Conflict Resolution in Transatlantic Economic Relations

What Can We Learn from the Early 1970s?

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Conflict Resolution in Transatlantic Economic Relations : What Can We Learn from the Early 1970s? - Andreas Dür

Abstract

Whereas in the 1970s considerable conflict characterized transatlantic economic relations, still before the mid-1970s the two sides of the Atlantic managed to find satisfactory compromises on most issues. To explain this outcome, I argue that disputes in the economic realm among highly interdependent entities tend to mobilize countervailing forces. Fearing losses, these forces push for a resolution of controversial issues before they can set off a genuine crisis. After applying this argument to the case of the 1970s, I suggest that a similar mechanism may help the European Union and the United States find compromises on disputed issues in the early twenty-first century as well.

Conflicts in Transatlantic Economic Relations in the Early 1970s

Throughout the 1950s and early 1960s, the US was largely supportive of European integration, with President John F. Kennedy even proclaiming that the two sides of the Atlantic were "moving steadily toward unity and cooperation."4 By the mid-1960s, however, the mood on the western side of the Atlantic had changed substantially. Suddenly, the supporters of European integration among American decision-makers found themselves marginalized, with the general conviction being that European integration was detrimental to American interests. In a commentary, Edwin Dale expressed this opinion well when writing, "Of all the grand and sad dreams of American foreign policy in the past 20 years, one of the two or three grandest and saddest is 'European unity', as represented principally by the European Economic Community. We bought a pig in a poke. We have been taken."5

The main reason for this change in mood was a series of disputes in the economic realm, starting with intense haggling over trade barriers in the Kennedy Round, and later continuing with a serious debate over the consequences of European discriminatory trade policies for American exports. Especially the expansion of the Common Agricultural Policy (CAP) to Great Britain, Denmark, and Ireland as part of the EC's enlargement process put strain on the relationship, as it was widely feared that this development would lead to losses in American agricultural exports.6 Great Britain was one of the largest markets for US, agricultural goods, and the expansion of the CAP to this market could lead to losses of wheat, rice, poultry, and dairy exports. The overall loss of US agricultural exports from British accession was estimated to be between twenty and 100 million dollars per year.7 As a result, in early 1971, Harald B. Malmgren, the prospective deputy US special trade representative, heavily criticized the EC's agricultural policies and asserted that there had been a forty percent drop in American exports to the EC of products covered by the CAP over the last three years. 8 The enlargement of the EC would aggravate the problem by providing new markets for the surpluses created by the CAP and thus easing internal pressure for reform of the EC's agricultural policy. In addition, the entry of Denmark, a country with a strong agricultural sector, would increase European exports to third markets, damaging American exports there.

Not only EC enlargement, however, but also the accompanying free trade agreements between the EC and a series of European countries, namely Austria, Cyprus, Finland, Iceland, Norway, Portugal, Sweden, and Switzerland, in 1972 and 1973, strained transatlantic relations. The agreements, which foresaw the abolition of tariffs on industrial goods between the EC and these countries over a period of five years, potentially imposed losses of up to 300 million dollars on US exporters. 9 The New York Times, consequently, referred to a "sharp dispute [...] between the United States and the European Economic Community over the trading arrangements the enlarged bloc would make with the industrialized countries of Europe that do not intend to join."10 The US administration even expressed its disapproval of these negotiations with a formal verbal protest to the EC member governments.

The association agreements that the EC negotiated with a series of developing countries were a final bone of contention for the US. These policies were particularly problematic because they included reverse preferences, i.e., 'they not only granted preferential access for developing countries in the, EC but also facilitated EC producers' access to the markets of the developing countries. 'Two types of such agreements can be distinguished: on the one hand, the EC concluded the so-called Yaounde association agreements with a series of former colonies.11 On the other hand, the EC negotiated agreements with neighboring Mediterranean countries, starting with Greece (1961), Turkey (1963), and Israel (1964). Later, also Morocco (1969 ), Tunisia (1969 ), Spain (1970 ), and Egypt (1972) were partners in the so-called Mediterranean agreements. In October 1971, the US asserted in the Ministerial Council of the General Agreement on Tariffs and Trade (GATT) that the preferential agreements between the EC and Spain and Israel (1975) respectively violated international trade rules.12 A resolution discussed in the US Senate even asked President Richard Nixon to use retaliatory measures to achieve an elimination of the discrimination against American exports of lemons and oranges unless the EC was willing to concede.

On the whole, in the early 1970s European commercial policies provided ample possibility for conflict with the US. Reviewing these developments, Senator Jacob K. Javits of New York declared: "I regret that the EEC [European Economic Community] is increasingly taking on the appearance of a narrow, inward looking protectionist bloc whose trade policies as they affect agricultural as well as industrial products increasingly discriminate against non-members."13 What bothered policymakers in the US most, however, was the seemingly-random spread of the trade agreements concluded by the EC. As pointed out by one US official: "It is disturbing that the Community appears to have no clear overall idea on what it wants to achieve. Each agreement is negotiated for its own political/economic reasons and represents a compromise among the member countries at the expense of the world trading rules."14

As a result, for some time most public statements demanded a tougher US line in its dealings with the EC. In view of the fact that the EC defended its proper preferences, the US administration should reciprocate and "give higher priority to the defense of American economic interests than it has in: the past."15 In March 1971, Senator Abraham Ribicoff confirmed this evaluation and stated, "From an American point of view, the EEC appears to be looking after its own internal interests to an excessive degree and to the detriment of outside countries."16 The mood among US policymakers and economic interests further deteriorated in the course of 1971 when it became clear that the American economy would incur its first trade deficit since 1893. Harald B. Malmgren thus concluded: "Taking account of the likely trade damage to the US if European policies move further in their present direction, the traditional American support for European enlargement and unification is bound to be reassessed."17

Despite the pressure that the American Congress and administration put on European governments, however, the latter remained defiant. Both EC member states and the European Commission maintained that American problems stemmed from ill-conceived monetary policies and domestic inflation caused by the costs of the Vietnam War rather than European economic policies. They even insisted that American unilateralism in trade and monetary policy was the root of transatlantic conflicts. To buttress their point, they drew attention to a long list of decisions that went to the detriment of European interests. Already in 1968, Congress had failed to approve a trade agreement between the US and the EC that would have eliminated a disputed form of customs valuation in the US in exchange for European tariff concessions in the chemicals sector. In 1969, moreover, the US negotiated a three-year voluntary export restriction agreement with European steel producers, which was challenged by European governments. Finally, Congress threatened the imposition of mandatory quotas against steel and textile imports.18 On August 11, 1970, the Committee on Ways and Means of the House of Representatives reported a bill that, if enacted, would not only have established import quotas on shoes and textiles, but would have also required the president to accept any other recommendations for quotas made by the Tariff Commission. The so-called Mills Bill, named after the influential Chairman of the Committee on Ways and Means Wilbur Mills, passed the House of Representatives in November 1970 but never came to a vote in the Senate.

Europeans also heavily criticized the New Economic Policy that President Richard Nixon announced in August 1971. Nixon's proposals contained three solutions to the perceived economic problems of the US: a wage-price freeze to counter inflation, the end of dollar convertibility into gold to stop the outflow of dollars, and the imposition of a ten percent tax on all dutiable imports to improve the trade balance. Europeans not only complained about the unilaterality of this policy but also about the fact that, for a withdrawal of the surcharge, the Americans demanded that the EC agree to end its free trade negotiations with various European countries.19 Moreover, it called upon the EC to halt its plan to harmonize the excise tax on tobacco since the US felt the change would reduce American exports of tobacco to Great Britain.

In sum, in the early 1970s severe conflicts dominated transatlantic economic relations. Despite the supposed strength of the transatlantic alliance during the Cold War, these tensions even had repercussions for foreign policy decisions. In response to European economic policies, for example, Congress discussed the so-called Mansfield Resolution that demanded the withdrawal of US troops from Europe.20 This was a credible threat to the extent that the failure of the plans for a Multilateral Force in the mid-196os and the US involvement in Vietnam had already led to a substantial decrease in the American military presence on the European scene. Despite this near-escalation of the conflicts, in the end, all issues were resolved in bilateral and multilateral negotiations. In the following section, I will analyze the conditions that allowed for the finding of compromises in the disputed areas.

Resolving Transatlantic Conflicts: The Importance of Countervailing Forces

Existing theories of international relations and foreign policy-making suggest different reasons for why the US and the EC may have been able to avoid an escalation of economic conflicts in the early 1970s. Regime theorists, for one, argue that the "embeddedness" of the US and the EC in an international regime allowed them to resolve the conflicts.21 According to this view, the international regimes built around the GATT and other international organizations such as the World Bank and the International Monetary Fund constrained economic policies and helped developed countries to avoid a protectionist backlash even though the period of American hegemony had ended. Alternatively, liberal ideas prevalent among decision-makers in developed countries since World War II may have been decisive in making politicians resist the pressures of forces opposing international cooperation. 22 Having learned from the disastrous consequences of the unilateral trade and monetary policies of the interwar years, policymakers may have been eager to avoid a repetition of these events.

Instead of building on these existing explanations, I argue that tensions among highly interdependent countries tend to create countervailing forces that push for the resolution ofc onflicts because they fear losses offo reign market access as a result of trade and monetary wars.23 Substantial evidence supports this argument. In the US, for example, in reaction to the threats to transatlantic cooperation the chairmen of several important American companies such as Boeing and Caterpillar founded the Emergency Committee for American Trade in 1967. The first action of the Committee was to publish advertisements in large newspapers, in which it argued that the "protectionist trade measures now being discussed in Congress would gravely jeopardize American markets abroad and would seriously weaken our position of leadership in the world."24 Similarly, the US Chamber of Commerce, in its recommendations on US-EC relations, pushed for an early resolution of the trade problems accompanying EC enlargement.2 5 It claimed that a possible trade conflict between the US and the EC could have negative repercussions for the whole trading system. Finally, agricultural exporters mobilized in opposition to the protectionist measures proposed by some legislators in the US Congress because they feared that American protectionism could lead to foreign retaliation.26 These domestic pressures resulted not only in conciliatory gestures towards the EC by the US administration, but also in the passage of the Trade Act of 1974, which enabled US participation in the following Tokyo Round (1973-79).

In Europe, as well, interest groups expressed concerns about the escalation of the conflicts. In October 1970, for example, the Permanent Conference of the EC's Chambers of Commerce proposed further negotiations between the major trading entities to reduce trade barriers as an alternative to the protectioniht tendencies in American Congress.27 Fritz Berg, President of the Bundesverband der Deutschen Industrie [Federation of German Industry], even visited Washington to suggest the creation of a commission, consisting of representatives of the industries of the US and the EC, which should try to find solutions to the existing trade problems. The other major German business association, the Deutsche Industrie und Handelstag [German Association ofindustry and Trade], demanded that the EC oblige itself not to take measures that could result in a further burden on agricultural imports and that the EC should restrain its subsidization of exports of agricultural goods.28 According to this association, these steps, together with a new trade round in the framework of the GAIT, which was concerned with tariffs, non-tariff barriers, and quantitative restrictions to trade, would help to ease trade relations with the US. Finally, the German group of the International Chamber of Commerce emphasized that the creation of a powerful economic grouping in Western Europe necessarily created concerns in third countries.29 It therefore asked the EC to agree to certain changes in its policies to defuse some of the concerns and objective difficulties. In its opinion, the existing problems could be resolved in the interest of world trade only if the advantages of regional integration also accrued to excluded countries.

These demands left their imprint on the preferences of the German government. The general opinion within the government was that the EC should take American interests into account when elaborating European policies. In particular, it believed that further steps towards economic integration should create rather than divert trade;30 the EC's trade policies should comply with GAIT rules in the future; the reverse preferences with developing countries should be abolished since they did not make economic sense and were supported by France for political reasons only; and a multilateral trade round should be started.31

In Great Britain, as well, domestic interests paid attention to the European trade problems with the US. Already in September 1970, when the US Congress discussed various protectionist bills, the Association of British Chambers of Commerce asked the British government to work towards a resolution of transatlantic trade disputes.32 The Confederation of British Industry published a paper on its "objectives in Europe," arguing that "the enlarged EEC should try to ensure that the forthcoming multilateral negotiations to liberalise world trade further produce substantial and fair results as quickly as possible."33 As a result, the British government -just as the German one -was eager to avoid an escalation of transatlantic conflicts.

Only French domestic interests were less accommodating vis-a-vis US demands. Some French business associations even called for retaliation against American unilateral policies.34 It is no wonder, then, that the French government was much more reluctant to agree upon a compromise with the US than other European governments. It argued that the CAP and the common external tariff were important for "Community solidarity."35 France also objected to the idea that the EC should compensate the US for eventual losses from enlargement with the argument that the US would gain more from enlargement than it lost. The government even opposed the US proposal for regular bilateral economic consultations. In its opinion, such a mechanism would give the US too much influence over European policies. Finally, France was concerned about the fact that a devaluation of the dollar, as happened in 1971, could make all American concessions on trade worthless.

The prediction derived from this discussion of national preferences is that a possible compromise had to overcome French resistance but was likely to find a positive reception with the other major players. The further development of transatlantic relations closely follows this prediction. In early 1971, the US administration and the European Commission started bilateral consultations on the EC's preferential tariff treatment for fresh citrus fruits from Israel, Morocco, Spain, and Tunisia and also the EC's policies with regard to lard, poultry, and tobacco. The Commission proposed a global offer for these products on April 1, 1971, which included the cutback of export subsidies for poultry and lard (conditional upon the reduction of American export subsidies), consultations on tobacco, and a cut in the tariff on oranges during the summer months (conditional on some further US concessions). France, however, withdrew its support for the proposed package deal in May, since it objected to the reduction of the export subsidies for lard and poultry. Based on a new compromise within the EC, the Commission now asked the US to abolish the retaliatory measures that it had applied since the Chicken War (1962) in response to European policies in the poultry sector, if the EC were to stick to its offer fromApril.36 This proposal allowed for a temporary truce between the US and the EC.

The difficulties in bilateral negotiations, however, made evident the advantages of engaging in all-around trade negotiations that would allow for better compromises across issues. In December 1971, consequently, the US and the EC signed the so-called Smithsonian Agreement in which they agreed to start a new multilateral trade round in the framework of the GATI. The US administration made two major concessions to reach this agreement: the acceptance of a link between trade and monetary issues, as demanded mainly by France, and the removal of the surcharge that it had imposed in August of the same year. In a joint US-EC declaration on February 11, 1972, then, the two sides announced the &tart of preparations for these future trade negotiations, which, as both delegations confirmed, would cover tariffs and non-tariff barriers as well as industrial and agricultural goods.

In the Casey-Soames understanding (1974), finally, the US and the EC also resolved the question of reverse preferences for developing countries, with a promise by the EC to limit agreements with reverse preferences to the Mediterranean countries. The former European colonies in Africa, the Caribbean, and the Pacific, instead, would receive one-sided preferences in the so-called Lome agreements. As a counter-concession, the US agreed to end its legal challenge to these preferential agreements in the GAIT. 37 In sum, by 1974 the econoimic conflicts crippling transatlantic relations had been resolved, although, only a few years earlier, it had seemed that the tensions could leave severe ruptures in the dealings between the US and the EC.

Conclusions

I have proposed that disputes between highly interdependent economies are likely to be contained before they lead to crisis because they mobilize forces that have an interest in avoiding economic warfare out of fear of losses of foreign market access. This argument seems to account well for the historical evidence available concerning transatlantic economic conflicts in the early 1970s. What can be learned from this case of conflict resolution for modern-day disputes in transatlantic relations? Again, economic relations are strained due to conflicting positions - among other issues - with regard to agricultural subsidies, the health risks of genetically modified food, and subsidies for civil aircraft production. Based on my argument, I suggest that an escalation of these conflicts is unlikely.

A review of recent developments with regard to some of the more publicized disputes in the economic realm bolsters this point. In the steel sector, President George W. Bush imposed extra tariffs on European exports in March 2002. The ensuing EU move to impose punitive duties on American exports of some steel products, fruit juices and textiles worth 300 million dollars in June 2002, however, caused strong lobbying efforts by American exporters, such as the American Chamber of Commerce in Germany.38 Their demands made the US administration retreat from its earlier position and announce an end to the extra tariffs in the steel sector. Countervailing pressures such led to a resolution of the conflict.

Similarly, the recent de-escalation of the struggle over civil aircraft, subsidies could be taken as confirming the prediction made in this article. On October 6, 2004, the US administration decided to use the dispute settlement process of the World Trade Organization to push its complaint against alleged European subsidies to Airbus. In response, the European Commission launched its own case against subsidies given to Boeing. This escalation of a conflict that had been simmering for a long time, however, was not of long duration. In early 2005, the EU and the US agreed on the start of negotiations to resolve the problem bilaterally. The stated objective of the negotiations is to establish fair market-based competition between Boeing and Airbus by eliminating various types of subsidies. Peter Mandelson, the European Trade Commissioner, consequently declared: "When disputes arise in transatlantic trade relations we should try to solve them by dialogue and co-operation."39

These signs of relaxation in specific sectors are mirrored by moves towards a general improvement in transatlantic economic relations. In June 2004, for example, the US-European summit agreed to further strengthen the transatlantic economic relationship. To do so, all interested parties on both sides of the Atlantic should come up with new ideas for how to push transatlantic economic integration.40 Although more directed towards political relations, the recent proposal for an early warning system for US-European relations made by the European Union's High Representative for Common Foreign and Security Policy, Javier Solana, also suggests a general tendency towards detente in current transatlantic relations.

In sum, the 1970s may find their parallel in the early twenty-first century not only in the extent of economic tensions but also in the way conflicts are resolved. It seems that, even though conflicts are likely to arise between the two sides of the Atlantic as long as their economies do not converge completely, high interdependence makes sure that long-term crises can be avoided. The analysis of past conflict resolution in transatlantic relations thus should make us optimistic that the strength of common commercial interests will prevail over the forces pushing the two regions apart this time as well.

Introduction

Over the last few years, with only a short interlude after the terrorist attacks on the World Trade Center in September 2001, many observers have alluded to a crisis in transatlantic relations.1 Friction has been apparent with respect to foreign policy issues, where several European governments disagreed with the American stance on the Middle East, and the United States (US) resisted the establishment of the International Criminal Court. Perhaps less publicized, but equally contentious, have been the conflicts over economic matters such as: European agricultural subsidies and policies concerning genetically modified organisms; American policies in the steel sector and the taxation of foreign sales corporations; the US current account deficit; and both sides' subsidies for civil aircraft construction. These disputes have caused concerns about a major rift in transatlantic relations.

Significant discord also characterized the rapport between the two sides of the Atlantic in the early 1970s, providing an interesting parallel to the current crisis in transatlantic economic relations. According to the Economist, the quarrels during the Kennedy Round (1964-67) of multilateral trade negotiations already "made something very close to an enemy out of the European common market in many American minds; particularly in Congress but not only there."2 In the following years, the US complained about the negative consequences of European discriminatory trade policies for American exporters and even threatened with retaliation if the European Community (EC) was unwilling to concede. In Europe, however, governments remained defiant and challenged the great-power position of the US. Rather than accepting a compromise, they in their turn sharply criticized unilateral American trade and monetary policies. As a result, observers saw potential for a major transatlantic confrontation, making the conflicts between the two regions the "greatest problem" confronting the American administration at that time.3 Nevertheless, after several years of severe tensions, a compromise was found in the end that resolved most of the conflicts and allowed for closer cooperation in the following decade.

To explain this process of conflict resolution, I argue that disputes in the economic realm among highly interdependent entities tend to mobilize countervailing forces, which, fearing losses, push for a resolution of controversial issues before they can set off a genuine crisis. In the first part of this article, I consequently briefly discuss the major problems crippling transatlantic relations in the late 1960s and early 1970s. In the next section, I show how these conflicts could be resolved after economic interests on both sides demanded an end to the confrontation. Based on this analysis, I provide an optimistic outlook about the possibility of avoiding a deterioration of transatlantic relations today in the final part of the article.

Notes

Dr. Andreas Dür is currently a research fellow at the Mannheim Centre for European Social Research (MZES) at the University of Mannheim, Germany. His research interests encompass trade liberalization, decision making in the European Union, and interest group lobbying.