How was trade important to the economic development of Western Europe the United States?

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Section 5. Western Europe

1. East-West Relations in Europe

(1) West European Nations' Active Diplomacy with USSR and Eastern Europe 

West European countries have stepped up diplomacy with the Soviet Union and East European countries against the backdrop of improvements in East-West relations and reforms in the Eastern bloc nations. Exchange of leaders' visits between Western Europe, and the Soviet Union and Eastern Europe was brisk especially between autumn 1988 and summer 1989.

In order to ensure the whole Western bloc's uniformity and persistence of policy toward the Eastern bloc, West European countries have closely consulted and coordinated policies with one another, and with the United States and Japan through bilateral talks, the annual summit of seven industrialized democracies, the North Atlantic Treaty Organization, the European Community and other forums.

(2) Conclusion of Vienna CSCE Follow-Up Meeting

East-West dialogue has progressed apace not only at bilateral talks but also at multilateral conferences. The Conference on Security and Cooperation in Europe (CSCE) is represented by 35 countries including NATO and Warsaw Pact members and non-aligned neutral nations. The CSCE has been an important mechanism for East-West dialogue in Europe since the adoption in 1975 of the Helsinki final act which stipulates security in Europe, cooperation in the field of economy, of science and technology, and of the environment, as well as cooperation in humanitarian and other fields.

Follow-up meetings have been held intermittently to help promote the implementation of the Helsinki final act. The third follow-up meeting in Vienna started in November 1986, and ended in January 1989, after more than two years of discussions, producing East-West agreements on a broad range of themes including disarmament, human rights, economic cooperation and environmental problems. Most significant achievements made at the Vienna meeting include substantive progress gained in the human rights area as well as the commencement of negotiations on Conventional Forces in Europe (CFE) and on Confidence and Security-Building Measures (CSBM) (see Chapter II, Section 1-4 on Disarmament and Arms Control).

As for the human rights area, the meeting reached a new accord on a mechanism to implement human rights pledges (Note). A decision was also made to hold three human rights meetings before the next CSCE follow-up conference scheduled for 1992. Accordingly, the first human rights meeting took place in Paris in May 1989, to be followed by the second in Copenhagen in 1990 and the third in Moscow in 1991.

(3) Maintenance of Western Unity at NATO

NATO has been a key venue for the talks of the West on its own security and policy toward the East.

The effectuation of a treaty banning all Intermediate-Range Nuclear Forces and the commencement of negotiations on Conventional Forces in Europe and Confidence and Security-Building Measures coupled with the Soviet peace initiative provided impetus for a psychological trend toward disarmament. The trend dictated NATO work out basic policies on future East-West relations, security, arms control and disarmament.

The NATO summit held in May 1989, which coincided with NATO's 40th anniversary, adopted a declaration describing freedom and peace over the 40 years as the successful achievement of NATO and emphasizing the Western system's superiority over the Eastern suppressive system. It rated highly the reforms in the Soviet Union and Eastern Europe, demanded their promotion and noted that sustained reforms would help augment East-West relations.

As for arms control and disarmament, the NATO summit adopted the Comprehensive Concept of Arms Control and Disarmament, which had been discussed within NATO. The document, which lays down NATO policy guidelines for security and arms control, said NATO's security policy should be designed to maintain peace under freedom through political means and adequate defense capabilities. It said that NATO should maintain the current strategy of deterrence for the foreseeable future through a proper combination of nuclear and conventional forces. On arms control, the document stated that a lowered-level military balance should be sought in strengthening security.

Prior to the NATO summit, NATO members were divided in their views over the Short-Range Nuclear Forces (SNF) issue prompting speculation that the summit might end unproductively regarding the issue. The United States and the United Kingdom were opposed to SNF reduction talks and stood for the promotion of SNF modernization while the Federal Republic of Germany insisted on the early commencement of the SNF talks and on the postponement of SNF modernization. But a compromise (Note) was struck in the final stage and NATO unity was maintained led by a proposal on conventional forces talks by U.S. President George Bush (see Chapter II, Section 1-4 on Disarmament and Arms Control).

Work had been under way within NATO to coordinate sharing of defense burdens between the United States and Western Europe. In December 1988, the defense planning committee adopted a report entitled "Enhancing Alliance Collective Security - Shared Roles, Risks and Responsibilities in the Alliance." The report gave an overall evaluation of each member's contributions to the alliance, noting that contributions should be measured not only by defense spending and other financial burdens but also by social costs involved in the supplying of sites and facilities for training and stationing of troops, as well as other social costs for military excercises and training.

2. Western Europe Speaking in "One Voice"

(1) EC Market Integration Making Steady Progress

"The Single European Act," which took effect in July 1987, is aiming at completing a borderless EC market for unrestricted movement of people, goods, services and capital within the region by 1992. Instead of the traditional unanimous decisions, this epoch-making act adopts the system of specific majority decisions on many matters to accelerate policy formulation. Preparations for EC market integration have been underway in line with the act.

EC market integration means the birth of a giant single market counting 320 million people. The EC Commission's survey report says that integration and rationalization of regional economies and promotion of competition through removal and unification of regulations will create a tremendous economic impact boosting the EC's economic growth by an estimated 4.5 percent.

Market integration has been nearly completed in agriculture, fishery and trade policy areas with each member country's relevant authority having been transferred to the EC. But various problems still exist regarding other areas. The EC Commission's white paper entitled "Completing the Internal Market" issued in June 1985, called for removing a total of 299 internal barriers in three areas - (1) removal of physical barriers (including abolition of customs procedures, unification of animal and plant quarantine standards and elimination of emigration and immigration controls), (2) removal of technical barriers (including unification of standards and certification, mutual recognition of qualifications and licenses, adoption of common banking regulations and liberalization of capital transactions) and (3) removal of fiscal barriers (including harmonization of the value added tax). The number of barriers subject to removal has since been reviewed and reduced to 279. By May 31, 1989, the EC Commission had made proposals for more than 80% of the barriers and about one half of the proposals have been adopted at the EC Council.

The areas left for future market integration negotiations include taxes, border regulations and financial systems touching the very root of national sovereignty. Such being the case, the preparatory work will probably slow down in the future. But EC market integration has gone too far to be turned back, as confirmed at the European Council in Hanover in June 1988. Although some conflict of opinions could emerge over individual problems, the basic direction of EC market integration would stay intact.

The goals beyond market integration include economic and monetary integration. On monetary integration which has been perceived as one of the largest confrontational issues, a committee established under EC Commission President Jacques Delors adopted a final report in April 1989, indicating three phases toward monetary union. And an agreement was reached at the European Council in Madrid in June 1989, on procedures toward monetary union including the commencement on July 1, 1990, of the first phase which features all EC members' accession to the European Monetary System.

History of EC Integration

1952:    Establishment of the European Coal and Steel Community (ECSC)

1957:  Adoption of the Rome Treaty for the EC establishment

1958:   Establishment of the European Atomic Community (EURATOM)Establishment of the European Economic Community (EEC) (six original members: France, the FRG, Italy, Netherlands, Belgium and Luxembourg)

1967:   Unification of the three above-mentioned communities into the European Community

1973:   The U.K., Denmark and Ireland join the EC to increase the EC membership to nine.

1981:   Greece joins the EC to increase the EC membership to 10

1985:   Adotpion of the white paper on EC integration

1986:   Spain and Portugal join the EC to increase the membership to 12

July 1987: The Single Market Act takes effect to virtually revise the Rome Treaty

February 1988: Agreement was reached on the EC's fiscal and agricultural reforms at an extraordinary EC council meeting, or an EC summit

June 1988: EC leaders confirm at a Council meeting in Hanover that the EC market integation plan has been advanced to an inreversible stage

December 1988: An interim report on the integration was adopted at an EC Council meeting on the Rhodes Island

June 1989: An EC Council meeting in Madrid

(2) European Political Cooperation

West European countries, which traditionally had a great influence on world politics, are promoting political cooperation to exert a growing influence on international politics as EC members step up market integration to increase their economic power. Specifically, the 12 EC members have issued joint statements on East-West relations, the Middle East problem, the Latin American issue and other matters under the European Political Cooperation (EPC) as stipulated in the Single European Act.

Recent cooperation examples include the "troika" foreign ministers' (Note) visit to the Middle East countries including Jordan, Egypt and Syria on Feb. 11-13, 1989, a joint statement on the problem of "The Satanic Verses" on Feb. 20 (calling for withdrawal of ambassadors from Tehran and suspension of high-level exchanges with Iran) and a joint declaration on China at the European Council in Madrid on June 26-27. The 12 EC countries are expected to increase their influence through expressing their joint policies and stance, or speaking in "one voice."

(3) Movements of EFTA

The European Free Trade Association (EFTA), consisting of Switzerland, Austria, Sweden, Finland, Norway and Iceland has adopted political and economic policies independent of those of the EC, while maintaining close economic, cultural and social relations with the EC countries. However, the EFTA countries are now required to find new response to the rapid progress in the EC's market integration efforts.

The EC and EFTA have promoted their economic cooperation. The Luxembourg Declaration in 1984 contained the mutual agreement that all EC and EFTA countries would establish a European Economic Space in which free transfer of people, goods, services and capital is guaranteed. Since then, they have stepped up consultations and cooperation with regard to the common standards, certification, origin-of-product regulations, research and development, and other areas.

In some EFTA countries, opinions are expressed to acquire a full membership of the EC in order to secure full participation in the Common Market. Austria submitted an official application for membership of the EC in July 1989. In Norway and Sweden, industrial sectors are particularly eager to call for their accession to the EC. But, if EFTA countries, which have adopted the policy of neutrality, are to apply for membership of the EC, they would be faced with various problems such as the issue of compatibility between the neutrality and participation in the EC which pursues political integration as a final goal.

3. Situation in Major West European Countries

(1) United Kingdom

Prime Minister Margaret Thatcher's Government celebrated its 10th anniversary on May 4, 1989. On the basis of the magnitude of her Conservative Party's landslide victory in the June 1987 general election, which brought her to her third term in office, the prime minister became more confident of domestic government and carried out fundamental tax reductions in 1988. She also announced proposals in 1989 for reforms in health and medical services as well as the legal system. The opposition Labour Party for its part has reviewed its policies and shifted to more realistic ones, excluding its policy of unilateral elimination of nuclear weapons. Its popularity rate has been exceeding that of the Conservative Party since March 1989. In the European Parliament election in June 1989, the Labour Party gained a victory over the Conservative Party by capturing 45 seats against 32 for the Conservatives.

The U.K. economy has continued expansion since 1982. Gross domestic product grew by 4.5% in 1988. The unemployment rate fell for 34 consecutive months, to 6.4% in May 1989. The budget went into the black in 1987 for the first time in 18 years, and the budget surplus in 1988 totaled £14 billion. But deficits in the external current account widened as imports rose sharply on account of overheated economic expansion. Inflationary pressures have grown, raising consumer prices by 8% in April 1989, over a year before. The government has maintained a high interest rate policy to control inflation and support the value of the pound sterling with the base lending rate as high as 14% in June 1989. The falling popularity of the Conservatives is attributed mainly to this high interest rate policy. The government is currently forced to undertake difficult economic management, seeking sustained economic expansion while trying to tame inflation.

(2) France

The Socialist Party failed to win a simple majority in a general election in June 1988, which followed the presidential elections in April and May. But through its deft maneuvering of the parliament, the Socialist Cabinet of Prime Minister Michel Rocard has successfully obtained support or abstention of the Communist Party and middle-of-the-road groups. Domestic politics has thus remained relatively stable helping the ruling Socialist Party to maintain its relative superiority over other parties through various elections held between 1988 and the first half of 1989.

Generally, the Rocard Cabinet has gotten to a good start. It established the Matignon agreement in June 1988, on the New Caledonia problem successfully bringing the situation in the territory under control. It also settled public sector strikes in September keeping them from spreading to the private sector. While enforcing some Socialist policies including the introduction of luxury taxes, the Cabinet has promoted realistic economic policies giving priority to industrial and economic restructuring through vitalization of industries, avoiding direct governmental intervention and enforcing tax cuts to ease the burden of corporations.

Although the domestic economy remained strong, a high unemployment rate and large external trade deficits persisted.

In external relations, France has positively worked for European integration, and promoted relations with the FRG and dialogue with the United States, the Soviet Union and Third World countries. As it feted the bicentennial of the French Revolution and hosted the annual summit of seven industrialized democracies in 1989, France has taken these opportunities to promote human rights or diplomacy from a humanitarian standpoint.

(3) Federal Republic of Germany

The ruling Christian Democratic Union has suffered setbacks inmost local assembly and other elections since its victory in the federal parliament election in 1987. To regain its stature, Chancellor Helmut Kohl reshuffled the Cabinet and revised some unpopular policies in April 1989, abolishing the withholding tax on interest payments and delaying an extension of the compulsory military service period. In the European Parliament election in June 1989, the ruling conservative alliance barely managed to remain the No. 1 party. But its poll declined sharply allowing rightist parties to increase their seats.

The German economy achieved a growth rate of 3.4% in 1988, the highest in the 1980s, supported by firm personal consumption, brisk investment and increased exports. The expansionary trend continued into 1989, with the first quarter posting as high as 4.2% growth. The employment situation is still unfavorable, but the number of jobless slipped below the 2 million mark to 1.95 million in May 1989, for the first time since October 1982, with the unemployment rate standing at 7.6%. The federal government is traditionally known to exercise extreme vigilance against inflation. But consumer prices rose in April 1989, as much as 3% from a year earlier prompting some observers to sound an alarm against encroaching inflation. The FRG's trade surplus surged to an all-time high of 128 billion deutsche marks in 1988. Two-thirds of the surplus came from trade with other EC countries, and a surplus with the United States declined.

(4) Italy

President of the Council of Ministers Ciriaco De Mita and his Cabinet, inaugurated in April 1988, positively tackled domestic political and budget reforms and other priority issues. But a rift emerged over the issues among the coalition participants. A confrontation aggravated between the Christian Democratic Party and the Socialist Party in April 1989, over an increase in medical expenses borne by the individual and other issues. A criticism raised by Socialist Party General Secretary Bettino Craxi against De Mita in May, led De Mita to submit his resignation to the President. The President stepped in to remedy the situation through consultations and coordination with political leaders and as a result, the Giulio Andreotti Cabinet Was inaugurated June 23.

The Italian economy has grown steadily since 1984, registering a 3.9% growth in 1988, the highest in the 1980s. Prices began to ease up again amid surging domestic demand in the latter half of 1988, but a consumer price rise in the whole of l988 was held to 5% against 4.6% in 1987. Italy suffered a trade deficit of 12,875 billion lire in 1988, and the deficit has been increasing in 1989. The unemployment rate averaged 12%, with higher unemployment among the younger generation, women and in southern Italy.

4. Relations with Japan

(1) Japan-U.S.-Europe Trilateral Cooperation and Japan-Europe Relations

West European countries share the basic value and system, namely freedom and market economy, with Japan and the United States. In order for Japan to play a greater role in the international community undergoing dramatic changes evolving around East-West relations and the international economy it is essential to promote trilateral cooperation between Japan, the United States and Europe. While maintaining unity with the United States, Japan should strengthen its ties with Europe which are not so close as Japan-U.S. or U.S.-Europe relations. This approach is indispensable for balanced development of trilateral cooperation. In this respect, the Japanese Government looks to cooperation with West European countries as one of the priority areas in its foreign policy. The government has been striving to develop relations with Europe in all fields ranging from politics to economy and culture. West European countries too are increasingly interested in Japan in recent years. In such circumstances, the pace of cooperation between Japan and Europe is picking up more than ever.

(2) Development of Japan-Europe Economic Relations

Japan's imports from the EC have increased faster than exports to the region since 1987. The trend became more evident in 1988 trimming Japan's trade surplus with the EC albeit slightly.

Japan-EC industrial cooperation has been stepped up in recent years. Especially, Japan's direct investment in the EC has sharply expanded while EC countries have been eager to attract Japanese investment.

Japan-EC relations have moved toward improvement with solutions to problems in some individual sectors. The liquor tax issue which had persisted for years, was settled for all practical purposes as Japan revised its liquor tax effective April 1989, eliminating taxation according to liquor grades and ad valorem tax in line with recommendations by a GATT panel. Simultaneously, the automobile-related tax issue was resolved through removal of the commodity tax and the revision of the automobile tax. The quantitative import restrictions imposed on 131 items from Japan by EC countries except the United Kingdom have been a long-standing issue between Japan and the EC. A step toward its solution was made in September 1988, when Japan and the EC began unofficial consultations in which the EC offered to remove 40 items from the list immediately.

Trade and Investment Relations Between Japan and EC

Japan has welcomed the 1992 EC market unification as contributing to the development of the world economy. At the same time, Japan has expressed its hope that the EC will not turn to protectionism in anticipation of market unification. Japan believes that the EC's anti-dumping duties levied on Japan-based manufacturing companies in the EC regarding components run counter to GATT rules. Accordingly Japanese delegates have requested the establishment a panel to examine the duties at GATT meetings. Japan has also voiced concern about the EC Commission's recent moves to unilaterally set new rule-of-origin regulations in the absence of any established international rules about it. Such moves could cause uncertainties in investment decisions for Japanese companies and Japan regard them as hindering trade and investment.

Both the Japanese Government and private sectors have enlivened exchange with the EC Commission against the backdrop of their growing interest over EC market integration. Recent exchange includes Japan-EC high-level consultations in Tokyo in July 1988, in which Japan and the EC Commission had discussions to further improve the Japan-EC relationship in various areas, and visits by EC Commission Vice President Karl-Heinz Narjes (Nov. 1988), Frans Andriessen for the funeral ceremony of Emperor Showa, (Feb. 1989), Martin Bangemann (May, 1989).

to table of contents

Note: Each country will respond to any other country's request for information When a human rights problem erupts, bilateral talks are held to seek a solution. Information on the problem will be presented to the human rights meetings and the next CSCE follow-up conference.

Note: According to the Comprehensive Concept of Arms Control and Disarmament, the outlines of the compromise were (1) that NATO would be ready to begin negotiations for partial SNF reduction on condition that Vienna Conventional Forces Reduction Talks produced agreement and that the agreement was implemented, (2) that SNF reduction should be preceded by the completion of conventional forces reduction, (3) that a decision would be made in 1992 on SNF modernization, and (4) that the NATO members would value the United States' research and development of a new SNF system succeeding the Lance missile, although the research and development were up to a decision by the United States. This was really a compromise between the United States and the U.K., and the FRG. It conditionally accepted the FRG's request for the postponement of the decision on SNF modernization and for the commencement of SNF reduction talks, while supporting U.S. research and development of a new SNF system and the U.S.-U.K. proposal for SNF reduction instead of total SNF elimination.

Note: The "troika" foreign ministers mean such ministers of the present, preceding and next chair countries of the EC. These countries then were Spain, Greece and France.

How was trade important to the economic development of Western Europe?

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