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Trade Tensions Mount as US Bars EC Companies from Government Contracts

By John M. Broder
and Joel Havemann

Los Angeles Times

WASHINGTON

The Clinton administration intensified growing trade tensions with Europe Monday by barring European companies from bidding on millions of dollars worth of U.S. government contracts in retaliation for "intolerable" European procurement rules.

U.S. Trade Representative Mickey Kantor, in a tough-worded statement, said the United States would consider further retaliatory steps if the 12-nation European Community does not drop its discriminatory rules governing purchases of telecommunications and other utilities equipment.

The administration's action is to take effect March 22, but Kantor and EC Trade Commissioner Sir Leon Brittan noted that they would meet in Washington Feb. 11 and hinted that a negotiated deal could be reached to avoid the U.S. response.

The action follows a U.S. decision last week to impose stiff tariffs on steel from seven EC countries and comes against the backdrop of continuing U.S.-Europe friction over trade in agricultural goods, services and entertainment products.

For the new administration, which is clearly trying to sound tough on trade in its early days, the harsh language and actions are in part negotiating tools intended to achieve progress on a number of bitter disputes with major trading partners -- particularly the European Community and Japan.

On the domestic political front, the tough approach sends signals to important constituencies, such as labor and its allies in Congress, that the Clinton administration is not unalterably wedded to the free trade ideology of the previous Republican administrations.

Kantor's strike against the Europeans came after negotiations, begun under the Bush administration, failed last month to resolve an impasse over government purchasing. U.S. officials said Monday's response was tougher than any planned by the previous administration and indicated that Clinton officials would rather see lengthy talks on a range of trade matters collapse than agree to flawed deals.

EC officials, making no effort at conciliation, rejected the U.S. action as continuation of a pattern of protectionism.

"I cannot believe it is in anybody's interest, European or American, to attempt to deal with trade issues in this way," Brittan said. "We do not accept this form of unilateral bullying -- especially since there are ongoing EC-U.S. bilateral negotiations on telecommunication procurement and other issues."

Brittan and other EC officials said the community's procurement rules were more liberal than numerous "Buy American" laws applied to federal and local government projects.

"The EC's directive that the U.S. is complaining about is quite the reverse of a protectionist device," Brittan said from EC headquarters in Brussels Monday. "It actually offers increased liberalization of procurement in the community's markets, and opportunities for U.S. firms that did not exist before."

The dispute centers on an EC rule known as the Utilities Directive, which took effect Jan. 1. It gives preference to European suppliers in bidding for work on state-owned telecommunications and power-generation projects. The rule requires EC utilities to discount the bids received from EC companies and allows them to reject non-European bids for virtually any reason.

Major U.S. companies such as American Telephone & Telegraph Co. and General Electric Co., which provide the hardware for thousands of telephone and utility systems worldwide, complained that they were being unfairly shut out of the European market and petitioned the U.S. government to try to break down the barrier.

Former U.S. Trade Representative Carla A. Hills failed to persuade the Europeans to make changes, and Kantor inherited the problem upon taking office 10 days ago. After a brief internal review and approval by Clinton and the new National Economic Council, Kantor decided to move ahead with three actions:

--Prohibit purchase of EC products not subject to government procurement rules spelled out by the General Agreement on Tariffs and Trade, or GATT, the international body that tries to regulate global trade.

--Seek public comment on possible further retaliatory steps to be taken against the Europeans.

--Consider withdrawing from the GATT procurement code, a step that would permit the United States to impose strict domestic-content rules on a wide range of government purchasing.

The potential market for U.S. goods in the European utilities market is perhaps $1 billion, but the value of European goods and services that would be barred from the United States is no more than $50 million, according to a government trade official.

Also, only a handful of government bodies, such as the Tennessee Valley Authority, and some federal airport and waterways projects, are covered by Monday's order. All procurement by the Department of Defense and virtually every other major U.S. agency was exempted, as was any procurement in which "public healthy, safety or public interest considerations require such exclusions."

Kim Elliott, a trade analyst at the private Institute for International Economics, said both sides were being disingenuous. The Europeans have erected barriers against non-EC products while claiming to be liberalizing their purchasing rules, and the United States is asking Europe to accept rules that private U.S. communications and utilities companies do not have to follow, Elliott said.