Testimony of Ambassador Peter L. Scher

Mayer, Brown & Platt

before the

United States Senate

Subcommittee on Forestry, Conservation, and Rural Revitalization

Committee on Agriculture, Nutrition and Forestry

September 21, 2000

Thank you, Mr. Chairman and Members of the Committee. I am honored to have the opportunity to testify today regarding the beef hormone dispute with the European Union. As the former special trade negotiator for agriculture at USTR, I worked closely on this issue for some time and understand its importance to the U.S. beef industry. I am happy to appear today as a private citizen to offer an overview of the history of this dispute, as well as to discuss briefly this issue in the broader context of the WTO dispute settlement system.

Retaliation and Sovereignty

Before addressing the history of our dispute with the EU and offering some comments on how I think we can help bring about relief for the beef industry, I'd like to put this dispute into the larger context of the World Trade Organization dispute settlement system. In particular, I want to talk about the difficult balance struck between the issues of retaliation and sovereignty.

Here in Washington many of us will remember that the question of sovereignty was central to the 1994 congressional debate over U.S. entry into the WTO. Perhaps more than any other issue, the debate in Congress was about whether we were unwisely subjecting our laws and our authorities to the jurisdiction of bureaucrats from Geneva. Several Senators even went so far as to propose a commission of former judges to review decisions of the WTO.

Today, many of those who insisted that the WTO should not have the authority to order the United States to change its laws have shown great frustration that the EU failed to comply with the panel findings in the case of both the beef and the banana disputes.

The painful reality is that in both of these cases, the system has worked as it was intended, and as the United States intended. Where a country fails to comply with a panel finding, in this case Europe, penalties are assessed. Like the United States, the European Union has the absolute right under the laws and the agreements we negotiated not to change its laws. Of course, the injured country has the right to impose retaliation.

Make no mistake, the EU is still at great fault for its approach to both of these cases, an approach which has damaged the credibility of the WTO system in the eyes of many Americans. This is particularly true in the beef hormone dispute. Europe's approach is damaging to the credibility of the system not simply for their failure to comply, but for their cynical approach to the system in the first place. One does not need to be a great expert in European affairs to know that the EU lacks the political will to allow the importation of hormone-treated beef at this time. As much as I, and most of us here, may disagree with these views, that is the reality.

Frankly, it would be far better for the system as a whole for the EU to simply acknowledge this reality: it should accept the findings of the panel, invoke its right to maintain its regulations, and pay the penalties imposed by the WTO. There could be no greater demonstration that the WTO does respect the sovereign power of nations than such an act.

Instead of this honest and lawful approach, the European Commission has embarked on another effort, after ten years of failure, to use pop science to justify a ban that has no real scientific or health rationale. The Financial Times, a London-based newspaper, commented last year that the EU's ban is not a scientific ban, but a political ban. This, I believe, is what strains the credibility of the system and leads to many of the complaints that the EU will bend the rules to suit its purposes.

The irony of all of this of course is that the prime cheerleader for a new system was not the United States, but Europe, and other countries who expressed their ongoing frustration that our 301 law put the U.S. in the position of being the judge, jury and executioner of international trade disputes. While never being so bold as to say this, many countries believed that by making the new dispute settlement system binding, it would kill 301.

I recall when first joining the Clinton Administration in early 1995 as we were threatening Japan with unilateral sanctions for their failure to open their market to imports of automobile and auto parts, it was the European Trade Commissioner who came to Washington to lecture all of us on the need to use the new WTO system to resolve disputes.

The United States has used the system, and even when we have not prevailed we have taken great efforts to comply with the results of panel decisions, even when not politically popular.

History of the Dispute

Mr. Chairman, let me address the specifics of the beef hormone dispute. This dispute is rooted in a mix of political, economic and cultural factors which have combined to make it one of the more lengthy - and acrimonious - trade disputes with one of our major trading partners.

To fully trace the origins of this dispute we have to go back to the late 1970s. It was during this time that a few incidents of hormone-related illnesses appeared and were eventually linked - in the press, if not scientifically - to the illegal use of the hormone dethylstilboestrol (DES) in veal production. This led to a crisis of consumer confidence in the use of hormones in meat production, and in 1980 the European Commission (EC) proposed a ban on the use of all hormones (both synthetic and natural) in livestock production unless the hormone was administered for therapeutic purposes.

While consumers probably had a right to be concerned due to the high percentage of illegal - and incorrect - use of hormones, consumer fear in the EU for food safety was exacerbated by the fact that the European Union does not have an FDA-style regulatory body charged with protecting consumer health and setting policy on food safety issues. And the national-level regulatory bodies of the member-states have not always instilled a great deal of consumer confidence in citizens of the member states. In fact, one of the main problems is that these regulatory or oversight bodies are staffed with politicians, not scientists, and are not always trained to handle the complex health and science issues present in food safety discussions.

Another factor contributing to the EU ban on meat imports is the EU's own meat production industry. When the issue first arose, the illegal and unregulated use of hormones in livestock production in several European countries was one of the key considerations in the decision to ban the use of hormones. In addition, the EU must also have considered the status of domestic beef producers and the attraction of limiting beef imports that would compete with domestic production and interfere with operation of the Common Agriculture Policy (CAP).

These factors all worked together toward the eventual ban of beef hormones. In July 1981 the EC Council of Ministers adopted the 1980 directive which banned five hormones used in livestock production. The EC then began a study to provide a scientific assessment of the effects these hormones might have if used for growth promotion. This report, the Lamming Report, while calling for more study, concluded that most of these hormones were not harmful when used properly, and suggested the implementation of control programs and monitoring systems to ensure safety. These findings were eventually rejected and the EU issued Directive 85/649/EEC which banned the use of all six hormones for growth promotion purposes, including a ban on the import of meat and products produced with these hormones. The ban was to take effect on January 1, 1988, but was eventually delayed to January 1, 1989.

During this time, the U.S. government was working to oppose this process both through bilateral consultations and through the GATT. In September of 1986 the U.S. raised this issue with the Committee on Technical Barriers to Trade. In 1987 the U.S. invoked dispute settlement under the Tokyo Round Agreement on Technical Barriers to Trade. The U.S. also held negotiations directly with the EU. Both bilateral and multilateral mediation efforts were unsuccessful.

Finally, President Reagan announced retaliatory tariffs on about $100 million worth of EU imports - approximately equal to the value of lost meat exports to the EU - in December of 1987. The tariffs did not actually go into effect until January 1, 1989, but they remained in place for over six years.

While the EU was successful in blocking attempts by the United States to mediate this dispute under the GATT, the U.S. was afforded the tools to address the ban multilaterally when the Sanitary and Phytosanitary Agreement (SPS) came into force under the new World Trade Organization in January 1995. The SPS Agreement allows governments to adopt food safety measures but requires that these measures be based on science. The ongoing beef hormone dispute was one of the reasons the U.S. pushed so hard in the Uruguay Round negotiations to adopt just such a mechanism to challenge trade barriers disguised as consumer protection. The WTO also set out for the first time a specific dispute-resolution procedure with a clear timetable for each stage of the process.

The beef hormone dispute had the distinction of being the first such case to be tested under the new SPS agreement. It had become clear that despite the findings of numerous scientific studies (including studies commissioned by the EU) that the EU would not lift its ban on beef imports. In July of 1995 the Codex Alimentarius Commission (an international organization that recommends food safety standards) voted to approve the use of natural hormones in meat production. In November of 1995 the EU's own study conducted by the Scientific Conference on Growth Promotion in Meat Production concluded that there was "no evidence of human health risk arising" from the controlled us of five hormones: oestradiol beta 17, progesterone, testosterone, zeranol, and trenbolon, all of which are approved for use in the United States.

Despite these findings, two months later the European Parliament voted to maintain the ban. The U.S. then requested consultations under Article XXII of the WTO, and after objections by the EU, was eventually successful in forming a dispute settlement panel in July of 1996. Australia and New Zealand joined the United States in challenging the ban and Canada also initiated its own panel on the same issue.

One year later the panel vindicated both the U.S. and the Canadian positions. The WTO panel found that "the scientific conclusions reflected in the EC measures in dispute...does not conform to any of the scientific conclusions reached in the evidence referred to by the European Community." A subsequent appeal to the WTO Appellate Body by the EU was unsuccessful and the EU was given until May 13, 1999 to comply with the findings of the panel.

As we all know, the EU did not comply and the WTO authorized the U.S. to retaliate. The U.S. did so by applying 100 percent duties on a broad range of EU agricultural products beginning on July 29, 1999. So far, these sanctions, while imposing a penalty on the EU for its non-compliance, have not resulted in a lifting of the ban nor have they helped the beef industry.

Beef Hormones and the Dispute Settlement Process

Mr. Chairman, the beef hormone dispute holds important lessons about the WTO dispute settlement process. As a starting point, it is important for us to remember that in the vast majority of cases the dispute settlement process has worked. Since 1995 the U.S. has filed 53 complaints with the WTO, and in fact, we have been the most active user of the dispute settlement mechanism. So far 28 cases brought by the U.S. have been concluded. Of these 28, the U.S. won 13 cases in panel proceedings and successfully settled 12. In all but two of these cases our trading partner have made the required changes to their trade regime. The two exceptions, as you know, are beef and bananas.

Where the WTO dispute settlement process has not resulted in changed behavior, it is important to remember the underlying reason: The WTO cannot force sovereign countries to change their laws. However, the WTO does require that countries who fail to comply with the rules pay a price.

The failure of the old GATT system showed us that the credible threat of retaliation is a critical component to resolving international trade disputes. The United States must continue to be willing to retaliate when its rights are aggrieved. In some cases, the imposition (and even the threat) of 100 percent tariffs may lead to removal of the illegal trade barrier. Where the barrier is not removed, the offending country must pay a price. Certainly, the European Union is now paying a price for its intransigence. The new carousel provisions provide an additional tool for administrations to apply as they seek to create leverage - or to craft an appropriately significant penalty.

There are a couple of ways in which current retaliation system has fallen short - and S.2709, the Trade Injury Compensation Act of 2000 (TICA) under discussion today, addresses one of these shortcomings. Most significantly, TICA seeks to ensure that the injured party in a trade dispute receives compensation. For example, while the current system imposes a price on the EU, it does nothing to provide relief to American ranchers for the ongoing injury caused by the EU. TICA represents a major improvement over the current system by establishing a mechanism to channel relief generated from the penalty to the injured party.

In this regard, there is one refinement that this Committee - and Administration officials - may want to consider in addressing the retaliation issue. The current retaliation practice has been to impose 100 percent tariffs on goods with the express purpose of keeping them out of the US market. While some goods - such as luxury goods - can absorb the steep price hike, these tariffs generally succeed in blocking goods.

While this approach is sometimes sufficient to force an offending country to bring its rules into compliance with the WTO, there are several problems which need to be considered. First, Administrations, as well as the Congress, must deal with the very real problem of harming innocent bystanders. In the case of beef and bananas, USTR received more than 400 comments seeking the removal of particular items from the list. These comments came primarily from US parties - including many Members of Congress - concerned about blocking the import of particular goods. A second problem with attempting to block goods completely is that very little, if any, tariff revenue is generated.

In certain cases, one solution to consider may be the imposition of lower tariffs on a wider array of goods. For example, instead of 100 percent tariffs on a small list of goods, USTR could impose a 10 - 15 percent tariff on a larger list of goods. Because they are far lower, these tariffs would be less likely to block goods completely from the U.S. market. And because actual tariff revenue would be generated, it would be possible to provide appropriate compensation for the aggrieved party in a trade action.

Make no mistake, we should never be cavalier about raising tariffs, even when authorized to do so by the WTO. But remember, we're talking about the limited number of cases where countries refuse to comply with WTO decisions and some type of retaliation is already assumed. In these rare cases, the best balance of interests may be a level of tariff that: imposes a significant penalty; harms fewer innocent bystanders because it still allows most goods to be traded; and generates actual tariff revenue which can be channeled to aggrieved parties.

Mr. Chairman, the beef hormone dispute is a complex issue that requires balancing a number of priorities. There are no clear-cut solutions. While the current system has proven to be successful in some respects, refinements such as TICA and adjustments to tariff levels, could make the system more effective. The hearing today is an important step toward accomplishing that goal.

Thank you for the opportunity to speak before the committee.