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EUROPEAN COMMUNITIES

1.

General Policy Framework

The European Communities (EC) exercise supranational authority over many areas of economic and trade policy of the EC's 12 member states (France, Germany, Belgium, Netherlands, Luxembourg, Italy, United Kingdom, Ireland, Denmark, Greece, Spain, and Portugal). Major policy decisions are made by the various councils of the ministers of the 12 member states. The EC has responsibility for non-military trade and agricultural policy, including tariffs, multilateral negotiations, and customs practices. It also has competence in fisheries and nuclear energy, and increasingly in environment, transportation, telecommunications, and research and development. EC influence on member states' financial and investment policies has been relatively limited. Implementation of the Single Market Program (EC-92) and of economic and monetary union (see discussion below on EMU) during the 1990s will substantially increase the EC's role with regard to tax harmonization, financial services, industrial standards, and monetary and fiscal policy. Currently, members of the European Exchange Rate Mechanism (ERM) (all but Greece and Portugal) are limited in their conduct of interest and exchange rate policies. Full economic and monetary union, characterized by the irrevocable fixing of exchange rates, the adoption of a single currency and the establishment of a single, supra-national central bank, will further restrict flexibility for those member states which realize it. EMU will mean that monetary and exchange rate policies will be determined largely at the Community as opposed to the national level. The drive for economic convergence inherent in the move to full economic and monetary union also implies that member states' fiscal policies will be increasingly influenced by EC considerations.

The EC has been making steady progress toward completing the Single Market Program which is designed to create a single EC market and allow all goods, services, people, and capital to move without national restrictions across member state borders. The EC's stated policy is to accomplish this goal through liberalizing measures which will open the EC market through deregulation and reduction of barriers. As the EC has generally followed market principles in pursuing the Single Market Program, U.S. business should find greater and easier access to the larger market provided EC-92 is implemented in an open and non-discriminatory manner.

As of December 18, 1991, all 282 directives called for in the Single Market Program had been drafted by the EC Commission, and over 70 percent of these directives had been adopted by the EC Council of Ministers. However, only 49 of the 282 directives have been implemented by all 12 member states. With one year before EC-92's completion, it appears that the overall trend is towards a more liberal trading regime, although certain EC decisions are discriminatory or potentially discouraging or distorting for third countries.

2.

Exchange Rate Policies

The European Monetary System (EMS) constitutes an

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arrangement among the participating currencies to maintain their cross-rates within a certain band of fluctuation. This arrangement is called the Exchange Rate Mechanism (ERM) and 10 of the 12 member states participate in it (only Portugal and Greece are outside the ERM). In practice the anchor currency is the Deutsche mark (DM), which moves freely against the U.S. dollar in response to market forces. There were no currency realignments or other significant ERM developments during 1991.

The agricultural green rate system is an instrument of trade policy. Current green rates effectively devalue EC currencies 14 percent, stimulating exports and hampering imports.

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Following year-long negotiations, EC heads of government reached agreement in December 1991 in Maastricht, Holland on a draft treaty on economic and monetary union (EMU). Signature is expected in February 1992, following final editing of the treaty. EC member countries are expected to ratify the EMU treaty during 1992. Implementation of the EMU treaty would result ultimately in the establishment of a single currency and a single monetary authority in the European Community. Full economic and monetary union is intended to eliminate exchange rate risk for intra-EC transactions, facilitate capital market integration, enhance the Single Market's stimulation of intra-EC trade, and promote greater harmonization and coordination of macroeconomic policy within the EC. During Stage 1 of EMU, which is currently underway, all EC members' currencies are to be brought into the ERM and all remaining restrictions on internal EC capital flows are to be lifted. During Stage 2, which is scheduled to begin in 1994, EC members will continue efforts to curb budget deficits and inflation in order to meet economic convergence criteria specified in the EMU as conditions for entering full economic and monetary union. In 1997, provided a majority of EC members are politically willing and economically prepared for full EMU, exchange rates will be irrevocably fixed, the independent, supra-national European Central Bank will be set up and a single currency will be created. If the move to Stage 3 does not occur in 1997 because not enough countries are willing or able, Stage 3 will start definitely by January 1, 1999.

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Competition Policy: The EC Commission has produced guidelines for an EC approach to industrial competition. The guidelines espouse the benefits of free markets in fostering productivity and efficiency. If the EC adheres to these principles, EC markets will be more open to non-EC enterprises.

Tax Policies : a. Indirect taxes: The EC's role in tax policy is limited to the harmonization of direct and indirect taxes in order to avoid competitive distortions. During 1991 the Community decided to harmonize VAT rates over the next few years with a goal of a minimum rate of 15 percent. Countries with a higher minimum rate than 15 percent are free to leave it at that level. The hope is that through competition, the higher rate countries will be forced to lower their minimum rate to 15 percent. The EC has agreed to adopt an EC-wide

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system of collecting VAT in the country of origin by 1997.

b. Indirect taxes: The Community is concerned that widely varying business tax practices may be causing EC firms to be less competitive on world markets. Therefore, in early 1991, a blue ribbon committee, under the chairmanship of former Dutch Finance Minister Ruding, was created to look at the problems and suggest solutions. The Committee's work will not be finished until February 1992.

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Debt management policies are determined by the individual member governments of the Community.

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EC Variable Levy: A basic principle of the Common Agricultural Policy, Community Preference, ensures that internally produced agricultural products have a competitive advantage over like products imported into the EC, even if the latter are produced at considerably lower costs. Import levies, equalling the differences between higher EC threshold prices and the lowest price of competing imports, plus transportation and handling costs, guarantee that imported products are priced at least as high as, and usually above, Community products. Levies apply to most agricultural commodities: cereals and rice, milk and milk products, beef and veal, sugar and olive oil. Commodities not subject to import levies include oilseeds, vegetable protein meals and non-grain feed ingredients, such as corn gluten feed; import duties on these products are bound at zero under terms negotiated in the Dillon Round.

Tariffs: In general, EC tariffs are not considered to be a major barrier to U.S. industrial exports. EC variable levies, on the other hand, present considerable tariff-like barriers to U.S. agricultural exports (see below). There are exceptions in other areas as well where EC tariffs do constitute significant barriers to U.s. trade interests: certain paper products, some wood products, aluminum products, semiconductors, computer parts, tobacco, and certain chemicals. These are being negotiated in the context of the Uruguay Round.

Quantitative Restrictions: The October 1989 EC broadcast directive came into force October 2, 1991. The directive includes a provision calling for a majority proportion of television transmission time to be reserved for European programs where practical. The United States believes that these de facto quotas are contrary to the GATT. Consultations have been held with the EC, and the United States has reserved all GATT rights to take further actions as necessary. Member states must fully implement the directive by the end of this year. Since the EC adopteu the directive, several member states have passed legislation placing explicit or de facto quotas on non-EC television programs.

Enlargement Agreement: The U.S.-EC Enlargement Agreement compensated u.s. producers for approximately $420 million of

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lost sales due to the increases in Spanish and Portuguese tariffs when those nations joined the Community. The Agreement was set to expire in December 1991; the EC refused formal rollover of the Agreement, but unilaterally extended compensation under the Agreement through the end of December 1992. Review of the Agreement will begin in June 1992, to seek final and mutually agreed resolution to this dispute. The United States regards this compensation as permanent; the Community does not. The United States has reserved all GATT rights.

Oilseeds: A new EC regime for oilseeds was formally adopted by the European Parliament in December 1991. Reform of the existing regime was required due to the 1989 GATT panel ruling which found the EC's position out of conformity with certain GATT obligations. The principal features of the new regime are compensatory payments paid directly to farmers, on a per hectare basis; an adjustment mechanism whereby the compensation element would not compensate for price fluctuations within 8 percent of the world price for oilseeds; and a fixed price ratio of 2.1:1 between oilseeds and cereals. The U.S. has informed the EC that in its view the new regime does not redress the impairment to the oilseeds tariff concession granted the U.S. in the Dillon Round. The EC believes the new regime satisfies all the requirements of the GATT panel. The U.S. and EC have agreed to have the original oilseeds panel reconvened to consider the adequacy of the EC reform package. The Panel's ruling is expected in March 1992.

Services Barriers: In the context of the Uruguay Round services negotiations, the United States has made a services request of the European Community. In addition to the Broadcast Directive discussed above, the major area in which U.S. exports are being restricted by the Community is in telecommunication services within the Community. For instance, the U.S. has requested that the Community allow foreign telecommunications firms to use proprietary protocols; limit monopolies on telecommunications services to public, switched voice telephony service; and ensure that non-EC competitors have access to reserved services on an equal basis. Another services barrier is the fact that u.s. nationals who fully satisfy one EC member state's accreditation requirements may not be able to obtain mutual recognition in all other member states under the same terms and conditions as an EC national.

Standards, Testing, and Certification: While the U.S. remains concerned about the standards, testing and certification procedures that u.s. companies may be required to follow to offer their products for sale in the European market, the U.S.-EC dialogue on standards, testing and certification has, on balance, been positive. In standards, the meetings between Secretary Mosbacher and EC Vice President Bangemann on June 21 culminated in the commitment of U.S and EC standards institutions to look for ways to strengthen international standards so that they can be better used by manufacturers, exporters and others that need them in u.s. and EC markets. This approach is particularly constructive because many non-European interests still cannot participate directly in the European Committee for Standardization (CEN) and the European Committee for Electrotechnical Standardization (CENELEC); and the International Organization for Standardization (ISO) and

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International Electrotechnical Commission (IEC) offer only limited participation to non-Europeans at this time.

Wine Certification and Enological Practices: U.S. wine exports continue to face uncertain market access into the European Community. The U.S. and EC undertook an agreement in 1983 which resulted in the implementation of temporary EC regulations which permit u.s. wine producers: 1) to use wine treatment practices which are not approved in the Community; and 2) to use a simplified procedure in completing EC wine export certificates. These temporary regulations will expire at the end of January 1992. The U.S. and EC are presently involved in consultations in which the U.S. is seeking an EC commitment to implement the referenced regulations on a permanent basis. The EC is linking its willingness to do so to a U.S. commitment to take further steps to prevent the erosion of EC geographic wine terms. The consultations are still in progress.

U.S. Exports of Bourbon and Other Spirits: A change in the EC's definition of whiskey has disrupted the marketing of American Blended Whiskey in the EC by prohibiting the use of the designation "whiskey" in association with the product. The U.S. has requested that American Blended Whiskey, as well as Bourbon and Tennessee Whiskey, be provided the same legal protection as EC domestic products. Discussions with the Commission on this issue continue, in the context of their request for enhanced U.S. protection of several leading EC distilled products.

Canned Fruit: In July 1991, a dispute arose between the U.S. Government and the European Commission over the interpretation of the 1989 exchange of letters which had resolved the long dispute over the subsidies provided by the Commission to the European canning industry. The U.S. government contends that the level of the 1991/92 processing aids is not in conformity with the agreement. For future years, the Commission has agreed to revise the methodology which created the current problem, but it is unwilling to make the changes in the current year. The U.S. continues to seek a favorable resolution to this dispute, whether correction of 1991 aid levels or establishment of 1992 levels which compensate for the 1991 overpayment.

Government Procurement: In September 1990, the Council adopted a directive opening up procurement in the EC in four areas telecommunications, water, energy, and transport. The directive will enter into effect on January 1, 1993. In addition to procurement by traditional government bodies, the directive also covers contracts of private entities which operate on the basis of special or exclusive licenses or privileges in these four sectors. Under the directive, tenders with a majority proportion of non-EC products in the total value of the tender may be rejected without explanation. Bids of EC origin are also granted a three percent price preference over non-EC bids. The directive provides for the extension of national treatment to third countries with whom the EC reaches an agreement.

The EC is a signatory of the GATT Procurement Code. In the current negotiations to expand the Code, the U.S. government

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