IT LOOKED TO U.S. TRADE NEGOTIATOR Carla Hills as if six years of tortuous bargaining to reach a global free-trade agreement were about to collapse over a mere hill of beans. Frustrated, she decided to risk it all by announcing that the U.S. would slap 200% tariffs on $300 million worth of European farm exports, notably white wine, if a deal were not concluded in a month. Suddenly, an all-out trade war between the U.S. and Europe seemed imminent.
Hills' threat was intended as shock therapy -- to force the European Community to reduce its agricultural subsidies, the issue that has thwarted all recent attempts to forge a new global General Agreement on Tariffs and Trade among the U.S. and 107 other trading partners. As Americans fretted about prohibitively priced Chablis and Europeans contemplated retaliation, puzzled observers tried to sort out a complex question: Who's really to blame?
THE HILL OF BEANS. What Hills and her European counterparts were specifically wrangling about was oilseeds: soybean, sunflower and rapeseed used as animal feed and in cooking oil. The U.S. has long claimed that European farmers receive excessive government subsidies that make it difficult for foreign rivals to compete. Washington contends that American oilseed farmers have lost nearly $1 billion worth of E.C. business. Though European negotiators made significant concessions on subsidies, they have refused to sign off on the long-term guarantees that the U.S. demands.
Washington officials are quick to point out that the U.S. twice brought its grievance to GATT panels and won both times. The first ruling was issued in 1989, and the second, handed down last March, awarded the U.S. $1 billion in compensation for 20 years' worth of lost business. That decision set off a new round of negotiations, but at the last minute a proposed settlement was scuttled over a plan to cap annual oilseed production in Europe. The E.C. agreed to reduce the production limit from 12.5 million tons to 11 million tons but refused to accede to American requests to slash it again to 8.5 million tons. It was this standoff that finally drove Hills to take action.
THE REAL ISSUE. The battle is only incidentally about oilseeds. "At stake," says Robert Hormats, vice chairman of Goldman Sachs International, "is the credibility of the international trading system." At risk too is the recession-ravaged world economy: an all-out trade war would be tantamount to mutually assured economic destruction.
To sew up a comprehensive GATT agreement, expected to boost global commerce substantially, U.S. and European negotiators need to settle their long-running dispute over agricultural subsidies. The U.S. has demanded that European governments trim their healthy price supports, although they have shrunk already under a recent reform package. The E.C. has agreed, but the two sides cannot come to terms on the details.