EC92 - European Community 1992; includes related articles on the European Community

EC92 A mammoth effort to sweep away obstacles to the free movement of goods, services, and capital within the 12-nation European Community will unify a market half again as large as America's, and it could create a host of opportunities for U.S. companies.

Like many other small U.S. manufacturers, Mentor O&O Inc. struggles mightily to build a market in Europe.

But just because its diagnostic and surgical equipment used in eye care meets rigorous U.S. standards doesn't guarantee Mentor smooth sailing into European countries.

On the contrary, says Richard W. Young, chief executive officer of the firm in Norwell, Mass., a Boston suburb. Mentor spends a lot of money modifying its equipment to meet design specifications that change from country to country on the continent.

The Germans, for example, are particularly hard to please, says Young. The alarm bell on a Mentor testing device sold in this country has an on-off switch. The Germans refuse to approve the machine until the switch is removed, and they also dictate just how loud the alarm bell must sound.

Such requirements are typical of the trade barriers that Young hopes will fall as the 12 nations that make up the European Community move toward establishing a single internal market by the end of 1992.

The countries that are participating in EC92 have embarked on a mammoth adventure in deregulation that aims to sweep away obstacles, some of them centuries old, to the free movement of goods, services, capital, and people within the European Community. Barriers that have sheltered inefficient home markets will be dismantled in favor of a unified market of 323 million consumers--half again larger than the U.S. market. This single market will produce $4.5 trillion in goods and services, putting it just behind the U.S. and far ahead of Japan in economic might.

Opportunities will abound for U.S. companies--large and small--in a unified European market. On the upper end of that range, U.S. multinationals are particularly well positioned to profit from the single market. While their European competitors traditionally focused heavily on well-protected home markets, the multinationals developed strategies for Europe as a whole.

In fact, some Europeans fear that the Americans may have an upper hand in profiting from a unified market, says Eric Friberg, managing director of McKinsey & Co., an international consulting firm. He is based in Brussels and is president of the American Chamber of Commerce in Belgium.

Small and midsized U.S. exporters are not as well positioned to cash in on EC92 changes as are the multinationals. Nor are they as well informed. Consequently, they are more anxious about the program's potential negative impact.

But experts foresee new opportunities for small and midsized exporters because they will be selling into a single market with a generally uniform set of norms, standards, and testing and certification procedures. They will no longer face a dozen different sets of national requirements or border controls between countries within the group of 12. An invigorated European economy also will create more demand for U.S. goods and services.

Even U.S. companies that do not currently export to Europe have shown a sharply increased level of interest in EC92 in recent months, says Charles Valentine, director of international trade advisory services for the accounting and consulting firm Arthur Young & Co. in Washington.

Santhanam Shekar, European director for the consulting firm Arthur D. Little in San Francisco, says the process of change in Europe has opened "a large window of opportunity for American business in virtually all industries." While much uncertainty remains about the outcome, U.S. firms shouldn't wait to start planning to take advantage of these changes, Shekar advises.

Business managers should begin now to evaluate their four basic options:

. Broadening distribution networks;

. Developing joint ventures with European companies;

. Acquiring or merging with European companies;

. Investing in European manufacturing capacity.

U.S. enterprises seeking to benefit from EC92 should also keep up-to-date on the flow of decisions being made in preparation for the major changes, the experts say. Working through their trade associations and other organizations, they not only can remain informed but also can be in a position to exert political pressure on the American government to support those positions that achieve the greatest advantages for U.S. enterprises as EC92 evolves.

Such pressures might help guard against possible slippage between theory and practice in a unified market. Richard Young of Mentor, for example, is particularly concerned about new technical standards that would affect his company's chances to compete within the EC. "I don't think all the nontariff barriers to trade with the EC countries will be eliminated by the 1992 process, but they'll be reduced," he says. "I just hope they don't adopt the most difficult standards as the new Community-wide standards."

Young is far from alone in his concern that new barriers might be erected around the external borders of the newly unified market even as old internal ones fall. Such a "Fortress Europe" could leave American business on the outside looking in.

Technical standards represent "one of the fundamental issues now in terms of whether some relatively large fences are built around certain sectors" of European business, says William T. Archey, vice president of the U.S. Chamber of Commerce and chief of its International Division.

But standards make up just one area where tensions between the U.S. and its European trading partners have risen in recent months as the EC92 process goes forward. No less significant are the issues involving local-content and country-of-origin requirements, government procurement restrictions, and reciprocity for financial services.

"My fear is that, as European governments seek to balance political interests among the 12 member states, the legitimate interests of outsiders will be the first to be traded off," says Lionel H. Olmer, former undersecretary of commerce for international trade. Olmer, now a Washington lawyer and vice chairman of the U.S. Chamber committee on EC92, says that "Fortress Europe may not be a realistic outcome, but selected protectionism will be defended as necessary" to phasing in a more open market.

For their part, European Community officials strenuously deny that they are building a new Europe-for-Europeans. Last October, the EC Commission, the Community's executive branch, issued a position paper to answer critics who say EC92 is destined for protectionism. The commission stated that "1992 Europe will not be a Fortress Europe but a Partnership Europe."

Sir Roy Denman, EC ambassador in Washington, steadfastly agrees. "There is not going to be a Fortress Europe," he says. "I think it's a silly phrase."

But such assurances do little to alleviate the anxiety about Fortress Europe felt on Capitol Hill. "I think you can take it as a fundamental rule that when people change the rules of the game, they usually are not doing it to make it easier for you," says Rep. Sam Gejdenson, D-Conn., chairman of the International Economic Policy and Trade Subcommittee of the House Foreign Affairs Committee. His subcommittee has held a series of hearings on the impact of EC92 on U.S. business.

Senate Finance Committee Chairman Lloyd Bentsen, D-Texas, recently warned that import restrictions being enacted by the Community threaten free trade and could provoke U.S. countermeasures. Bentsen's committee oversees trade legislation.

The Bush administration is more reserved in its comments, but it is concerned nonetheless. "While I do not foresee a Fortress Europe, it would be naive to believe that there will not be a few `strongholds' here and there," says Commerce Secretary Robert Mosbacher. He pledges that the administration will "forcefully advocate vital U.S. business interests" and work to tear down barriers to free trade wherever they spring up.

To that end, more than 30 federal agencies are monitoring EC developments through an interagency study group headed by U.S. Trade Representative Carla A. Hills. In addition, several agencies, led by the Commerce Department, have set up special services for U.S. businesses seeking information about the unified European market.

Because small U.S. exporting companies such as Mentor O&O don't generally have a European base of operations from which to track EC92 developments, Richard Young maintains that the federal government must be their advocate at the bargaining table. This is a position repeatedly taken by small-business representatives appearing before Gejdenson's subcommittee.

The goals of EC92 are not new. The Treaty of Rome, signed in 1958 by France, West Germany, Italy, Luxembourg, the Netherlands, and Belgium, set a clear mission to abolish all tariffs and quotas among the six original European Community members within 12 years. Even as tariffs and quotas faded, governments established new nontariff barriers, and economic unity proved elusive.

Over the years, taxes, elaborate technical standards, and "buy-national" government procurement policies cropped up to insulate home markets from competition--even from other EC members. By the early 1980s, inflation, high unemployment, and reduced economic growth had combined to produce a pervasive economic stagnation and pessimism dubbed "Eurosclerosis."

Midway through the decade, it became clear that the Community had to do something drastic or forever slip behind the U.S. and Japan in world markets. Spurred by the fear of becoming a second-rate economic bloc, the EC Commission in 1985 proposed that the Council of Ministers, which enacts laws, adopt some 300 proposals to eliminate barriers to a unified market by the end of 1992.

The Council of Ministers moved boldly to incorporate the proposals into a history-making piece of legislation called the Single Europe Act, which took effect in July 1987.

To speed the work of the EC government in Brussels, the Council of Ministers also amended EC law to permit, for the first time, qualified majority rule rather than unanimous approval of laws, called directives. Without majority rule, any EC member state, numbering 12 since 1986, could veto laws designed to bring about economic unity. The countries that joined since 1958 are Denmark, Greece, Ireland, Portugal, Spain, and the United Kingdom. Unanimity, however, still is required in certain sensitive areas, such as taxation and monetary-system reform.

Work on implementing EC92 goals started slowly, but by late last year the process had become the principal topic of discussion in capitals and boardrooms across Europe. EC92 finally had gathered the "critical mass" needed to attract and hold public attention.

Thus far, 107 proposals have been adopted, and 122 are in various stages of the decision-making process. Fifty of the most difficult issues remain in the discussion phase. The initial 300 proposals were trimmed to 279 to consolidate some issues and sidestep others considered too sensitive for Community action.

Even if the EC government misses the Dec. 31, 1992, deadline for enactment of all 279 proposals, the unification process will probably be irreversible. It also is clear that 1992 is just the beginning, not the end, of European economic unification. Controversial goals, such as a single European currency and a central European bank, are unlikely to come about for years--if ever.

Over the next decade, however, removal of internal trade barriers is expected to revive a moribund EC economy. A recent Commission study projects that 1992 market reforms eventually would increase the EC's annual output of goods and services 5 percent, create 2 million to 5 million jobs, and cut consumer prices 6 percent as producers take advantage of new economies of scale and more efficient distribution networks.

For the short term, however, the study advises EC countries to expect some unpleasant side effects from 1992 changes, as business consolidations and restructuring shake out thousands of jobs.

For American companies, "the unification of the 12 member states represents a unique opportunity to develop unparalleled economies of scale in the production of goods and the provision of services for what would be the largest trading bloc in the world," says Olmer, the former Commerce Department official.

In fact, business between the U.S. and the EC already is booming. The EC buys one-fourth of American exports and accounts for two-fifths of American external direct investment. "We are your best customer," says Denman, the EC ambassador in Washington. And the EC Commission's U.S.-based magazine, Europe, has noted that "many people in the EC are afraid that the main beneficiaries of the internal market could well prove to be the Japanese and American companies operating in Europe."

Most observers agree that the threat of protectionism is aimed more at the Japanese, who could flood Europe with Asian imports, than at the Americans, whose subsidiaries often are more "European" than the European-based competition. The danger is that barriers aimed at the Japanese will block U.S. trade as well. The greatest concerns about protectionist trade policies are focused on four key areas: local content and rules of origin; technical standards; reciprocity; and government procurement.

Local Content And Rules Of Origin. EC countries currently have a variety of local-content laws that require foreignowned firms to buy fixed percentages of their production supplies from domestic firms. Nissan, for example, recently agreed to satisfy an 80-percent local-content standard at its auto plant in Great Britain. The EC Commission is contemplating local-content rules that could cause problems for U.S. manufacturers in a variety of sectors.

The Community already has modified its anti-dumping laws to crack down on "screwdriver" assembly plants--those that assemble finished products locally from imported parts. The screwdriver law requires at least 40 percent local content to avoid stiff anti-dumping tariffs imposed on parts imported at prices below actual production costs.

The law was aimed at plants controlled by Japanese firms. But it will harm some U.S. producers whose parts are purchased by the Japanese for export to Europe. In some cases, the Japanese will now "design out" American-made parts in favor of parts made in Europe.

A new approach also has been adopted for defining rules of origin for products manufactured in two or more countries. A product's country of origin is crucial in determining how it will be treated for customs purposes.

In February, the Community abandoned a longstanding rule based on where a product's "last substantial transformation" took place. Now, for semiconductors and some other products, the Community essentially requires that production occur within the EC to avoid tariffs. For example, under new rules of origin for semiconductors, only computer chips finished in Europe will qualify for free movement within the Community. U.S. semiconductor manufacturers have cried foul, but to no avail.

"The intent of these related developments is unmistakable: to force non-European manufacturers, primarily the Japanese, to increase investments in Europe," says Charles S. Levy, a Washington attorney who specializes in EC law. While these changes are aimed at the Japanese, Levy warns, they will adversely affect U.S. business. Foreign producers that export products from the U.S. may feel compelled to shift capital investments to Europe to meet new requirements on local content and rules of origin.

Technical Standards. Harmonization of standards within the Community is one of the most important aspects of the EC92 program. The goal is to replace divergent national technical, health, and safety standards with unified standards for the whole EC. While this change holds great promise for expanding U.S. access to EC markets, it is also possible that new standards would be used to create nontariff trade barriers that discriminate against American-made products.

To avoid this result, Commerce Secretary Mosbacher and U.S. business leaders have pressured the Community to put U.S. representatives on the key committees that draft proposed EC standards. To date, the Community has said no. This has only heightened fears that individual European producers may use closed proceedings to develop standards favoring their own products.

Community officials maintain that U.S. business interests have ample opportunity to influence standards when they come up for public debate.

Joe Bhatia, vice president for governmental affairs for Underwriters Laboratories Inc., disagrees, however. "Once proposed standards emerge from committee, they may not be set in concrete, but experience has shown that it is not easy to make substantial changes," he says.

In a related area, U.S. companies are pressing the Community for liberalization of testing and certification requirements to provide for recognition of procedures performed outside the EC. A requirement that all product testing and certification be performed within the EC would burden U.S. manufacturers with high costs and long delays.

Reciprocity. Like fair trade, reciprocity means different things to different people. It is debated most often in relation to banking, insurance, and other financial services.

Hard-liners within the Community argue that EC trading partners must adopt laws identical to EC laws for financial-services companies to gain access to the unified European market. Under this approach, for example, a U.S. bank would not be allowed access to the EC market unless EC banks were granted equal access to the U.S. market. But that can't happen, because EC law permits banks to move freely among the 12 member states, while U.S. law restricts both domestic and foreign banks geographically and in the services they can offer.

The U.S. government and financial-services companies are pushing for a more flexible standard called "national treatment" under which U.S. companies would play by EC rules when on European soil, and EC financial-services companies would play by U.S. rules when on American soil.

While there are strongly divergent opinions within the EC member states on this issue, the EC Commission has indicated that it prefers not to take the hard-line approach of requiring that its trading partners' laws be identical to those of the EC.

Government Procurement. "Buy national" policies practiced by the EC's member nations all but exclude foreign firms from this $600-billion-a-year market. EC countries even discriminate against one another, effectively limiting even intra-Community competition for government contracts.

The EC Commission has proposed laws to expand cross-border procurement and pry open fiercely national buying policies in the big-ticket areas of telecommunications, energy production, water, and transportation. However, the proposed laws allow member states to refuse outside bids if EC content is below 50 percent. Community officials point out that the content requirement is modeled after "Buy American" government procurement programs in the U.S. that favor American-made products.

On balance, however, the EC is moving toward procurement policies that will open the way for greatly increased opportunities for U.S. companies.

The bottom line, U.S. business leaders say, is that American companies will benefit from EC92 to the extent that the European countries eliminate barriers among themselves and then between a unified EC and the rest of the world. Gerald Greenwald, vice chairman of Chrysler Corp. and chairman of the U.S. Chamber's EC92 committee, puts it this way: "Europe 1992 represents tremendous opportunities for American businesses--if Europe keeps its external border open while breaking down the walls among its countries."

Other trade issues besides protectionism make it important for U.S. companies to keep up their guard as the EC92 process moves ahead. Eamonn J. Bates, EC affairs manager for the American Chamber of Commerce in Belgium, says: "The real question has to do with the impact of EC92 on European competitiveness. How will the changes affect competition within Europe? And more important, how will that affect the world market?"

Archey, of the U.S. Chamber, says a leaner and meaner Europe will put new pressure on U.S. businesses--and not just those that trade with Europe: "An American company that has never and will never export a product has to be aware of what's going on internationally. Competitors will likely be coming into this market unless we just put up barriers to keep them out. And I don't think that's going to happen."

With the EC92 deadline 3 1/2 years away, American business can perceive only a vague outline of the eventual impact of European economic unification. Like many small-business people who export, Tom Coulter, president of Coulter Steel & Forge in Emeryville, Calif., hopes that when the dust settles, the process will have helped more than hurt. Says Coulter: "The trouble with EC92 is that I don't know if anyone knows what its effect will be."

PHOTO : Richard W. Young, CEO of Mentor O&O Inc.

PHOTO : Tom Coulter, president of Coulter Steel & Forge Co.

PHOTO : Gerald Greenwald, vice chairman of the Chrylser Corp.

COPYRIGHT 1989 U.S. Chamber of Commerce
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