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U.S. DEPARTMENT OF STATE
EUROPEAN UNION: 1994 COUNTRY REPORT ON ECONOMIC POLICY AND TRADE PRACTICES
BUREAU OF ECONOMIC AND BUSINESS AFFAIRS





                        THE EUROPEAN UNION



1.  General Policy Framework

    The European Union (EU), which includes within its
framework the European Community (EC), is a supranational
organization which in some cases exercises exclusive authority
to adopt legislation and to represent its membership in the
international arena, and in other cases shares competence with
the authorities of its member states.  Its legal capacity is
most highly developed in economic areas such as trade,
antitrust policy, agriculture, transport, nuclear energy and in
the environment.  In areas within its exclusive competence, the
EU is represented by the European Commission.

    The Treaty on European Union (TEU, "Maastricht"), which
came into force on November 1, 1993, introduced new areas for
coordination among the member states and the EU institutions,
such as the Common Foreign and Security Policy (CFSP) and
Cooperation in Justice and Home Affairs ("Third Pillar").  Most
notably, in the economic area, the TEU establishes a timetable
which is to lead to Economic and Monetary Union (EMU) by 1999
at the latest.  The aim is to introduce a single currency (the
ECU), a common monetary policy, and an economic policy closely
coordinated among the member states.  The European Central
Bank, to be based in Frankfurt, will control the money supply
and interest and exchange rates.

    The European Union comprises 15 member states: Belgium,
Denmark, France, Germany, Greece, Ireland, Italy, Luxembourg,
the Netherlands, Portugal, Spain, the United Kingdom, Austria,
Sweden and Finland.


2.  Exchange Rate Policy

    Under the Maastricht Treaty, the European Union (EU)
intends to establish an Economic and Monetary Union (EMU) with
a common monetary and exchange rate policy no later than 1999. 
During the second stage of EMU, which began on January 1, 1994
with the establishment of the European Monetary Institute
(EMI), the member states continue to coordinate their exchange
rate policies through the European Monetary System (EMS) and,
specifically, its Exchange Rate Mechanism (ERM).  The EMI
facilitates and monitors implementation of these arrangements. 
Member states retain full authority to set monetary policies
during the second stage of EMU.

    The EMS and ERM aims are to promote monetary, price, and
exchange rate stability in Europe by limiting the fluctuations
of participating currencies within a certain range around
bilateral central parity rates.  Pressures in foreign exchange
markets in September 1992 led the United Kingdom and Italy to
suspend their participation in the ERM, and compelled
adjustment of the parities for other currencies in subsequent
months.  In part to relieve these pressures, on August 2, 1993,
the ERM fluctuation band was widened from 2.25 to 15 percent.

    The EMS and ERM are not aimed at influencing trade flows
with the United States or other third countries and are
consistent with the Articles of Agreement of the International
Monetary Fund.  Since the EMS was created in 1979, there have
been periods both of U.S. dollar strength combined with a U.S.
trade deficit with the EU and of dollar weakness combined with
a U.S. trade surplus with Europe.


3.  Structural Policies

    Tax Policy:  Tax policy remains the prerogative of the
member states, who must approve by unanimity any EU legislation
in this domain.  EU legislation to date in this area has been
aimed at eliminating tax-induced distortions of competition
within the Union.  As such, it has focused on harmonizing
value-added and excise taxes; eliminating double taxation of
corporate profits, interest and dividends; and facilitating
cross-border mergers and asset transfers.

            Regulatory Policies-Single Market Program

    Overview:  The European Union's "1992" Single Internal
Market was officially inaugurated on January 1, 1993 with the
disappearance of most intra-EU border controls on movement of
goods, services, and capital.  While the legislative program is
largely complete, gaps remain.  Measures affecting certain
specialized types of trade, such as that of precious metals and
CITES-listed plant and animal species have not yet been
adopted.  The Schengen Accord on removing controls on people,
agreed upon by nine member states (Austria has observer
status), was to enter into force in February 1994 but has been
delayed.  When the accord goes into force, passport controls
will be lifted at European airports on intra-EU flights;
passport controls will continue on entry into Denmark, Ireland
and the UK.  Because necessary standards are not yet in place
for many product-related directives, they will not immediately
replace member-state regulation.  Other measures have long
grace periods before they come fully into effect. 
Transnational quotas are also still in effect on certain kinds
of intra-EU road transport.  Nor are all directives in effect
fully implemented by member states; the average implementation
rate stood about at 95 percent in October 1994.

    Goods, Capital & Services:  For goods, capital and
services, the net effect should be freer movement, fewer
member-state regulations for products and service providers to
meet, and real consolidation of markets.  Some aspects of the
program raise problems for U.S. exporters, including directives
on procurement for utilities and on television broadcasting,
and conditions for negotiation of mutual recognition agreements
on testing and certification of regulated products (all
discussed in chapter 5 below).

    Veterinary Regulations:  In the area of veterinary
regulation the EU adopted a large body of new legislation under
the 1992 single market program that was designed to harmonize
standards and complete the single market for live animals and
animal products.  In some cases, such as meat inspection, this
means that Member State slaughter houses are now subject to the
same requirements as facilities in third countries.  However,
in many areas where EU legislation did not previously exist,
new Union-wide requirements that could pose problems for
imports from third countries have been established.  Notable
among these is a set of new directives that will require every
consignment of live animals or animal products entering the
Union from third countries to undergo documentary, identity,
and physical checks by veterinarians at designated frontier
posts.  Since January 1993, the uneven application of the
Single Market provisions has been the cause of many trade
problems.  The U.S. Government and other principal suppliers of
these products have entered into consultations with the
Commission on the entire package of veterinary legislation with
the objective of identifying areas where disruptions in trade
can be avoided through the application of equivalence.

    Environmental Measures:  Pending environmental measures may
also affect the trade and business climate.  Among them, a
proposal for a CO2/energy tax would substantially raise energy
costs for industry, although no progress on the plan has been
made since 1994.  The debate continues over a packaging
directive which could raise producer costs by mandating
extensive recycling of packaging materials, possibly enforced
by member-state fiscal and economic measures.


4.  Debt Management Policies

    Debt management policies are determined by the individual
member states of the EU.


5.  Significant Barriers to U.S. Service Exports

    Broadcasting:  The 1989 "Television Without Frontiers"
directive requires a majority of television transmission time
to be reserved for European programs where practicable.  The
United States believes that this provision is contrary to the
spirit of the General Agreement on Tariffs and Trade (GATT). 
The U.S. and the EU were unable to resolve their differences
over this issue at the Uruguay Round in 1993; the U.S. remains
committed to continued work to achieve our objectives with the
EU, i.e. to promote more open trade in audiovisual services and
to ensure freedom of choice for consumers.  The U.S. hopes that
in the course of reviewing the 1989 directive, the EU does not
either remove the element of flexibility contained in the quota
provision or extend it to new services. The U.S. still reserves
its ability to take Section 301 action against the EU on the
issue.

    Telecommunications:  U.S. exports of telecommunications
services and supplies are 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
(e.g. infrastructure, voice telephony).  Two other impediments
to the trade in telecommunications goods and services are
intellectual property rights protections (European 
Telecommunications Standards Institute, or ETSI/Standards) and
government procurement practices.  These issues are addressed
later in the report.

    Standards, Testing, Labelling and Certification:  The
United States-EU dialogue on standards, testing and
certification has, on balance, been positive.  The European
standardization bodies have in general committed themselves to
adopting international standards, although this varies
depending on the body and the need.  However, many non-European
interests still find participation in European standardization
bodies difficult and/or frustrating (i.e. limited access to the
European Committee for Standardization/European Committee for
Electro-technical Standardization through European industry
associations, and limited voting power in ETSI).  This
frustration can also be felt at the international level in the
International Standards Organization (ISO) and the
International Electrical Committee, where the EU still wields
12 votes and the U.S. only one.

    Central to standardization policy in the Union is the
harmonization of requirements for "regulated" products,
including products as diverse as toys and earth moving
equipment.  In order to circulate freely in the Single Market,
these products will have to carry the CE Mark, denoting
conformity to these harmonized requirements.  It is anticipated
that fifty percent of U.S. exports to the EU will eventually be
required to carry the CE Mark.  While the harmonization of
these requirements and the drafting of European standards is
supposed to facilitate market access, the overall CE Marking
program has fallen behind schedule largely due to
implementation and standardization problems.

    A number of these "regulated" or CE Marking products are
also candidates for Mutual Recognition Agreements (MRA's)
between the United States and the EU.  An MRA would allow
manufacturers in the United States to have their products
tested and certified to the EU requirements by recognized
Notified Bodies in the United States, and vice versa.  MRA's
would reduce conformity assessments costs and the time it takes
to bring a product to market.  The United States and EU held
preliminary discussions in October 1992 and June 1993.  In
November 1993, the EU formally selected the United States as a
priority country along with Canada, Australia and New Zealand. 
U.S. and EU officials held three rounds of negotiations in
April, June and November 1994 in the following areas: 
pharmaceuticals, telecommunications, electrical products,
medical devices, lawn mower safety equipment, and recreational
craft.

    ETSI/IPR:  On September 5, 1994, ETSI abandoned its March
1993 IPR policy that had differed significantly from those long
considered to be international norms (ISO and International
Telegraph and Telephone Consultative Committee).  In late
September, the U.S. Computer and Business Equipment
Manufacturer's Association (CBEMA), which had lodged a
complaint with the European Commission's Competition
Directorate (DG IV) asserting that the original ETSI policy
violated Articles 85 and 86 of the Treaty of Rome,
conditionally offered to withdraw its DG IV filing in light of
ETSI abandonment of the March 1993 IPR policy.  CBEMA's 
condition for withdrawing the policy was that ETSI also
withdraw its separate DG IV request for a waiver of the same
articles of the Treaty of Rome.  In close consultation with
U.S. business and the European Commission, the U.S. has
supported efforts by all parties to reach a new, consensus
ETSI/IPR policy.  Until a new policy is adopted, it is
difficult to determine whether or to what extent ETSI/IPR
policy may remain an impediment to U.S. purveyors of
telecommunications goods and services. 

    Government Procurement Practices:  On April 13, 1994, the
United States and the European Union reached an agreement on
government procurement, most of which will be incorporated into
the GATT Government Procurement Agreement that was signed on
April 15, 1994.  The United States-EU agreement will
dramatically expand public procurement opportunities to over
$100 billion on each side.  Sub-national government agencies
and electrical utilities on each side will for the first time
guarantee equal treatment to the other side's firms on a
permanent basis.

    Unfortunately, the EU was not willing to include
telecommunications in the agreement, leaving in place the
discriminatory provisions of the Utilities Directive in that
sector with respect to bids that do not meet a 50 percent EU
content requirement.  The United States therefore decided to
keep in place its retaliation against this practice.

                  Other Significant Potential or
                Existing Barriers to U.S. Exports

    Leghold Traps:  A ban on imports and domestic sales of fur
from animals caught in leghold traps will come into force
January 1, 1996 unless agreement is reached on international
standards for humane trapping.  During 1994 the EU extended the
deadline for the ban by one year from January 1995, citing
progress toward international standards.

    Animal Testing of Cosmetics:  An amendment to the cosmetics
directive will ban sales in the EU of cosmetics whose
ingredients were tested on animals from 1998, unless the
Commission determines there are still no feasible alternatives.

    Data Privacy:  The European Commission has proposed a
directive to set minimum standards in the EU concerning
"protection of individuals in relation to the processing of
certain personal data."  Many U.S. companies are concerned that
depending on how it is implemented, this directive could
adversely affect them by restricting their operations in the EU
or the transfer of data between the United States and the
Union.  The latter case could even prevent intra-company data
transfer.  These concerns are shared by EU industry.  U.S.
experts will continue to monitor this issue and consult with EU
officials.

    Wine Certification and Enological Practices:  U.S. wine
exports continue to face uncertain market access into the
European Union.  The United States would like the EU to make
permanent the current temporary derogations whereby U.S. wine
producers can use wine treatment practices which are not
approved in the Union, and U.S. wine exporters can use a 
simplified export certificate.  The Union continues to link
these access questions to the U.S. commitment for greater
protection for EU wine names in the United States.

    Whiskey:  During 1994 the United States and the EU
concluded an agreement whereby the EU provides recognition to
Bourbon Whiskey and Tennessee Whiskey as distinctive products
of the United States in exchange for U.S. recognition of Scotch
Whisky, Irish Whisky, Cognac, Armagnac, Calvados and Brandy de
Jerez.  The EU, however, has not agreed to cover a third
product, American Blended Whiskey (ABW) in the new agreement
because the current EU distilled spirits regulation maintains
that ABW cannot be labeled a whiskey product due to
insufficient aging.  The U.S. Government will continue to seek
to restore access for ABW into the EU market.

    Third Country Meat Directive and Hormone Ban:  A November
1992 exchange of letters laid down the terms for an improved
working relationship between the U.S. and EU meat inspection
services and paved the way for the approval earlier this year
of a number of U.S. slaughterhouses.  Under the terms of the
agreement, this is seen as an interim stage in a process
leading ultimately to certification by the USDA that U.S.
establishments meet EU standards.

    Despite the progress made toward resolving the dispute over
meat inspection, U.S. exports of beef and beef products to the
Union will continue to be severely limited as long as the EU's
hormone ban remains in place.  This ban took effect January 1,
1988.  It applies to meats and meat products imported into the
EU after January 1, 1989, with the exception of meats for pet
use.  The ban has caused trade damage to U.S. exports estimated
at $97 million a year.  In response, the United States imposed
100 percent tariffs on imports of EU agricultural products
valued at $97 million.  This level of retaliation was adjusted
downward in July and December 1989 to reflect this partial
resumption of U.S. exports of meats that are not treated with
hormones.

    EU Ban on Bovine Somatotropin (BST):  An EU moratorium on
the use and marketing of Bovine Somatotropin (BST), a synthetic
protein that stimulates increased milk production in cows, has
been in effect since April 1990.  In December 1993, the EU
Council of Ministers voted to extend this moratorium through
December 31, 1994, in order to examine the implications of the
ban, its consequences for trade, and the experience of
countries where the use of BST is authorized.  The EU has also
taken the unusual step of barring individual member state
licensing of BST, requiring license approval at the Union level.

    Scientific and technical study to date in both the United
States and Europe has found no health or other hazards in the
use of BST, and the U.S. Food and Drug Administration has
approved its use in the United States.  However, the Commission
as well as European consumer groups, critics of biotechnology,
and small farmers (who fear increased supplies of cheap milk)
oppose its use.  An important factor in the Commission's
decision is the impact increased milk production resulting from
the use of BST will have on the EU's budget for farm price
supports.  Because of the high cost of farm subsidies under the
CAP, the EU already has strict milk production quotas.

    Given the fact that the U.S. Food and Drug Administration
review has established scientifically that the drug does not
pose a threat to human or animal health, the United States has
serious trade concerns with the EU's BST policy.  

    Oilseeds:  A central element of the Blair House Accord is
the text on oilseeds which establishes limits on oilseeds
market supports and establishes a mechanism to further limit
support if oilseeds production area exceeds certain limits, the
separate base area (SBA) for oilseeds.  The Commission has
announced that it plans to exclude oilseed production by
farmers under simplified crops scheme (principally for small
farmers).  The United States feels strongly that all areas for
which compensatory payments are received must be counted under
SBA plan for oilseeds.

    Quota and Import Licensing for Bananas:  On July 1, 1993,
the European Union implemented an import quota regime for
bananas that is administered using import licenses.  The EU
developed the new regime as part of its single market
exercise.  U.S. companies have seen a significant erosion of
their market share in Europe because the quota that applies to
imports of bananas from Central and Latin America is
significantly smaller than recent import volumes.  Moreover,
the licensing system includes elements that discriminate
against third country importers to the benefit of EU firms. 
After losing two GATT panel cases, the EU negotiated a
framework agreement with Costa Rica, Colombia, Nicaragua, and
Venezuela which allocated specific quota levels to those four
countries, and which raises the possibility of further
discrimination against U.S. firms.  On October 17, USTR decided
to initiate an investigation under Section 301 of the 1974
Trade Act of the EU banana regime.

    Shipbuilding Subsidies:  EU member states provide subsidies
and other forms of assistance to their shipbuilding and repair
industries.  The European Commission sets ceilings for
subsidies annually.  In 1994, the ceiling was nine percent of
gross investment for new ships and 4.5 percent for conversions
and small vessels.  The Commission has proposed extending this
ceiling through December 31, 1995.  On June 8, 1989 the
Shipbuilders Council of America (SCA) filed a Section 301
petition, seeking 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 to eliminate all subsidies for
shipbuilding by the OECD member countries.  An agreement was
reached in July 1994 and is expected to be signed in December. 
It is scheduled to take effect January 1, 1996, following
ratification by all signatories.


6.  Export Subsidy Policies

    Agricultural Subsidies:  Export subsidies (also known as
export restitutions or refunds) are widely used by the EU to
offset competitive disadvantages of EU agricultural exports
caused by high EU internal support prices.  Export subsidies
enable the EU to dispose of its surplus production at prices
that match, and often undersell, U.S. agricultural exports to
foreign markets.  The impact on U.S. agricultural exports, 
particularly grain exports, runs in the order of billions of
dollars.  Export subsidies, however, were subject to
disciplines as a result of the Uruguay Round.  As that
agreement is implemented, therefore, there will be progressive
reductions in the value and volume of subsidized agricultural
exports.


7.  Protection of U.S. Intellectual Property

    The European Commission is committed to securing a high
level of protection for intellectual property rights (IPR) in
the EU.  The Commission believes that completion of the Single
Market requires harmonization of the scope of IPR protection so
that trade and investment within the Union will not be
distorted based on differences in the scope of intellectual
property protection among the member states.  The Commission
has proposed directives in certain areas where inadequate IPR
protection is seen as a hindering development of EU industry
(biotechnology, data bases) and has adopted directives covering
software, pharmaceuticals, and semiconductor topologies.  Other
IPR measures completed include a Community Trademark
harmonization regime and a Community Patent Convention, but
they will not be fully implemented until 1996.  Additional
legislation will eventually harmonize regimes covering
industrial design and biotechnological inventions.

    In the copyright area, the EU Council has adopted
directives establishing rental and lending rights, harmonizing
neighboring rights and the term of protection, and creating a
system for protecting works transmitted by satellite and cable
retransmission.  It remains to be seen whether the directives
will give full protection to U.S. right-holders and whether
U.S. film producers and the works-for-hire system will be fully
respected.

    The EU adopted in May 1991 a directive requiring member
states to protect software as a literary work within the
meaning of the Bern Convention.  Member states were required to
implement the directive in national legislation no later then
January 1, 1993, but a number had not completed action by that
date.  The directive differs from U.S. law by allowing
decompilation carried out under certain circumstances for
purposes of obtaining information necessary for
inter-operability.  Although U.S. industry was satisfied with
the final compromise reached by the Council, the U.S.
Government will closely monitor implementation of the directive
to ensure that U.S. right-holders are protected.


8.  Workers Rights

    Worker rights are discussed in the individual country
sections of the report.  However, it is worth noting that the
EU Commission has proposed to Member States that GSP
beneficiaries be offered an extra margin of preference if they
meet certain worker rights standards.  It is not yet clear
whether the proposal will be accepted by Member States.



  Extent of U.S. Investment in Selected Industries.--U.S. Direct
Investment Position Abroad on an Historical Cost Basis--1993

                    (Millions of U.S. dollars)
                                                                
              Category                          Amount          

Petroleum                                              19,827
Total Manufacturing                                    91,034
  Food & Kindred Products                    8,667
  Chemicals and Allied Products             24,760
  Metals, Primary & Fabricated               4,620
  Machinery, except Electrical              16,455
  Electric & Electronic Equipment            5,819
  Transportation Equipment                   9,392
  Other Manufacturing                       21,321
Wholesale Trade                                        21,362
Banking                                                 8,719
Finance/Insurance/Real Estate                          66,517
Services                                               10,803
Other Industries                                        6,326
TOTAL ALL INDUSTRIES                                  224,587  

Prior to 1993, the European Union was known as the European
Communities.  The European Union comprises Belgium, Denmark,
France, Germany, Greece, Ireland, Italy, Luxembourg, The
Netherlands, Portugal, Spain, and the United Kingdom.  As of
January 1, 1995, it will also include Austria, Finland and
Sweden.
Source: U.S. Department of Commerce, Bureau of Economic
Analysis

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