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The latest negotiation on trade involves the reduction of subsidies for sale of EC grain products overseas. This action is taken to protect the community preference model of CAP and also to appease the American trade interests. This proposal was necessitated by the accession of Spain and Portugal into the EC and restrictions into these markets for US grain products. 2. OUR GOALS 1. To preserve the economic and political unity of the European Community 2. To preserve the mechanism of CAP for maintaining agriculture within the EC 3. To maintain good economic relations with the United States, and to prevent a trade war.

DIAGNOSIS OF THE SITUATION The outstanding issues today include: 1. Does the GATT entitle the United States to sector-specific compensation when a third party trade agreement affects the trade balance? The United State claims that GATT is sector specific, while the EC claims GATT is over the entire balance of trade. 2. CAP has been under close examination, particularly the portions which subsidize exports in order to effectively sell surpluses. The United States claims that this practice is an unfair trade agreement, and the EC has found this practice is becoming more expensive as domestic production increases.

The United States claims that the annual loss from the accession of Spain into the EC for the grains sector is $400 million. The EC claims that this amount will be compensated in industrial areas where the tariffs are lower. The United States claims that the sector specific impact is greater than what can be made up in other sectors, and doubts that the US will see the benefits promised by the EC, as Germany and other EC members will still receive preferential treatment for industrial supplies to Spain and Portugal.

The United States is proposing an implementation of tariffs on many French products including cognac, brandy, and cheese in order to recapture the estimated loss from grains. The amount the United States estimates to be loosing is $400 million annually. Of course, the costs to the US are not only economic and measurable in dollars. The Farmer’s Association in America is politically powerful and active. In addition, the United States is experiencing extreme criticism of its trade policies, as many sectors are blaming the United States of allowing more goods in than what the United States is able to export.

One of these export areas is with farm grains. Since the EC subsidizes farm exports, the price of EC goods is much less to other nations around the world, effectively pricing the United States out of this market. A resolution that addresses this inequality would create great value for the United States internally. The EC stands to loose financially if the United States implements the tariffs they are discussing. With the accession of Spain and Portugal, the EC does not suffer an economic loss, other than the possible additional expense of additional corn and grain export subsidies.

On the surface, the cost to the EC would be the value of the United States tariffs. However, there are hidden costs as well as high valued items would be targeted and these industries in France could be severely hampered. The United States is the primary market for these high value exports, as other countries throughout the world do not have the incomes to purchase these items. We do find that the EC and the United States agree on two principles: 1. A trade war between the two entities would be detrimental to both sides.

The United States will suffer a financial loss in the grains sector with the accession of Spain and Portugal. 3. Export subsidies alter fair pricing in markets throughout the world. Unfortunately, neither side must make an agreement. The EC can proceed along its course without bending to the United States, and the United States can implement retaliatory tariffs. Economically, the impacts would be limited to particular sectors of the economy, for both the US and the EC. However, the need for negotiation comes from internal political pressures, as well as bi-lateral relations.

The EC cannot politically defend itself against retaliatory US tariffs, and the US can gain domestic political momentum by implementing these. The US has little to loose in implementing their proposed tariffs, while sectors in the EC economy could be substantially threatened at he cost of protecting the farmer. It is in the EC’s best interest to find a solution that works to address internal EC problems, while also meeting the United States objectives. The EC is now poised to make changes which can create value for both parties.

Currently, subsidizing grain exports is costing EC members large amounts of money. The United States finds this policy to be the most detrimental to US interests out of all CAP policies. Of course, the reasons for export subsidies are to protect the farming economies of the member nations, particularly France. However, over the course of CAP, these policies seem to be abused and outdated as farming technology improves and production quantities increase. This is a potential time for the EC to correct this policy for the current times, as well as avoid a costly and straining trade war with the United States.

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