U.S., Europe Far From a Postwar Partnership

As bombs exploded over Baghdad and American military forces marched through Iraq, the French on Friday fired a rhetorical shot of their own at the U.S.

France, declared President Jacques Chirac, will not accept a United Nations resolution “giving the American and British belligerents powers over the administration of Iraq.”

The implied threat -- that certain European countries may not contribute funds for the rebuilding of Iraq or may try to block U.N. backing for such an effort -- underscores a harsh truth: The biggest economic fallout from the war won’t be its effect on oil prices or construction contracts for the Bechtels and Fluors of the world. Rather, the most important thing for the business community to keep an eye on is the growing rift between the U.S. and European Union -- or at least two leading members of that body, France and Germany.

All told, the U.S. and EU share $800 billion in annual trade. U.S. and European companies have a total of more than $14 trillion of investments in each other’s economies.

But tensions between these economic giants have been mounting. And now, with France and Germany vociferously opposing the U.S.-led combat in Iraq and the U.S. harshly voicing in its criticism of Old Europe, “it will be harder to resolve issues in biotechnology and digital technology,” notes John Zysman of the Berkeley Roundtable on the International Economy.

The conflict goes beyond high-tech. Last year, when the Bush administration imposed tariffs on imported steel, it exempted Russia and Eastern European countries. But it wouldn’t give a pass to “our old Cold War allies” in Western Europe, points out economist Diane Swonk of Chicago-based Bank One.

Meanwhile, one of the hottest disputes at the moment is over genetically produced agricultural seeds and food products.

U.S. farmers are losing $300 million annually in food exports, industry officials estimate, because the EU won’t give its blessing to what it terms “genetically modified” foods and seeds. The Bush administration is so fed up that it’s ready to bring a lawsuit against the EU over the policy, which the U.S. regards as a trade barrier -- pure and simple.

For now, the lawsuit has been delayed while Undersecretary of State for Economic Affairs Alan Larson makes a last-ditch attempt to negotiate with the European Commission and members of the European Parliament. Rockwell Schnabel, U.S. ambassador to the EU headquarters in Brussels, expresses confidence that the talks will produce some agreement.

“We have had delays, “ Schnabel says, but now “biotech negotiations will get back to business.”

Even so, EU regulations of U.S.-based corporations are likely to multiply in the years to come -- a trend that could hurt the free flow of goods around the globe. Albert M. Wojnilower of Craig Drill Capital, a New York investment firm, is among those who believe that U.S. companies could find themselves “inhibited by discriminatory regulation” across Europe.

Not that there’s much they can do about it -- a fact discovered by General Electric Co. a few years ago. After Washington regulators had approved its proposed acquisition of Honeywell Inc., the European office of competition rejected the deal.

Europe’s disapproval killed the transaction because the U.S. companies could not afford to turn their backs on the continent -- 350 million people and growing as the EU admits 10 more members.

That said, experts remain divided over just how much economic clout Europe actually wields. Charles Kupchan, a Georgetown University professor of international relations, lays out a thesis in his book, “The End of the American Era,” that the EU will surpass the United States as a global economic power in the next three decades.

Others concur, seeing a rude awakening for the U.S. in the post-Iraq world. “The U.S. is the unparalleled military power but not an unparalleled economic power,” Zysman warns.

Yet some, including economist Donald Straszheim of Santa Monica, disagree. He points to weaknesses in major European economies, including Germany’s, and signs of discord between current EU members such as France and those nations set to join the union from Eastern Europe next year. “The Eurozone is a failing experiment,” Straszheim says.

Adds Bank One’s Swonk: Europe, which runs a $90-billion-a-year trade surplus with the United States, “needs the U.S. more than the U.S. needs Europe.”

Whatever the stronger economic power in the end -- Europe or the U.S. -- doesn’t really matter, of course. What does matter is that the two, which together account for 50% of the world’s economic output, work together to ensure that prosperity spreads around the globe.

Ambassador Schnabel maintains that the EU and the United States “have too much at stake to let Iraq poison relations for long.” After the war, he foresees Europe making “substantial commitments” to rebuilding in the Middle East, Chirac’s comments notwithstanding. Given their wealth, Schnabel says, the U.S. and the EU could breathe life into the global economy if they could “forge a powerful team against worldwide poverty.”

Such a vision is appealing. But sadly, given the current state of relations, getting there anytime soon is sure to prove impossible.

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James Flanigan can be reached at jim.flanigan @latimes.com.