Trade With The European Union: Recent Trends and Electronic Commerce Issues

Published by the Government Accountability Office on 1999-10-13.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                              United States General Accounting Office

GAO                           Before the Subcommittee on European Affairs, Committee
                              on Foreign Relations, U.S. Senate

For Release on Delivery
Expected at 10:00 a.m., EDT
                              TRADE WITH THE
October 13, 1999
                              EUROPEAN UNION

                              Recent Trends and
                              Electronic Commerce
                              Statement for the Record by Susan S. Westin, Associate
                              Director, International Relations and Trade Issues,
                              National Security and International Affairs Division

                        Mr. Chairman and Members of the Subcommittee:

                        I am pleased to have this opportunity to provide this statement for the
                        record for your hearing on October 13, 1999, on U.S. trade with the
                        European Union (EU). As major trading partners, the United States and the
                        EU are currently addressing several trade-related issues, including their
                        approach to electronic commerce, or e-commerce.

                        My statement will focus specifically on (1) the size and composition of
                        U.S.-EU trade and investment flows from 1992 through 1998 and
                        (2) U.S.-EU efforts to facilitate e-commerce. My observations are based on
                        GAO’s past and ongoing work,1 our analysis of trade and investment data,
                        our review of executive branch and other documents, and our discussions
                        with U.S. government and private sector officials.

Summary                 The sizeable and growing U.S.-EU trade relationship is dominated by flows
                        of sophisticated manufactured goods and services and extensive
                        cross-Atlantic investment. E-commerce has tremendous potential for
                        facilitating U.S.-EU trade, but it also raises numerous issues, including
                        consumer protection and market access. The United States and the EU are
                        attempting to lower these potential barriers to e-commerce through the
                        framework of the World Trade Organization (WTO) and other forums.

U.S.-EU Trade and       The European Union and the United States have the world’s largest trade
                        and investment relationship. In 1998, the EU was the leading U.S. trading
Investment              partner, the largest recipient of U.S. direct investment abroad, and the
Relationship Is Large   biggest foreign direct investor in the United States. The EU has retained its
                        dominant share of U.S. trade over the past decade even as U.S. trade with
and Growing             the rest of the world has grown. In 1998, 1 out of every 4 dollars in U.S.
                        exports was destined for the EU market, and 1 out of every 5 dollars in U.S.
                        imports was spent on EU products.

                        The EU is the largest foreign direct investor in the United States as well as
                        the largest recipient of U.S. direct investment. On a historical-cost basis,

                         At the request of the House Ways and Means Subcommittee on Trade, GAO is currently
                        examining the issues to be considered in Seattle, Washington, at the November 1999 World
                        Trade Organization Ministerial Conference meeting.

                        Page 1                                                               GAO/T-NSIAD-00-46
                          the EU had $481 billion invested in the United States in 1998 and the United
                          States had $434 billion invested in the EU. These figures represent about
                          59 percent of all foreign direct investment in the United States and
                          47 percent of all U.S. direct investment abroad. For both the EU and the
                          United States, manufacturing industries, such as chemicals and autos, and
                          services industries, such as banking and insurance, are the leading sectors
                          for such investment.

Bilateral Trade Deficit   Over the past 6 years, the U.S. merchandise trade account has gone from a
Widening                  surplus of $3 billion in 1992 to a deficit of $34.7 billion in 1998, as U.S.
                          growth rates exceeded those in Europe and the U.S. dollar remained strong
                          against European currencies. (See fig. 1 for an illustration of U.S.-EU trade
                          from 1992 to 1998.)

                          Figure 1: U.S.-EU Merchandise Trade, 1992-98

                          Source: U.S. Department of Commerce.

                          The United States is urging the EU to make structural changes in its tax,
                          employment, and other policies to bolster its economic growth and
                          imports. Recent economic indicators for the EU show positive expansion

                          Page 2                                                      GAO/T-NSIAD-00-46
                          and the International Monetary Fund’s recent World Economic Outlook
                          report predicts such growth in the EU and elsewhere will spur demand for
                          U.S. exports.

U.S.-EU Trade Largely     Over two-thirds (68 percent) of the approximately $440 billion in total
Comprised of Industrial   U.S.-EU trade in 1998 was comprised of manufactured goods. Services,
                          such as financial and business services, constituted about 30 percent of
Products and Services
                          bilateral trade. Agriculture−often a sticking point in U.S.-EU trade
                          relations−accounted for just 3 percent of U.S.-EU trade. However, the EU is
                          the second leading destination for U.S. exports of agricultural products and
                          second leading supplier of U.S. agricultural imports. (Fig. 2 illustrates the
                          share of U.S.-EU trade that each sector represented in 1998.)

                          Figure 2: Share of Total U.S.-EU Trade, 1998

                          Source: U.S. Department of Commerce.

                          The United States and the EU are strong competitors and leading buyers in
                          major product sectors. For example, electric machinery and precision
                          instruments are among the top categories in U.S. exports to and imports
                          from the EU. In 1998, U.S. exports of electric machinery to the EU
                          amounted to $15 billion, an increase of nearly 60 percent from 1992 levels.

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Other leading categories include nonelectric machinery, aircraft and other
transportation equipment, chemicals, pharmaceuticals, processed foods
and beverages, and steel. (Fig. 3 shows the share of total U.S.-EU
merchandise trade by product group for 1998.)

Figure 3: Share of Total U.S.-EU Trade by Product Group, 1998

Note: Percents do not add up to 100 percent because of rounding.
Source: U.S. Department of Commerce.

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U.S.-EU Efforts to      The United States and the EU both recognize the potential of e-commerce
                        to expand trade and spur growth. Therefore, both partners have
Facilitate E-Commerce   collaborated on efforts to maintain an open international environment and
                        to liberalize related industries. However, e-commerce and the Internet are
                        characterized by decentralized, “borderless” interactions that affect the
                        way businesses and consumers operate. These qualities have given rise to a
                        variety of new policy questions, such as consumer protection and market
                        access. Although the United States and the EU agree on key policy goals,
                        they have taken different approaches to these challenges, resulting in
                        current or potential trade disputes. U.S.-EU differences over e-commerce
                        are currently being addressed in the context of the World Trade
                        Organization, the Organization for Economic Cooperation and
                        Development,2 and through bilateral means.

The Importance of       E-commerce, as defined by a recent WTO Secretariat special study,3
E-Commerce              includes the production, advertising, sale, or distribution of products via
                        telecommunications networks. For example, consumers may order
                        clothing through the Internet and have it physically delivered, or order
                        music from a website and have it electronically delivered to their personal
                        computer. A doctor may provide a traditionally face-to-face service through
                        a video-link and have payment handled completely electronically through a
                        transfer of funds. All of these involve e-commerce to some degree.

                        U.S. and EU leaders recognize e-commerce as a valuable business tool and
                        an important engine of economic growth. Although still relatively small,
                        e-commerce is a rapidly growing part of the world economy. The United
                        States Trade Representative (USTR) reports that by 2005, an estimated
                        1 billion people will be using the Internet and e-commerce transactions in
                        the United States alone may reach $1.3 trillion by 2003. In addition to
                        opening doors for new products, services, and modes of distribution,
                        beneficial indirect effects can be gained from e-commerce such as reduced

                         The Organization for Economic Cooperation and Development (OECD), created in 1960, is
                        a forum for monitoring economic trends and coordinating economic policy among 29
                        countries, including the United States and the 15 members of the EU. The OECD has
                        adopted principles on some aspects of e-commerce. The OECD is also conducting analytic
                        work regarding e-commerce. This work addresses consumer protection and other issues.
                         World Trade Organization, Electronic Commerce and the Role of the WTO
                        (Geneva, Switzerland: World Trade Organization, March 1998.).

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                           transaction costs, more efficient production processes, and expanded
                           production of information technology products.

                           The United States and the EU are leaders in exploiting e-commerce’s
                           potential. The United States generated over 85 percent of worldwide
                           Internet revenue in 1996-97, according to the WTO. Europeans generated
                           about 5 percent of Internet revenue, but this is expected to double by 2001.
                           The United States has the largest number of Internet users and websites in
                           the world, but Europe has been called one of the fastest growing Internet
                           markets. According to the Department of Commerce, most of the available
                           data on the growth of e-commerce comes primarily from industry sources.
                           Using this data, forecasters have predicted significant growth in
                           e-commerce worldwide. In early 1998, online retail sales were projected to
                           reach $7 billion by the year 2000. The Department of Commerce reports
                           that the $7 billion mark was already surpassed by year-end 1998.

U.S.-EU Initiatives to     The United States and the EU have worked cooperatively to maintain an
Expand E-Commerce          open international environment for e-commerce and to liberalize related
                           industries. They have also agreed on other key policy goals.

World Trade Organization   Within the World Trade Organization,4 the United States and the EU have
Initiatives                taken the lead in concluding

                           • the 1996 Information Technology Agreement, which reduces tariffs to
                             zero on information technology products such as computers and
                             semiconductors by 2000 for most countries;
                           • the 1997 WTO Basic Telecommunications Agreement, which liberalizes
                             the telecommunications services market—the infrastructure of the
                             Internet and e-commerce; and
                           • a 1998 Ministerial Declaration on Global Electronic Commerce calling
                             for a (nonpermanent) moratorium among WTO members on the
                             collection of customs duties on e-commerce transmissions and the
                             launch of a WTO work program to examine issues related to

                            The WTO administers rules for international trade and provides a forum for resolving trade
                           disputes and conducting trade negotiations. Established by the Uruguay Round Agreement
                           in 1994, the WTO provides the institutional framework for the multilateral trading system.

                           Page 6                                                                 GAO/T-NSIAD-00-46
                        The Information Technology Agreement effectively resolved a U.S. dispute
                        settlement case of potential relevance to e-commerce. The United States
                        brought the case in the WTO against the EU’s tariff classification of
                        computer equipment. Two EU member states had decided to classify
                        computers with networking capabilities as telecommunications equipment
                        and classify a type of personal computer with multimedia capabilities as
                        televisions for tariff purposes, thus subjecting such computers to a tariff
                        rate that was nearly double that previously applied. The EU later did a
                        similar thing for local-area network equipment. The United States initiated
                        WTO dispute settlement procedures against the EU and its two member
                        states in 1996. However, as a result of the Information Technology
                        Agreement, the EU agreed to reduce the tariffs in question to zero by
                        January 2000. The EU also confirmed that in the future it would treat
                        multimedia personal computers as computers for tariff classification
                        purposes. The EU’s action restored the tariff treatment of such computers
                        to that desired by the United States.

                        WTO members will be addressing several initiatives related to e-commerce
                        at its Ministerial Conference meeting this November in Seattle. Efforts are
                        underway to sign a new agreement on information technology. This
                        agreement would further reduce tariffs, cover additional products, and
                        address non-tariff barriers.

                        WTO members must also decide in Seattle whether or not to extend their
                        current moratorium on imposing duties on electronic transmissions. The
                        United States originally proposed that the Seattle Ministerial result in a
                        permanent moratorium, but the EU, Japan, and Australia have only given
                        support for a nonpermanent moratorium until the WTO’s examination of
                        e-commerce issues is completed. The current and proposed moratorium
                        only covers electronic transmissions and not products physically imported
                        after being ordered electronically. No WTO members impose such duties,
                        and the moratorium is an effort to maintain that practice. The moratorium
                        does not cover domestic taxation.

Bilateral Initiatives   Within the context of the 1995 “New Transatlantic Agenda,” a framework to
                        enhance cooperation and promote joint action on trade and other matters,
                        the United States and the EU have specifically pledged to facilitate
                        electronic commerce and signed a Joint EU-U.S. Statement on Electronic
                        Commerce. The statement includes a commitment by each government to
                        provide a clear, consistent, and predictable legal framework to promote
                        competition. This statement also reflects agreement by the United States
                        and the EU on several key policy goals related to e-commerce, including

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                               • ensuring a liberal environment for international transactions;
                               • protecting personal information, privacy, and intellectual properties;
                               • developing legal and institutional structures to support electronic
                                 business; and
                               • providing universal access domestically and internationally.

                               U.S. and EU government officials have the benefit of receiving regular
                               business input into their discussions on e-commerce from the Transatlantic
                               Business Dialogue, a forum of high-level U.S. and EU business leaders. The
                               Transatlantic Business Dialogue’s May 1999 midyear report offered several
                               recommendations on electronic commerce, including instituting strong
                               intellectual property rights protection for information transmitted over the
                               Internet and harmonizing and simplifying export regulations for products
                               containing cryptographic capabilities.

Current and Potential Areas    Despite agreement on the overall promotion of e-commerce, U.S. and EU
of U.S.-EU Disagreement on     approaches to various legal and policy issues have differed. This has
                               manifested itself in discussions over the coverage of e-commerce under
E-Commerce Issues
                               WTO rules and on data protection. U.S.-EU positions on other subjects−
                               Internet “domain” names, encryption, and digital signatures−have been the
                               subject of bilateral differences but have not reached the point of dispute.
                               The United States and the EU are engaged in efforts to bridge their
                               remaining differences bilaterally and in the WTO.

Coverage of E-commerce Under   WTO members have been examining the coverage of e-commerce under
Global Trade Rules             existing WTO agreements as part of the WTO’s e-commerce work program.
                               The work program involves reviews by four existing WTO bodies of how
                               multilateral trade agreements apply to global electronic commerce.5 In that
                               context, the United States and the EU have disagreed on whether or when
                               e-commerce should be classified as a “good” or a “service” under global
                               trading rules. The EU has proposed to the WTO that e-commerce
                               transactions, including any content transferred, be considered services,
                               and suggested that a decision to that effect should be reached soon. The
                               United States believes that it is premature to reach a definitive conclusion
                               on the classification of e-commerce, given its evolving nature and WTO
                               members’ limited understanding of how such a decision could affect
                               market access and other trade rights. As a general rule, however, the

                                The four WTO bodies are the Committee on Trade and Development, the Council on
                               Trade-Related Intellectual Property, the Council on Goods, and the Council on Services.

                               Page 8                                                                 GAO/T-NSIAD-00-46
                  United States has proposed that e-commerce should receive the most
                  liberal treatment available, whether as a good or a service.

                  The U.S.-EU disagreement stems from the fact that electronic commerce
                  consists of two types of deliveries. The first involves items ordered
                  electronically but delivered physically, such as software received through
                  the mail on a computer disk. The second involves items both ordered and
                  delivered electronically, such as software transmitted directly to one’s
                  computer. The EU considers both ordering and receiving items over the
                  Internet to be the delivery of a service. The United States, on the other
                  hand, maintains that such transactions can involve either a good or a
                  service, depending upon the circumstances. How e-commerce is classified
                  has trade implications because, in some cases, WTO rules provide
                  relatively greater certainty of market access and equal treatment to goods
                  than to services.

                  These and other issues will be addressed in a report to the WTO’s
                  November 1999 Ministerial Conference meeting in Seattle. A decision on
                  the future of the WTO’s e-commerce work program is to be made at that

Data Protection   The protection of personal data is another notable area of contention. The
                  United States has supported industry self-regulation as the primary means
                  of protecting personal information. The European Union instead has opted
                  for a comprehensive regulatory approach. In October 1998, the EU enacted
                  the so-called Data Protection Directive, which only permits the transfer of
                  personal information from Europe to third countries that provide
                  “adequate” data protection.

                  Following this directive, U.S. officials began a dialogue with the EU
                  comparing the protection of the U.S. system with that mandated in the EU.
                  In those areas where differences in the level of protection existed, the
                  Department of Commerce proposed to bridge them with an agreement with
                  the EU on a set of “safe harbor” principles for U.S. companies to follow.
                  U.S. firms that subscribed to the safe harbor principles would be presumed
                  to provide adequate privacy protections. Data transfers from the EU to
                  them would continue. Among other things, these principles will likely
                  prescribe a level of security for data transmissions and specify recourse
                  mechanisms for complaints about the use of data.

                  The EU’s Data Protection Directive is already in effect, but the EU has
                  pledged to avoid disrupting data flows to the United States so long as

                  Page 9                                                     GAO/T-NSIAD-00-46
                          negotiations continue in good faith. The United States and the EU are
                          working to complete an agreement by the next U.S.-EU summit in
                          December. However, considerable differences remain over enforcement of
                          the principles by industry associations and the length of time U.S. firms
                          would have to implement the principles. The EU has accepted the U.S.
                          approach of industry self-regulation, but wants assurance that U.S. industry
                          self-regulating groups will be independent from the companies they are
                          regulating and able to enforce compliance with the principles. Also, U.S.
                          firms want to have a longer period of time to implement the principles than
                          the EU is currently willing to accept. According to the Department of
                          Commerce, multinational corporations with operations in Europe and the
                          United States, financial organizations, and other companies with significant
                          transatlantic business could be harmed if agreement is not reached.

Internet “Domain Names”   In addition to these current disputes, the United States and the EU have
                          grappled with differences over what process would be entrusted to register
                          new website names and addresses, also known as “domain names” on the
                          Internet. Domain names, such as “www.senate.gov” or “www.ibm.com,” are
                          used to identify the millions of websites worldwide for individuals “surfing”
                          or navigating the Internet. As such, they have also developed into business
                          identifiers because they are easy to remember and use.

                          As the Internet has become more global, the EU and others have raised
                          questions about how these names are assigned. Historically, the task of
                          registering domain names was overseen by the U.S. government and
                          contracted to public and private entities. As part of the executive branch’s
                          1997 Framework for Global Electronic Commerce, the Department of
                          Commerce has begun a process of privatizing management of the Internet
                          name and address system to increase competition and facilitate global
                          participation while preserving the stability of the internet. Commerce’s
                          initial recommendation in February 1998 was met with criticism by the EU,
                          which claimed that the proposal seemed to seek exclusive U.S. jurisdiction
                          over the Internet. However, Commerce issued a second draft in June 1998,
                          which led to the formation of the Internet Corporation for Assigned Names
                          and Numbers—a nonprofit corporation assigned to oversee the transition
                          to private management. The EU has stated that it supports this approach.
                          However, the privatization process has just begun, and, given its
                          importance and complexity, the potential exists for more disputes
                          regarding domain names.

Encryption and Digital    The security and verification of information transferred digitally is a basic
Signatures                requirement for the growth of e-commerce. Encryption technology, of

                          Page 10                                                      GAO/T-NSIAD-00-46
                   which the United States is a leading producer, is necessary for the transfer
                   of sensitive information across public networks. However, the availability
                   and export of sophisticated encryption software raise important national
                   security and law enforcement concerns. For instance, should legal
                   authorities have access to the “key” to decrypt electronic transmissions to
                   monitor illegal activities? Also, how can export controls protect national
                   security while still fostering domestic innovation? The United States
                   restricts exports of encryption systems, but recently the executive branch
                   has proposed changes that would significantly loosen such restrictions.
                   The United States and the EU are also working to simplify their respective
                   review processes for exporting encryption products.

                   In addition to requiring the security of information, business transactions
                   typically rely on legal contracts, which in turn require signatures. The
                   expansion of e-commerce depends upon the existence of a legal framework
                   for acceptance of electronic signatures, as well as the technology to
                   authenticate or verify those signatures. Both the EU and the United States
                   have been developing just such a framework. However, differences in the
                   types of technology required or in the legal definitions between the United
                   States and the European Union may limit certain transactions or hinder
                   innovation. Noting the global nature of the Internet, the Transatlantic
                   Business Dialogue has recommended that national governments
                   coordinate their activities to avoid passing conflicting legislation and
                   creating biases in favor of particular technologies.

                   Mr. Chairman, this concludes my statement for the record. Thank you for
                   permitting me to provide you with this information. If you or your staff
                   have any questions about this statement,we will be pleased to answer them.

                   Contact and Acknowledgment

                   For future contacts regarding this testimony, please contact Susan S.
                   Westin or Elizabeth Sirois on (202) 512-4128. Individuals making key
                   contributions to this testimony include Kim Frankena, Nina Pfeiffer, and
                   Tim Wedding.

(711454)   Leter   Page 11                                                     GAO/T-NSIAD-00-46
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