Baucus FSC/ETI Speech
The United States and Europe: Trading Partners or Trading Adversaries? The New Atlantic Initiative
Considered from a distance, the United States and Europe have every reason tomaintain a stable, mutually supportive trading relationship.
The United States and the European Union have the largest trading relationship inthe world. Each year, more than $375 billion in goods and services cross the Atlantic.Historically, the trade has been relatively balanced, without the enormous trade deficitsthat weigh down U.S. trade with China and Japan.
Both the United States and Europe are rules-based societies, and both have led theway in establishing a rules-based global trading system. In fact, the United States andEurope are sometimes called the twin pillars on which the World Trade Organization isbased.
Add to that strong cultural affinities and a history of working together to facesome of the greatest challenges of the 20th century, and one might expect the UnitedStates and Europe to have a rock-solid trade relationship.
Unfortunately, this is not quite the case. In recent years, trade tensions have oftenflared to near crisis levels. Even seemingly minor disputes over meat from animalstreated with growth hormones or trade in bananas have proven nearly insoluble.
Since 1995, the European Union has bombarded the United States with WTOchallenges that go to the core of the U.S. trade and tax policy. At the same time, the EUhas launched WTO complaints against the United States – like the challenge to the ByrdAmendment – that I believe are essentially nuisance litigation.
Making things worse, Europe has turned a deaf ear to a number of legitimatecomplaints raised by the United States.
BIOTECH AND THE WTO
Many of the concerns the United States has raised against the EU center on onesector – agriculture.
The reason for decades of tension is obvious. In 1970, European Community wasthe largest net agricultural importer in the world. By 1980, thanks to Europe’s CommonAgricultural Policy or CAP, Europe had transformed itself into the world’s largest netexporter.
As one of the world’s major agricultural exporters, this shift cost U.S. farmersbillions in lost exports and caused the cost of the farm program to sky rocket.Europe’s CAP continues to cost the U.S. billions in lost exports. But in recentyears the United States has shifted its focus in part from dismantling the CAP tocombating European programs, such as the hormone ban and the current moratorium onnew biotech products that unfairly restrict U.S. exports.
The United States has, for some time, been contemplating bringing a formal WTOcomplaint against the ill-advised and unscientific moratorium on new farm productsbased on biotechnology. It is always difficult to foresee the future, but I think there islittle doubt that a challenge to the EU moratorium would succeed in convincing a panelthat it violates WTO rules.
But the United States has held back in deference to the EU’s leaders who haveargued that this issue is not appropriate for WTO litigation because it is widely supportedby consumer groups in Europe. They make this claim without seriously addressing thefact that authorities in the United States and elsewhere have demonstrated these productsto be safe. Indeed, these products have considerable potent ial to boost food productionand provide consumers with a wider choice of affordable, healthy food.
I believe strongly that governments must make policy based upon sound science,not on fears based upon science fiction. But the EU continues to argue that the biotechmoratorium is necessary – in spite of overwhelming scientific evidence – because of thefears of consumer groups. I personally do not know how much of this rhetoric is anhonest explanation and how much is simply a convenient excuse for protectionism.What’s worse, the EU’s irrational fears are becoming the basis for policy in othercountries. It is time – in fact, well past time – for the United States to make a WTOcomplaint against Europe’s irrational restrictions on farm product imports which havebenefited from biotechnology.
I hope this point is heard not only in Europe, but in the decision making circles ofthe Bush Administration where the issue is presently stalled. To this point, theAdministration has given too much weight to unrelated foreign policy concerns inmaking the decision on initiating a WTO complaint on this matter.
FSC-ETI TAX ISSUES
I also find it comic that Europe’s leaders argue that they cannot make agriculturaltrade policy based upon a U.S. complaint to the WTO, but feel perfectly justified inpressing the United States to reform its tax policies based upon their WTO complaint.This brings me to the second major topic I wanted to focus on today, the tradedispute over Foreign Sales Corporation or FSC tax and its descendant, the ExtraterritorialIncome Exclusion.
My initial reaction to this dispute was that Europe was out of line in bringing thecomplaint. Nothing I have heard or seen since has led me to believe otherwise. Simplyput, the FSC tax was no more trade distorting than Europe’s practice of rebating its ValueAdded Tax on exports. Yet the EU pushed the case forward in direct contradictrion of atwo- decade old “gentleman’s agreement” not to pick away at each other’s tax policy.The United States probably made a mistake by not ensuring that this “gentleman’sagreement” was explicitly written into the WTO as Europe did when it won a grandfatherclause for its VAT rebates. Nevertheless, the rationale for bringing this case – beyond titfor-tat retaliation for U.S. action on bananas – escapes me.
Were I the U.S. Trade Representative, I would be inclined to counter Europe’s taxchallenge by vigorously defending our own policy, attacking the portions of the Europeantax system that are open to WTO challenge, and negotiating new rules on taxes that werefairer to the United States. This is why my colleagues and I included a principlenegotiating objective in the 2002 Trade Act designed to seek just this kind of fairness.Now, I recognize that I am not personally in charge of U.S. trade policy. But theAdministration’s reluctance to vigorously defend U.S. tax policy and demand fairness in
WTO rules baffles me.
Nonetheless I have been working with my colleague Senator Grassley and otherson considering a range of possible approaches to the FSC problem, including newlegislation.
Over the last few months, my staff has analyzed a number of options inconsultation with the Administration and others in Congress. I am now confident that itis possible to replace the FSC with a new manufacturing income exclusion, expandedresearch and development tax credit, or a combination of the two. And we needappropriate rules to transition to the new system.
Unlike some of the other legislative approaches that have been explored, I believethis approach would encourage companies that produce and export from the United Statesto continue doing so. That said, however, I do not believe that legislation like this shouldbe pursued in isolation. Rewriting U.S. tax policy is a wrenching and time-consumingexercise.
I would be much more confident in the process, if the Administration weremeaningfully pursuing basic fairness in WTO rules on taxation. But right now, I see verylittle effort from the Administration to do its part. Instead, they seem to prefer thatCongress shoulder the burden alone.
CONCLUSION
As I said before, the fact that European leaders can argue that the WTO cannot beused as a forum to force change in European farm policy, while maintaining it is fine toattempt to use it to force changes in U.S. tax policy simply floors me.
In fact, the irony does not end with taxes. The United States is under WTO attackfrom Europe on many fronts. In addition to FSC, Europe is challenging the U.S.safeguard on steel imports, the Byrd amendment to redistribute dumping duties, currentpractice for deciding the impact of privatization on unfair subsidies and a raft of otherissues.
In most of these cases, political gamesmanship seems to play at least as great arole as economic interest. It may surprise some in Europe, but I agree that some of thetrade complaints pursued by the United States in the past may not have been chosen ascarefully as they should have been.
That said, what is good for the goose is good for the gander. If Europe persists inthis WTO litigation, the United States should employ all measures within its control todefend its policies and make sure the glare of the WTO also falls on some of Europe’smany trade sins. There also may well be occasions in which the United States shouldpersist in policies that particular WTO panels have criticized.
I do not, however, believe that this is the best way to do business. I believe thatboth Washington and Brussels could be more rational in deciding what issues to putbefore the WTO. I also believe that both would be better off resolving matters throughserious consultations rather than relying on litigation.
Further, I still believe that more formal undertakings between the United Statesand Europe to expand trade and resolve disputes deserve consideration – perhaps evenincluding the possibility of a real Trans-Atlantic Free Trade Area.Unfortunately, if we cannot mutually manage far-sighted solutions, the UnitedStates must defend its trade interests. Washington, Brussels, and even the WTO must allbe respectful of each other’s legitimate prerogatives and interests. Otherwise, the roadahead may prove bumpy for all parties.
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