A Seven-Point U.S. Strategy to Push Europe to Free Trade

Report Europe

A Seven-Point U.S. Strategy to Push Europe to Free Trade

July 8, 1991 23 min read Download Report
Christopher Gacek
Senior Fellow and Director of Government Finance Programs

(Archived document, may contain errors)

i 839 July8,1991 A SEvE"T US S .IRAm TO'PUSH EUROPE To FREE TRADE INTRODUCI'ION while Europe's political upheavals grab the headlines, the continent is der going an equally fundamental, if less dramatic, economic transformation. From the fading familiar divisions of post-World War II E u rope may emerge a single continental economy with over 600 million people. The stakes for America in this quiet revolution are high. America's prosperity will be advanced by the emer gence of a Europe with markets open to the world and with economies full y in tegrated into the West. By contrast, an insular, protectionist Europe could become a drag on the American economy. As such, the most effective way for America to advance its economic interests in Europe is through a strategy to move Europe in exorably toward free trade.

No region of Europe is unaffected by the sweeping economic changes now un derway. In Eastern Europe, countries newly freed from Soviet domination are dis mantling Stalinist command economies and moving toward free market economies Furth er east, several of the European republics of the Soviet-Union I 1 The term "Eastern Europe" has been used since World War II to denote that area of Europe under Soviet control. Historically, however, the northern portion of that bloc choslovakia, East Ge r many, Hungary, and Poland -has been hawn as "Central Europe a term which recently has returned to common use in those countries. Geographically, the European republics of the Soviet Union constitute the actual "Eastern" Europe. 1 have begun introducing fr e e market reforms and are moving towardinde pendence. And in Western Europe, the twelve-member European Economic Community (EC or Common Market) is in the final stages of eliminating many of the barriers to trade among its members? Dubbed "EC 92 this proje c t is on track to create a single market of 340 million, the world's largest, by the end of next year. Meanwhile, negotiations are underway between the EC and the European FreeTrade Association (EFTA a group of developed European countries outside the Comm o n Market, aimed at creating a new sphere of economic cooperation, to be known as the European Economic Area (EEA U.S. Interests. America has a tremendous stake in the outcome of Europe's economic revolutions. First among America's interests is to ensure n o n-dis criminatory access for itself to European markets. U.S. trade with the EC alone amounted to $190 billion in 1990, exceeding trade with Canada or Japan and ac counting for one-quarter of total U.S. trade. A second interest is preventing EC protection ism from undermining progress in the liberalization of world trade.

A third U.S. interest is ensuring that the countries of Eastern Europe and the European republics of the Soviet Union make the transition to free market economies. This not only would expand markets for American goods and services but would advance America's strategic interest in stabilizing the new democratic governments in Eastern Europe and integrating these states into the West ensures access to markets, stimul ates economic growth, and steadily increases the ties among countries.

But there is a cloud darkening this horizon. The EC increasingly is emerging as a major impediment to free trade. During the most recent round of negotiations of the General Agreement o nTariffs and Trade (GATI the organization largely responsible for the post-World War I1 liberalization of global trade, talks brokf down over the EC's refusal to reform its heavily subsidized agricultural sector cluding the newly liberated countries of Ea s tern Europe, down the protectionist path.This would damage America considerably. Instead of dealing with a prosperous and dynamic continent from the Atlantic to the Urals, in which bar riers to trade had been largely eliminated, America might find itself d ealing with a All these objectives can be advanced through the promotion of free trade, which Protectionist Path. Even worse, the EC threatens to push the rest of Europe, in 2 Properly EC" is an abbreviation for "European Communities not the widely used b u t inaccurate term European Community The EC is composed of three different organizations: the European Economic Community (popularly referred to as the Common Market the European Coal and Steel Community, and the European Atomic Energy Community.The EC's m embers are Belgium, Britain, Denmark, France, Germany Greece, Ireland, Italy, Luxembourg, The Netherlands Spain, and Portugal 3 EFI'A consists of Austria, Finland, Iceland, Norway, Sweden, and Switzerland 4 The General Agreement onTariffs and Trade (GAlT) was established in 1948 to promote trade liberalization.

Through several "rounds" of negotiations, it has reduced significantly tariffs and other barriers to trade and has produced an enormous increase in global trade.The latest round was suspended last D ecember over disagreement between the EC and most other countries regarding agricultural subsidies 2

3 Several of the U.S.S.R.3 European republics, including the Baltic states, Ar menia, and Georgia, are moving rapidly toward independence and have begun the i 4 join them. America should hold out the prospect of free trade agreements with these republics. For one thing, this would be an incentive for them to complete their economic and political reforms quickly. For another, it would pressure the EC to mo v e to free trade. And, of course, adherence to the conditions required to compete and survive in a free trade environment such as property rights mobility of labor and capital, and elimination of barriers to foreign investment would ensure the permanent di sappearance of authoritarian re

mes.The poten tially huge markets of the U.S.S.R.s European republics could be opened to U.S business, and their devastated economies best assisted, by eventually including them in a free trade area with the U.S.

Point #5: Complete the ECs encirclement by offering to negotiate free trade agreements with other non-EC European countries, particularly Turkey.

Several European countries either do not wish to join the EC or have been rejected by it.These include not only EmA mem bers like Iceland and Switzer land, but alsoTurkey. Many EFTA members are uncomfortable being drawn into a closer embrace by the EC, but see no other option. Closer ties with America would help these countries resist the ECs influence and further would pr y open the back door into EC markets Point #6: Split the EC.

The Bush Administration should work with Britain,The Netherlands, and any other EC country that favors greater free trade to prevent the EC from adopting additional protectionist practices. Discu ssions with these and other governments should focus on how best to coordinate policies to halt additional EC protec tionism Point #7: Ultimately, propose an America-EC Free Trade Agreement reduced, the logic and advantages of free trade finally may becom e apparent to the EC leadership. The culmination of U.S. strategy would be a broad free trade agreement between the U.S. and the EC as a whole Once the EC is surrounded by a U.S.-led free trade area and its options EUROPES UNCERTAIN PATH TOWARD FREE TRADE A s the dominant world power after World War 11, America assumed principal responsibility for reconstructing the war-ravaged economies of Western Europe and rescuing the international economic system. American leadership helped liberalize and expand global trade. In Western Europe, America erected an entire ly new economic order. Such historical enemies as France and Germany were per suaded to work together economically and to drop barriers to trade and com merce among themselves.

This soon took organization al form: the European Coal and Steel Community ECSC) was created in 1952, consisting of Belgium, France, West Germany, Italy Luxembourg, and The Netherlands. Although formally an organization for 5 economic cooperation, its underlying rationale was a beli e f that integration of the key economic sectors of coal and steel would make war between member countries impossible. A direct outgrowth of the ECSC was the European Economic Community (EEC formed in 1957 As its nickname the Common Market suggests, the EEC was established to promote the creation of a single integrated market among its six member states economies. It was combined with the ECSC, and the European Atomic Energy Community (Euratom), to form the European Communities (EC).The EC gradually was expa n ded from its original six members to the present twelve, ad ding Britain, Ireland, and Denmark in 1973, Greece in 1981, and Spain and Por tugal in 1986 In 1960, several European countries that did not wish to join the EC, or whose memberships had been rej e cted, banded together to form the European Free Trade Association (EFTA Founded to promote free trade among its members EFTA differed from the EC in that it did not aim at economic or political integra tion. EFTA originally included Britain, Denmark, and P ortugal; they later left to join the EC integration into the global economy, Eastern Europe fell increasingly under Soviet domination and became tied almost exclusively into an insular East bloc trading system In the years after World War n, Moscow impose d Soviet-style central planning on East European economies, virtually wiping out private enterprise. While America pumped over 12 billion into Western Europe under the Marshall Plan (approximately 70 billion in 1991 dollars the Soviet Union ex tracted roug h ly the same amount from its East European satellites. The Council for Mutual Economic Assistance (Comecon) was created by the Soviet Union in 1949 to increase its control over East European economies, which effectively be came extensions of the Soviet eco n omy. Comecons original members were Bul 1 garia, Czechoslovakia, Hungary, Poland, Romania, and the Soviet Union. Later additions were Albania (admitted in 1949, but withdrew in 1961 East Germany 1950 and Yugoslavia (1964 Trade was conducted primarily by b arter.

Europe hence developed along two divergent economic paths: an increasingly prosperous Western Europe that was part of a global trading system, and an East ern Europe cut off from its Western neighbors and falling increasingly behind the industrializ ed world in income, technological development, and competitiveness.

This post-World War I1 order lasted for over four decades, but largely has been destroyed by two major developments: Eastern Europes anti-communist revolu tions of 1989 and Western Europe s movement toward political and economic union Divergent Economic Paths. As Western Europe moved toward free markets and 5 Non-European members included Cuba (1972 Mongolia (1%2 and Vietnam (1W8 6 THE EAST EUROPEAN REVOLUTIONS on a firm path to democracy a nd free markets ing.The entire region shares a depressing economic legacy of Soviet rule: grossly antiquated industrial plants and infrastructure;Third World living and health standards; excessive emphasis on steel and other heavy industries; primitive se r vice sector; high energy consumption; ecological devastation; and agricultural inef ficiency.

With this legacy, the need for rapid conversion to free markets is widely ac cepted in these countries despite the short-term economic dislocation it inevitably will cause. Poland has been the leader in this transition. Since the beginning of 1990, the Polish government has opened its economy to foreign investment stopped subsidizing money-losing state enterprises, freed prices, and made the Polish currency conv e rtible. Poland also is determined to privatize state enterprises. In other countries, reforms lag, particularly in Romania where state control of the economy has eased only slightly. 1 Most Western countries have created assistance programs for Eastern Eu rope the Bush Administration has requested $470 million in aid for Eastern Europe for fiscal 19

92. In addition, such institutions as the European Bank for Reconstruc tion and Development (EBRD) have been established by Western governments to give grants a nd loans to the private and public sectors in Eastern Europe. The EBRD, which officially began operations in April 1991, is to be ca italized at $12 billion, making it the major lending institution to Eastern Europe.

Generous Aid. For all their generosity, Western aid programs for Eastern Europe cannot lift Eastern Europe out of its economic quagmire. For this, fun- damental reform is needed. In fact, there is a danger that Western aid programs may slow needed reforms by reducing the economic pressure on East European governments to take such basic, but often politically unpopular, measures as free ing prices.

Instead of receiving aid, these countries would be better sewed by increased ac The economic problems facing E astern Europes new governments are stagger E 6 The EBRD made its first loan in June 1991, providing $50 million to Poland for energy conservation projects 7 The big unanswered question regarding the future of Eastern Europe is whether the revolutions of 1 9 89 will be repeated across the border in the European republics of the Soviet Union? They may well be.The political authority of the Soviet regime continues to decline while that of the democratic opposition gathers strength, especially in the European re p ublics In Armenia, Estonia, Georgia, Lat via, Lithuania, and Moldavia, democratic governments have been elected.These soon may be joined by Ukraine and Byelorussia. In addition to a firm commitment to independence, each of those with democratic government s is committed to es tablishing a free market economy. In the giant Russian republic, Soviet leader Mikhail Gorbachevs major opponent Boris Yeltsin has vowed to introduce free market reforms, albeit with strong opposition from the Soviet central govern men t WESTERN EUROPE-A DANGER TO FREE TRADE Western Europes economic transformation is as important for America as the revolutions farther east. Were EC efforts devoted as much to liberalizing trade with the rest of the world as they are to dropping trade barr i ers among EC mem bers, EC consolidation and expansion would be welcome. After all, a growing European market open to American goodswould be as much of a boon to Americas economy as to Europes. But the EC Commission, and many of the governments of its memb er states, in many ways remains devoted to protec tionism, an addiction that may worsen.

The most glaring example of EC protectionism is the Common Agricultural Policy (CAP).The CAP is the ECs most elaborate bureaucratic creation to date accounting for two -thirds of the ECs $55 billion annual budget.The CAP is designed to shield Western Europes inefficient farm sector from foreign competi tion by fixing agricultural prices at above-market levels and by subsidizing farmers.

These subsidies enable EC farmers to undersell America and other countries in food markets around the world. As serious, the CAP weighs heavily on the EC. Its estimated annual cost to Europes consumers includes $49 billion in taxes to pay for direct subsidies to farmers and $85 billion i n higher food prices!

The EC also protects high-tech industries in a misguided effort to give them an edge over their American and Japanese competitors. Funds are being lavished on programs such as ESPRIT, which supports basic high-tech research in such ar eas as computers, high-definition television (HDTV and telecommunications. With few exceptions, these programs are reserved exclusively for EC companies. With no exceptions, these programs are inefficient 7 The European republics of the Soviet Union inclu d e Armenia, Byelorussia, Estonia, Georgia, Latvia, Lithuania, Moldavia, Russia, and Ukraine. 8 The Economist March 23,1991 8 U.S. WORLD TRADE 1990 billions 92 20.3 28.2 13.1 13.7 1.9 1.1 190 43.8 47.0 26.8 24.6 5.0 3.6 I I U.S I 394 I 495 I 889 Source: U.S . Department of Commerce Heritage InfoChart Among EC countries, France is probably the most protectionist. With one-third of French industry owned by the state, public subsidies and favors have been dis tributed extensively to failing companies. Example Ov e r the past decade, the French government has given almost 3 billion in subsidies to its state-owned com puter company, Groupe-Bull and favored it with government purchasing con tracts? Nevertheless, Groupe-Bull is in serious financial difficulties and is a sking for still more public cash. Frances new Prime Minister, Edith Cresson, is an avowed protectionist and has established a new and powerful ministry embracing finance, trade, telecommunication, and industry with a mandate to protect and promote Frances international trade led to restrictions on the import of Japanese cars. Although Britain and a few other EC countries welcome free trade in automobiles, France has imposed a voluntary ceiling of 3 percent of its market for Japanese cars; Italys restrictio n s are even more severe. In the name of ending these national restrictions, the EC has proposed extending protectionism throughout the Community with an EC wide quota for Japanese cars of 11 percent of the market. This will be allowed to rise only graduall y to 17 percent by 19

99. By contrast, Japanese cars account for 30 percent of the U.S. market Much of Western Europes protectionism is aimed explicitly at Japan. This has 9 The Economist April 20,1991 9 Similarly, French officials have attempted to help t heir electronics firms by vir tually forbidding the importation of Japanese electronics. Recently, when the Japanese electronics company Fujitsu, Ltd. bought the British company ICL, the latter was deemed to be no longer European and was ejected from JESS I , an EC-dominated, government-aided consortium that funds computer research crimination as Japanese firms for example, the European subsidiaries of such American firms as International Business Machines Corp. are allowed to par ticipate as European compan i es in JESSI and other programs protectionist measures aimed at Japan can hit America. Example To circumvent EC restric tions on Japanese imports, Honda Motor Co Ltd. is proposing to ship to Europe cars made in its American plants; France wants to label th e se Japanese, and sub ject to the quota An area of particular concern for the U.S. is Airbus Industrie, a consortium of aerospace companies in Britain, France, Germany, Italy and other EC countries that builds commercial aircraft. Airbus has become a major player in the world civil aviation market over the past two decades, eroding the commanding American presence.This challenge has been possible only through massive sub sidies to Airbus from European governments. The U.S. Department of Commerce estimates t h is government support at 13.5 billion to date in direct subsidies and far larger amounts in concessionary loans. Airbus, in fact, never has made a profit in its twenty years of existence; its aircraft are sold at a price estimated to average one-third bel o w actual costs U.S. protests have been to no avail, and the U.S recently referred the case to GATI for review for possible trade violations fears of a Fortress Europe with high protectionist walls have not yet been real ized, the number of American trade d isputes with the EC has been growing.The experience of these disputes, ranging from banking to pasta imports to electronics indicate the troubling EC tendency to adopt free trade practices only under pres sure EC Intransigence. This stubbornness endangers the world trading system. EC anti-trade practices are under discussion in the current round of GATI negotia tions, which is aimed at significantly lowering trade barriers around the world.

After five years of negotiation and an unprecedented scope of agre ement among the worlds industrialized and developing nations, the talks have foundered on the ECs refusal to modify the CAP significantly. Americas position has been that a GATI agreement that fails substantially to liberalize trade in agricultural produc t s would penalize America and the many other countries that have a com parative advantage in agriculture. This includes many impoverished Third World countries. Yet the EC refuses to budge Hitting America, Too. Although American firms do not face the same o vert dis The problems with Airbus are not an isolated phenomenon. Although the worst 10c 3 Is EUROPE'S TRADING BLOCS PlanEcon Estimate, 198K Includes Asian portion of the Soviet Union Note: The lack of Western accounting measures and free prices makes est imates of the size of centrally planned economies unreliable.

Source: PlanEcon Report, U.S. Department of Commerce, EC Commission.

Heritage Infochart THE EC AND ITS EUROPEAN NEIGHBORS The EC's economic clout will be extended further upon the expected comp le tion this summer of negotiations between it and the six-member European Free Trade Association (EFI'A EFTA's current members Austria, Finland, Iceland Norway, Sweden, and Switzerland -have highly developed economies and are among the wealthiest countri es in Europe.

Current EC-EFI'A negotiations are aimed at lowering trade barriers between them and increasing economic coordination.The resulting bloc will be known as the European Economic Area (EEA It will embrace virtually all of Western Europe and numbe r almost 380 million people, with an aggregate gross domestic product of $6.9 trillion. Some EFTA members, meanwhile, are pursuing full EC membership: Austria has submitted a formal application; Sweden is likely to do so this summer. Less enthusiastic is Norway, whose voters rejected EC membership in a 1972 national referendum. But Norway may be forced into an ever-closer relationship with the EC due to its economic dependence on the EC and a lack of alternatives.

Outside of EFTA,Turkey has had an Associat ion Agreement with the EC since 1963, but its application for full membership has been put on hold indefinitely by the EC. Turkey's relatively low level of economic development, its Muslim cul ture, and the hostility of its old antagonist, Greece now a fu l l EC member 11 capable of blocking Turkeys application make its prospects for full membership On Hold. Each East European country has expressed interest in EC member ship. In Poland, for example, all new economic legislation is drafted in accordance with E C standards. At present, however, the EC is too absorbed in its own politi cal and economic integration to consider admitting new members and also is wary of the costs and risks of admitting such countries as economically backward Poland. French President Fransois Mitterrand recently advised East European countries not to expect membership for several decades.

The ECs closed door is good news and bad news for these EC aspirants. While membership would open currently closed markets and be an important spur to growth, it also would subject the fragile East European economies to the rapidly increasing burden of EC regulatory policies, like stringent environmental stand ards and rigid employment practices. The weight of these policies could erase for Eastern E urope many of the economic gains resulting from the removal.of trade barriers.

Instead of membership, the EC is offering to negotiate Association Agreements with the East European countries. In addition to regulating trade between East European countries a nd the EC, these agreements would hold out the possibility though not a guarantee of full EC membership.

Severe Disadvantage. Given the disparity in size and wealth between the EC and the East European countries, the East Europeans are at a severe disadvantage in these negotiations. Poland is a case in point. While demanding that Poland com mit itself to eli minating all restrictions on imports from the EC, the EC has of fered in turn to remove restrictions only on about one-half of Polands exports.

Limits on the import of Polish textiles and steel would be reduced, but only over five to ten years. Most Polish agricultural products would continue to face daunt ing barriers or would not be admitted at all. Coal exports would remain blocked.

The irony is that formerly communist Poland now has an economy that in many ways is more open than that of the EC; it has no quantitative restrictions on im ports and has very low tariffs. Yet the EC is encouraging Poland and other liberalizing East European countries to raise tariffs to match those of the EC.

Without an alternative, Poland will be forced to comply with the ECs demands. poor. lo 10 Each EC member possesses a veto over the admission of new members. A recent opinion poll showed 99 percent of Greeks opposed toTurkish membership 12 RECOMMENDATIONS American interests argue strongly for promoting free trade within Europe and between Europe and the rest of the world.The key will be to push the EC off its present protectionist path toward free trade. Doing so will require a carefully coor dinated seven-point strategy proceeding along several reinforcing fronts: the G AlT negotiations; relations with U.S. trading partners around the world; U.S relations with non-EC European states; and. relations with the EC itself.

Points of the strategy are Point #1: Continue to use GATI' as the main forum for liberalizing global trade; prevent the EC from torpedoing the GATI' negotiations.

Despite its shortcomings, GAlT has been a valuable tool in creating a relatively free international trading system. The latest round of trade liberalization negotia tions, known as the Uruguay Roun d, is essential to maintain the momentum toward free trade. Throughout the Uruguay Round, America tirelessly has pressed the EC, to little avail, to reduce barriers to trade in agricultural products. As of now, a nearly complete GAlT agreement is being he ld up by this single issue.

Even if the talks fail in agriculture in this round, Washington should continue to use GAlT to press for trade liberalization globally. GAlT is a particularly useful forum to challenge EC protectionist practices as it can mobili ze support from around the world.

Point #2: Expand the number of free trade agreements between America and other countries.

The U.S. already has signed free trade agreements with its largest trading partner, Canada, and with 1srael.The Bush Administratio n currently is negotiating a free trade agreement with Mexico. Free trade agreements with other Latin American countries could follow, creating a free trade zone for the entire Western Hemisphere. After Mexico, Chile and Colombia are likely candidates. In addition to expanding U.S. business opportunities, these and other potential agreements demonstrate forcefully to the EC and other protectionists that America has the op tion of establishing its own free trade system and that countries that pursue protec tionist policies risk exclusion from these and other markets around the world.

Especially important would be agreements with the East hiannations of South Korea, the Republic of China onTaiwan,Thailand, and, eventually, Japan. In addi tion to the tremendou s economic advantages to America presented by such agree ments, they would create the prospect of a North American-East Asian free trade zone. This would mobilize tremendous pressure on the EC, which could not afford to be left out of what would be the wo r ld's largest trading group Point #3: Offer to negotiate free trade agreements with East European countries that have embarked on free market reforms Free trade agreements with the U.S. would give the East European countries secure access to the American m a rket at a time when the EC is restricting access to agriculture, steel, textiles, and other sectors in which the East Europeans are 13 I competitive. Such access to the U.S. market was a key element igniting the dramatic growth of the East Asian economies .

While the immediate gain to U.S. business in new markets would be relatively small, opportunities will expand as the East European markets grow. Free trade agreements with the U.S. also would head off protectionist measures by East Europeans. Several cou ntries now are considering such measures in an unwise at tempt to protect their uncompetitive industries from foreign competition.

Moreover, .American-East European free trade agreements, or even the prospect of them, will increase the leverage of these c ountries in their Association Agreement negotiations with the EC. Given their poverty, the East European countries are at a considerable disadvantage in these talks. A free trade agree ment with America would give the East Europeans an alternative to the E C and thus would press the EC to open its markets to Eastern Europe. Open trade be tween the EC and Eastern Europe ultimately benefits the U.S as long as Eastern Europes barriers to U.S. trade stay down, because it opens a back door into the EC for Americ an companies. U.S. companies, for example, could operate plants in Eastern Europe and export their output to the EC on terms that might be bet ter than exporting directly from America to the EC.

Point #4: Begin laying the foundation for free trade agreements with the European republics of the Soviet Union.

The same advantages of free trade agreements with Eastern Europe and EFTA would apply to those republics of the Soviet Union that are on the road to inde pendence.These include not only the republics that have elected democratic governments and have procl a imed independence as their goal -Armenia, Es tonia, Georgia, Latvia, Lithuania, and Moldavia but also those other European republics in which democratic forces may soon come to power and move toward independence: Byelorussia and Ukraine. Several of these republics have begun the transition to a free market economy, even though the Soviet central govern ment continues to hamper their efforts. The prospect of a free trade relationship with America can encourage these nations to speed the transition.

A democr atic, free market Russia, a potentially wealthy country of 150 million people and enormous resources, eventually will be a candidate for a free trade agreement with America. It is in Americas long-term strategic interests that Rus sia become democratic an d align itself with the West. Providing Russia with the opportunity to grow economically is the most practical way to achieve these goals.

Point #5: Complete the ECs encirclement by offering to negotiate free trade agreements with other non-EC European countries, particularly Turkey.

Although the six EFTA countries are negotiating with the EC for closer rela tions, several of its members are wary of getting too close to the EC and of being dominated by it. A free trade agreement with America not only would increase EFTA nations trade opportunities but also would serve as a political and economic counterweight to the EC 14 Turkey, which is not a member of either the EC or ERA, is a particularly at tractive candidate for a free trade agreement with America. T urkey has a large and dynamic economy and is searching for greater access to foreign markets Its 1987 application for admission to the EC has been shelved. In October 1990, the Turkish government proposed a free trade agreement with the U.S. So far Washin g ton has done nothing to pursue this. A free trade agreement withTurkey would open new markets for American exports and would bolster the economy of a key American geostrategic ally, as demonstrated byTurkeys steadfastness in the Persian Gulf war. Along wi th free trade agreements with the ERA countries to the north and the East Europeans to the east, a free trade agreement withTurkey would complete the encirclement of the EC by a U.S.-led free trade area I Point #6 Split the EC.

In addition to applying exte rnal pressure to the EC, America should make use of its allies within the EC to prod the EC toward free trade. Britain and The Netherlands, for instance, favor freer trade. Germany, along with America the worlds largest trader, has a vital interest in kee p ing its overseas markets open, al though it often defers to protectionist sentiment for political reasons, such as paciwg its farmers or improving relations with France. The Bush Administration should consult with London and other appropriate EC-capitals on ways of coor dinating policy to halt EC protectionism I Point #E Ultimately, propose an American-EC Free Trade Agreement.

The culmination of American efforts should be a comprehensive fee trade agreement with the EC itself. An American-EC agreement woul d eliminate the major threat to world trade and ensure that all of Europe is open to American business and to economic growth. The prospect of a Fortress Europe wreaking havoc on U.S. economic interests would be eliminated; instead, the EC could be come a n ally in promoting free trade in East Asia and around the world CONCLUSION Europes quiet economic revolution is as important as the political convulsions of recent years. For America, the stakes in this economic revolution are high.The familiar divisions o f post-World War I1 Europe are fading and in their place a single continental economy may emerge, numbering over 600 million people. The creation of a dynamic economy embracing all of Europe and open to the world would greatly enlarge markets for American goods, talents, investment, and ser vices. It would boost world trade as a whole.The alternative is a continent that remains divided into blocs, with the East mired in poverty and the West threaten ing global trade with its protectionism.

Not all American interests in this process are economic. Important American geostrategic concerns also are involved in promoting free trade in Europe: bolster ing the economies of the new democracies of Eastern Europe, supporting its ally Turkey, and integrating all area s of Europe into the West 15 America should not be a passive observer in Europe's economic revolution. In itead, America should pursue a strategy to advance American economic and itrategic interests in an open and expanding European economy. The key to ach i eving this will be to push the EC, which is moving dangerously toward protec tionism, toward free trade.This will take tremendous pressure, which can be ap plied only if America gradually builds a free trade area of its own a free trade area so powerful t hat the EC will find itself on the outside looking in, and have no zhoice but to open its borders or risk permanent "second class" economic status.

Critical Intervention. This American strategy should have at least seven points.

I'hese are: continue press ure on the EC through the GAlIT process on liberaliz ing global trade; negotiate free trade agreements with Latin American and East Asia countries; offer free trade agreements to those East European countries that move decisively toward free market econom i es; offer similar agreements to rurkey and other non-EC countries of Europe; lay the groundwork for free trade with the European republics of the Soviet Union; split the EC by working with those countries that are opposed to protectionism; and finally, of fer to negotiate a free trade agreement with the EC itself.

In the first decades after World War II, American intervention in European economic matters was critical to Europe's economic health and progress toward freer trade. Once again, America's influenc e will be needed if Europeans are to be spared the consequences of their governments' protectionist actions, and if American interests are to be preserved.

Douglas Seay Policy Analyst On Eastern Europe, see Heritage Foundation Backpunders No. 820 An Ameri can Response to the Balkan Revolutions March 29,1991 No. 7 Yellow Light for Eastern Europe: Beware Four Economic Development Myths November 13,1990 No 76 Promoting the Peaceful Decolohtion of the Soviet Union July 12,1990 and No. 759 For Eastern Europe, A n Agenda for Economic Growth March 13,1990 16


Christopher Gacek

Senior Fellow and Director of Government Finance Programs