GMO Battle Shows How Transatlantic Trade Truce Cracks

By Matthew Newman
750 words
13 May 2003
16:30
Dow Jones International News
English
(Copyright (c) 2003, Dow Jones & Company, Inc.)

Of DOW JONES NEWSWIRES

BRUSSELS -(Dow Jones)- As the U.S. announced plans Tuesday to file suit against European biotech rules, experts worry that the long truce in transatlantic trade relations is cracking.

For the past few years, E.U. Trade Chief Pascal Lamy and U.S. Trade Representative Robert Zoellick -- personal friends who jog together -- have kept simmering differences over steel, tax breaks and biotech crops from blowing up into full-fledged disputes.

But both sides now are losing their patience. The first shot came last Wednesday when the E.U. gave the Americans a year-end deadline to scrap a tax break or face $4 billion in trade sanctions. Now the Europeans are bracing for American retaliation against their biotech crop trade barriers.

"The typical U.S. congressman sees the European deadline as a shot being fired, and then it would be legitimate to shoot back," said Cliff Stevenson, chief economist at Mayer, Brown, Rowe & Maw in London.

When U.S. trade negotiator Zoellick took office in February 2001, he inherited several nagging trade rows, including European restrictions on bananas. Teaming up with Lamy, he resolved that conflict.

Then the trading giants patched up major differences over farm trade and together helped launch a new round of global trade talks in Doha, Qatar.

The transatlantic goodwill could have evaporated two years ago when President George W. Bush -- against Zoellick's advice -- buckled to election year pressures and raised steel tariffs by 30%.

Europeans shouted protectionism and launched a lawsuit at the World Trade Organization. Lamy threatened $360 million in punitive tariffs but backed down after the Americans exempted many European steel products from the tariffs.

He also defused a long-running dispute over U.S. tax breaks for exporters. In August 2002, the WTO ruled that breaks were an illegal subsidy and authorized the E.U. to impose $4 billion in sanction. But Lamy knew billions in sanctions would kill transatlantic trade relations and opted to give the Americans ample time instead to change their tax laws.

Zoellick, likewise, has shown great patience with the Europeans' five-year embargo on biotech crops. The E.U. promised him new legislation to label and monitor the genetically modified organisms, and he held off suing.

But now the trade chiefs' patience is worn out in both cases. They can't put off action any longer.

"It's like two boys with fingers in the dike, and the level of water is getting to point where they can't withstand the pressure," worries David Woods, a Geneva-based trade consultant.

For the U.S., it's one thing to block GMO imports into Europe. It's another to warn developing countries that buying them will threaten their own farm exports. When the E.U. reportedly warned Zambia last year to refuse U.S. corn donations precisely for this reason, Zoellick advised Bush to file a WTO suit.

"The U.S. was worried that the E.U. soon would threaten China, India and other big food importers," one Brussels-based trade expert says.

For Lamy, emotions are similarly high about U.S. tax rules. Changes have been making their way slowly through Congress, and Lamy's announcement of a year-end deadline was aimed at focusing lawmakers' minds. Without the threat of sanctions, the E.U. trade chief feared that U.S. lawmakers never would act.

"There are core disputes that can't go away and can't be kept on the back burner," says John Wyles, a European affairs expert at Brussels consultancy GPlus Europe.

On both sides, the aggressive tactics carry huge risks. A U.S. suit on GMOs could spark a backlash by European consumers, already nervous about the safety of their food following health scares such as Mad Cow disease. The European threat to impose sanctions could stiffen Congress' desire to delay action on the tax issue.

Tensions also distract Lamy and Zoellick from working together to get the moribund Doha trade round moving.

"It's in the interest of the U.S. and the Europeans to play down the differences and work on the reparation of transatlantic relations," says Hans Labohm, an international trade economist at the Netherlands Institute of International Relations in The Hague.

The rationale for a continued trade truce may be compelling. But so is the pressure for confrontation.

-By Matthew Newman,Dow Jones Newswires;322-285-0133;matthew.newman@dowjones.com