USTR - 1996 National Trade Estimate-European Union
Office of the United States Trade Representative

 

1996 National Trade Estimate-European Union


The European Union and the United States share the largest two-way trade and investment relationship in the world. In 1995, the United States had a trade deficit with the European Union (EU-15) of $8.3 billion, $3.4 billion less than that recorded in 1994. In 1995, U.S. merchandise exports to the EU-15 were $123.6 billion, an increase of $15.9 billion from those in 1994. U.S. imports from the EU-15 totaled $131.9 billion in 1995, or 10.4 percent greater than those in 1994.

The stock of U.S. foreign direct investment in the EU was $256.1 billion in 1994, an increase of 6.9 percent over that in 1993. U.S. direct investment in the EU-15 is concentrated largely in manufacturing, finance and wholesale.

IMPORT POLICIES

1995 EU Enlargement - Austria, Finland and Sweden

When Austria, Finland, and Sweden joined the EU on January 1, 1995, these countries adjusted their tariffs to the EU's common external tariff, resulting in increased tariffs on $3 billion of U.S. industrial and agricultural exports. Under WTO rules, the European Commission was required to negotiate with the United States and other affected trading partners a package of compensating tariff cuts. During 1995, the EU adopted interim compensation for the United States under which the EU continued to apply pre-accession tariff levels on imports into the three countries on most of the affected industrial products, but provided no compensation in agriculture.

In December 1995, the EU and United States concluded negotiations on the permanent compensation owed to the United States. Some of the concessions were in the form of acceleration of tariff reductions agreed in the Uruguay Round, while others involved reductions of tariffs beyond levels agreed in the Round or the establishment of tariff-rate quotas (TRQs). The highest value concessions were in three sectors: semiconductors, agriculture and chemicals.

Customs Classification of Information Technology Products

The reclassification by the European Commission of certain products emerging from new computer technologies has raised concern with information technology equipment manufacturers. These reclassifications have a potential to increase tariffs from 3.9 percent to 14 percent, posing a serious competitive issue for U.S. exporters. In one example, adaptor cards used in connection with a local area network (LAN) were reclassified from a provision for computer parts to a provision for telecommunications equipment. In another example, CD ROM drives which have been classified in a provision for computer equipment, were classified in provisions for consumer electronics. The industry is working to develop a common position and bring the issue to the attention of high-level Commission officials and key Member states. The United States has alerted the EU to its concern over reclassification issues concerning information technology products, and has requested consultations on the matter.

EU Implementation of Uruguay Round Grain Tariff Commitments

On July 1, 1995, the EU implemented its Uruguay Round commitment for grains and rice using a reference price system. In adopting the reference price system, it appeared that the EU would exceed its binding for products valued above the applicable reference price. In September 1995 the United States and the EU held GATT Article XXIII consultations regarding the EU's reference price system. The consultations were followed by intensive bilateral negotiations, and culminated with the announcement on November 30, 1995, of an agreement that helps improve access to the EU. The agreement reduces import charges on brown rice by changing the basis for the reference price. In addition, the EU committed to implement, on a one-year trial basis, a system allowing importers of brown rice the possibility to cumulatively recover duty overages that might occur. The EU also agreed to future consultations if the reference price system results in duties greater than those committed to in the Uruguay Round.

Corn Gluten Feed

Corn gluten feed (CGF) is composed of a variety of residues from the corn wet-milling process. CGF has entered the EU under a zero-duty binding for more than 25 years. However, in 1991 the EU began to reclassify some shipments of CGF as mixed feed, which is subject to a prohibitively high import charge. In October 1991, a bilateral Memorandum of Understanding aimed at clarifying the definition of CGF was signed. However, new questions arose and the EU continued to reclassify some shipments. The United States and the EU negotiated an agreement that applied to shipments from October 1991 to June 1994. The EU also agreed, as a part of the so-called Blair House Accords, to language designed permanently to resolve the issue.

In December 1995, the European Court of Justice found that corn gluten feed, as described in the Blair House Accords, was misclassified in the EU's tariff schedules. The Commission and the Council acted quickly to remedy the potential immediate trade effects by creating a new classification that continues zero duty treatment for CGF. The USG will remain vigilant to ensure that the U.S. rights with respect to corn gluten feed are maintained.

Broadcast Directive and Motion Picture Quotas

In 1989, the EU issued the Broadcast Directive which included a provision requiring that a majority of entertainment broadcast transmission time be reserved for European origin programs "where practicable" and "by appropriate means." By the end of 1993, all EU Member states had enacted legislation implementing the Broadcast Directive.

Since 1993, the Commission has worked, first, on a review of member state implementation of and compliance with the key provisions of the Directive, including quotas, and subsequently, on revisions to the Directive. In March 1995, the College of Commissioners approved strengthening quotas, but made it possible to end them in ten years time, and agreed not to expand the scope of the Directive to new services. In November 1995, the Council of Ministers, unable to agree on the quota issue, reached a political agreement that settled for keeping the quota provisions of the 1989 Directive intact, while tightening up the provision governing member state jurisdiction over broadcasters. The European parliament voted in February 1996 to tighten the quota provisions of the Broadcast Directive and to include video on demand and other on-line services under the scope of the Directive. If broad divisions remain between the Council and the Parliament, a conciliation procedure will take effect. This procedure could take a number of months before a final agreement is reached.

The United States has held consultations under GATT Article XXII with the EU concerning the Directive because the broadcast quotas appear to violate the member states' obligations under the GATT. The United States has reserved its right to take further action under WTO dispute settlement procedures and is closely

monitoring implementation of these measures. While the EU did not make specific commitments to liberalize trade in the sector, the United States succeeded in preventing the exclusion of the audio-visual sector from coverage under the General Agreement on Trade in Services (GATS). Because of the Broadcast Directive, the EU remains on the Special 301 "priority watch list."

Several countries have specific legislation that hinders the free flow of broadcast materials. A summary of some of the more salient restrictive national practices follows:

France: The 1989 EU Broadcast Directive requiring a "majority proportion" of programming to be of European origin was transposed into French legislation in 1992. France, however, chose to specify a percentage of European programming (60 percent) and French programming (40 percent) which exceeded the requirements of the Broadcast Directive. Moreover, the 60 percent European / 40 percent French quotas apply to both the 24-hour day and to prime-time slots. (The definition of prime time differs from network to network according to a yearly assessment by France's broadcasting authority, the "Council superieur de l'audiovisuel," or CSA.) The prime time rules in particular limit the access of U.S. programs to the lucrative French prime time market. France's broadcasting quotas were approved by the EU Commission and became effective in July 1992.

In December 1993, the French Parliament approved a law imposing a 40 percent quota of French songs on almost all French private and public radio stations. The 40 percent quota will be applicable only during prime time and will go into effect beginning January 1, 1996. Some 1700 AM and FM stations will be affected. French songs are defined as "variety music" written or interpreted by French or Francophone writers and artists. In addition, half of the 40 percent radio quota will have to be either new French songs (songs released less than six months ago) or French songs interpreted by new French or Francophone singers (singers or groups who have not yet had two albums sell at least 100,000 copies each).

The effects of the French radio broadcast quota are hard to evaluate. The law may prove difficult to administer or enforce because of its scope and complexity. The potential exists, though, that it will reduce the broadcast of American music by as much as 30 percent from current levels.

Italy: In keeping with the 1989 EU Broadcast Directive, Italy's 1990 Broadcast Law requires that upon conclusion of three years from concession of a national broadcast license, a majority of TV broadcast time for feature films be reserved for EU-origin films. The Italian law also requires that half of the European quota be dedicated to Italian films. The Italian law is more narrowly focused than the Broadcast Directive, since it encompasses only films produced for cinema performance, and excludes TV films and series and other programming. The film sector decree-law enacted on January 18, 1994, calls for application of the Italian broadcast quotas proportionally during evening viewing hours, but its language is strictly hortatory.

A separate issue concerns films shown in Italian theaters. The film sector law approved by Parliament in February 1994 eliminated obligatory screen quotas for Italian films (heretofore 25 days per quarter subject to closing of the theater, under a 1965 law), and in their place substituted discretionary rebates on Italy's box office tax for theaters that show Italian films. The rebates and eligibility thresholds (percentages of screenings required to qualify) vary according to the category of the film. The United States continues its efforts both to obtain elimination of discriminatory laws and regulations in the audiovisual sector and to limit their impact in the interim.

Portugal: Television legislation passed in 1990 contains language taken from the EU's 1989 Broadcast Directive requiring a "majority proportion" of works broadcast be of "Community or European" origin. In practice, however, this rule has not been enforced because Portuguese television production is minimal and production from other EU countries is inadequate to satisfy the networks' broadcasting commitments. The United States will monitor closely the implementation of this restrictive legislation.

Spain: Program restrictions for private television are contained in a law authorizing private television in Spain. The law includes restrictions on non-EU programming to be shown on private TV, including movie quotas. Government-owned and private television networks meet their quota restrictions. These restrictions, which are intended to encourage Spanish language production, follow the EU's Broadcast Directive. In December 1993, the Government of Spain adopted legislation which transposes the Broadcast Directive.

While the principal government-owned television networks now show more U.S. programs than the quota restrictions on private channels would permit, private network licenses match the private TV program quotas. U.S. programs would have greater sales without the quota restrictions.

Spain requires a license for distributing each non-EU film dubbed domestically. Dubbing is deemed essential since dubbed movies account for about 95 percent of box office revenues for imported films; the rest is earned by sub-titled original language films. Until December 1993, to obtain the first dubbing license, distributors had to contract to distribute a Spanish film - up to three additional licenses per distributed film could be earned when box office earnings for that film reached 30, 60, and 100 million pesetas.

This requirement was significantly tightened in December 1993 by a decree law which cut the number of dubbing licenses per Spanish film from four to two (distribution of an EU film counts the same as a Spanish film in terms of qualifying for a dubbing license), and which grants the first license when box office receipts reach 20 million pesetas (about $140,000); the second license is granted when receipts reach 50 million pesetas and the film is dubbed and screened in a second officially-recognized regional language in Spain. Spain also continues to maintain screen quotas requiring movie theaters to show at least one day of new EU films for every two days of non-EU films shown. The December 1993 law slightly relaxed this requirement for rural areas, setting the ratio at one day of EU films for every three days of non-EU films. In response to protests by motion picture distributors and exhibitors, the Spanish Government is reviewing the law.

U.S. industry sources indicate that the dubbing license system increases film distributor costs by $100,000 to $200,000 per film. About 125 U.S. feature films are exported to Spain each year, so dubbing licenses cost U.S. firms more than $15 million. The U.S. industry believes that, based on historical performance of EU films in Spain, the new more restrictive rules will limit the number of licenses to fewer than fifty per year.

The United States has raised the dubbing license issue bilaterally and in the OECD Invisibles Committee and continues to seek elimination of this barrier. In addition, Spanish distributors have won a ruling from the EU Commission's Competition Directorate that part of the pre-December 1993 dubbing license system violates the Treaty of Rome.

Import Quotas on Canned Fish

In 1992, the EU adopted Commission Regulation No. 3900/92, which establishes annual import quotas for preserved tuna, bonito and sardines from 1993 through 1996. Preferential trade is excluded from the quota. The quota is limited to the total volume of non-preferential imports recorded during 1991 plus a minimum annual rate of increase of 6 percent. Eighty-five percent of the quota is allocated to importers of non-preferential fish products during the two years preceding imposition of the quota.

U.S. concerns stem both from the direct effects of tuna quotas and their potential distortion of trade patterns. Annual U.S. exports to the EU have been relatively small (about $1 million). Of even greater concern, however, is the likely effect on the U.S. domestic markets, as major exporters to the EU, such as Thailand, the Philippines, Fiji, Solomon Islands, Indonesia and Venezuela seek outlets for their production over the EU's quota. The United States, as the largest market in the world for canned tuna, is the likely destination for such spill-over. In addition, if Thailand's exports to the EU are affected, this might indirectly reduce U.S.-flag vessels' sale of fresh tuna to Thai canneries (44,000 mt in 1992, with a value of about $40 million.)

Thailand and several other countries held consultations with the EU in 1994 under GATT XXIII, and were assured that the EU quotas will not be extended. The United States held separate consultations with the EU in 1994 under GATT Article XXIII.

Restrictions Affecting Wine

The United States seeks assurance of long-term access for U.S. wine exports to EU markets. Current EU regulations require imported wines to be produced with only those oenological practices (i.e., wine treating materials and processes), which are authorized for the production of EU wines. Although not all U.S. oenological practices are authorized in the EU, since the mid-1980's U.S. wines have been permitted entry to EU markets by means of a series of extensions to temporary EU regulatory exemptions. Without these "derogations," the majority of U.S. wines would be immediately barred from entering the EU. This leaves in doubt both the foothold U.S. exporters have secured in the EU market and the prospects for export expansion in the future.

EU regulations also require that a wine-import certification document be provided for each wine in each shipment. This document requires production and shipping information as well as eight chemical tests which are costly to perform. In 1986 the EU authorized certain qualifying U.S. producers to use a simplified, less costly procedure for completing this document; however, this authorization is subject to the same temporary and uncertain regulatory status as are U.S. oenological practices.

Ban on Fur from Animals Caught in Leghold Traps

In November 1991, the EU adopted a ban on imports of fur from countries allowing the use of the leghold trap, together with a simultaneous ban on the use of such traps in the EU. As the leghold trap is widely used in the United States and Canada, such a ban, once implemented, could harm U.S. exports of fur to the EU. The import ban, which would have applied to fur and fur products from 13 specified species of animals, was most recently to go into effect on January 1, 1996, but has been postponed until at least January 1, 1997. Meanwhile, work in the International Organization for Standardization (ISO) to develop standards for animal trapping has not yet yielded a result.

In August 1995, at the urging of the U.S. Government and others, experts from the European Commission, Canada and the United States (later joined by Russia) launched an intensive discussion of humane trapping standards. Encouraged by the progress of this group, in December 1995 the European Commission introduced alternative legislation and directed that the ban be postponed until January 1, 1997 pending consideration of the proposal. The proposed legislation still maintains the threat of a ban but calls on trading partners to negotiate commitments to meet trapping standards. The U.S. Government is studying the proposal and monitoring its consideration by the European Council and the European Parliament. The United States remains committed to seeking science-based humane trapping standards and will continue to seek to avert a ban on U.S. fur exports.

Import and Distribution of Bananas

On July 1, 1993, the European Union implemented a new banana import regime as part of its Single Market exercise to replace individual member State rules for banana imports. Elements of the new regime include a tariff rate quota for imports of bananas from Central and Latin America set at a level significantly smaller than recent historical import volumes, and a licensing system that discriminated against third country importers and distributors to the benefit of EU firms.

In early 1994, a GATT panel found that the EU's new banana regime was inconsistent with GATT rules, but the EU blocked adoption of the panel's report. The EU in the spring of 1994 concluded a "Framework Agreement" to settle the GATT case with four of the five Latin American countries which had brought the case against the EU, but the Framework Agreement did not commit the European Union to reform those aspects of the regime which are most harmful to U.S. banana marketing firms. In fact, the Framework Agreement created a situation in which the Latin signatories could implement a banana export licensing scheme in a manner which further discriminates against U.S. banana companies in favor of EU firms.

In October 1995, the United States, joined by Guatemala, Honduras and Mexico, held formal WTO consultations with the European Union in an effort to resolve the bananas dispute. Ecuador joined the United States and its other Latin American partners in another request for formal WTO Consultations on the bananas issue in February 1996. Those consultations were held in March 1996.

STANDARDS, TESTING, LABELING AND CERTIFICATION

EU member states still have widely differing standards, testing and certification procedures in place for some products. These differences may serve as barriers to the free movement of these products within the EU and can cause lengthy delays in sales due to the need to have products tested and certified to account for differing national requirements. Nonetheless, the political will and the advent of the "New approach," which streamlines technical harmonization and the development of standards for certain product groups, based on minimum health and safety requirements, generally still point toward the harmonization of laws, regulations, standards, testing, quality and certification procedures in the EU. The European standardization process is still closed to U.S. firms' direct participation, although European standards bodies can be sympathetic to U.S. concerns when approached.

Standardization

Standardization continues to play an increasingly significant role in U.S.-EU trade relations, as evidenced by the Transatlantic Business Dialogue Conference in Seville, where one of only four working groups was devoted to standards issues. The U.S. Department of Commerce anticipates that EU legislation covering regulated products will eventually be applicable to 50 percent of U.S. exports to Europe. Given the enormity of this trade, EU legislation and standardization work in the regulated areas is of considerable importance. Although there has been improvement in some respects in 1995, a number of problems related to this evolving EU-wide legislative environment have caused concerns to U.S. exporters. These include: lags in the development of EU standards; lags in the drafting of harmonized legislation for regulated areas; inconsistent application and interpretation by member states of the legislation that is in place; overlap among directives dealing with specific product areas; grey areas between the scope of various directives; and, unclear marking and labeling requirements for these regulated products before they can be placed on the market. While many such problems are not deliberate "trade barriers," their existence can impede U.S. exports to the European Union.

Mutual Recognition Agreements

The EU is implementing a harmonized approach to testing and certification, as well as providing for the mutual recognition of national laboratories designated by member states to test and certify "regulated" products. The EU encourages mutual recognition agreements between private sector parties for the testing and certification of non-regulated products.

One difficulty for U.S. exporters is that only "notified bodies" located in Europe are empowered to grant final product approvals of regulated products. While there are some laboratories in the U.S. which can test regulated products under subcontract to a notified body, the limited number of such labs means that such subcontracting procedures are unlikely to provide sufficient access for U.S. exporters. Moreover, these labs cannot issue the final product approval but must send test reports to their European affiliate for final review and approval, delaying the process and adding costs for U.S. exporters.

Both the U.S. and the EU are negotiating to resolve this hindrance to trans-Atlantic trade through what are known as mutual recognition agreements (MRAs). MRAs will permit a U.S. exporter to test and certify his products to the requirements of the EU in the United States. They will similarly facilitate EU exports to the United States. U.S.-EU discussions have been ongoing since October 1992, and in October 1993 the European Commission was formally authorized by the member states to proceed with negotiations. In 1994, the United States and EU officials held two rounds of negotiations on twelve "priority" sectors of interest to both parties. In 1995, during three sessions, U.S. and EU negotiators narrowed the focus to 4-5 sectors including telecommunications, pharmaceuticals and medical devices.

Approval of Biotechnology Products Uncertain in EU

U.S. companies are beginning the approval process for genetically modified organisms (GMO's) in the European Union. One product, a Belgian rapeseed, has been approved, and other products, including a U.S.- developed glyphosate-tolerant soybean, are still in the regulatory process. Existing legislation covering biotechnology in the EU thus far has proven at times to be unpredictable, cumbersome and non-transparent.

The U.S. Government is also concerned about the draft EU novel foods regulation. The draft regulation is intended to improve approval procedures for new and biotech food products, but it may be used as a vehicle to introduce mandatory labeling and other measures.

Ban on Growth Promoting Hormones in Meat Production

The EU banned, effective January 1, 1988, the use of all growth promoting hormones, including natural and synthetic hormones, in livestock production. The ban also applies to meats and meat products imported by the EU on or after January 1, 1989. The only exceptions are for specific hormones when they are used for therapeutic purposes and for meats destined for pet food use. The ban has effectively eliminated most U.S. red meat and meat product exports to the EU. When the ban was imposed, the United States estimated the amount of trade damage at about $97 million a year. In response to EU implementation of the hormone directive, the United States in 1989 imposed 100 percent tariffs on imports of EU agricultural products valued at $97 million.

In 1995, the absence of a scientific justification for the hormone ban was confirmed when the Codex Alimentarius Commission adopted standards for five natural and synthetic hormones for meat production. These are the same five products approved for use in the United States. In addition, in November 1995 a scientific conference sponsored by the European Commission concluded that the use of the five products posed no risk to human health. Nevertheless, the European Union insists on maintaining the hormone ban. As a consequence, the United States in January 1996 requested WTO consultations with the EU regarding its ban on imports of meats from hormone treated meats. Canada, Australia and New Zealand have requested to join the consultations.

Veterinary Equivalency

The EU maintains many import barriers for livestock and livestock products that do not allow for imports through the recognition of equivalent levels of protection offered by exporting countries' animal and public health requirements. One example is the EU's third country meat directive (TCMD) which requires strict compliance with EU standards. An Agreement was reached in November 1992 which adopted the findings of a joint U.S.-EU veterinary group. Under this Agreement the EU undertook to amend the TCMD by January 1, 1995 to provide for recognition of equivalent inspection systems in third countries. However, this target has not been met and, in fact, no action has been taken by the Council as of early 1996 on the proposal forwarded to it by the Commission.

Subsequent to the principle of equivalency being endorsed in the WTO Agreement on the Application of Sanitary and Phytosanitary Measures (SPS), the Commission has entered into negotiations to establish a Framework Agreement that would provide the mechanisms for the United States to seek a recognition of equivalency on various veterinary standards. Intermittent trade disruptions have occurred during the negotiations as the member states continue to implement EU import requirements which were drafted before the EU's commitment to the recognition of equivalency.

Voluntary Eco-Labeling Scheme

On March 23, 1992, the European Council approved an EU-wide eco-labeling scheme. The scheme is a voluntary program which permits a manufacturer to obtain an eco-label for a product when its production and life-cycle meets general and specific criteria established for that particular product. In 1993, the EU adopted criteria for washing machines, dishwashers, tissue paper, soil improvers, kitchen rolls, laundry detergent, single-ended light bulbs, paints and varnishes. In addition, in late 1995, the EU Eco-labeling competent bodies, comprised of member State technical experts, approved criteria for double-ended light bulbs, which the Commission expects to publish in early 1996 for review. In 1996, the Commission intends to develop criteria for the following: refrigerators, footwear, hair sprays, bed mattresses, converted paper products, and household cleaning products. The Commission is developing these criteria through its EU Eco-label regulatory committee. Designated authorities in each member State are responsible for proposing product groups for inclusion in the scheme, to assess individual applications for a label and to conclude contracts with successful applicants.

U.S. and EU technical and policy officials met in two rounds of consultations in 1995 to discuss the EU process for developing criteria and to address specific U.S. industry concerns related to the fine paper and textile sectors. Following the consultations, the EU requested additional technical data and delayed final votes on criteria in these sectors, which could affect up to $4 billion in U.S. exports to Europe. The U.S. and EU also met in the Fall of 1995, where the U.S. raised concerns about the transparency of the scheme and some of the technical problems presented by the textile and paper criteria.

In early 1996 member state representatives voted to adopt textile criteria on bed linen and t-shirts. The regulatory body also scheduled a vote for fine paper product sector criteria in May 1996. These steps were taken despite a request by the U.S. Government for further technical consultations on textile criteria and an equivalent expression of concern about the fine paper criteria.

In October 1995, the Office of the U.S. Trade Representative included the EU Eco-labeling scheme in its annual report to Congress under the "Super 301" program as a practice on which consultations are ongoing but the policy remains a subject of continuing concern. The U.S. government is concerned that the process for developing criteria has been insufficiently transparent and failed to provide for adequate participation by non-EU interest groups. Although the U.S. Government had seen some responsiveness to U.S. industry concerns with respect to the substantive criteria, it is concerned that despite problems with the scheme as a whole and with textile and paper criteria in particular, acknowledged by the EU Commission, the Commission nevertheless proceeded to adopt new product criteria. The United States will continue to monitor closely the setting of EU criteria to assure that they do not become de facto trade barriers disadvantaging U.S. producers.

Some EU member states have their own national practices regarding standards, testing, labeling and certification. A brief discussion of the national practices of concern to the United States follows:

Austria: Certification procedures in the telecommunications field have created problems for U.S. exporters. Although the responsibility for approval of telecom equipment has been shifted from the Austrian Post and Telegraph Administration (PTT) to the Austrian Federal Ministry of Transportation and Public Economy (to conform with the EU Telecommunications Directive), U.S. suppliers still encounter difficulties getting approval for state-of-the art technologies. Standards for such equipment have not been established. In fact, standards still need to be finalized on existing technologies. The Ministry has been apprised of U.S. industry concerns, and has promised to improve the standards setting process. In 1995, U.S. exports of telecom equipment to Austria were estimated at some $40 million.

France: The Government of France has implemented new labeling restrictions for scallops, effective January 1, 1996. The new restrictions require scallops of genera other than "pecten" to be labeled "pétoncle" and prohibit the use of the term "Saint Jacques" on the label. The United States is concerned that these restrictions are intended to disadvantage imports of scallops from the United States and other countries in order to protect French scallop producers. The United States is participating as an interested third country in WTO dispute settlement panel proceedings brought by Canada, Chile, and Peru.

Italy: Italy's interpretation of EU sanitary and phytosanitary requirements have caused, or threatened to cause, problems for the following U.S. agricultural exports: processed meat products, wood products, poultry meats, soybeans, and seafood. Furthermore, Italy's food laws governing additives and colorants have proven to be more restrictive than the EU norms and have affected adversely U.S. exports of some dairy products, baked goods, candy, and beer. Finally, Italy's qualitative standards for bull semen, which limit the number of foreign bulls in favor of domestic animals, and the numerous testing fees, which are used to fund the national industry association, have proven to be cumbersome and expensive. In the absence of these restrictions, U.S. exports of these products to Italy could increase by an estimated $25 - 100 million.

Spain: While product certification requirements ("homologation") have been liberalized since Spain's EU entry, problems remain for U.S. exporters in three areas. First, cumbersome certification requirements remain for telecommunications products, terminal equipment, certain computer peripherals, and some building materials. Second, there is a lack of transparency and consistency in the application of certification regulations. There are no published norms for the documentary evidence needed to show that an item has met certification requirements of another EU governments and that an item is in "free circulation" in an EU market. However, a fast track procedure may be followed in such cases that would expedite the product's entry into the Spanish market. Third, the local interpretation and application of EU Directives and regulations have caused disruption in U.S. trade. For example, U.S. produced gas connectors have had difficulty obtaining permission for entry into Spain . Although the Ministry of Industry now accepts as valid the certification issued by an authorized certification body in the EU, it still reserves the right to require gas connector manufacturers/importers to comply with certain local certification requirements -- i.e., the product may have to be retested by a local authorized certification body.

The Spanish Government generally maintains that it does not use product certification procedures to hinder trade. It has been cooperative in resolving specific trade problems brought to its attention. The United States has encouraged Spain to simplify its certification procedures and to make them more transparent. With respect to the medical and health equipment sector, FDA approval is sufficient to waive the requirement for local testing. However, registration with the Ministry of Health is required.

United Kingdom: At least one U.S. company has encountered difficulties with provisions in certain British standards that impair access to the U.K. market for U.S. products and with U.K. procedures for modifying standards. The British Government has recently been supportive of efforts to resolve such concerns. The United States will continue to monitor the situation.

GOVERNMENT PROCUREMENT

Discrimination in the Utilities Sector

Concurrent with the conclusion of the Uruguay Round in 1994, the United States and the EU reached an historic, market-opening bilateral agreement on government procurement after several years of difficult negotiations. The EU ratified this agreement in May 1995. The U.S. Government will continue to pursue opening of EU telecommunications procurement which is not covered by the agreement.

In 1990, in an effort to open government procurement markets within the EU, the Union adopted a "Utilities Directive" covering purchases in the water, transport, energy, and telecommunications sectors. The directive, which went into effect in January 1993, requires open, objective bidding procedures, a benefit to U.S. firms, but discriminates against non-EU bids absent an international or bilateral agreement. Under the directive, EU procuring utilities may exclude bids with less than 50 percent EU value without additional justification. In addition, acceptable bids with a majority of EU-content must receive a three percent price preference over otherwise equivalent non-EU bids.

In February 1992, citing the Utilities Directive, the Administration identified the EU as discriminating against U.S. businesses under Title VII of the 1988 Trade Act. The report stated that the President intended to institute sanctions against the EU, should the EU proceed to implement the discriminatory provisions of the Utilities Directive. In February 1993, U.S. Trade Representative Kantor announced the Administration's intention to prohibit awards of contracts by certain federal agencies for products and services from some or all of the EU member states, to take effect with respect to solicitation for contracts published on or after March 22, 1993. Ambassador Kantor later postponed imposition of sanctions, in order to give further time for negotiations.

On May 25, 1993, the United States and the EU signed a bilateral agreement under which the EU agreed to waive the discriminatory provision of the Utilities Directive with respect to procurement by electrical utilities. At the same time, the EU agreed to expand coverage of the GATT Government Procurement Code procedures to procurement of services and construction by its member states. In return, the U.S. agreed to remove "Buy American" preferences in procurement by the federally-owned utilities (Tennessee Valley Authority and the five Department of Energy utilities) and by executive branch agencies not previously subject to the GATT Government Procurement Code. The U.S. also agreed to waive "Buy American" requirements for construction contracts and to provide Code treatment to procurement of services. However, because the EU would not eliminate discrimination in telecommunications procurement, the U.S. simultaneously imposed sanctions on goods and services from the EU member states. These sanctions do not apply to Spain, Greece, Portugal and Germany, because these countries do not apply the discriminatory provisions of the Utilities Directive. The EU retaliated by imposing limited sanctions on U.S. goods and suppliers.

The U.S. and EU on April 15, 1994 concluded a procurement agreement that expanded upon the 1993 MOU. The agreement extends non-discriminatory treatment to over $100 billion of procurement on each side, including all goods procurement by all EU subcentral governments, as well as to selected procurement by 37 U.S. states and 7 U.S. cities. Much of the agreement is implemented through the WTO Government Procurement Agreement which took effect January 1, 1996. The 1994 agreement, however, did not end the discrimination with respect to telecommunications. Consequently the U.S. retained the May 25, 1993 sanctions imposed against the EU.

With the accession of the three new member states, the U.S. extended to these new member states the benefits of the 1993 MOU and the 1994 procurement agreement (upon its ratification by the EU), as well as the May 25, 1993 sanctions.

Member State Practices

Some EU member states have their own national practices regarding government procurement. A brief discussion of some of the national practices of particular concern to the United States follows:

Denmark: The Danish Central Government, its institutions, and entities owned by it are obligated to apply environmental and energy criteria on equal footing with price, quality and delivery terms in their procurement of goods and services in a manner consistent with EU procurement rules. In practice, this will likely mean specification of products bearing the EU "eco-label" or products produced by firms with a satisfactory "ecoaudit." The environmental/energy requirement is likely also to spread to procurement by lower level governmental entities. The trend toward specification of environmentally certified products raises concerns, given U.S. concerns with the EU ecolabeling scheme (see above).

Germany: German implementation of the EU Utilities and Remedies Directives was accomplished through modifications to the German basic budget law. Under the terms of a 1993 U.S.-EU Memorandum of Understanding (and since January 1, 1996, the WTO Government Procurement Agreement), the system established for reviewing bid awards covered by the EU Utilities Directive has also been available to U.S. firms bidding on supply contracts in the heavy electrical equipment sector. The review mechanism has provided an administrative means for challenging procurement practices in the electrical utilities sector, considered by many to be relatively closed to foreign suppliers. To date, two U.S. firms have availed themselves of this review mechanism, alleging irregularities in bid procedures. Their experience has been mixed. In one case, a review board ruled that a contract had, in fact, been awarded illegally. In the other case, however, the authority of the review board appears to have been circumvented through the use of intermediaries in the contracting process. No corrective measures have been taken or ordered in either case.

The new remedies procedures have not been entirely transparent, have proved somewhat cumbersome to use, and do not provide an immediate remedy for violations of procurement rules. Finding a legally competent entity to conduct a review has proved difficult. Moreover, the powers of the review boards to remedy illegal awards are somewhat limited. For example, in cases where a final contract has been signed, review boards have no authority to re-open bids. Nor do they have authority to award compensation directly for damages suffered due to an illegal award. Firms which win a judgement before a review board must still file for compensation in a civil court.. The German press reported last year that the EU Commission has formally challenged the adequacy of Germany's implementation of EU procurement Directives in part due to some of these considerations.

Greece: Greek laws and regulations concerning government procurement nominally guarantee nondiscriminatory treatment for foreign suppliers. Officially, Greece also adheres to the EU procurement policy, and Greece has also recently joined the WTO Government Procurement Code. Greek willingness to join this Code is a positive step and reflects the improvement in the procurement situation. As a result of the new Greek attitude, U.S. companies are finding it easier to participate in tenders and a number of them are winning sizeable contracts.

Many problems, however, still exist. Included are occasional sole-sourcing (explained as extensions of previous contracts), loosely written specifications which are subject to varying interpretations, and allegiance of tender evaluators to technologies offered by longtime, traditional suppliers. It is also a widely-held belief that firms from other EU member states have an automatic advantage over non-EU contenders in winning Greek government tenders. It has been noted that U.S. companies submitting joint proposals with European companies are more likely to succeed in winning a contract. The real impact of Greece's "Buy National" policy is felt in the government's offset policy (mostly for purchases of defense items) where local content, joint ventures, and other technology transfers are stressed.

Italy: Italy's highly-fragmented and sometimes non-transparent government procurement practices have created obstacles to U.S. firms' participation in Italian government contracts. Procurement in certain areas is heavily directed toward Italian suppliers. On January 13, 1994, the Italian parliament enacted legislation (Merloni law) aimed at providing more transparent procurement procedures, including establishment of a central body to monitor implementation. Due to its complexity, the bill has never been fully implemented. An estimated increase in U.S. exports of $25 to $100 million could be anticipated were such problems with the Italian procurement system fully remedied.

EXPORT SUBSIDIES

Agricultural Product Subsidies

The EU grants export subsidies (restitutions) on a wide range of agricultural products including wheat, wheat flour, beef, dairy products, poultry, and certain fruits, as well as some manufactured products such as pasta. Payments are nominally based upon the difference between the EU price and the world price, usually calculated as the difference between the EU internal price and the lowest offered price by competing exporters.

The Uruguay Round agreement will require the EU to reduce export subsidies over six years by 21 percent in volume and 36 percent in value from a 1986-90 base period. Under the agreement, the EU will have cut export subsidies by about $5-7 billion from recent levels.

Canned Fruit

The U.S. cling peach industry complained in late 1994 that the European Union had failed to observe and enforce a commitment made in the 1985 U.S.-EU Canned Fruit Agreement (CFA) to not subsidize EU processing operations for peaches in syrup. The U.S. industry claimed implementation of the EU's minimum grower price and fruit withdrawal programs was undermining the no-processing subsidies commitment made by the EU in the CFA, and that the sale of subsidized Greek canned peaches in the U.S. and a number of foreign markets, including Japan, Mexico, and Canada, was harming the U.S. industry. The United States is now working to address industry concerns.

LACK OF INTELLECTUAL PROPERTY PROTECTION

Four EU intellectual property rights (IPR) measures announced in 1988 that were deemed essential to implementation of the internal market have been enacted. One of these, the Software Directive, approved by the Council in 1991, entered into force on January 1, 1993, but so far, only seven member states have implemented the Directive in national legislation. The Commission also has proposed a Directive aimed at harmonizing member state legislation on the legal protection of designs together with a regulation on Community design that would create a Community Design Office. As currently drafted, the Directive would provide protection for up to a maximum of 25 years for registered industrial designs. U.S. firms, while supportive of the Commission's initiative in this area, argue that certain measures will make it more difficult than at present to qualify for valid design rights. U.S. car manufacturers object in particular to the regulation's "repair clause," which effectively eliminates IPR protection for spare styled car body parts after three years and might well encourage copying of designs. Insurance companies and spare parts manufacturers, however, do not share these objections.

The proposal submitted to the Council in 1993 to expand the regulation of counterfeit goods from trademarks to copyrights, related rights and design rights is a positive development. The American business community would like it to be expanded even further to include patents and be made to apply to parallel imports from outside the Community. However, progress remains slow on other Directives in the copyright area. These include directives on home copying and reprography. Some of these directives establish rights based on reciprocity, rather than on national treatment. One possible consequence of providing protection based on reciprocity is that in certain areas U.S. right holders and their assignees might not be able to exercise and enjoy those rights in EU member states unless the United States were to enact the same rights under its laws. Developments in these areas are being monitored closely, and senior U.S. officials have intervened a number of times to discourage the EU from adopting directives establishing rights based on the principle of reciprocity.

Patent filing and maintenance fees in the EU and in its member states are extraordinarily expensive relative to other countries. Fees associated with the filing, issuance and maintenance of a patent over its life far exceed those in the United States.

In March 1995, the European Parliament rejected the text agreed by the Conciliation Committee that had been set up to work out differences between the Parliament, the Council and the Commission on the Directive on biotechnological inventions, including revised language on the patentability of human body parts. In December 1995, the Commission approved a new proposal for a directive aimed at striking a better balance between the need to promote research in the biotechnology field and the need to address ethical concerns. It distinguishes clearly between inventions and discoveries; excludes completely from patentability methods of germ line gene therapy on humans; and makes an explicit derogation for farmers as regards breeding stock. With these changes, the directive may get approval more readily from both the Council of Ministers and the Parliament.

Member State Practices

Some EU member states have their own special practices regarding intellectual property protection. A brief discussion of those which are of concern to the United States follows:

France, Germany and Spain: France, Germany, and Spain collect levies on blank tapes and recording equipment to compensate right holders for the private, home copying of their works and to provide a source of funding for local productions. These levies are distributed by national collecting societies to the various categories of right holders according to statutory provisions. National treatment is denied to U.S. right holders, however, and the U.S. motion picture and recording industries have not been able to collect their rightful share of these proceeds. Recently, an agreement between the Motion Picture Association (MPA) and the General Society of Authors of Spain (SGAE) was reached, granting MPA access to rights collected on behalf of screenplay authors collected through the levy on blank video cassettes and recording equipment. This agreement does not, however, include performers' or producers' rights. According to SGAE, some payment has already been remitted to the Hollywood studios, and the United States will continue to watch very closely to see impact from this agreement.

Germany: The level of software piracy continues to be a source of concern in Germany, as in other large developed markets. The effects of Germany's 1993 implementation of the EU's software directive, as well as an educational campaign by the software industry, may have helped reduce piracy from previous levels.

Greece: Copyright protection in Greece is inadequate and Greece remains on the Special 301 "priority watch list," where it was placed in November 1994. Greece had been on the Special 301 "watch list" for six years. It was kept on the "priority watch list" largely due to rampant television piracy. A large number of unlicensed television stations thrive in Greece by telecasting unauthorized broadcasts of U.S. motion pictures. The U.S. film industry is harmed because pirate stations do not pay for the films they show. Also, these illegal broadcasts have led to a decline in theater attendance and video sales and rentals. Although a media law with strong copyright protection was adopted in August 1995, the Greek Government has not yet begun to enforce its copyright provisions. As of the end of 1995, the Greek Government had moved against a few of the pirate stations. The United States Government is closely monitoring enforcement efforts to see if they are the beginning of a sustained campaign that will lead to effective enforcement of copyrights.

Italy: Italy has been "watch listed" under the Special 301 program since 1989, primarily due to problems with protection of copyrights for computer software and videos. During 1995, Italian authorities showed considerable sensitivity to the need for action in these areas. Working through an interministerial anti-piracy committee, the Italian authorities have substantially increased enforcement actions against both video and software pirates. A key development has been the creation in several major municipal centers (i.e., Milan, Rome, Naples) of special "pools" of Italian prosecutors specialized in combating intellectual property crimes.

Application of the December 1992 Italian software law appears to be making a significant dent in Italy's longstanding software piracy problem. U.S. industry reports that Italian enforcement actions against software pirates have continued to increase. As a result of these actions, the industry estimates that the rate of software piracy in Italy declined from about 86 percent in 1992 to 57 percent in 1994, and legitimate software sales have expanded rapidly as businesses have moved to legalize their holdings. Nonetheless, duplication of software internally by some Italian companies remains a problem,, and there are reports of illicit software holdings in public institutions such as schools and universities. Film video piracy remains a serious problem. U.S. motion picture distributors estimate that some 40 percent of the video market consists of pirated material copied in Italy. U.S. industry has noted persistent enforcement efforts involving police raids and confiscation of illegal cassettes and copying equipment. Piracy of musical recordings is also a problem and may be on the rise due to availability of more sophisticated reproduction equipment and rapid growth of the lucrative market for compact discs. The Italian phonographic industry estimates that piracy of musical recordings (CD's and audio- cassettes) is in the range of 25 percent. There have also been reports of large-scale illegal photocopying of textbooks located around Italian universities.

The United States Government has been monitoring consideration of an "audio-visual piracy prevention and suppression bill," introduced in the lower house of the Italian Parliament. This Parliamentary initiative would impose stiffer penalties and establish special investigative police task forces to combat video and audio piracy. The Office of the Prime Minister in late 1995 prepared its own draft anti-piracy legislation for the audiovisual sector, but this is still awaiting consideration by the Council of Ministers. The government draft would impose new administrative penalties for piracy violations and increase criminal sanctions for more serious offenses. Bilateral consultations have contributed to improved enforcement action and progress towards a stronger legal framework. The United States will continue to monitor closely developments in this area.

Portugal: The Government of Portugal promulgated a new industrial property code which went into effect on June 1, 1995. The purpose of the new code is to bring Portuguese patent and trademark protection in line with TRIPs obligations, as well as Portugal's joining of the European Patent Convention and Patent Cooperation Treaty (PCT).

Although the Portuguese Code is consistent with most provisions of the TRIPs Agreement, it does not extend 20-years-from-date of application protection to patents that were applied for before the new code went into effect, as required by Article 33 of the TRIPs Agreement. U.S. pharmaceutical manufacturers report that early expiration of Portuguese patents on two major pharmaceutical products will result in lost sales of USD 20 million over a three year period.

Local patent attorneys and United States firms continue to compare the new Portuguese legislation with TRIPs obligations and are in the process of further analyzing the effects the new code.

Spain: Public and private sector enforcement actions (especially private sector initiatives), using Spain's new patent, copyright, and trademark legal framework, have sharply reduced the level of video piracy, which declined to 9 percent in 1993. Unlicensed "community video" systems illegally operating in neighborhoods and apartment blocks remain a concern, especially with regard to enforcement in Andalucia. Copyright holders also remain concerned with unauthorized public performances on local television stations and in buses and bars, and unauthorized exports to Latin America.

Despite overall improvement, software piracy remains a serious problem in Spain. Although the rate has been declining, U.S. software producers estimate that approximately 73 percent of the off-the-shelf personal computer software in use in Spain has been copied illegally, resulting in one of the highest piracy rates within the European Union. In 1993 the Spanish Government enacted legislation that transposed the EU's Software Directive, including a provision that allows search procedures that permit authorities to conduct unannounced searches in civil cases. However, judges have been reluctant to exercise these powers. In any event, pursuing piracy cases through the Spanish Courts remains a lengthy process, which diminishes the deterrent power of initial searches and arrests.

In October 1992, Spain finally modernized its patent regime to provide protection for pharmaceutical products as required by the EU. However, the law offers no pipeline protection for products in the research and development stage, effectively postponing any practical effects another 10 years. The U.S. industry remains concerned about Spanish reluctance to provide full protection for pharmaceutical products and points to Spanish efforts to dilute EU requirements. These efforts include exempting itself from parts of EU rules, postponing implementation of other parts, challenging EU protection in the European Court of Justice and maintaining the most extensive system of compulsory licenses in Europe.

United Kingdom: The UK has not enacted into law a provision of the WTO TRIPs agreement involving compulsory licensing of patents. Current United Kingdom law states that a compulsory license may be granted if a patent is not worked in the United Kingdom. This provision was struck down by the European Court of Justice as incompatible with the Treaty of Rome. The United Kingdom intends to change its law so that a patent worked anywhere in the European Economic Area would not be subject to compulsory licensing, but legislation has not yet been prepared. The TRIPs Agreement requires that this exception from the working requirement be extended to all WTO members including the United States.

SERVICES BARRIERS

Computer Reservation Services

U.S. Computer Reservation Services (CRS) companies have had difficulty cracking the EU market, as each member state market tends to be dominated by the CRS owned by that member state's carrier. The EU's 1993 CRS "Code of Conduct" compelled one U.S. CRS firm to establish subsidiaries in virtually every member state, at a cost of more than $10 million, and there are questions whether the Code may be used to establish "charging principles" which could further erode the ability of U.S. firms to gain market share. In addition, German Rail, which owns one-third of the largest European CRS firm in Germany, has thus far refused to deal on an equal basis with U.S. CRS firms, severely affecting their ability to expand in the German market. The German Competition Office has recently issued an injunction against German Rail over this, which may resolve the problem. U.S. CRS firms face similar problems in Spain and France.

Ground Handling

In December 1995, the Council agreed on a common position liberalizing the market to provide ground- handling services at EU airports above a certain size by January 1, 1998. While generally welcoming this move, U.S. airline companies and ground-handling service providers remain concerned that airports can continue to have a monopoly service provider through January 1, 2002 and can also limit the number of firms which can provide certain services on the airport tarmac (ramp, fuel, baggage and mail/freight handling) either for themselves or for other carriers. To some extent, these potential barriers are offset by more liberal provisions in bilateral air services agreements with the individual member states.

Postal Services

U.S. express package services like UPS and Federal Express remain concerned that the prevalence of postal monopolies in many EU countries restricts their market access and subjects them to unequal competitive conditions. Proposals to liberalize many postal services and to otherwise constrain the advantages enjoyed by the monopolies may not be sufficient to fully redress these problems.

Legal Services Barriers

France: Beginning in 1992, the French Government made significant changes in the legal services system, including eliminating the legal consultants category under which most American lawyers practiced in the past. Interpretations of these changes raised significant barriers to American (and other non-EU) law firms or lawyers wishing to establish in France or to offer advice on non-French law. Under GATS and in response to U.S. concerns, the government of France has been obliged to remove these barriers. New-to-market lawyers, from whatever country of origin, must now pass one of two exams: the French bar exam, which requires 200 hours of study and covers all aspects of French law, or the short form for foreign lawyers, which is more specialized but still time-consuming. Both exams have a large oral component and require substantial knowledge of French. Meaningful access now hinges on how implementing regulations are administered by local French bar associations, including the interpretation of granting access on a "reciprocal basis" and the nature of the test to be imposed on non-EU lawyers.

Auditing Barriers

Greek: In November 1994, the Government of Greece mandated that the government-controlled accountancy organization SOL must be the auditor for all state-owned enterprises, financial institutions, publicly listed companies, and companies over a certain size. While Greece did not bar other companies, including U.S. owned accounting firms, from providing auditing services, the law would effectively have denied them 70 percent of the auditing market in the country. The United States repeatedly emphasized to the Greek government, as well as in multilateral fora such as the OECD, that this action would be inconsistent with Greek commitments under the General Agreement on Trade in Services. In November 1995, the Greek Council of State (Supreme Administrative Court) ruled that the Greek legislation was unconstitutional because it violated EU Directives, and the status quo ante liberalization of the audit sector was reaffirmed.

Shipping Restrictions

Spain: In 1992, the EU established a calendar for liberalizing cabotage practice. While cabotage within peninsular Spain has been liberalized, the EU has allowed Spain to restrict merchant navigation to and within the Balearic Islands, the Canary Islands and Ceuta and Mililla to Spanish flag merchant vessels until January 1, 1999.

INVESTMENT BARRIERS

The European Union has a growing role in defining the way in which U.S. investments in the member states are treated. Although member state governments traditionally were responsible for policies governing non-EU investment, in 1993 the Maastricht Treaty shifted competence over third country investment from the member states to the Union. member state barriers existing on December 31, 1993 remain in effect, but these may now be superseded by EU law. In addition,, direct branches of non-EU financial service institutions remain subject to individual member country authorization and regulation.

In general, the EU supports the notion of national treatment for foreign investors, and the EU Commission has traditionally argued that any company established under the laws of one member state must, as a "Community company," receive national treatment in all member states, regardless of its ultimate ownership.

However, some restrictions on U.S. investment do exist under EU law and others have been proposed:

Ownership Restrictions

The benefits of EU law in the aviation and maritime areas are reserved to firms majority-owned and controlled by EU nationals. In addition, the EU Commission has proposed that companies wishing to benefit from the mutual recognition of licenses for the provision of satellite network or communications services be 75 percent owned, and effectively controlled by, EU nationals.

Reciprocity Provisions

EU banking, insurance and investment services directives include "reciprocal" national treatment clauses, under which financial services firms from a third country may be denied the right to establish a new business in the EU if the EU determines that the investor's home country denies national treatment to EU service providers . In the recently adopted Hydrocarbons Directive , this notion may have been taken further to require "mirror-image" reciprocal treatment, under which an investor may be denied a license if its home country does not permit EU investors to engage in activities under circumstances "comparable" to those in the Union. It should be noted, however, that thus far no U.S.-owned firms have been affected by these reciprocity provisions.

Access to Government Grant Programs

The European Union does not preclude U.S. firms established in Europe from having non-discriminatory access to EU funded research and development grant programs, although in practical terms association with a known "European" firm helps win grant awards. In another area, the Commission in November 1995 proposed that only firms majority-owned and effectively controlled by EU nationals could receive loan guarantees to develop and distribute European films. This proposal has not yet been adopted and we are not aware that any U.S. firm has complained about this proposal.

International Negotiations

The EU and its member states are participating actively in the OECD negotiations toward a Multilateral Agreement on Investment (MAI), which should help reduce existing and preclude any further discriminatory measures. The EU approach to the negotiations has been generally constructive, although in recent international negotiations the Union has argued for an "economic integration" provision that would allow it, and its member states, to deny U.S. firms most favored nation treatment and potentially other rights and benefits under EU law.

The role of the EU in the treatment of foreign investment is still evolving, however, and in many instances member state practices are of more direct relevance to U.S. investors. EU member states negotiate their own bilateral investment protection and taxation treaties, and generally retain responsibility for their investment regimes.

Member State Practices

Principal national barriers include:

Austria: Foreign investment in Austria has been hampered by complicated administrative procedures for establishing new operations. Austrian residency laws and quotas for foreign labor have caused problems for resident U.S. firms in obtaining resident and work permits for non-EU and non-U.S. citizens and their dependents for management positions. The U.S. Embassy in Vienna has raised U.S. investor concerns with the Austrian Government.

France: Responding to an initiative of the Minister of the Economy, the National Assembly passed a law, effective in the first quarter of 1996, eliminating the prior-approval restriction on non-EU Foreign Investment. According to the new regulation, non-EU investors will no longer need advance government approval of their investment plans, although notification is still required. The French government took this step in keeping with its policy of encouraging foreign investment in France. This elimination of prior approval puts non-EU investments on the same footing as EU investments. However, certain restrictions (including prior approval requirements) continue to apply to all foreign investments, EU and non-EU, which affect national defense, public safety, or public health.

The recently passed privatization law prevents the French government from selling more than 20 percent of a firm's capital to non-EU investors at the time the government sells its shares. Thereafter, however, EU investors may sell their shares to non-EU investors. In addition, through a "golden share" (a legal right) the government may retain the right to block the sale of any assets "essential to the national interest," prevent certain investors from purchasing additional shares in a company, and exert significant control over company management, even after privatization is completed. Under the privatization program just begun in 1993, the government has invoked a golden share only when it sold ELF Aguitaine. Finally, any investor seeking to own more than five percent of outstanding shares of a privatized company in the health, security or defense sectors will first have to receive approval from the Ministry of Economics.

Greece: Both local content and export performance are elements which are seriously taken into consideration by Greek authorities in evaluating applications for tax and investment incentives. However, they are not legally mandatory prerequisites for approving investments.

Greek tax authorities also continue in some cases to withhold refunds on royalties, despite the U.S.-Greek bilateral tax treaty and despite streamlined procedures put into place January 1, 1990. In some pending cases, the Greek tax authorities have ruled that a U.S. company has a permanent establishment in Greece, thereby making the question of royalty refunds moot. The tax authorities then apply the withheld royalties against tax liabilities arising from being declared a Greek establishment. Such action can only be overcome by waging a protracted (up to 6-8 years) court battle to prove non-residency. Consequently, some U.S. firms write off the 25 percent withholding on royalties as non-collectible and take the deduction against their U.S. taxes. In some recent cases refunds have been made. No new cases have been reported in the past year.

Foreign exchange controls have been progressively relaxed since 1985. Medium and long term capital movements for EU and non-EU countries have been fully liberalized. Most restrictions on short-term capital movements were lifted in 1994. This move brought Greece in line with EU rules on the movement of capital. However, significant bureaucratic obstacles in short-term capital movements still remain, particularly within the state-dominated banking system. For example, compliance with tax laws must be demonstrated prior to the transfer of capital, and financial institutions must monitor the investment. However, individuals with Embassy assistance have succeeded in overcoming these barriers.

Greece restricts foreign and domestic private investment in public utilities. U.S. and other non-EU investors also receive less advantageous treatment than domestic or other EU investors in the banking, mining, broadcasting and transport sectors, and in land purchases in border areas.

Italy: In 1992, Italy passed legislation requiring all financial service firms wishing to operate on the stock exchange to incorporate in Italy as a "Societa Di Intermediazione Mobiliare" (Security Intermediation Company-SIM). This entailed costly personnel and capital requirements, and led to protests from European Union partners, the U.S. and others that the law was discriminatory. The EU Commission initiated legal proceedings against the SIM law in the European Court of Justice, saying it conflicted with the Treaty of Rome.

The European Union's Investments Services Directive, which came into effect January 1, 1996, requires that Italy lift the incorporation restriction with respect to EU firms. The Italian Parliament passed legislation in mid-January 1996 formally incorporating the Directive into Italian law. Consequently, firms incorporated elsewhere in the EU, including U.S. firms with EU subsidiaries will now be able to operate in Italy without incorporation. U.S. firms with EU subsidiaries, will now be able to operate in Italy without incorporation. U.S. firms without an EU presence, however, will remain subject to the SIM law, although the law may be modified in the context of broader financial market reform. In practice, the major U.S. financial service firms are already active in the Italian market, so the new law will not likely lead to significant new activity by U.S. firms. It may however, encourage U.S. firms present in other EU countries to consider expanding into Italy.

Portugal: Portugal amended its foreign investment law via decree-law 321/95, effective December 4, 1995. Foreign investments are now subject only to post facto registration. The new regime replaces the prior declaration regime that in principle constituted a latent barrier to foreign investment. A new "safeguards" provision applies only in situations involving public order and security and applies equally to investment by EU and non-EU firms.

Portugal limits foreign investment in state-owned companies being privatized on a case-by-case basis. This barrier is relevant to U.S. business in the energy and telecommunications sectors. It is estimated the potential increase in U.S. exports associated with greater U.S. investment in the energy and telecommunications sectors to be in the range of 10 to 15 million dollars.

OTHER BARRIERS

French Poultry Regulations

Currently, French regulations prohibit the import of poultry products, except offal, from the United States. A French decree of 1962 bans imports of poultry products from countries using arsenicals in poultry feed, as is the case with American poultry. The U.S. has recently renewed its objection to this barrier, which is imposed only by France. While harmonization of policies within the EU may end this ban, the United States will continue to monitored this issue closely.

Telecommunications Market Access

U.S. telecommunications equipment industry access to EU member nations varies widely from relatively open to nearly closed. As described in the section on government procurement, most EU member states are required to discriminate against non-EU bids in the telecommunications sector. In addition, market access is restricted through standards and standard-setting procedures, testing, certification, and attachment policies.

For example, telecommunications administrations in some EU countries (particularly in France) still procure their network equipment from domestic national suppliers whenever possible. In addition, most EU countries continue to impose needlessly burdensome testing and certification procedures on non-EU suppliers of terminal equipment.

U.S. access to basic telecommunications services is constrained by several EU practices. The United States has requested that the Union ensure that non-EU competitors have access to reserved services on an equal basis with EU competitors once those services are liberalized (infrastructure, voice telephony). The EU, through its recently announced directive on mobile communications, has opened up infrastructure competition in that sector in early 1996.

The European Union is in the midst of implementing wide-ranging telecommunications policy reforms and liberalization intended to prepare Europe for facilities-based competition in the infrastructure and voice telephony market on January 1, 1998. The European Commission's proposals for third country access to the market for many of these services is linked to the treatment agreed in the negotiations on basic telecommunications services at the WTO. These negotiations are scheduled to conclude on April 30, 1996. Absent prompt agreement in those negotiations, access to service sectors in Europe may often be tied to service opportunities offered European providers in the United States. The EU's initial offer safeguarded discriminatory provisions against non-EC investors in France, Spain, Belgium, Italy and Portugal; inappropriate deferment of foreign companies' market entry rights in Spain and Portugal; a broad carve-out that would allow denial of virtually any market access by Belgium; restrictions affecting international services in Belgium, Spain and Portugal; and, restrictions on telex and telegraph services in France and Italy.

Other concerns include how the EU liberalization directives may be implemented, their effect on suppliers from outside the EU, and the ultimate effect of adjusting EU and national practices to whatever agreement may be reached in the basic telecommunications services negotiations.

Portugal: The Government of Portugal controls 72 percent of Portugal Telecom (P.T.), the State telecommunications monopoly, along with the regulatory organ, the Instituto de Communicacoes de Portugal (ICP). Portugal has an EU derogation on liberalization of most of its telecommunications market until 2003. In fields which are open, several U.S. firms operating in the market report that both PT and ICP have been slow and non-transparent in responding to licensing requests and requests for interconnections into the existing system operated by the State-held PT.

Only one U.S. firm has been able to directly calculate the lost revenue from the ICP's processing delay. Difficulty in working with ICP and PT have resulted in the decisions by several American telecommunications operators to leave or significantly reduce their presence in the Portuguese market.

Government Support for Airbus

Since the inception of the European Airbus consortium in 1967, its partner governments, France, Germany, Spain and the United Kingdom, have provided massive support to their national company partners in the consortium to aid the development, production and marketing of large civil aircraft. These government funds facilitated the growth of Airbus Industrie and its introduction of a range of large transport aircraft by allowing its national partner companies to avoid bearing the normal commercial risks that U.S. manufacturers face with respect to investing in new civilian aircraft programs.

The individual Airbus partner companies are leading aerospace manufacturers in their home markets and, in some cases, have substantial government participation in ownership. The French Government, for example, owns 97 percent of Aerospatiale's shares. Airbus had approximately 36 percent of the total value of the outstanding orders for large civil aircraft at the end of 1995.

To address U.S. concerns about the impact of European government support for their civil aircraft manufacturers, the United States negotiated a bilateral large aircraft agreement with the EU that was signed in 1992. This bilateral agreement expanded on the principles contained in the 1979 GATT Agreement on Trade in Civil Aircraft. The bilateral agreement contains specific disciplines over the provision of future European government support for aircraft development by the Airbus consortium and on the repayment of past support. In addition, it includes a prohibition on support for the manufacturing, marketing and sales of aircraft and a clarification of disciplines on unreasonable government intervention in aircraft marketing or procurement decisions and provides for increased transparency of direct and indirect government support and government-funded research activities.

Negotiations were undertaken in 1993 and 1994 to incorporate into the Multilateral Agreement on Trade in Civil Aircraft similar disciplines to those contained in the bilateral agreement. In addition to current signatories to the 1979 Multilateral Agreement, participation in these negotiations was also opened to all other GATT contracting parties, and to those nations for which the accession processes to the GATT had commenced or observer status had previously been given. At the end of 1994, no consensus was reached on proposed substantive changes to the text or on a basis for continuing the negotiations. Further discussions in 1995 did not yield any new progress. However, all civil aircraft, engines and components are subject to the stronger rules on subsidies contained in the WTO Agreement on Subsidies and Countervailing Measures. The status of the 1992 bilateral aircraft agreement has not been changed as a result of implementation of the WTO Agreement or by the absence of a revised Agreement on Trade in Civil Aircraft Agreement.

The United States held formal consultations with the EU Commission, in May 1995 and in February 1996, under the terms of the bilateral agreement. At these meetings, the operation of the agreement and information previously exchanged under its transparency provisions on direct and indirect government supports and on other government aeronautic research activities were discussed, as well as other issues of concern. These included increased pressures the Airbus partner governments may receive from their aircraft manufacturers, which experienced profit and cash flow difficulties in 1995, for additional support. Airbus is considering the development of new and derivative aircraft which may also lead to requests for additional governmental support. The United States will continue to monitor compliance with the terms of the 1992 bilateral agreement and the Agreement on Trade in Civil Aircraft.

Government Shipbuilding Industry Support

Members of the EU provide subsidies and other forms of aid to their shipbuilding and repair industry. These have included subsidized restructuring of their domestic shipbuilding industries, direct subsidies for operations and investment, indirect subsidies, home credit schemes, subsidized export credits, and practices associated with public ownership of yards. The European Commission sets annual ceilings for subsidies under its Seventh Directive. In 1995, the ceiling was nine percent of gross investment for new ships and 4.5 percent for conversions and small vessels (under 10 million ECU, about $13 million).

U.S. shipbuilders have operated without U.S. government subsidies since 1981. On June 8, 1989 the Shipbuilders Council of America (SCA) filed a section 301 petition, seeking the elimination of subsidies and trade distorting measures for the commercial shipbuilding and repair industry. In response, USTR undertook to negotiate a multilateral agreement in the OECD Working Party Six (WP6) to eliminate all subsidies for shipbuilding. WP6 members include the EU, Japan, Korea, Finland, Norway and the United States, which account for roughly 80 percent of global shipbuilding. Upon its accession to the EU, Finland lost its seat in the WP6 and is now represented by the EU.

An agreement was reached in July 1994 and signed in December 1994, to take effect on January 1, 1996 with a review after three years. The agreement will restrict direct and indirect subsidies for shipbuilding, extend antidumping rules to the industry, establish strict rules for government financing of shipbuilding, and authorize sanctions on imports of goods from participants found to be violating the agreement. Belgium, Portugal and Spain have derogations for their restructuring aid predating the accord.

U.S. implementing legislation was introduced in Congress in the Fall of 1995, but was not passed by the end of the year. Japan's Diet was also unable to ratify the Agreement in 1995. As a result, only Korea, Norway and the EU deposited their instruments of ratification at the December 11-12, 1995 meeting of the WP6. The Parties therefore agreed that ratification should be completed as soon as possible but not later than June 15, 1996, in order to bring the Agreement into force on July 15, 1996 at the latest.

The EU's Seventh Directive governing shipbuilding aid was scheduled to expire on December 31, 1995. It has been extended until the OECD Agreement enters into force, but not beyond October 1, 1996 at the latest. If the OECD Agreement is not in force by June 1, 1996, the Commission will propose new EU shipbuilding aid rules to take effect after October 1.

Data Privacy

The Council of Ministers formally adopted the Directive on the Protection of Personal Data in July 1995. The Directive tries to strike a balance between the protection of an individual's right to privacy in regard to transmission of personal data and the need to facilitate the flow of such information within the European Community. The Directive allows for data transfer to third countries if they provide an adequate level of protection for the data under their own laws or through international obligations they have undertaken. U.S. companies are concerned because the text lacks clarity about data transmission to non-EU countries. The ease with which data moves across borders will depend on how individual member states define what constitutes an adequate level of protection.

 
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