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EU: Analysis From Washington -- When Free Trade Leads To Trade Wars

Washington, 5 March 1999 (RFE/RL) -- Regional free trade associations -- such as the European Union --promote commerce among their members by lowering tariffs on transactions among their member states. But the external barriers that such associations in every case retain can lead to trade wars between such associations and other countries and groups of countries.

And because these groupings not only are larger than any one of their members and thus have more clout and because these groupings often have political as well as economic goals, such trade wars may become not only more intense but also more difficult to resolve than trade wars among individual countries have been in the past.

That danger is very much in evidence in the growing battles over trade issues between the European Union, on the one hand, and the United States and its North American Free Trade Area (NAFTA) partners, on the other. While the conflict began over an apparently minor question-- the EU's restrictions on the importation of bananas -- it is spreading to a variety of other issues as well.

Upset by American pressure on the banana front, the European Union recently decided to impose new noise restrictions on planes, a nominally neutral measure but one widely seen as intended to force American airlines to purchase new and European-produced equipment.

In response to that, Washington has imposed new tariffs on European-produced luxury goods, including clothing and special foods, and the U.S. Congress is considering legislation that would prohibit the Anglo-French supersonic Concorde from landing at American airports.

And as this conflict escalates, each side is presenting itself as the chief advocate of free and fair trade, blaming the other for supposedly ignoring the rules of the game as established by the World Trade Organization, and showing itself to be significantly less willing to talk than its member countries typically were when such issues were negotiated on a state-to-state rather than organization-to-organization level.

On the one hand, this dispute reflects some very specific features of the EU-US relationship. Fresh from introducing the euro, the new common European currency, the European Union is especially interested in showing that it can stand up to the Americans on any and all issues.

And the United States, which has pushed free trade issues harder than any other country and has usually benefited as a result, is obviously concerned both about possible losses in sales to the large EU market and about the paradoxes of free trade that this dispute is likely to exacerbate if Washington yields to the European Union on any of these issues.

But on the other, this emerging trade war, as leaders on both sides are now calling the dispute, also points to three more general problems in the world economy as regional groupings of states become more important.

First, regional groupings, even when committed to free trade among themselves, must maintain some trade restrictions at their boundaries to justify their own existence. And because these groups have more economic leverage and broader political goals, they are likely to be more inclined to press their own case, up to and including trade wars.

While this gives some formerly weaker countries a greater voice in trade matters and thus levels the playing field with stronger ones, it also risks the kind of isolation, admittedly on a larger scale, that could threaten the economic well-being not only of those outside these groupings but even of the members of free trade areas. Second, in such disputes, some members of any given free trade area are likely to suffer more than others. . Thus, American restrictions on the Concorde will hit Britain and France more than Germany or Italy, while EU restrictions on American aircraft will help some EU countries far more than others. And this is likely to drive much of the politics within these groups as well as dictate the strategy of those negotiating with them.

Thus, the new American tariffs on some EU-produced luxury goods are likely to spark intense debate in Brussels as to whether fighting the banana war is worth it. And the EU restrictions on American aircraft seem certain to set up domestic conflicts in the U.S. in much the same way. Both the EU leadership and Washington certainly understand this and will seek to exploit it as talks continue.

And third, because these groups are larger than single states -- the U.S. is acting on behalf of NAFTA in most cases -- developing a common strategy with one's own partners and reaching agreement with the leadership of other groups is likely to become ever more difficult as regional trade associations become more important. . Such difficulties could not only rob much of the world of the benefits of free trade, but they could lead to other kinds of conflicts, including those over security issues that economic ties have seldom been able to contain. And that in turn suggests that what began as a fight over bananas could turn into something much larger and more threatening.