US-Europe Rift Disrupts World's Free-Trade Deal

European oil-seed subsidies stall 108-nation pact that would stimulate global commerce

THE United States and Europe are on the edge of a dangerous trade confrontation.

If the trade battle is not resolved within the next 30 days, the dispute may doom the world- trade-liberalization negotiations that have been going on for six years.

Yesterday the US announced that it would impose $300 million of tariffs on European luxury exports. The 200 percent tariffs will not go into effect for 30 days, allowing negotiators some extra time to resolve the conflict. If the tariffs go into effect, the European Community (EC) says it will retaliate with duties of its own on US exports.

Trade analysts say this trade battle potentially could poison the air for broader trade reform, planned in 15 areas of commerce.

"The US feels it is on high moral ground," says Harry Freeman, a Washington-based trade consultant. However, the EC views the US as politically "unrealistic."

At issue is a nearly five-year-old trade dispute over oil seeds such as soybeans, sunflowers, and rapeseed. The US Department of Agriculture estimates that European subsidies are now costing US farmers $1 billion in lost orders. The United States trade representative is threatening to impose punitive tariffs worth at least that much on European farmers, particularly on French luxury foods and spirits. The French have been particularly difficult in the negotiations.

"We are hoping the US government will announce retaliation immediately and follow through as necessary," says Steve Yoder, president of the American Soybean Association and a Florida grower.

The US and the EC say they nearly reached agreement this week. However, EC Farm Commissioner Ray MacSharry says the US demands were "too great and politically unrealistic." On Tuesday, the US announced its determination "to defend our GATT rights and the interests of our oil seeds producers."

The genesis of the battle goes back to the 1960-62 Dillon Round of the General Agreement on Tariffs and Trade (GATT). The US asked Europe to allow soybean exports in without duty. The Europeans agreed that they would not impose duties or hinder US sales. But as European production of oil seeds increased, the EC began to subsidize its farmers. The EC reports it spent $4.83 billion in 1991 subsidizing 12 million tons of oil seeds. The subsidy is 12.2 percent of total European agricultural subsidies.

These subsidies kept US farmers from selling as much of their soybean crop on the continent as they had hoped. In 1987 the American Soybean Association asked the US to take action. Following GATT rules, the US asked two panels at the world-trade body to rule on the dispute. Both panels agreed with the US position. But the EC has ignored the nonbinding rulings, leading to a final round of unsuccessful negotiations this week in Chicago.

ON Wednesday, the US ambassador to the GATT's current Uruguay Round, Rufus Yerxa, said the European decisions to ignore the panels "cannot be permitted."

"What is at stake here is the credibility of the very system the European Community professes to support as the means of solving international trade disputes," Ambassador Yerxa said.

Some trade specialists say the dispute has dragged on because of the political influence of farmers.

"The real problem here in the ultimate analysis is two weak presidents [Bush of the US and Mitterrand of France] confronting two internal lobbies, neither of which is willing to reach a compromise," says Jagdish Bhagwati, a professor at Columbia University and an adviser to Arthur Dunkel, director-general of the 108-nation GATT.

In Europe, French farmers have disrupted transportation to protest proposed cuts in subsidies. French farmers grew 4.6 million tons of oil seeds in 1990. The farmers worry that a settlement on this issue will result in a similar settlement on grains - the sticking point of the current GATT round.

If the trade dispute has not been settled by Jan. 20, President-elect Bill Clinton will have to become involved. "If that happens, I hope President Clinton will be able to work out a formula by which we can arrive at an agreement," Mr. Bhagwati says.

Earlier this week, Australian Prime Minister Paul Keating, on behalf of 12 trading nations, sent a message to the leaders of the Group of Seven industrialized countries, asking them to reach a settlement before the end of the year. "We all need the benefits that will flow from the round package," Mr. Keating said.

Economists expect trade liberalization will add about $200 billion to the world economy.