If the complex and wide-ranging negotiations here to revise rules and reduce barriers for world trade break down at the end of the year, part of the blame will be shared by seemingly innocent butter cookies from Denmark.
Although the cookies may look harmless enough to American shoppers, in the eyes of U.S. trade experts the cookies have been tainted by a government subsidy that gives them an unfair trade advantage over similar American products. And unless Congress amends the current trade act, the U.S. will levy extra duties on the cookies (and some other European agricultural products, including cheeses and hams) in January to even the competitive odds for American producers.
If that happens, trade negotiators fear that a trade war between the U.S. and Europe may ensue and that the tentative results of long years of delicate bargaining here on reducing trade barriers will unravel.
The butter cookies, of course, are only the tip of the controversy surrounding the use of subsidies by governments which threatens the Tokyo Round of trade talks here. Beyond the cookies, the Europeans fear that a wide range of agricultural and industrial exports to the U.S. eventually will face countervailing duties (extra taxes to compensate for a subsidy) unless Congress extends a provision, due to expire Jan. 3, of the Trade Act allowing the president to waive mandatory extra duties whenever an import enjoys a foreign subsidy.
The Europeans have warned that they may not be able to conclude the negotiations on Dec. 15 as scheduled if the waiver expires, the president's special trade representative, Robert Strauss, is lobbying Congress to let the waiver continue until July provided he notifies Congress that negotiators have complete a trade package that Congress then will vote on.
As Strauss and the Americans bargaining here daily know, Congress will be taking a particularly careful look at what the final trade package says about subsidies.
Subsidies, broadly defined, are government aids to industry, such as grants, special tax rebates or concessions, multiple exchange rates and low-interest loans. Although many subsidies are openly geared to boost exports, a subsidy that may have been designed for legitimate domestic economic or social reasons - such as regional industrial development or income maintenance to protect farmers from the gyrations of world commodity prices - in the process also may provide a competitive advantage for exports.
Traditionally, Americans have been more adverse politically to government intervention in business than Europeans, and in tackling subsidies, this political aspect of the question has been a major problem for the trade experts here on both sides. While the American negotiators have to answer to free-enterprise proponents in Congress and the business community, the European negotiators face parliaments and corporations that have grown used to a much closer type of government involvement in business. Europeans have been resisting American demands for more "discipline" in the use of subsidies which effect trade flows not only for purely commercial reasons but also because, as one European negotiator explained, "It's a direct attack on the way mixed economies in Europe work." Meanwhile, the Americans argue that they no longer are crusading against subsidies as such (after all, the U.S. uses them, too), but they are demanding that the effect of subsidies in distorting trade flows be reduced substantially through a code that will moderate the use of subsidies and provide for various countermeasures.
Nor is the current economic environment helping to resolve the issue. The Americans struggle to find ways out of record trade deficits and a crippled dollar that contributes to inflation at home, and they feel foreign subsidies are among the chief culprits.
Meanwhile, the Europeans are under severe economic pressure to expand subsidies further to salvage increasingly inefficient industries and preserve jobs for a work force suffering from high unemployment.
Although governments claim they mainly are helping aging industries to "restructure" by modernizing plants or developing new product lines, many trade experts contend that the aid often only serves to perpetuate inefficient companies to save jobs.
As the Europeans are quick to point out, the U.S. also uses subsidies such as government financing of research and development for the defense and aerospace industries, which has led to many high-technology commercial products (according to reliable sources, the U.S. did not mention R&D on its proposed list of subsidies for the trade code).
The administration's $8 billion plan to revitalize urban areas was noted recently in an Organization for Economic Cooperation and Development report as a subsidy. And President Carter's export stimulus package announced last Tuesday relied on a number of classic subsidies, including low-interest loans and a $20 million export development program, although the package's use of subsidies was toned down from original proposals last summer so it wouldn't undermine the U.S. position at the trade talks. Nevertheless, the European level of subsidization is greater than the American.
American negotiators are particularly eager to curb the impact of subsidies in agricultural trade, which with Europe alone adds some $6 billion to the U.S. trade balance.
While insisting they are not attacking the European Economic Community's Common Agricultural Policy (CAP) as such, the U.S. maintains that the CAP policy of buying produce from European farmers at high prices and selling it on the world market at lower prices distorts trade and that some provisions to compensate for this must be worked out for a final trade package.
While reiterating that the CAP is "inviolate," the EEC has agreed to look at the trade effects of its farms policies. This is a breakthrough, but it remains to be seen how much real progress can be made because it is one of the most contentious areas in the entire negotiation.
Resolving the differences between the U.S. and the EEC on subsidies is further complicated because not even the experts have been able to agree on a definition of subsidies.
A government grant to a factory so that it can sell its products abroad more cheaply is clearly an export subsidy, but the picture becomes blurred if the government provides money to a factory in an economically depressed area as part of a regional aid plan. It may not appear to be a subsidy for exports at first, but what if 80 percent of the plant's production is exported?
The U.S. is insisting that a list of subsidy practices be drawn up which could be referred to by administrators during cases when countries complained to each other or before an international trade panel that subsidies are hurting their exports.
The EEC still is resisting the idea, but one European negotiator acknowledged, "The U.S. wants it to wave in front of Congress, and I don't see how we'll get around that." The Europeans fear that by listing a type of subsidy, the assumption would be made that the practice is likely to distort trade and therefore deserves some countermeasures.
Meanwhile, the EEC is insisting that the U.S. come into line with General Agreement on Tariffs and Trade rules and impose countervailing duties only when it has been proven that subsidized imports are materially injuring domestic producers. Current U.S. law does not require an injury test on dutiable items.
To break the logjam, the U.S. has proposed a "two-track" system. This has been broadly agreed to in theory, but basic differences remain. On the first track, a nation could impose countervailing duties in case of injury to domestic industry, but the U.S. feels this could be done unilaterally, while the Europeans want the countervailing duty subject to review by GATT.
The second track would be open to domestic producers complaining of imports, but it would mainly be used in cases where nations felt their exports were being hurt by a subsidized competitor in a third market. Provisions would be made for legal countermeasures such as the suspension of trade concessions to compensate for the subsidy, and an international panel would settle disputes.
But an injury test is not required under track two, which leads a European negotiator to wryly observe, "The U.S. is taking away with one hand what it gave with the other." American negotiators argue that, although a firm might decide to avoid the rigors of an injury test by pleading its case on track two, it would be more difficult to deal with an international panel than with its own government.