Trade Scene: May Day for EU

Trade Scene: May Day for EU

WASHINGTON - May Day!

That's an old call of distress, but this week, it's a cry of celebration, at least in Europe.

Tomorrow (May 1), 10 counties will join the 15-nation European Union, further expanding the world's biggest trading bloc.

In one fell swoop, the EU's population will jump by 75 million to 455 million and the EU's total economic output will increase by more than $300 billion a year.

The newcomers -- Cyprus, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia and Slovenia -- will assume the EU's full panoply of policies, rules, standards and procedures, among them duty-free trade among all 25 member nations.

And of special interest to U.S. exporters, the incoming nations will adopt the EU's common external tariffs, which for the most part means lower duties on U.S. sales to the new EU members.

The tariffs of the new members have been averaging about 9 percent; now they will average slightly over 3 percent for U.S. and other "third country" goods.

This, says Frank Vargo, vice president for international economic relations for the National Association of Manufacturers, "will help level the (European) playing field" for U.S. exporters, especially of industrial items.

Concerns for U.S. ag exporters

Some U.S. agricultural groups are less pleased, however. "We view the EU's enlargement with concern," says an American Farm Bureau Federation executive. The incoming countries, in adopting the EU's common external tariffs, will have to raise their duties on a number of farm commodities, he points out.

But much more than that the group, in keeping with EU rules, must ban U.S. beef and apply phyto-sanitary regulations that amount to a de facto moratorium on imports of U.S. genetically modified corn and corn products.

Overall, says the Farm Bureau executive, he expects U.S. farm exports to the EU to keep declining.

Gary Litman, the U.S. Chamber of Commerce's vice president for Europe, offers another view. He foresees the enlargement as unlikely to yield anything "dramatic" in U.S.-EU trade flows.

For one thing, trade among the 15 established EU members and the newcomers is already essentially duty-free. For another, some of the newcomers -- including Hungary, the biggest East European buyer of U.S. goods -- have already reduced their duties toward meeting the May 1 deadline for adopting the EU's common external tariffs. Exchange rate swings may "dwarf" the impact of the tariff cuts, he says.

Still, U.S. officials are joining the Europeans in cheering. Enlargement, says the Commerce Department, is "creating many opportunities for U.S. firms" in Central and Eastern Europe.

Enlargement bringing new opportunities

Prospects are especially bright, U.S. officials say, for exports of information technology, telecommunications, transport, energy and environmental equipment, all to help the East and Central European countries integrate into the highly competitive EU market.

"On the whole," they assert, the EU's enlargement "should prove extremely beneficial to U.S. industries."

EU officials promote the expansion as "greatly simplifying" for U.S. and other "third country" companies the complexities of doing business in Europe. Technical standards, for example, will be the same throughout the 25-country market.

Other benefits, they promise, include stronger enforcement of intellectual property rights and more open government procurement in the new member states.

U.S. investors stepping up

Anticipating all this, U.S. firms have been stepping up their investment in Eastern Europe. Last year, U.S. direct investment flows into Poland and Hungary each totaled about $300 million. The EU has been encouraging these flows, advertising the protections it provides to private foreign investors. But it seems reluctant to sign bilateral investment treaties in such sectors as agriculture, audio-visual, financial services, energy and transport.

The EU, meanwhile, is offering to "compensate" the U.S. and others hit by higher tariffs on their exports because of enlargement. This raises the possibility of some further tariff reductions.

But there is doubt that the EU will pay much compensation. It is arguing that enlargement resulted in more tariff cuts than hikes. This, it says, will "have to be taken into account" in any compensation.

In any event, the expansion establishes the EU as the biggest two-way trade partner of the United States, ahead of Canada.

And only with China does the U.S.. incur a bigger merchandise trade deficit than with the EU, and the enlargement seems almost certain to increase this deficit. Last year U.S. imports from the EU's 10 incoming members more than doubled U.S. exports to them.

The U.S. deficit with the EU looks about to top $100 billion a year.

Despite all the U.S.-EU camaraderie, will we have a new "China" in our trade policy debates?

Richard Lawrence, a long-time trade reporter for The Journal of Commerce, is based in Washington.