THE JOURNAL OF COMMERCE - June 16, 1999

Far More is at Stake than Bananas and Beef

by Andrew Harig and Peter Morici

The European Union announced last month that it would not comply with a World Trade Organization ruling that it lift a 1989 ban on imports of U.S. beef raised with growth hormones. This comes on the heels of a similar EU decision rejecting meaningful reform of its banana-import quotas that discriminate against countries in the Caribbean and Central America where U.S. growers have large investments.

Although U.S. exports of beef to the EU may be significant absent the ban on growth hormones, and U.S. multinationals stand to gain in the banana case, the more critical issue ensuing from the EU's renegade tactics is the potentially undermined credibility of the WTO.

In response to EU noncompliance in the beef case, the United States is planning to petition the WTO for permission to exact compensation from the EU in the form of new tariffs on EU products, such as tomatoes, chocolate and mineral water. Washington is choosing items for the proposed list to pressure the EU into compliance. The aggressive U.S. stance puzzles, and in some cases outrages, certain observers. However, in our view, the U.S. action is the only possible response if we are to secure the future of the WTO.

Prior to the establishment of the WTO in 1995, the EU and many trading nations believed the United States was too quick to take unilateral action to enforce its trade rights. U.S. policy-makers viewed the dispute settlement
procedure of the General Agreement on Tariffs and Trade, which the WTO replaced, as fundamentally inadequate. It was too slow and unreliable.

In exchange for improvements and reforms in this procedure negotiated in the Uruguay Round of trade talks, the Clinton administration took on the difficult task of persuading the Congress to accept limits on U.S. enforcement actions.

For the new system to work, member states must implement the decisions of WTO dispute settlement panels. Five panels have cited the United States for violations, including import bans on shrimp from India and Pakistan -- caught using methods that endanger sea turtles. In each case, the Clinton administration has complied, despite the potential for considerable political fallout. Japan and Canada, other large players in the WTO, have a similar
exemplary record of prompt and complete compliance.

However, in both the banana and beef cases, the EU has stalled and abused the system.

In the former case, it made several cosmetic changes in its import regulations that the WTO dispute-settlement panel found completely inadequate. With respect to beef, the only WTO-legal basis for an outright ban on U.S.
exports would be a scientific finding of a risk to consumers' health. The EU has no such scientific basis. In fact, several reports, including one by the World Health Organization, found that hormone-treated beef poses no
threat to consumers.

By unilaterally deciding to ignore the findings of two dispute settlement panels, the EU is flouting the enforcement mechanism that is a cornerstone of the WTO system. Without member states' adherence to the rule of law, the
WTO becomes an empty vessel.

As a large market for most countries' exports, the United States has the raw economic power to unilaterally impose sanctions to enforce its trade rights. If the Congress comes to view the WTO as an inadequate forum to obtain redress for legitimate trade grievances, it may yet compel the administration to take unilateral actions.

In the wake of the financial crisis that swept through Asia, Russia and Latin America, the United States has been urging developing countries to adopt pro-market reforms, and to strengthen their legal systems. How can the
West hope to advance the rule of law if the EU routinely flouts it? Similarly, how can we expect transitional economies with weak legal systems, such as Russia and China, to enter the WTO and take its rules seriously?

The beef and banana cases are about much more than narrow trade disputes. If the WTO is to effectively manage the global trading system in the new millennium, its decisions and rulings must be enforceable.

The United States and its fellow WTO members -- especially the smaller ones, who stand to gain the most from the protection afforded by a rule of law system -- cannot afford to ignore the EU's actions.