Tearing Down U.S. Trade Barriers

The rules of the business game are about to change, so those CEOs who haven’t already done so had better [...]

December 1 1990 by Edwin J. Feulner


The rules of the business game are about to change, so those CEOs who haven’t already done so had better crank up their calculators, pull out their wall charts, and call their congressmen. The dramatic political events in Eastern Europe have all but overshadowed the looming economic integration of the European Community (EC), but removal of the remaining barriers to the free movement of products, services, capital and labor among the EC’s 12 members is happening swiftly. By this time next year, many of its market-opening goals will be a fait accompli, creating a true common market of 320 million European people-and a vast potential marketplace for the U.S. to sell goods.

Corporate America is justly afraid that liberalization of trade among EC countries will be accompanied by increased protectionist trade barriers against goods and services from countries outside the EC, creating a kind of “fortress Europe.” At the very least, it now appears certain that once the EC is stronger and more unified, it will take the U.S. to task for its protectionist sins.

FORTRESS AMERICA

Many Europeans believe Americans talk a lot about free trade-and complain a lot about how Europe and Japan should open up their markets and stop subsidizing domestic industry-but then never look into the mirror. They’re right. The U.S. itself is extremely protectionist in a number of areas. Witness the textile bill passed earlier this year (ditto the U.S. quotas on steel, sugar, lemons, autos, et al.). The Europeans correctly argue that if American business executives really were serious about free trade, they would scream to their congressman about U.S. trade barriers. Practice what you preach, they say.

And they’re right.

If Washington fails to use EC-92 as an opportunity to tear down U.S. trade barriers and restrictive regulations, it will have squandered one of the greatest economic opportunities of this century.

The EC is currently the world’s largest commercial and trading unit, with an annual GDP of more than $4 trillion.

Imports topped $720 billion last year, much of that from the U.S., and exports topped $680 billion. Together these account for 20 percent of total world trade (the U.S. accounts for about 14 percent).

Considering how much is at stake, Washington policymakers should be prepared to meet the inevitable European demands for trade reciprocity in fields such as banking, steel, textiles, and agriculture by readying plans to lower U.S. trade barriers. This should include, among other things, removing the federal government’s suffocating restrictions on American banks so that they can compete more effectively with European banks.

At the moment, EC-92 is an experiment in competitive enterprise that, provided it is successful and receives the support of a free-market-minded U.S. government, could help reshape the way business is done in the rest of the world. Obviously, the economic changes under way in the EC have profound implications for U.S. corporations, whether or not they currently do business in Europe.

WE’RE OKAY, EURO-KAY

Reduction of trade barriers within the EC is expected to lead to a rise in European incomes and thus enormous opportunities for U.S. sales to Europe and European operations. This is why many U.S. businesses with subsidiaries or branches in the EC already are expanding: getting ready for 1992. Others are planning to establish European operations in the near future.

The EC is already America‘s biggest customer. The dozen EC countries purchased almost 25 percent of total U.S. exports last year, exceeding trade with either Canada or Japan.

European money and capital markets are also major sources of U.S. corporate investment funds, rivaling American domestic sources. Many European companies, in turn, raise funds in U.S. markets-each year more than $200 billion in capital passes through this transatlantic financial network. In fact, companies on both sides of the Atlantic are increasingly relying on each other’s national markets as a source of capital, risk diversification, debt management, and import and export financing.

Exactly how this will change in the next two years is the topic of serious speculation in the higher echelons of world finance. There is, however, considerable agreement that the current U.S. trend for greater protectionism could ignite a flurry of similar protectionist resolutions from the EC.

Considering the scope of European investment in the U.S. and vice versa, the damage caused by such retaliation would likely be tremendous. Within the last few years, Britain‘s direct investments in the U.S. topped an estimated $140 billion. The EC as a whole accounts for an estimated $397 billion, roughly half the entire $830 billion in foreign investments here. At the same time, some 40 percent of U.S. overseas investment is located in the EC.

In this new common market, trade barriers between member states, such as tariffs and quotas, will be removed and common tariffs toward nonmember countries established. The common market will also allow the free movement of labor, capital, and other factors of production between member countries. This arrangement differs from a free trade area primarily in the fact that, under a free trade agreement, such as that between the U.S. and Canada, member states retain control over their own trade policy toward nonmember countries. The U.S. currently has free trade agreements with Israel as well as Canada, and the White House is working to establish another with Mexico.

MODERN EUROPE, OPEN EUROPE

However, the EC-92 plan does not address some of the economic and industrial policies that have contributed to relatively slow growth and job creation in Europe. For example: high unemployment benefits and social insurance taxes, which inhibit employment growth; and rigid curbs on plant closings and layoffs, which discourage entrepreneurship. Similarly, its mandate, the so-called White Paper of 300 market-opening directives, contains no plans for a substantial reduction in government ownership of industries, which are a drag on the economy-although some member countries, most notably Great Britain, are well on the way to privatizing many state-owned corporations.

The prospect of 1992 has already affected corporate decision making in EC countries significantly. European firms are modernizing, feeling that the changes scheduled for 1992 will enable them to better compete against major American and Japanese firms. European corporations are also in a frenzy of mergers, acquisitions, and joint ventures in anticipation of the increased competitive challenges of EC-92.

The opening up of markets and the diversion of assets to Eastern Europe is likely to have a powerful influence on the effectiveness of EC integration.

There has already been a significant diversion of European, American, and Japanese investment funds-that may otherwise have gone into the EC-into Eastern Europe. This could actually turn out to be a positive factor. The desire to compete with Eastern Europe for potential investment funds may well encourage the EC’s economy to become more open and competitive.

The desire for higher economic productivity, more consumer choice, lower prices, and greater access to foreign markets in part has motivated Europe to seek integration and the U.S. to seek FTAs. The U.S. needs to go one step further, challenging EC-92 with its own U.S.-92, seeking to make its own economic borders as open and friendly as it would like those of Europe to be.


Edwin J. Feulner, Ph.D. is president of The Heritage Foundation, a Washington, D.C.-based public policy research institution. He also serves on the board of several other foundations and research institutes. Dr. Feulner is the author of Conservatives Stalk The House.