Anxiety Over Trade Rift Grows U.S.-European Strife Could Threaten International Economy
By Paul Blustein Washington Post Staff Writer Sunday, March 23, 2003; Page A12 First there was the bluster about slapping duties on imports from countries opposing war with Iraq. Then came the imbroglio about "freedom fries," and calls for boycotts against French and German goods -- the latest being a series of articles in the New York Post urging readers to shun products made by "the beret-wearing escargot eaters." Discord over the Iraq war is putting uncomfortable strains on economic links between the United States and Europe, a relationship that many view as a cornerstone of global prosperity. Guardians of transatlantic harmony are scrambling to keep the diplomatic rift from poisoning economic ties. Last week, for example, Guenter Burghardt, the ambassador of the European Union to the United States, came armed with data illustrating Europe's economic importance when he paid a visit to Sen. George Allen (R-Va.), the new chairman of a Senate subcommittee on European affairs. The ambassador's figures suggested that the senator's constituents might pay a stiff price if the dispute over Iraq were to spill into the economic sphere. "I showed him my chart about the European Union and Virginia," Burghardt recalled. "He saw for the first time that 34 percent of Virginia's exports go to the European Union, and 74 percent of foreign direct investment in Virginia comes from the European Union." The upshot, according to the ambassador: "I think this senator will become part of the constituency we need" to keep economic tensions in check. Economic relations between the United States and Europe run deep, making the cost of a serious rupture almost too high to contemplate. Of the more than $5 trillion in assets held by American companies overseas, nearly three-fifths is in Europe. European firms hold about $3.3 trillion in U.S. assets, or slightly more than two-thirds of the foreign holdings in the United States. European firms employ an estimated 4.4 million Americans, and the number of Europeans employed by U.S. companies is only slightly less. But the animosity that has flared of late appears almost certain to seep into transatlantic trade and investment issues, especially those involving the United States and France, where the mutual antagonism is the most intense. One obvious bone of contention concerns the awarding of reconstruction contracts in postwar Iraq; French officials from President Jacques Chirac on down are vehemently objecting to indications from Washington that the rebuilding will be an American-run undertaking, with U.S. corporations in line for preferred treatment. The French embassy has received a half-dozen or so reports in recent days of sizable U.S. corporations cutting off business with French banks, according to Jean-Francois Boittin, the embassy's minister-counselor for economic and commercial affairs. He declined to name the parties involved but said of the anti-French campaign underway in the United States: "I for one think it's not so much a spontaneous mobilization, but all very well politically organized." Large corporations doing business across the Atlantic and their governments say they are monitoring developments closely and finding only scattered signs of the war's impact on purchasing and investment choices -- for example, a Web site selling French cheese over the Internet that has reported a 20 percent drop-off in business. Pernod Ricard, the French liquor group that owns Martell cognac and Ricard pastis, said last week that it had seen scant evidence of a boycott, though it postponed its 2003 financial forecast because of uncertainties about whether its products will be targeted. In one prominent case, a major transatlantic business deal went ahead in the face of war tensions -- Procter & Gamble Co.'s announcement of plans to acquire control of Wella AG, the German hair-products maker, for $5.75 billion. Beyond the question of how consumers and businesses are acting lie longer-term concerns -- that lingering acrimony among top policymakers will spark tit-for-tat trade wars, and wreck the U.S.-European cooperation needed to strike a worldwide trade accord that could help spur global growth. U.S. Trade Representative Robert B. Zoellick sought to allay such concerns. "The analogy I would urge you to consider is that after September 11th, there were a spate of stories about how this would lead to closure of international economic relations and trade," Zoellick said in an interview. "And we actually employed it, along with other things, to push the launch of the Doha negotiations," a reference to the city in Qatar where agreement was reached at a World Trade Organization meeting in November 2001 to initiate a new round of global trade talks. Zoellick also noted that rhetoric about being "joined at the hip" filled the air during a visit to Washington a couple of weeks ago by Pascal Lamy, the EU's trade commissioner. Despite opposition toward Washington's Iraq policy in Lamy's native France, "we both recognize that part of our task is to look ahead in terms of strengthening the international economy," Zoellick said. But U.S.-EU differences on trade were already vast, and the possibility clearly exists that ill feeling over the war between Washington and big EU member states will only make the gaps harder to bridge. Last week, both sides rejected a compromise proposal on one of the thorniest issues in the WTO negotiations: how to pare the multibillion-dollar subsidies that rich countries give their farmers, which cause overproduction of crops and depress world prices, hurting farmers in poor nations. As a result, chances are rising that the negotiators will miss a series of deadlines they set at Doha for reaching interim agreements necessary to build momentum toward a final deal in 2005. Although trade officials note that the final deadline is still off in the future, the danger looms of a much sourer atmosphere, especially if economic dealings are contaminated by war considerations. Any American assault that might be launched against French or German economic interests would face strict legal limits. WTO rules bar governments from treating the products of WTO member countries any worse than they treat those from all other member countries. And battling the EU would mean picking a fight not only with Paris and Berlin, but with member states that are Washington's staunchest allies in Iraq, including Britain and Spain. Still, like Ambassador Burghardt, some firms are nervous enough about the economic side effects of transatlantic sniping that they are doing all they can to spread the word that the U.S.-European commercial and financial relationship is vital for both sides. DaimlerChrysler Corp., which prides itself on being the largest transatlantic company, is bankrolling the distribution costs, such as printing and public presentations, for a study documenting the stakes that the United States and Europe have in each other's economies. The study's author, Joseph P. Quinlan, a fellow with the Center for Transatlantic Relations at Johns Hopkins University, presented his work at a National Press Club lunch on Thursday, and DaimlerChrysler hopes to hold another such lunch for people in Congress and the administration. Quinlan argues in his study that the already-enormous links between the United States and Europe have been growing rapidly in recent years, notwithstanding all the hoopla about American firms moving operations to Asia and Latin America. He places particular emphasis on the direct investment by European companies in American plants and equipment, and similar investment by U.S. companies in Europe. Over the past decade, "U.S. companies did go to places like Brazil and India, but for every dollar they put abroad, half, or a little more, went to Europe," Quinlan told the press club audience. "And conversely, of all the foreign direct investment in the United States, three-quarters of that came from Europe." Such figures have to be placed in context: Foreign direct investment accounts for only about 12.5 percent of all spending on plants and equipment in the United States. And of that foreign investment, the biggest single source is British firms; the French and the Germans together accounted for a little more than 22 percent of all foreign direct investment. Still, Quinlan contends that the web of production and supply relationships between U.S. and European companies is so tight that Americans can't easily give up the products associated with countries they dislike without hurting some of their fellow citizens in some way. For example, refusing to buy a Mercedes on the grounds of its German origin makes little sense, Quinlan said. "Recognize that an Alabama worker helped build that," he said.
