February 2003
The Best of Both Worlds

Europe and America cannot seem to agree on anything these days. Differences over Iraq dominate the headlines, while wounds persist from previous fights over the International Criminal Court and Kyoto Protocol. However, America and Europe are not only political and military allies but also major economic and trading partners. As this February 13 conference showed, there are important economic lessons to be learned from both sides of the Atlantic.

Representative Bill Thomas (R-Calif.)
House Ways and Means Committee

Rep. Bill Thomas

In Bill Thomas’s view there is a fundamental difference in European and American mentality, which can be described as "cartelizing versus competition." In areas such as corporate taxes, the European Union is ahead of the United States. However, in 2003 taxes in America will change-1916 dumping provisions will be removed and a new tax bill to adjust the taxation of dividends will be passed. The flexibility of the labor market is just as important as corporate taxes, and here the U.S. is clearly ahead of Europe. Thomas expressed concern about the lack of change in the EU’s Common Agricultural Policy. Agriculture will be one of the major issues at the Doha-Cancun Round, which will take place in September. If the negotiating parties do not achieve significant progress there, Congress might not renew American membership in the World Trade Organization. Doha’s success, on the other hand, could lead to the establishment of a transatlantic free trade zone.

Tax Competition in Europe-A Lesson for America

According to AEI’s Kevin A. Hassett, it is apparent from the available data that lowering corporate taxes to about 20 percent significantly increases tax revenue. Low corporate taxes are also good for the employees as their wages increase. Many European countries have aggressively decreased their corporate taxes. About fifteen years ago the U.S. was in the middle of the list of countries with low corporate taxes. Today it is at the very bottom of that list, second only to Japan. Adam Lerrick of Carnegie Mellon University described some of the methods by which U.S. companies take advantage of European regulations. Chris Edwards, director of Fiscal Policy Studies at the CATO Institute, stressed that not everyone in the EU wants to preserve tax competition-the EU also champions tax harmonization. It has a minimum VAT rate of 15 percent, and over the years there were numerous proposals to harmonize corporate taxes. Eckhard Janeba of University of Colorado pointed out that in parliamentary democracies-where the size of government, tax rates, public goods supply, and government waste are generally higher than in presidential systems-there exists a tendency to believe that tax competition creates an economic distortion, which leads to under-provision of public goods and lower welfare. Janeba argued that this theory is false and that both democratic models profit from tax competition, although to a slightly different degree.

Opportunities in the New Europe-Does Europe Need a Dose of Cowboy Capitalism?

The U.S. has economically outperformed Europe since 1995. Robert Atkinson, vice president of the Progressive Policy Institute, and Hans Labohm, senior visiting fellow at the Dutch Institute for International Relations, pointed out that America is patenting more and has significantly higher productivity than Europe. Europe needs to adopt a milder version of American cowboy capitalism-loosen its job and financial markets, liberalize communication, reduce restrictions on retail, and eliminate trade barriers. It is evident that Europe needs to take more risks. According to the former prime minister of Poland Jan Krzysztof Bielecki "Europe" does not have one economic model. Since the fall of communism, Eastern Europe has exemplified economic entrepreneurship. Two million new enterprises, which contributed to a successful transition from a centralized to a market economy, were established in Poland alone. However, EU enlargement means that the candidate countries will be encouraged to behave like "good Europeans" and accept the EU’s social economy. At this stage, Europe needs to find a better trade off between economic growth and social equality.

AEI’s James K. Glassman pointed to the distinction between the European post-paradise economy and the American Hobbesian economy. In the former, economic issues are dealt with by compromise, and in the latter by fierce competition. American policymakers have learned that competitive markets and limited government-the essence of cowboy capitalism-dramatically advance American economy.

U.S. and EU-Leaders or Laggards in Establishing Global Free Trade?

Ellen Frost, visiting fellow at the Institute for International Economics, said that over the last ten years the level of trade between Europe and the United States almost doubled. Fifty-three percent of investments in the United States are from Europe, and seventy-two percent of all investments in Europe are from the United States. One could almost speak of a transatlantic single market. However, constant quarrels between Europe and America spoil this picture. In the recent past the U.S. has boosted subsidies and both sides have resorted to resolving their differences by litigation. Since Gerald Ford’s presidency, American administrations have developed a culture of showing Congress how "tough" they can be with foreigners.

According to Patrick Messerlin, professor at the Institut d’Etudes Politiques de Paris, three main issues-agriculture, steel tariffs, and communications-stand between the U.S. and the EU in establishing free trade. Europe’s deficiency of market-oriented, dynamic lobbies, seriously endangers agricultural free trade policies. Although greatly amplified by European and American rhetoric, the issue of steel tariffs could easily be resolved by abolishing protectionist tariffs on both sides of the Atlantic. Finally, the communication sector has been liberalized more by technology than by decisionmaking, and a much bolder approach is necessary.

Hugo Paemen, former head of the European Union delegation to the U.S., argued that nothing substantial happens in the World Trade Organization when the U.S. and the EU do not work together. This job becomes more difficult as the diversity of participants and subjects grows. Some deadlines have already been missed, for example those for special and preferential treatment and intellectual property. The deadline for resolving agriculture is March 31. Additionally, the WTO is becoming more difficult to manage. The European approach that nothing is agreed until all is agreed and the shortened term of the organization’s director general-now only two years-are hurdles to effective governance. The role of nongovernmental organizations will most likely increase in the process, which could mean that the WTO could evolve into a UN. Claude E. Barfield of AEI argued that in order to save the WTO, it is necessary to settle disputes through diplomacy and not through a stringent legal system.

Senator Max Baucus (D-Mont.)
Senate Finance Committee

Senator Max Baucus

Max Baucus believes that the U.S and Europe have every reason to establish a mutually supportive trading relationship: They are the twin pillars of the WTO, the biggest trade partners in the world, and have solid cultural affinities. However, many issues at stake poison the transatlantic trade relationship. The WTO amplifies transatlantic trade tensions. The organization became the collector of trade complaints on both sides. When the EU and the U.S. bitterly confronted each other after the Europeans refused to lift the hormone ban or the moratorium on new biotech products, the U.S. decided not to bring the case to the WTO. The U.S. valued the EU concern that its citizens felt strongly about this issue. In spite of this, the EU launched an attack on U.S. tax policies by filing a suit against the foreign sales corporation tax and the extraterritorial income exclusion tax. These developments show that the administration needs to adopt a more active policy in defending American interests vis-à-vis the European tax challenge. If the EU persists in using the WTO litigation as a weapon against U.S. trade interests, the U.S. will have to employ the same weapon to force Europe to lift its trade barriers, above all, the Common Agricultural Policy.