An Evaluation of United States-European Union Bilateral Trade Relations

By Islam, M. Faizul | The Journal of Social, Political, and Economic Studies, Summer 2005 | Go to article overview
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An Evaluation of United States-European Union Bilateral Trade Relations


Islam, M. Faizul, The Journal of Social, Political, and Economic Studies


This paper examines the U.S.-EU bilateral trade relations and finds that the U.S. current account with the EU has deteriorated in the last decade, primarily because of a disproportionate worsening in its merchandise trade. Based on SITC-3 classification, the U.S. had a trade deficit in nine out of ten commodities in 2003. Bilateral investment had declined after 2000. The EU has 10 offensive and 4 defensive cases against the U.S. at the WTO. Despite a weak dollar, the U.S. merchandise trade deficit has continued to worsen with the eurozone.

Key Words: Current account deficit; World Trade Organization; Anti-dumping; Countervailing duties; Twin deficits.

I. Introduction

The United States, with a population of 288 million and gross national income of $10 trillion, and the 15-member European Union (EU) consisting of 378 million people and gross national income of $8 trillion as the world's major economic blocs are becoming more intertwined and interdependent.1 In 2004, the U.S. and EU each accounted for about a fifth of each other's merchandise trade.

Over the last several years, a couple of changes have taken place in the European Union. Prominent among them was the launching of the euro on January 1, 1999. The euro became the single currency of Austria, Belgium, Finland, France, Greece, Germany, Ireland, Italy, Luxemburg, Netherlands, Portugal, and Spain of the 15-member EU. When the euro was launched on January 1, 1999, one euro was exchanged for $1.17 (in nominal values). The euro depreciated and bottomed at one euro for U.S.$ 0.88 in October 2000. Since then, the euro has appreciated with one euro exchanged for an average U.S.$ 1.32 in March 2005.

On May 1, 2004, ten more countries - Cyprus, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia and Slovenia - joined the EU. Their entrance is creating a market of 450 million with a combined gross national income of $8.5 trillion, and eclipsing the U.S. as the world's largest economic bloc.

In the light of growing importance of the U.S. and EU as the two major economic and trading blocs, this paper analyzes and evaluates their bilateral trade. The paper is organized as follows. In the second section (next), a description of U.S-EU bilateral trade is presented and analyzed. The trade related issues are presented in section three, followed by an analysis of the relationship between the dollar-euro exchange rate and trade balance in section four. Section five concludes the paper.

II. A Description of the United States-European Union Bilateral Trade and Investment

In 2004, the United States exported $167.7 billion of goods (or 20.5 percent of its world total) to, and imported goods valued at $278.9 billion (or 19.0 percent of its overall total) from EU-15 members. As Table 1 indicates, the U.S. current account balance was in deficit for 14 years, and surplus for five years with the European Union from 1986 through 2004. The current account deficit increased from $2.7 billion in 1996 to a whopping $115.4 billion in 2004. The U.S. goods or merchandise trade balance was in surplus for only three years, while experiencing deficit in the other 16 years. The U.S. merchandise trade deficit increased from $7.2 billion in 1993 to $111.3 billion in 2004. On the contrary, the U.S. services trade balance was in deficit for five years, and enjoyed surplus for 14 years. Since 1990, the U.S. had a surplus in its service trade except in 2002. Therefore, it appears that the U.S. goods or merchandise trade balance with the European Union is more unfavorable than its service trade.

The U.S. trade balance with the European Union by commodity (SITC-3) classification for 1999-2003 is presented in Table 2.2 During this period, the U.S. trade position continued to deteriorate, surplus turned into deficit, and early levels of deficits worsened. In 2003, in all types of commodities except crude materials, the U.S.

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