Washington And Bonn Trade Punches Over Trade

It was what diplomats describe as a frank discussion. At an Apr. 27 meeting in Bonn, U.S. Under Secretary of Commerce Jeffrey E. Garten accused Germany of keeping its energy market closed to outside competition--in this case, General Electric Co.

But Johannes Ludewig, State Secretary at the Economics Ministry, would have none of it. For 20 minutes, he passionately defended Germany's record on free trade to a dumbstruck Garten. The next day, Ludewig fired off a press release saying Garten had distorted the situation.

TEST CASE. While this kind of heated exchange might be typical of U.S.-Japan relations, such flare-ups have been rare between the U.S. and Germany--until now. After years of trying to open specific markets in Japan, China, and Latin America, Commerce is turning up the heat on Germany and its neighbors. "It's time for aggressive advocacy in Europe, too," says Garten. He's looking into such fields as power generation, telecom, and aerospace--where American companies claim that locals get preferential treatment from their governments. U.S. negotiators are using German utilities as a test case.

Yet singling out Germany could sour relations just when the two countries must work closely together on a range of issues, from strengthening NATO to stabilizing currency markets. And Germans are in no mood to be a test case--which led to a much sharper reaction than Washington bargained for. "These two nations see eye to eye on most things," says Munich political commentator Josef Joffe. "You don't beat up on your friends first."

State Dept. officials insist that all is well. "This is not an explosive mix," says one. Garten and others figure that when the smoke clears, commercial ties between Europe and the U.S. will actually be tighter.

But the Germans have been showing flashes of anger. Tempers are already strained over the dollar's 10% plunge against the mark, which is endangering Germany's export-led recovery. Chancellor Helmut Kohl and Finance Minister Theodor Waigel have criticized Washington for letting the dollar slide. Bundesbank Chief Hans Tietmeyer recently rebuked the U.S. for not cutting its budget deficit. Business leaders such as Mercedes-Benz Chief Executive Helmut Werner and Siemens CEO Heinrich von Pierer have blamed job cuts on currency dislocations. Bonn also is at odds with Washington on the issue of how to treat Iran.

The disputes are bound to continue, as both sides grope to define a new relationship. On the U.S. side, negotiators figure that, with the cold war over, they can afford to speak up for America's economic interests. The Germans, meanwhile, must tackle the politically tricky task of fully deregulating their economy to make it more competitive. It doesn't make German policymakers any happier when American companies start hammering on Bonn to open up the market faster.

LOST OUT. With billions in potential business at stake, the Americans are not going to go away. Take utilities. Although many German industries are wide open to competition, the business of building power plants in Germany has long been dominated by Siemens and the German division of ABB Asea Brown Boveri (Holding) Ltd.

But GE sees a $36 billion power market in Germany through 2004, and it wants in, as does Westinghouse. GE argues that it unfairly lost out to ABB on a steam-turbine contract after VEAG, the utility, gave it only six weeks to prepare a bid under vague guidelines. VEAG says GE's bid did not meet technical specifications. Francis Blake, general counsel at GE, says the Germans weren't complying with European Union guidelines. GE may sue for damages, "but our overall goal is to compete fairly in Germany," says Blake.

The Germans are puzzled. "We are on the American side in the fight for open markets," argues Klaus Bunger, director of economic policy at the Economics Ministry. U.S. negotiators have to acknowledge the German side while still pressing their point. Sometimes fights with friends are the toughest ones to handle.

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