The Future of Transatlantic Relations: V

V. The United States, Europe, and World Trade and Finance

Independent Task Force Report
The Future of Transatlantic Relations

February 1999

As this report looks to the future of Transatlantic economic, security, and diplomatic collaboration, it is telling to examine the U.S. and European reactions to the current Asian economic crises and their global impacts—the most serious financial challenge that has faced the world in a half-century. The picture that emerges is not entirely encouraging.

Both the United States and Europe were tardy in recognizing the extensive implications of the financial problems in Asia (caused by overly rigid exchange-rate systems that many Asian countries adopted, weak domestic financial systems, and the volatility of international capital markets) and were therefore slow to try to institute remedial action. Initially, Washington allowed the IMF to take the lead in handling the problem; until late December 1997, the official U.S. approach to the Asian crises was to provide policy advice to the stricken countries but not direct loans. In November 1997, President Clinton called the crises “a few glitches on the road.” Only at the end of last year when it became apparent that the IMF loan program was not restoring investor confidence did the United States realize that the severity of the situation required Washington to do more.

Since then the United States has taken a vigorous role in attempting to manage the various dimensions of the economic crises in Asia. It led the effort to construct the $57 billion rescue of South Korea organized by the IMF; consistently pressed Indonesia to undertake the necessary structural reforms required by the IMF; exhorted Japan to stimulate its domestic economy and revamp its debt-ridden banking system and moribund tax code; intervened in June 1998 to stem the decline of the Japanese yen in foreign currency markets; consistently and publicly urged China not to devalue its currency; and prompted the Group of Seven (G-7) industrialized nations to the conclusion that the industrial world’s chief priority at present, with the balance of risk shifting away from inflation, is to spur economic growth. And the Congress passed the administration’s request for $18 billion to help replenish IMF resources (linking the additional funds to IMF reforms).

During this same period, European governments and banks have been generally supportive of these U.S. policies, including within the G-7, with respect to South Korea, Indonesia, Japan, and China. But the allies were decidedly slow to react coherently to these troublesome events in Asia, which were not initially seen in Brussels or in European national capitals as a threat to EU economies. This despite the fact that EU exports to the region are greater than those of the United States, as is the exposure of European banks through loans to the affected Asian nations. Perhaps this belated European response was caused by preoccupation with the pressing concerns of economic and monetary union and EU enlargement, a general inclination mostly to downplay events that are not occurring on or very near the continent, or an inability within the Union to agree on what to do. Recently, there are some indications that Europe might be ready to play a larger and more active role in curtailing the ongoing economic turmoil. At the fall 1998 annual IMF and World Bank meetings of finance ministers and central bankers, some European leaders even challenged American policies to date, questioning the wisdom of continued austerity programs, hinting that it might be time to consider intervening in capital markets, and suggesting ways to revamp these international financial institutions. Nevertheless, it still does not appear, at least from public documents, that Europe is shouldering an adequate share of the economic and political burden in managing these crises, which could endanger the entire global economy as well as destabilize important parts of Asia. With respect to the latter, Indonesia is a special and notably dangerous case that could blow up at any moment.

Although the Asian financial crises and their impact on the world economy are rightfully now dominating the headlines, it is important to recall in the context of this report that the U.S.-European economic relationship has been one of the great successes of the post-World War II era. The American and European economies together make up more than half of world GDP, and the United States and Europe have the largest, most stable, and most balanced trade and investment relationship in the world. Such economic interaction between the EU nations and America exceeds $1 trillion per year, and each side of the Atlantic depends deeply on the other for its economic well-being. And 95 percent of this Atlantic trade and investment takes place without difficulty or government involvement.

In December 1995, the United States and the EU sought to enlarge this transatlantic collaboration through a New Transatlantic Agenda (NTA), which is designed to increase European and global security, strengthen the multilateral trading system, build a more open trade and investment environment across the Atlantic, and address transnational challenges such as combating terrorism and protecting the environment. By all accounts, the unprecedented degree of contact and understanding among U.S. and European government officials provided by the NTA, combined with the influence and effectiveness of the Transatlantic Business Dialogue, have resulted in impressive strides so far in achieving the economic goals set forth in the NTA.

In addition, for nearly a half-century, the United States and Europe have successfully striven together to create an increasingly open environment for trade and investment throughout the world, based on the conviction that free trade is necessary not only for global prosperity but also to prevent a replay of the economic and political disasters of the 1930s. The countries of the European Union have been the most consistent and close supporters of the United States in every iteration of multilateral trade talks, beginning with the first round of the General Agreement on Tariffs and Trade (GATT) in 1947. Such sustained transatlantic economic cooperation was instrumental in establishing the World Trade Organization (WTO), is indispensable to further strengthen the WTO, and is crucial to greater liberalization of the global marketplace, including with respect to investment and financial services. And, more recently, the Asian economic crises have reminded both sides of the Atlantic of just how valuable and stable their economic relationship is.

This extraordinary record of U.S.-European cooperation does not mean that there are no economic disagreements across the Atlantic. Washington and Brussels continue to differ on issues related to their respective tariffs and direct and indirect subsidies, particularly connected to agricultural products (bananas come to mind at present); textiles; autos, auto parts, and automotive electronics; and nonferrous metals. In addition, the two sides of the Atlantic sometimes have discordant environmental, health, safety, and regulatory standards about which they argue as well as contrasting policies on broadcasting, motion pictures, and protection of intellectual property rights for software and entertainment products. None of these bilateral trade disputes, however, threatens to knock broad U.S.-European economic interaction seriously off balance, not to say the transatlantic relationship writ large.

Besides being the largest market in trade and investment for the United States, Europe is also America’s most important global competitor. The European Union has a larger volume of global trade than does the United States, and this, too, naturally upon occasion produces differences of view between Brussels and Washington. Asia has provided an especially fertile ground for U.S.-European trade competition but, again, this rivalry has been kept within acceptable boundaries and is healthy for the international economic system as a whole. Moreover, the EU is currently more supportive of U.S. trade policies than at many times in the past as the Union’s positions on China’s entry into the WTO and the Kodak case against Japan demonstrate.

On the other side of the ledger, a particularly contentious issue in U.S.-EU economic relations has been two pieces of extraterritorial sanctions legislation passed by Congress in recent years relating to Cuba, Iran, and Libya and directed against European individuals and companies. Despite the estimable strategic goals of these laws to promote democracy and human rights in Cuba and to address the rogue behavior of Iran and Libya, this is not an efficacious way to advance these unassailable U.S. objectives. As the above section on the greater Middle East makes clear, the United States needs its European allies in close partnership if it is to have a successful long-term policy toward that region, and particularly toward Iraq and Iran. This legislation makes such a coming together of U.S. and European policies significantly more difficult.

Put altogether, this record of transatlantic regional and global concerted action concerning trade and investment is impressive and, on balance with occasional ups and downs, it is likely to continue. The next transatlantic step is to open further trade and investment between the United States and Europe.

Prescriptions

The EU and allied governments should play a more active private and more visible public part in attempting to manage with the United States the regional and global implications of the Asian economic crises.
Such an increased and prominent role for Europe will be possible only if Washington is willing to engage in more intense coordination with the other side of the Atlantic regarding U.S. deliberations on how best to deal with the myriad global challenges triggered by Asia’s economic turmoil.
With the United States and Europe out front, the G-7 should urgently examine ways to reform the global financial architecture to better predict and deal with future crises.
Led by recent actions by the United States, the G-7 should informally seek to coordinate with their central banks a round of interest rate reductions by the industrial democracies.
Transatlantic nations should continue to press Japan vigorously to restart its economy, implement its commitment to banking reform, stimulate consumer demand, deregulate key economic sectors, and open its markets to fair trade. This would help stop a further deterioration in the Asian and global economies.
Congress should support U.S. contributions to the IMF and at the same time continue to press for fundamental IMF reforms.
Congress should urgently pass fast-track legislation to give the president enhanced authority to negotiate international trade agreements.
The United States and the European Union should become more ambitious by beginning to negotiate step by step a genuinely open trade and investment area—a true single transatlantic market—with real deadlines.
Washington and Brussels should continue to push hard for multilateral liberalization within the WTO, including in the agricultural talks beginning in 1999 and the services negotiations in 2000.
Both sides of the Atlantic should guard vigorously against protectionist pressures, especially in the new, more difficult global economic environment; the United States and Europe should want more competition based on fair rules of the road/level playing field, not less.
The U.S. Congress should remove from the legislation books as soon as possible the Cuban Liberation and Democratic Solidarity Act and, as prescribed earlier, the Iran-Libya Sanctions Act.