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PREPARED STATEMENT OF CHARLES M. LUDOLPH DEPUTY
ASSISTANT SECRETARY FOR EUROPE BEFORE THE
INTRODUCTION Madame Chairperson, I am pleased to be with you this morning to discuss the importance of our economic partnership with the European Union (EU). The EU is one of our most important economic partners and we welcome this Committee's sustained and informed interest in maintaining the health and stability of the U.S.-EU economic relationship. The overall transatlantic economic relationship is evolving rapidly. Therefore, our relationship requires considerable attention, both by government policy makers as well as by the private sector. The EU has shown notable successes in its integration of 15 national economic markets, but the deepening and widening of this integration creates stresses within the EU and with the United States that require careful management. The Commerce Department, and particularly the International Trade Administration, is actively engaged in a number of commercial matters of great importance to U.S. exporters and the transatlantic business community. Today, I would like to provide an overview of the state of our economic relationship, some of the key areas that require attention, as well as the efforts we are undertaking to resolve trade disputes and other matters of commercial concern. THE ECONOMIC SITUATION The United States and the EU share the largest two-way trade and investment relationship in the world. The July 1999 trade figures show a trade deficit at an annual rate of $43 billion with the EU. This is on top of the $60 billion trade deficit with the EU cumulated between 1995 and 1998. The U.S. Department of Commerce takes this very seriously. In 1998, the U.S. trade deficit with the EU was $27 billion. U.S. merchandise exports to the fifteen member states of the EU were $150 billion in 1998, with the EU being the first or second export destination for business in 41 U.S. states. U.S. imports from the EU in 1998 were $176 billion. Until recently, our trade with the European Union has tended to balance out, with surpluses in some years offsetting deficits in others. From 1970 through 1995 in fact, our cumulative trade balance with Europe was a deficit of less than $1 billion for that entire twenty-five year period. This indicates that the deficit reflects the difference in economic growth between Europe and the United States, rather than an increase in European trade barriers. To increase its chances for economic expansion, the United States is making suggestions to the EU about ways to strengthen its regional economy, including reforms of labor, goods, and financial markets and tax policies to make them more conducive to investment and employment. In addition to direct trade, the United States and the EU have maintained a longstanding and very large investment relationship. In 1998, U.S. companies had about $490 billion in direct investment in Europe. European companies registered more than this with about $540 billion worth of investment in the United States. More than 6 million jobs were directly created together by EU and U.S. investment in each other's markets. ENSURING A HEALTHY ONGOING U.S.-EU RELATIONSHIP We are working--and will continue to work--with the Europeans to help make their economies as strong as possible and to strengthen our bilateral economic relationship. That is the best way to help guarantee our own economic stability and strength -- and that of the world economy. The large and highly interdependent U.S.-EU economic relationship is successful because of the continued efforts to liberalize trade and investment rules that affect transatlantic commerce. Through the successes of international trade liberalization, primarily through the World Trade Organization, and U.S. and EU internal reforms in regulation of commerce, growth of the transatlantic marketplace has been sustained by opening markets, reducing costs and improving the confidence of consumers in the protections provided them in the U.S. and EU markets. But any large economic relationship, particularly one that is evolving in so many ways, generates trade disputes, and the U.S.-EU economic relationship has its share. It is important to keep in mind that while we have some very contentious trade disputes that have significant implications for companies directly affected, most U.S.-EU trade is virtually problem-free. We must resolve all of these disputes so that our rights and interests are maintained, and also so that the overall, largely trouble-free, economic relationship can continue benefitting producers and consumers. The United States and the EU can report progress in developing the means to address issues that currently divide us, in a more timely manner -- before these issues become big problems (I will discuss a bit later current efforts to flesh out so-called "early warning" principles and mechanisms announced at the June 1999 U.S.-EU Summit in Bonn), but concerns remain. The point is that together Europe and the United States can accomplish very positive outcomes in the WTO and globally. But if we do not cooperate, I am concerned that much less can be accomplished. This makes it a high priority for issues to be addressed and not just managed. Let me briefly share our perspective on the most important issues affecting our relationship. U.S.-EU COOPERATION IN PREPARING FOR THE WTO MINISTERIAL Working with the EU to ensure a successful WTO Ministerial is a priority for the United States. We regularly discuss WTO issues with EU officials and share a strong commitment to further liberalize the world trading system. As is understandable, there are several issues on which we have differing views, but we continue to work together closely to narrow the gaps between the U.S. and EU positions. For example, the EU appears reluctant to endorse the WTO's work on reducing or eliminating tariffs in the package of industrial items agreed to by APEC members. It has expressed the concern that if the WTO approves tariff packages, including the just mentioned Accelerated Tariff Liberalization initiative and also the Information Technology Agreement II, by the time of the Seattle Ministerial, as is hoped by the United States, that the United States will be reluctant to pursue further tariff negotiations in the Round itself. But this is not the case. The U.S. has a number of tariff liberalizations it would like to see agreed in the WTO. The EU is also reluctant to address labor issues in the WTO, although it does agree with us that core labor standards should be more widely respected throughout the world and that it is important for the WTO, ILO, and other international organizations to cooperate more closely on labor issues. We are in agreement with the EU that the next round of trade negotiations should be short -- about three years -- although the EU wants a broader-ranging negotiation than we do. For example, it is looking for negotiations on antidumping, competition and investment, all of which we believe are premature. On agriculture - which, along with services, is part of the built-in agenda agreed by Ministers at the close of the Uruguay Round to be the core of the next round - the EU has taken a defensive posture, in line with its role as a major user of agriculture export subsidies. The EU's approach with respect to health rules affecting imports is often -- in the U.S. view -- not based on scientific findings. On environment, it wants more clarity in the rules on a variety of issues which the U.S. believes the WTO already adequately addresses. The EU and the U.S. also agree that improved WTO transparency is a way to increase public confidence in the world trading system and that an agreement on transparency in government procurement will serve all countries well. We are looking forward to a very productive Ministerial meeting in Seattle and are working together to ensure that the next trade round is a real success. EU REGULATION OF BIOTECH FOOD PRODUCTS The Administration is increasingly concerned over the question of European market access for U.S. agricultural exports derived from bio-engineering. The United States has long viewed the EU's process for approving new agricultural products through bioengineering as being too slow and non-transparent. Unfortunately, the problem is getting worse, not better. Increased public concern over the safety of biotech food products in Europe has now caused the European Commission to operate under a de facto moratorium on the introduction of any new biotech products in Europe. No new agri-biotech products have been approved in the EU since 1998. Furthermore, there are calls from some European based Non-Governmental Organizations for a total ban on all bio-engineered products in Europe. If anti-biotech sentiment continues to grow in Europe, it is possible that the EU may one day refuse to take any genetically altered agricultural commodity and/or processed food products. While the United States certainly recognizes the right of the EU to take the steps necessary to ensure the health and safety of its citizens and the environment, we would hope that EU policy would be ruled by sound science and not political pressure on this issue. To establish agreed rules for trade in biotech products and to foster greater understanding and acceptance of the U.S. approval process for GMOs, the United States is engaged in a number of international and bilateral initiatives. The Transatlantic Economic Partnership's Biotech Working Group is one such forum where the United States is working with the EU to address issues of mutual concern. Also, at the June Summit, the United States floated the idea of a U.S.-EU scientific exchange on biotech issues and the EU has expressed a willingness to consider the idea. On September 17 in Brussels, Under Secretary Aaron challenged the new European leadership to "promote and forthrightly develop a comprehensive policy on biotechnology". We will work energetically with the EU's new Commission to encourage it to take a fresh look at resolving this immensely important issue. The Commerce Department, in conjunction with other U.S. agencies, is developing an outreach program to combat the misinformation campaign that is being waged in Europe and elsewhere. We simply must find a solution soon as the stakes are so high for the United States. EU'S DATA PROTECTION DIRECTIVE Concerns about individual privacy have increased with the advent of electronic commerce, and both the United States and the EU are working hard to ensure the protection of privacy of individuals. We both have the same goals of protecting personal data, but we differ in our approach. Billions, if not trillions, of dollars in international trade -- and the future of the promising electronic commerce marketplace -- may well hang on whether we can find ways to bridge these differences. The European Data Protection Directive prohibits the transfer of personal information from Europe to third countries that do not provide "adequate" data protection. Should the United States not be judged to provide adequate data protection, millions of data transfers from EU countries to the United States could be disrupted. International Trade Administration Under Secretary David L. Aaron has been engaged in detailed discussions for over a year and a half with John Mogg, his European Commission counterpart, to address the issues that the EU's Data Protection Directive present for our economic relations. Discussion are continuing this fall to conclude a "safe harbor" agreement -- a set of principles for data protection that U.S. companies could voluntarily use to deal with EU data protection requirements. After the substantial progress made on the substance of an agreement for the June U.S.-EU Summit, EU Member States raised new concerns in July 1999 about U.S. self regulation and enforcement under the "safe harbor". These issues are not insurmountable, but they raise important questions that need to be resolved this month with the EU's Article 31 Committee before we can proceed. Under certain circumstances, the United States is prepared to meet EU Data Commissioners' proposals for enforcement to take place in the United States. If we can agree on these circumstances soon, then it is our joint goal to have an "ad ref" agreement approved by the United States and the College of Commissioners for the December Summit. EU'S HUSHKIT NON-ADDITION REGULATION In April, the EU Council adopted an aircraft engine "hushkit" regulation that ostensibly is aimed at reducing noise around European airports. The Council postponed its implementation until May 2000 to provide time for resolving U.S.-EU differences over the trade and economic effects of the regulation. As Under Secretary for International Trade David L. Aaron testified three weeks ago before Congress, the hushkit regulation is one of the largest trade trade issues we face with the EU. U.S. aerospace manufacturers and airlines have already suffered commercial harm because of the chilling effect the regulation has cast on the marketplace. The economic damage to the United States is at least $2 billion. The EU "hushkit" regulation is based on a very carefully crafted design standard (rather than a performance standard) that targets U.S. products while leaving unaffected European-manufactured aircraft and aircraft engines. It fails to recognize aircraft that are fully compliant with the most stringent noise standards established in the International Civil Aviation Organization (ICAO) -- a global standard that until now has been observed by the EU and over 100 other countries. The EU hushkit regulation will have little, if any, effect in actually reducing aircraft noise. Under the regulation, many aircraft will be permitted to operate that are as noisy, and even noisier, thant the aircraft that are restricted. At the EU's request the United States has agreed to accelerate work in ICAO on the development of a new, even more stringent, aircraft noise standard. Unlike the cosmetic EU regulation, the new ICAO standard would provide for genuine noise relief, including the phase-out of the noisiest aircraft of concern to the EU. The EU agrees that, since April (when the hushkit regulation was adopted), work on the new ICAO standard has progressed satisfactorily. To date, though, the EU has not been prepared to make a clear commitment to rescind the hushkit regulation, restoring market confidence in hushkitted and re-engined aircraft. In mid-September, Ambassador Aaron discussed U.S. concerns with senior officials of the European Commission and EU Member States. Those consultations were constructive. We expect follow-up discussions in the near future. Withdrawal of the regulation will promote the prospects for achieving a more stringent noise standard in ICAO. It would also reduce trade tensions, avoiding the necessity of the United States having to consider initiating action to protect U.S. trade interests. THIRD GENERATION WIRELESS COMMUNICATIONS SYSTEMS The Administration and U.S. industry have had concerns for the last year and a half that EU efforts on third generation (3G) wireless standards were intended to replicate the first-to-market advantage that benefitted European vendors in the second generation and resulted in the worldwide dominance of European-developed Global System for Mobile communication (GSM) technology. Europe's intention of mandating the use of a single, European-developed wireless standard within Europe well before the International Telecommunication Union (ITU) was to complete its 3G standards development process later this year would have effectively precluded all the proposed technologies from being fully vetted through the ITU process and receiving full, fair and transparent consideration as potential global standards. We have forcefully advocated for an open, market-driven approach for developing these standards, which would give operators the freedom to choose the technology that best meets their needs and would allow multiple standards to compete freely and fairly in the marketplace. In addition, we have sought specific assurances from European governments that competing 3G technologies and services can be deployed in Europe in a time frame comparable to that in which European-sponsored 3G technologies and services are deployed. Achievement of these two goals would allow U.S. manufacturers and service suppliers, for the first time, to have an opportunity to serve the European market using U.S.-designed technology. Moreover, it would maintain the commercial viability of U.S.-developed second generation wireless technologies which were being portrayed in key third country markets, such as China, as having no future. Two Cabinet level USG letters on 3G, sent by myself and other agency chiefs to European Commissioners, set in motion a series of favorable developments in ITU-based negotiations on 3G wireless communications. The EU has gone on record in support of the ITU process and an industry-driven approach. The EU also clarified that its UMTS Directive requires Member States to reserve a minimum of one 3G license (i.e., not all) for the European-developed technology. The Transatlantic Business Dialogue (TABD), a U.S.-EU industry forum, broke a lengthy impasse on 3G standards by forging consensus on a multiple standards compromise that was satisfactory to U.S. industry. The ITU subsequently endorsed the TABD concept of multiple 3G standards. A key agreement was then reached by an ad hoc 3G Operators Harmonization Group (OHG) on a technical framework for 3G harmonization. This detailed framework for future harmonization work is compliant with the TABD agreement and has been endorsed by virtually all major operators and manufacturers (from 13 countries, including the U.S. and EU member states). The ITU acted swiftly to endorse the document, and standardization work is progressing. The ITU's resulting standards, to be completed by December, will be highly inter-operable, i.e., they will not serve the E.U.'s original strategy of creating its own unique standard, incompatible with the multiple standards used in the United States. These developments seemed to indicate that a market-driven solution to this issue might indeed be possible -- with governments appropriately taking a secondary role in the technology selection, development and licensing processes. However, there have been indications that European governments still wish to defeat any expectation that the multiple standards compromise will result in introducing U.S. 3G standards technology into Europe. Under E.U. law, Member State licensing arrangements must be finalized by January 1, 2000 (a one-year extension can be granted on Member State request). Among ten E.U. Member State regulators that proposed 3G licensing plans earlier in the year, nine have not indicated how they will change those arrangements so as to clearly allow equal domestic competition among any ITU-approved standard other than a single preferred European variant. It appears that the other five Member States will either seek an extension, miss the deadline or announce their planned licensing arrangements this fall with short, if any, opportunity for public consultations prior to finalization. Finland is the only country in the world that has granted 3G licenses already. However, all the Finnish 3G licensees previously had announced intentions to use the single preferred European standard when Finland indicated they were free to use any ITU-approved 3G technology. The Finnish decision on technology-neutrality came at a time (March 1999) when fears of a USG Super 301 action against Europe on 3G were widespread. Thus, although we have reason to be cautiously optimistic, given the possibility that pending European licensing or standardization decisions could still negate the progress to date, it is critical for the Administration to continue to relay the message in all meetings with European officials that we expect them to license and assign spectrum for 3G systems in a fair and nondiscriminatory manner based on any and all standards that emerge from the ITU, and that any decision to the contrary would create strong concerns in the United States regarding EU and Member States' compliance with their World Trade Organization obligations. BANANA AND BEEF HORMONE DISPUTES The two most publicized U.S.-EU trade disputes in recent memory, those involving bananas and beef hormones, are progressing according to WTO rules as administered by its Dispute Settlement Body (DSB). Regarding the bananas dispute with the EU, the World Trade Organization (WTO), on April 19, confirmed for the fifth time in six years that the EC's banana regime is not consistent with its international trade obligations. We hope that the EU will finally comply with its WTO obligations. We remain open to negotiating a WTO-consistent solution with the EU. Since the late 1980's Latin American countries and the United States have urged the EU to implement the "Single Market" for bananas in a manner consistent with their international obligations under the GATT (General Agreement on Tariffs and Trade) and the subsequent international agreements under the WTO. Unfortunately, it has taken five international trade panels six years to bring the EU to the point of considering changing its banana regime. The United States has imposed 100 percent duties on $191.4 million on goods from the EU. These increased duties will remain in effect until the EU institutes reforms of its banana import regime in a manner consistent with its WTO obligations. And although it is trying, the European Commission has still not been successful in its efforts to win EU Member State approval for implementing a new, WTO-consistent EU banana regime. With regard to beef hormones, the EU has effectively blocked U.S. beef exports to the EU since 1989, when it introduced its ban on the importation of beef from cattle treated with hormones. After appealing the 1997 WTO panel's findings against it, the EU was given until May 13, 1999 to come into compliance with a WTO ruling that found the EU's ban inconsistent with the principles of the Sanitary and Phytosanitary (SPS) Agreement. Instead of preparing to meet its international obligation to comply, the EU essentially did nothing, and failed to meet the deadline to end its arbitrary and unscientific ban on imports of hormone-treated beef. Therefore, we had no choice but to exercise our right under the WTO, and, on June 3, requested authorization to suspend concessions in the amount of $202 million, an amount equal to the level of damages that U.S. exports suffer on an annual basis. The EU responded by exercising its WTO right to request arbitration on the amount of our damage estimate. On July 12, the WTO arbitrators determined the damage to be $116.8 million. Accordingly, on July 19, the USTR announced the final list of products from the EU on which the United States would impose 100 percent ad valorem duties in response to the EU's failure to comply with the WTO finding that the import ban on beef produced with growth hormones is inconsistent with WTO rules. Unfortunately, the European Commission has said recently that it will not have the scientific studies it commissioned ready for WTO review until the middle of next year, making it unlikely that the EU will lift its ban anytime soon. With the hormones case, the EU once again missed the opportunity to show the world that it will respect the results of the WTO dispute settlement regime all Members agreed they would abide by. The real issue continues to be the EU's refusal to comply with the WTO rulings and its unwillingness to honor its international obligations. CIVIL SOCIETY DIALOGUES/TRANSATLANTIC BUSINESS DIALOGUE The Transatlantic Business Dialogue (TABD) is key to advancing the U.S.-EU commercial agenda, and has contributed significantly to progress made on the U.S.-EU Mutual Recognition Agreement, 3G Wireless standards, Southeast Europe reconstruction, data privacy, and hushkits. The TABD, made up of CEO representatives from U.S. and EU companies, offers the business community the opportunity, through a process of developing and submitting specific joint recommendations to government, to advise us on how we can best move forward with the liberalization of the massive transatlantic marketplace and reduce costs caused by redundant regulatory requirements. The TABD's work has produced a number of significant successes over the past four years, and continues to provide government with the advice we need. Specifically, the TABD has consistently informed government officials that the main impediment to trade across the Atlantic are divergent standards, testing and certification requirements, as well as other regulatory differences. And we are working on these issues. Under the leadership this year of Xerox and the French company Suez Lyonnaise des Eaux, the TABD has established a very challenging agenda for improving economic relations. We are working now with the TABD to make the next TABD Conference, to be held in Berlin on October 29-30, 1999, one of the chief events for improving U.S.-EU economic relations. Secretary Daley will lead the U.S. Government delegation to the Berlin Conference. Some of the issues that will be stressed at the Conference include: continued improvement in regulatory cooperation, electronic commerce, international accountancy standards, priorities for the WTO Ministerial, and Southeast Europe reconstruction and development. We also are pleased that the TABD continues to give high priority to 3G Wireless, as I discussed earlier, to ensure that this important issue comes to closure this year, and that it is paying increasing attention to alerting government of possible future trade irritants, as at its recent Mid-Year Meeting where it identified specific regulatory issues that must be addressed soon to head off bigger problems. In addition to the TABD we welcome the contributions that are being made by the other transatlantic dialogues, including the Transatlantic Labor Dialogue, the Transatlantic Consumer Dialogue, and the Transatlantic Environmental Dialogue, and the Transatlantic Legislative Dialogue. EARLY WARNING AND PROBLEM RESOLUTION Given the contentious, headline-grabbing trade frictions between the United States and the EU that surfaced this spring, the United States and EU came to realize that more must be done to identify future trade irritants before they become full blown trade problems. As a result, the United States and the EU announced at the June Summit principles for "early warning" of trade problems and we are now working to flesh out these principles in cooperation with the private sector. Through this early warning process, the U.S. Government and European Commission are working to coordinate better, both internally and bilaterally, to identify and solve bilateral problems at an early stage. Early warning is intended to improve the capacity of each side to take the other side's interests into account when formulating policy, legislative, or regulatory decisions, without limiting each side's existing decision-making authority. Both sides understand that we are not seeking to create a new bilateral dispute settlement mechanism. We are simply working to identify through an agreed process potential frictions at an early stage, and to resolve them, at the technical level where possible and at the political level if necessary. In addition to attuning government officials to work on the early warning concept, the Summit early warning announcement by the Leaders charged Civil Society Dialogues with contributing to this effort and the Dialogues are working to identify early warning candidates. Secretary Daley and Under Secretary Aaron are working closely with the Transatlantic Business Dialogue on this initiative and expect that the TABD will develop a comprehensive set of early warning candidates that government officials can address at its Berlin Conference. CONCLUSION In conclusion, I would again like to thank the Subcommittee for holding these hearings to allow us to discuss the many important initiatives that we are pursuing to liberalize transatlantic commercial relations and present the many means that we have developed, and are continuing to develop, to make progress on these issues.With the installation of the new European Commission on September 17, we are very optimistic that we can now move forward more quickly on making progress on the transatlantic commercial agenda. Let me close by emphasizing that the U.S.-EU relationship is too important to allow it to languish. The U.S.-EU commercial relationship is key to both our international trade strategies. Not only is our bilateral commercial relationship the largest worldwide, the United States and the EU also are partners in working for liberalized trade and investment throughout the world -- in Asia, Latin America, and in Africa. Without our strong joint leadership, much less would be accomplished in multilateral fora to advance the trade agenda. The broad contacts developed with EU Member States and with the private sector in the new Dialogues like the TABD broaden our ability to contribute to trade liberalization. Accelerated work under the NTA has brought about some impressive successes, such as the conclusion of the U.S.-EU Mutual Recognition Agreement, which cuts costs for U.S. business operating in the transatlantic environment. There is much work to be done on other important issues, such as bio-engineered foods, but I am optimistic that workable solutions can be found. I am especially pleased with work to develop early warning through government and private sector groups, such as the TABD, to keep our relationship on track. The relationship is simply too important for us to allow issues to go on without effective solutions that will address trade issues today and, over time, will actually strengthen the bond between our peoples. ### Go/Return to the ITA Pressroom Go/Return to the ITA Home Page
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