U.S.-EEC TRADE AND INVESTMENT RELATIONS By Lawrence A. Fox I. INTRODUCTION. II. COMMERCIAL POLICY ASPECTS OF I. INTRODUCTION With the possible exception of Canada, no foreign area influences United States trade and investment to a greater extent than the European Economic Community. Last year our exports to the EEC represented 18% of our total exports; our direct investment in the Common Market countries represented 14% of our direct investment abroad. A quarter century ago, at the conclusion of World War II, most observers expected substantial growth in U.S.-European economic ties, but few foresaw the scale of the flourishing and inter-dependent economic relationship that would develop between the United States and the six countries that now comprise the Community. Progress was possible because of what Secretary Stans called, in his speech in Brussels in April 1969, "historic victories of economic cooperation: —the rebuilding of the eonomies of Western Europe -the development of strong European production and trading entities -the building of financial reserves by European nations -the far-reaching Kennedy Round agreements -the substantial enhancement of living conditions in all free countries All of these advances owe most of their quality and vigor to one of the most remarkable achievements of our post-war era. I refer, of course, to the Common Market headquartered in this capital." The Common Market promises to continue to be the most dynamic force in Western Europe. It is ushering in a new phase of economic integration. Plans for economic and monetary union and for a common Lawrence A. Fox is Deputy Assistant Secretary of Commerce for International Trade Policy. industrial policy are being seriously discussed. Moreover, prospects are favorable for the enlargement of the Community by the addition of the United Kingdom, Ireland, Denmark and Norway. A Community of ten members would, on the basis of 1969 statistics, account for 26% of our total exports (Table 1) and 24% of our direct investment. However, this economic progress in Europe has also brought problems, some potentially quite serious. The agricultural sector stands out most prominently in the present and immediate period ahead. The problems in the industrial sector are less immediate, intangible to a degree, and generally the obverse of certain favorable potentialities from the U.S. business standpoint. The United States is the EEC's best single market and accounts for 15% of EEC exports to non-members. "The Community is aware of the decisive importance of the developments of its trade relations with the United States, both for its own economic growth and for that of the harmonious development of world trade." (EEC Commission, Third General Report on the Activities of the Communities, 1969, p. 390). II. COMMERCIAL POLICY ASPECTS OF EUROPEAN If the General Agreement on Tariffs and Trade (GATT) is to be considered a product of the nineteen forties, when the emphasis was on universalism, the EEC may be viewed as a product of the fifties, when regionalism appealed to practical European idealists. From the European standpoint, world-wide liberalization of trade barriers had its limitations, but a return to economic nationalism had not only even more serious limitations but the most obvious dangers. European trade liberalization under the Organization for European Economic Cooperation (OEEC) had made a highly important contribution to European recovery by eliminating most quantitative restrictions but, as it turned out, a Europe-wide free trade area was not destined to serve as the basis for restructuring Western Europe. Building on the example of the Belgian, Netherlands and Luxembourg customs union (Benelux), that type of organization was chosen as the basis of the European Economic Community. According to Article 9(1) of the Treaty of Rome: The Community shall be based upon a customs union covering the exchange of all goods and comprising both the prohibition, as between Member States, of customs duties on importation and exportation and all charges with equivalent effect and the adoption of a common customs tariff in their relations with third countries. The Treaty was explicit as to how tariffs on trade within the Community were to be dismantled; the process was to be progressive, more or less automatic, and irreversible. Incidentally, unlike most international treaties, the Treaty of Rome has an indefinite duration. TABLE 1.-Relation of U.S. Exports to the EEC to our Total Exports 1 O Present six EEC members plus U.K., Ireland, Denmark, Norway. 2 January-June, as annual rate. Source: Department of Commerce, Overseas Business Reports OBR 70-3 and OBR 67-43. Note should be taken of one phrase in Article 9 which is of growing importance as a natural consequence of the completion in July 1968 of the customs union as far as tariffs are concerned. This is the phrase "all charges with equivalent effect," which is the legal basis for efforts to remove national restrictions on public procurement within the Community, a subject of importance to U.S. exporters and Europeanbased American subsidiaries. Two other articles of the Rome Treaty, which deal with commercial policy, deserve quotation in full. Article 18 provides: Member States hereby declare their willingness to contribute to the develop. ment of international commerce and the reduction of barriers to trade by entering into reciprocal and mutually advantageous arrangements directed to the reduction of customs duties below the general level which they could claim as a result of the establishment of a customs union between themselves. In principal, the "general level" was that of a simple arithmetic average of the existing duties. Certain duties, however, were arrived at through negotiations between the Member States. Quite a few of these were of real interest to the U.S., e.g. paper pulp, aluminum, parts of motor vehicles, aircraft and machine tools. The negotiations usually resulted in lower rates than would have been the case from simple arithmetic averaging of country tariffs. Article 110 provides: By establishing a customs union between themselves the Member States intend to contribute, in conformity with the common interest, to the harmonious development of world trade, the progressive abolition of restrictions on international exchanges and the lowering of customs barriers. The thrust of these and other articles in the "constitution" of the EEC is clearly in the direction of trade liberalization, not just among members but with the outside world. Even in the case of agriculture there is no explicit bias toward high protection—although policy devel opments have taken the Community in this direction. As a result of the Dillon and Kennedy Rounds of tariff negotiations, the Common External Tariff (CXT) will have an average incidence on non-agricultural imports as of 1972 of about 8%, roughly the U.S. level. Moderate tariff levels of this nature provide little real protection and in part help to explain increasing concern about non-tariff barriers and EEC and U.S. plans and performance in this area. The desirability and even the necessity for concrete proposals for negotiating for the elimination or reduction of NTB's is evident. But the problems involved are difficult. How can one weigh and thereby equate one partner's NTB's against another's? Since many NTB's are nonprotectionist in origin, e.g. the Community's tax on value added which is part of the EEC tax harmonization program, what can be done? How are the internal and external aspects of this and other NTB's to be disentangled? Accordingly, it seems unrealistic to expect much or quick action at Geneva or in the OECD in Paris in this most difficult area. This is not to suggest that we give up trying. Indeed, the answer may be to try harder in different ways. At present I am inclined to regard the EEC's performance in regard to its enlargement and the related question of its recent and imminent preferential agreements as the major test of its outward-lookingness. The agricultural question, of course, is importantly involved, but I will not refer to it further. Respecting industrial trade and investment questions, it does not appear to be in our interest to insert ourselves directly in the negotiations between the EEC and the British and other applicants for membership, certainly not at this early stage. As they proceed, it will be prudent to keep an eye on specific threats to our commercial interest and to be prepared to intercede if necessary. Of immediate concern is the EEC's penchant for special trading arrangements with its Mediterranean neighbors. I refer to the EEC's preferential trade agreements or partial association agreements with Morocco, Tunisia, Spain and Israel and the prospect that there will be more of the same. It seems to me that what we are faced with is "too much of a bad thing." The GATT, which often seems to be a highly complicated, legalistic structure, is really a fairly simple operation designed to safeguard one principle, that of the most-favored-nation treatment; that is non-discriminatory trade. Let us bear in mind that the drafters of the General Agreement had to be realists, rather than perfectionists; they condoned existing preferential arrangements like the British Commonwealth. When the GATT articles were drawn up in 1947, the emergence of new regional blocs like the EEC was not foreseen, and |