After World War II and throughout the Cold War period, the United States was unquestionably the world leader in terms of political and economic policy. In fact, the Cold War provided much of the glue that held the American-Western European alliance together. Since the end of the Cold War, and in light of European Union (EU) expansion, as well as contentious trade disputes, it appears that the United States is no longer in a position of dominance. This will affect the United States’ ability to forge new political and economic policies that involve Europe and the rest of the world. This also will affect U.S. investment decisions.

On May 1, 2004, the EU welcomed 10 new countries, bringing the total number of members to 25 and increasing its total number of consumers from 375 million to 448 million. The world’s largest single economy now has a combined output of $13 trillion annually, according to the Progressive Policy Institute, a Washington, D.C., pro-trade think tank associated with the New Democrats.

As part of their accession agreement, the new EU members—the Czech Republic, Hungary, Poland, the Slovak Republic, Slovenia, the Baltic states of Estonia, Latvia and Lithuania, and the Mediterranean islands of Malta and Cyprus—will continue to adopt the EU’s common commercial policy and higher regulatory standards. In addition, they will adhere to EU bilateral trade agreements and apply its common external tariff. And, since most new members are located in Central Europe, their accession has erased the last traces of the old “Iron Curtain” from the Cold War years.

The original EU members also will have new responsibilities, many which may prove difficult. For example, since living standards and productivity levels of most new members are well below those of the original 15, billions of dollars in subsidies will be required to be transferred from the West to the East. And not unlike some of the problems that plagued former West Germany when it absorbed former East Germany, tensions will rise when workers in the West lose jobs to those in the accession countries. On the other hand, tensions also will rise in the East when jobs are lost to more productive workers in the West.

As new members apply the common EU external tariff, most U.S. products exported to these countries will be assessed a lower, not higher duty. In addition, since one set of standards and regulations now will apply to all 25 EU members, U.S. exporters selling to the new members will no longer have to navigate through 10 complex and often confusing regulatory environments. However, there is a downside.

Since products traded among the original 15 and 10 new EU participants are no longer assessed tariffs, intra-EU trade is likely to increase. Consequently, U.S. products exported to Central Europe, which are still subject to EU tariffs, albeit lower, are likely to become less competitive. The result: Europeans may buy more goods from each other and fewer from the U.S. and third countries—a phenomena known as trade diversion. As a result, this is likely to spur increased U.S. investment in the EU and will translate into more U.S. companies establishing facilities there.

Although the rejection of the EU constitution by the French on May 29 and Dutch on June 1, 2005 may have slowed further European integration efforts, the EU, as well as an emerging Asian bloc led by China, will continue to expand and gain influence over the long term. These developments will continue to have a profound impact on where American companies direct their overseas investments and build their manufacturing facilities and service centers.

About The Author John Manzella [Full Bio]

John Manzella, founder of the Manzella Report, is a world-recognized speaker, author of several books, and an international columnist on global business, trade policy, labor, and the latest economic trends. His valuable insight, analysis and strategic direction have been vital to many of the world's largest corporations, associations and universities preparing for the business, economic and political challenges ahead.




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