slump resumes.
Agriculture: GM deadlock
Pascal Lamy, Europe's top trade negotiator, dismissed the
US move on genetically modified food as 'pointless' at Friday's
World Trade Organisation ministerial meeting in Egypt.
Talks between the US and EU broke off on Thursday in Geneva,
and US officials said that they would soon request the WTO to
convene a panel to hear the case. The US says the WTO should
order the EU to end the moratorium on the ground that it is
an unfair trade barrier.
Europe imposed a moratorium on the farming and import of biotech
foods and grains in 1998 because of a tide of public concern
about 'Frankenfoods'. But EU officials recently have been working
on a system that would allow them to label genetically engineered
food so that European customers can choose whether or not to
buy it. Britain is believed to be helping to dilute the provision
to bridge the gap with the US.
Biotech crops have been widely grown in the United States for
years, including corn and soybeans genetically modified to resist
insects or disease. US exporters say the ban has stopped $300m
in sales of corn alone. And US officials claim that the EU ban
has led to copycat actions in the developing world, which help
to 'starve' poor countries by limiting the use of high-yield
seeds.
This claim has caused fury among European negotiators.
Defence: tough talkingFor Boeing, Lockheed Martin and
Northrop Grumman, there were too few major customers attending
the Paris Air Show to generate any benefit. Their message was
clear: we're interested in making money.
Meanwhile, across the Atlantic some US politicians are doing
their best to embarrass the US defence behemoths, the Pentagon,
State Department and the White House.
There are two key examples, both relating to the opening up
of the notoriously difficult US defence market to foreign companies.
The first is an amendment to the Defence Authorisation Bill,
which is currently navigating Congress. Tabled in the house
of Representatives by Californian Republican Duncan Hunter,
it calls for a list of 'critical items' in military systems
to be supplied only by US companies.
The proposal has been attacked by the White House, the US Aviation
Industry Association and individual companies. It would jeopardise
'interoperability' between American forces and their allies
and major projects such as the F-35 Joint Strike Fighter, which
relies on collaboration with a host of non-US companies. A source
at Lockheed Martin, the F-35 prime contractor, said: 'This is
clearly not helpful for anybody.' LM executives in Paris repeated
this to defence procurement Minister Lord Bach, who is campaigning
for better access for the US's 'ally in chief', the UK, adding
that 'there was no chance' of it going through.
However, the UK industry is very nervous. Defence expert Dr
Alexandra Ashbourne says they have reason to be. 'You have the
White House, Pentagon and State Department in agreement on liberalisation,
which is unusual. But the damage is in obstruction, and Congress
can continue to obstruct this process.'
This is true of the other area - arcane rules governing the
transfer of technology across national borders in collaborative
projects, known as Itar, which governs some 9,000 restricted
items.
The UK in particular has been putting pressure on the US defence
procurement head Peter Aldrich to lift Itar on non-classified
aspects of projects. 'It is an irritant, and hampers our ability
to operate effectively,' says Professor Keith Haywood of the
Society of British Aerospace Companies.
But while the White House and the industry is lined up behind
reform, Congressman Henry Hyde has organised the House International
relations Committee (which he chairs) to reject proposals for
Itar waivers for America's allies, writing to Colin Powell arguing
that the US needed to maintain a 'stringent system of control'.
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