GAO

United States General Accounting Office

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

Page 1 GAO/T-NSIAD-00-46

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 

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, 

1

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 2 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 

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 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 3 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 

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 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. 
Page 4 GAO/T-NSIAD-00-46

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.
Page 5 GAO/T-NSIAD-00-46

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,2

 and through bilateral means.

The Importance of 

E-Commerce

E-commerce, as defined by a recent WTO Secretariat special study,3

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 

2

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.

3

World Trade Organization, Electronic Commerce and the Role of the WTO 

(Geneva, Switzerland: World Trade Organization, March 1998.).
Page 6 GAO/T-NSIAD-00-46

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,4 the United States and the EU have 

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 

e-commerce.

4

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 7 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
Page 8 GAO/T-NSIAD-00-46

• 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 

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 “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 

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.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 

5

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 9 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 

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 
Page 10 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 

Signatures

The security and verification of information transferred digitally is a basic 

requirement for the growth of e-commerce. Encryption technology, of 
Page 11 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) Letr
Ordering Information

The first copy of each GAO report and testimony is free.

Additional copies are $2 each. Orders should be sent to the 

following address, accompanied by a check or money order made 

out to the Superintendent of Documents, when necessary, VISA and 

MasterCard credit cards are accepted, also.

Orders for 100 or more copies to be mailed to a single address are 

discounted 25 percent.

Orders by mail:

U.S. General Accounting Office

P.O. Box 37050

Washington, DC 20013

or visit:

Room 1100

700 4th St. NW (corner of 4th and G Sts. NW)

U.S. General Accounting Office

Washington, DC

Orders may also be placed by calling (202) 512-6000

or by using fax number (202) 512-6061, or TDD (202) 512-2537.

Each day, GAO issues a list of newly available reports and 

testimony. To receive facsimile copies of the daily list or any list 

from the past 30 days, please call (202) 512-6000 using a touchtone 

phone. A recorded menu will provide information on how to obtain 

these lists.

For information on how to access GAO reports on the INTERNET, 

send an e-mail message with “info” in the body to:

info@www.gao.gov

or visit GAO’s World Wide Web Home Page at: 

http://www.gao.gov

United States

General Accounting Office

Washington, D.C. 20548-0001

Official Business

Penalty for Private Use $300

Address Correction Requested

Bulk Mail

Postage & Fees Paid

GAO

Permit No. GI00