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Ire over Iraq Starts Tripping Up Trade with Europe

For years, Europe and the U.S. have exchanged threats over trade disputes ranging from European subsidies for aircraft to U.S. piracy of Irish music. Despite the bickering, though, business has kept growing: trade between America and the European Union totals about $1 billion a day, nearly double what it was a decade ago.

Now, however, the tension between the U.S. and Europe over Iraq is spilling into the trade arena. Not only might differences about whether to go to war dampen the appetite for each other's goods but foreign policy friction also threatens to derail trade talks that both sides were counting on for economic growth.

Just ask the disappointed CEO of Unimax Systems Corp., a Minneapolis software company. On the eve of announcing a joint venture with the U.S. subsidiary of a French aerospace company, the parent put the deal off, says CEO Andrew Hunkins. Reason: the French parent didn't want to advertise its ownership of the U.S. subsidiary at such a sensitive time. "We are estimating a significant opportunity cost," Hunkins says.

Other American execs report that a business trip to Europe is no longer a pleasant interlude. "They might spend the first 20 minutes of a business meeting being scolded and admonished about U.S. foreign policy," says Willard M. Berry, president of the European-American Business Council. A survey of council members in late February found that 37% were "very concerned" about the fallout from the Iraq dispute. one-quarter said their business had been affected.

Europeans are just as worried. "We need to handle this carefully," European Union Trade Commissioner Pascal Lamy told BusinessWeek during a Mar. 4 visit to Washington. "We want to limit the damage so that it doesn't make the resolution of the trade problems we have more difficult."

But the pressure on trade relations is already mounting in ways both silly and serious. House speaker J. Dennis Hastert (R-Ill.) has suggested putting health warning labels on French Wine. And rather than continue stalled trade talks with the Europeans on trimming farm subsidies, House Ways & Means Chairman Bill Thomas (R-Calif.) suggests just pulling out of the 144-member World Trade Organization.

As the transatlantic squabbles spread, the two sides are poised to stop talking and start retaliating. Days before his Washington trip, Lamy compiled a confidential list of $4 billion worth of U.S. products that face 100% retaliatory tariffs if Congress doesn't end a tax subsidy given to U.S. exporters. And the Administration is preparing to bring a WTO case against Europe for its refusal to accept genetically modified corn and other foods. A lawsuit against the Europeans over U.S. food, combined with Euro ire over Iraq, warned one EU diplomat on Feb. 28, "Could provoke a reaction from European consumers that could kill U.S. biotechnology imports for years to come...and even mean a boycott of all U.S. products." the response by top American trade officials: "It's not a matter of if we bring the case, but when."

Trade disputes are even affecting the fight against terrorism. Europeans object to a U.S. antiterrorism program, called the Container Security Initiative, that stations U.S. customs officers in foreign ports to screen containers bound for America for weapons or bombs. Europe says the program gives the larger ports, where U.S. inspectors are located, an advantage. The U.S. says it can't afford inspectors in every port.

Lamy, a French socialist, concedes that the rhetoric between Washington and Brussels has grown "undignified and incredible" and urges calm. Unfortunately, if bullets start flying in Iraq, the trade spats could get downright ugly. Former Vermont Governor Howard Dean wowed party activists with a fiery antiwar speech to the Democratic National Committee in late February, but his liberal act is also playing in early primary states. The 2004 Presidential candidate has moved into second place in two recent New Hampshire polls, behind Senator John F. Kerry. Dean has a long way to go nationally, though: A new Fox/Opinion Dynamics poll puts him in a sixth-place tie with Al Sharpton. Campaign fund-raising watchdog and Web site lists more than 275 Senate staff members named by their bosses as able "to perform limited political fund activity." In other words, they can accept envelopes containing campaign contributions from lobbyists, political action committees, and other donors seeking favors. In most cases, the aides listed are the same ones handling senators' schedules and legislative agendas. Companies in legal hot water often claim they are cooperating with the Justice Dept. But Deputy Attorney General Larry D. Thompson, who heads the feds' Enron prosecution task force, says such cooperation is often more show than substance. So he has issued tough guidelines requiring that to claim cooperation, companies must turn over materials from internal investigations, waive attorney-client privilege, and not provide targeted execs with company-paid lawyers.

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