Trade With the European Union: Recent Trends and Electronic Commerce
Issues (Statement/Record, 10/13/1999, GAO/T-NSIAD-00-46).

Pursuant to a congressional request, GAO discussed U.S. trade with the
European Union (EU), focusing 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 electronic commerce (e-commerce).

GAO noted that: (1) the sizeable and growing U.S.-EU trade relationship
is dominated by flows of sophisticated manufactured goods and services
and extensive cross-Atlantic investment; (2) e-commerce has tremendous
potential for facilitating U.S.-EU trade, but it also raises numerous
issues, including consumer protection and market access; and (3) the
United States and EU are attempting to lower these potential barriers to
e-commerce through the framework of the World Trade Organization and
other forums.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  T-NSIAD-00-46
     TITLE:  Trade With the European Union: Recent Trends and
	     Electronic Commerce Issues
      DATE:  10/13/1999
   SUBJECT:  International trade
	     International cooperation
	     Telecommunication
	     Foreign trade policies
	     International organizations
	     Foreign investments in US
	     International economic relations
IDENTIFIER:  1997 WTO Basic Telecommunications Agreement

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

For Release on Delivery
Expected at 10:00 a.m., EDT
Wednesday,
October 13, 1999

TRADE WITH THE EUROPEAN UNION

Recent Trends and Electronic Commerce Issues

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

*****************

GAO/T-NSIAD-00-46

World Trade Organization, Electronic Commerce and the Role of the WTO 
The four WTO bodies are the Committee on Trade and Development, the
Council on 
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,/Footnote1/ 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 Investment Relationship Is Large and Growing

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
partner, the largest recipient of U.S. direct investment abroad, and the
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 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, 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 Widening
--------------------------------

Over the past 6 years, the U.S. merchandise trade account has gone from a
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****Helvetica:x11****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 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 Comprised of Industrial Products and Services
-------------------------------------------------------------------

Over two-thirds (68 percent) of the approximately $440 billion in total 
U.S.-EU trade in 1998 was comprised of manufactured goods. Services, such
as financial and business services, constituted about 30 percent of
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****Helvetica:x11****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. 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****Helvetica:x11****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.

U.S.-EU Efforts to Facilitate E-Commerce

The United States and the EU both recognize the potential of e-commerce to
expand trade and spur growth. Therefore, both partners have 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,/Footnote2/ and
through bilateral means.

The Importance of 
E-Commerce
----------

E-commerce, as defined by a recent WTO Secretariat special
study,/Footnote3/ 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
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 Expand E-Commerce
----------------------------------------

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

World Trade Organization Initiatives

Within the World Trade Organization,/Footnote4/ the United States and the
EU have taken the lead in concluding

o the 1996 Information Technology Agreement, which reduces tariffs to
  zero on information technology products such as computers and
  semiconductors by 2000 for most countries;

o the 1997 WTO Basic Telecommunications Agreement, which liberalizes the
  telecommunications services market--the infrastructure of the Internet
  and e-commerce; and

o 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 
  e-commerce.

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

o ensuring a liberal environment for international transactions;

o protecting personal information, privacy, and intellectual properties;

o developing legal and institutional structures to support electronic
  business; and

o 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 of U.S.-EU Disagreement on E-Commerce Issues
------------------------------------------------------------------------

Despite agreement on the overall promotion of e-commerce, U.S. and EU
approaches to various legal and policy issues have differed. This has
manifested itself in discussions over the coverage of e-commerce under WTO
rules and on data protection. U.S.-EU positions on other subjects-Internet
(r)domain(c) 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 Global Trade Rules

WTO members have been examining the coverage of e-commerce under 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./Footnote5/ 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
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 time.

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
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 Signatures

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

--------------------------------------
/Footnote1/-^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.
/Footnote2/-^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.
/Footnote3/-^(Geneva, Switzerland: World Trade Organization, March 1998.).
/Footnote4/-^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.
/Footnote5/-^Trade-Related Intellectual Property, the Council on Goods,
  and the Council on Services.

*** End of document. ***