USIA - Text: 1997 National Trade Estimate Report -- European Union, 97-03-31

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TEXT: 1997 NATIONAL TRADE ESTIMATE REPORT -- EUROPEAN UNION

(Annual Foreign Trade Barriers appraisal released) (13,190)

(Begin text)

EUROPEAN UNION

The stock of U.S. foreign direct investment (FDI) into the EU in 1995 was $315.4 billion, an increase of 18.6 percent from the level of U.S. FDI in 1994. U.S. FDI in the EU is concentrated largely in the manufacturing, financial, and wholesale sectors.

IMPORT POLICIES

EU Implementation of Uruguay Round Grain Tariff Commitments

The United States held unproductive consultations with the EU under WTO dispute settlement procedures in September 1995 and requested a WTO panel later that month. The United States and the EU subsequently reached an agreement under which the EU committed to establish a cumulative recovery system for duty underpayments and overpayments on brown rice, and a side commitment to establish a system that would permit imports of a limited amount of malting barley at 50 percent or less of the duty that would otherwise be charged. The U.S. Government is working with the EU to ensure that it implements both commitments, and will proceed to a WTO panel if the problems is not resolved satisfactorily.

Implementation of EU Import Quotas for U.S. Rice

Broadcast Directive and Motion Picture Quotas

Since 1993, the Commission, Council, and European Parliament have been struggling to come to agreement on a revised directive. In June 1996, the Council reached a common position that essentially reaffirmed the flexibility of the original directive as regards the quota provision and rejected efforts to expand the scope of the directive to include new audiovisual services. However, in November 1996, the European Parliament voted amendments that are a source of further disagreement; the amendments call for guarantees of public access to major sports programs and for a "v- chip" type of system for coding programs according to their possible detrimental effect on minors. Since the Council decided not to accept the amendments as formulated by the Parliament, the Dutch presidency will now have to convoke a conciliation committee which will try to iron out the differences between the institutions and arrive at a workable compromise.

The United States continues to monitor developments with respect to the Broadcast Directive. The EU remains on the Special 301 "Priority Watch List" because the quota provisions of the directive appear to violate Member States' obligations under the GATT.

Several countries have specific legislation that hinders the free flow of broadcast materials. A summary of some of the more salient restrictive national practices follows:

France: The EU Broadcast Directive was transposed into French legislation in 1992. France, however, chose to specify a percentage of European programming (60 percent) and French programming (40 percent) which exceeded the requirements of the Broadcast Directive. Moreover, the 60 percent European/40 percent French quotas apply to both the 24-hour day and to prime-time slots. (The definition of prime time differs from network to network according to a yearly assessment by France's broadcasting authority, the "Council Superieur de l'Audiovisuel," or CSA.) The prime time rules in particular limit the access of U.S. programs to the lucrative French prime time market. France's broadcasting quotas were approved by the European Commission and became effective in July 1992.

In December 1993, the French Parliament approved a law imposing a 40 percent quota of French songs on almost all French private and public radio stations. The 40 percent quota went into effect January 1, 1996, and applies only to prime time. Some 1,700 AM and FM stations are affected. French songs are defined as "variety music" written or interpreted by French or Francophone writers and artists. In addition, half of the 40 percent radio quota will have to be either new French songs (songs released within the previous six months) or French songs interpreted by new French or Francophone singers (singers or groups who have not yet had two albums sell at least 100,000 copies each).

The effects of the French radio broadcast quota are hard to evaluate. The French Government claims a high compliance rate, but there is little objective public information available on compliance and enforcement. The law has the effect of limiting the broadcast share of American music.

Italy: In keeping with the EU Broadcast Directive, Italy's 1990 Broadcast Law requires that upon conclusion of three years from concession of a national broadcast license, a majority of TV broadcast time for feature films be reserved for EU-origin films. The Italian law also requires that half of the European quota be dedicated to Italian films. The Italian law is more narrowly focused than the Broadcast Directive, since it encompasses only films produced for cinema performance, and excludes TV films and series and other programming. The film sector decree- law enacted on January 18, 1994, calls for application of the Italian broadcast quotas proportionally during evening viewing hours, but its language is strictly hortatory.

In 1996, the Italian Government introduced legislation to make European content restrictions more binding, by applying a 51 percent European quota to prime-time specifically, not counting news, sports, variety shows, and other non-film programming. The bill containing this proposal remains before the Italian Parliament, despite the European Parliament's November 1996 decision to leave in place the more flexible EU quota regime.

Portugal: Television legislation passed in 1990 contains language taken from the EU Broadcast Directive requiring a "majority proportion" of works broadcast be of "Community or European" origin. In practice, however, this rule has not been enforced because Portuguese television production is minimal and production from other EU countries is inadequate to satisfy the networks' broadcasting commitments. The United States will monitor closely the implementation of this restrictive legislation.

Spain: In December 1993, the Government of Spain adopted legislation transposing the EU's Broadcast Directive. Program restrictions for private television are contained in a law authorizing private television in Spain. The law includes restrictions on non-EU programming to be shown on private TV, including movie quotas. Government-owned and private television networks meet their quota restrictions. These restrictions, which are intended to encourage Spanish language production, follow the Broadcast Directive. While the principal government-owned television networks now show more U.S. programs than the quota restrictions on private channels would permit, private network licenses match the private TV program quotas. U.S. programs would have greater sales without the quota restrictions.

Spain requires a license for distributing each non-EU film dubbed domestically. Dubbing is deemed essential since dubbed movies account for about 95 percent of box office revenues for imported films. The rest is earned by subtitled original language films. On January 24, 1997, the government approved implementing regulations for the 1994 cinema law which established a system under which up to three licenses may be earned by showing a single EU-produced film: the first when the film's box office receipts exceed 10 million pesetas (about $77,000), the second when they exceed 20 million pesetas (about $154,00), and the a third when they exceed 30 million pesetas (about $231,000). If the film is dubbed, it must be dubbed into a minority language, and earn at least 5 million pesetas (about $38,500) in the minority language to qualify for the third license.

The implementing regulations also established screen quotas requiring theaters to show at least one day of new EU-produced films for every three days of non-EU-produced films. When the non-EU produced films are dubbed into a recognized minority language, a more generous proportion of one day of EU-produced films for every four days of non-EU-produced films applied.

The film dubbing license and screen quota requirements established in the regulations were reached after negotiations in which industry, including the distributors of U.S. films, participated, and in fact are less stringent than those established in the text of the 1994 law (which did, however, allow the Government of Spain some flexibility in implementation). Nonetheless, U.S. industry continues to object both to the added costs and to the restriction on freedom to make commercial decisions which the requirements entail.

Restrictions Affecting U.S. Wine Exports to the EU

EU regulations also require that a wine-import certification document be provided for each wine in each shipment. While certain qualifying U.S. producers are permitted to use a simplified procedure, others must go through the full documentation and testing process. The United States has renewed consultations with the EU on these and other wine-related issues. The main U.S. objective in the consultations is to ensure that the EU market remains open to U.S. wine.

Ban on Fur from Animals Caught in Leghold Traps

Import and Distribution of Bananas

STANDARDS, TESTING, LABELING, AND CERTIFICATION

Standardization

Mutual Recognition Agreements

One difficulty for U.S. exporters is that only "notified bodies" located in Europe are empowered to grant final product approvals of regulated products. While there are some laboratories in the U.S. which can test regulated products under subcontract to a notified body, the limited number of such labs means that such subcontracting procedures are unlikely to provide sufficient access for U.S. exporters. Moreover, these labs cannot issue the final product approval but must send test reports to their European affiliate for final review and approval, delaying the process and adding costs for U.S. exporters.

The United States and the EU are involved in negotiations to address trade problems caused by certification and testing procedures through Mutual Recognition Agreements (MRAs). MRAs will permit a U.S. exporter to have its products undergo various conformity assessment procedures (such as testing and inspection) in the United States according to EU requirements. MRAs will similarly facilitate EU exports to the United States. U.S.-EU discussions concerning MRAs have been ongoing since October 1992. In 1996, U.S. and EU officials held several rounds of negotiations on "priority" sectors. The negotiators have narrowed the focus of the package to include telecommunications and information equipment, pharmaceuticals good manufacturing practices, medical devices, electrical safety, electromagnetic compatibility, and recreational craft. As a result of recommendations at the Chicago TABD meeting, the U.S.-EU Summit in December 1996 called for the conclusion of a package of MRAs by January 31, 1997. Substantial progress was made by the deadline and negotiators continue to work to conclude a package of MRAs.

Approval Process and Labeling

The new EU Novel Foods Regulation, expected to come into force in April 1997, should improve the approval process. However, concern exists that the Novel Foods Regulation contains provisions for mandatory labeling of biotech foods that may, depending on how they are implemented, serve to mislead consumers by implying that there are legitimate health or safety heighten concerns with the food.

Ban on Growth Promoting Hormones in Meat Production

The United States launched a formal WTO dispute settlement procedure in May 1996 challenging the EU's ban. Canada initiated a second WTO case against the EU hormone ban in October 1996. Panel reports are expected in the spring of 1997.

Veterinary Equivalency

Voluntary Ecolabeling Program

U.S. and EU technical and policy officials met three times in 1996 to discuss the EU process for developing ecolabeling criteria, and in particular to address U.S. industry concerns about the adequacy of the scheme's programs, transparency and opportunity for meaningful participation by U.S. firms, and its potential for discrimination against U.S. firms whose production processes and methods differ from those used in the EU while having comparable environmental impacts. The U.S. industry concerns were focused on the paper and textile ecolabels and their criteria, as well as the process leading up to the establishment of those criteria. As a result of these consultations with the United States, the European Commission agreed to a continuing dialogue on ecolabeling, including bilateral environmental discussions commencing in 1997. The Commission also agreed to brief U.S. consumer, environmental and business groups on the EU ecolabeling program at the first bilateral meeting taking place in the United States.

In October 1996, as it had the year before, the Office of the U.S. Trade Representative included the EU ecolabeling scheme in its annual report to Congress under the "Super 301" program as a practice which is the subject of ongoing consultations, but which is nonetheless a topic of continuing concern. In that report the U.S. Government expressed its concern that the process for developing ecolabeling criteria has been insufficiently transparent and has failed to provide for adequate participation by non-EU interest groups. The United States wants to ensure that these changes do not create de facto trade barriers that place U.S. producers at an unfair advantage. Despite the EU's stated commitment to improve the meaningful participation of non-EU interests, the U.S. Government believes there is considerable room for improvement. The United States has also urged that the criteria not reflect a single approach to environmental protection without adequate attention having been given to other potentially comparable approaches and that the EU ecolabeling program provide sufficient and accurate information to consumers regarding the relative environmental impacts of competing products. The United States will continue to monitor closely the development of and revision to the EU ecolabeling scheme.

Packaging Labeling Requirements

The second concern is related to Article 4 of the proposed directive, which would prohibit the application of other marks to indicate recyclable or reusable packaging. Based on U.S. experience, this requirement is likely to pose a particular problem for glass and plastic containers, as it would require companies to create new molds solely for use in the European market.

Market Access for Gas Connector Hoses in Europe

Member State Practices

France: France's advance implementation in September 1996 of EU harmonized regulations has effectively cut off U.S. exports to France of pet food products. In 1995, U.S. pet food exports to France amounted to about $20 million, with every expectation that the market and U.S. market share would continue to grow. Although the United States has shown its willingness to resolve the issue at a technical level, as of early 1997, the French Government has been unwilling to modify its position. The United States regards the French position as being non-scientific and without justification.

Italy: Italy's interpretation of EU sanitary and phytosanitary requirements has caused, or threatened to cause, problems for the following U.S. agricultural exports: processed meat products, wood products, poultry meat products, game meats, and seafood. Finally, Italy's qualitative standards for bull semen, which limit the number of foreign bulls in favor of domestic animals, and the numerous testing fees, which are used to fund the national industry association, have proven to be cumbersome and expensive. In the absence of these restrictions, U.S. exports of these products to Italy could increase by an estimated $25 -100 million.

Spain: In recent years, the transparency of Spain's product standards and certification processes has improved. Difficulties faced by telecommunications equipment suppliers have eased as Spain adapted its national regulations to conform to EU directives. Despite these changes, however, there is still some uncertainty as to whether the earlier exemption from homologation and certification requirements for equipment imported for military use is still valid. Pharmaceuticals and drugs still must go through an approval and registration process with the Ministry of Health requiring several years unless previously registered in another EU Member State or with the equivalent EU body, in which case the process is shortened to a few months. Vitamins are covered under this procedure; however, imports of other nutritional supplements are restricted, and they are dispensed only at pharmacies. In 1996, this had an impact on U.S. nutritional supplements exporter's efforts to develop the Spanish market.

United Kingdom: With support from the U.S. Government and cooperation from the British Government, a U.S. company has made progress in resolving its problems with design elements of a British Standards Institution (BSI) standard for commercial gas connector hoses. The BSI appears ready to finalize modifications to its standard which will allow the U.S. firm to certify its products to the standard and thereby enhance its marketing opportunities in the UK.

GOVERNMENT PROCUREMENT

Discrimination in the Utilities Sector

On May 25, 1993, the United States and the EU signed a bilateral Memorandum of Understanding (MOU) under which the EU agreed to waive the discriminatory provision of the Utilities Directive with respect to procurement by electrical utilities. At the same time, the EU agreed to expand coverage of the GATT Government Procurement Code procedures to procurement of services and construction by its Member States. In return, the U.S. agreed to remove "Buy American" preferences in procurement by federally owned utilities (Tennessee Valley Authority and the five Department of Energy Utilities) and by executive branch agencies not previously subject to the GATT Government Procurement Code. The U.S. also agreed to waive "Buy American" requirements for construction contracts and to provide Code treatment to procurement of services. However, because the EU would not eliminate discrimination in telecommunications procurement, the U.S. simultaneously imposed sanctions on goods and services from the EU Member States. These sanctions do not apply to Spain, Greece, Portugal, and Germany, because these countries do not apply the discriminatory provisions of the Utilities Directive. The EU retaliated by imposing limited sanctions on U.S. goods and suppliers. On April 15, 1994, the United States and the EU concluded a procurement agreement that expanded upon the 1993 MOU. The 1994 agreement extends non-discriminatory treatment to over $100 billion of procurement on each side, including all goods procurement by all EU subcentral governments, as well as to selected procurement by 37 U.S. States and seven U.S. cities. Much of the 1994 agreement is implemented through the WTO Government Procurement Agreement which took effect January 1, 1996. The 1994 agreement, however, did not end the discrimination with respect to telecommunications procurement. Consequently the U.S. retained the May 25, 1993, sanctions imposed against the EU. With the accession of the three new Member States on January 1, 1995, the U.S. extended to them the benefits of the 1993 MOU and the 1994 procurement agreement, as well as the sanctions.

On April 30, 1996, Acting USTR Barshefsky cited Germany under Title VII of the Omnibus Trade and Competitiveness Act of 1988 for its failure to implement its procurement obligations. On October 1, 1996, she announced that agreement had been reached with Germany to reform its procurement system (see below).

Member State Practices

Denmark: The Danish Government, its institutions, and entities owned by it are obligated to apply environmental and energy criteria on an equal footing with price, quality and delivery terms in their procurement of goods and services in a manner consistent with EU procurement rules. In practice, this will likely mean specification of products bearing the EU "eco-label" or products produced by firms with a satisfactory "ecoaudit." The environmental/energy requirement is likely also to spread to procurement by lower level governmental entities. The trend toward specification of environmentally certified products in government procurement raises concerns, given broader U.S. concerns with the EU ecolabeling scheme (see above).

Germany: German implementation of the EU Utilities and Remedies Directive was accomplished through modifications to the German basic budget law in February 1994. Under the terms of the 1993 U.S.-EU Memorandum of Understanding on government procurement (and since January 1, 1996, the WTO Government Procurement Agreement), the system established for reviewing bid awards covered by the EU Utilities Directive has also been available to U.S. firms bidding on supply contracts in the heavy electrical equipment sector. The review mechanism has provided an administrative means for challenging procurement practices in the electrical utilities sector, considered by many to be relatively closed to foreign suppliers.

Since then, two U.S. firms have availed themselves of this review mechanism, alleging irregularities in public procurement bid procedures. Despite Germany's obligations in the 1993 MOU, however, there proved to be no effective remedies available to challenge these procedures. German authorities took no corrective measures in either case.

In October 1995, the European Commission formally challenged the adequacy of Germany's implementation of the EU Remedies Directive. Moreover, in April 1996, the U.S. Trade Representative identified Germany under Title VII of the Omnibus Trade and Competitiveness Act of 1988 for discrimination in the heavy electrical sector. USTR suspended the imposition of the sanctions available under Title VII on October 1, 1996, following a decision by the German Cabinet in late September to address U.S. concerns and reform German procurement regulations by providing for court-based review of bid challenges, in line with EU requirements. The German Government has drafted new legislation and plans to incorporate the new procurement regulations, which will combine administrative and judicial review, into existing German competition law. The draft bill will likely enter the formal legislative process in early spring 1997 and is expected to enter into force on January 1, 1998. The U.S. Government, in consultation with industry, is studying the proposed legislation.

Greece: Greek laws and regulations concerning government procurement nominally guarantee nondiscriminatory treatment of foreign suppliers. Officially, Greece also adheres to EU procurement policy, and Greece joined the WTO Government Procurement Code in 1992. Nevertheless, many of the following problems still exist: occasional sole-sourcing (explained as extensions of previous contracts), loosely written specifications which are subject to varying interpretations, and allegiance of tender evaluators to technologies offered by longtime, traditional suppliers. It is also a widely-held belief that firms from other EU Member States have an automatic advantage over non-EU contenders in winning Greek Government tenders. It has been noted that U.S. companies submitting joint proposals with European companies are more likely to succeed in winning a contract. Greece continues to insist on offset agreements as a condition for purchase of defense items. In December 1996, the Greek Parliament passed legislation which allows public utilities in the energy, water, transport, and telecommunications sectors to sign "term agreements" with local industry for procurement. "Term agreements" are contracts to which Greek suppliers are given significant preference in order to support the national manufacturing base. This was made possible as a result of Greece's receipt of an extension until January 1, 1998, to implement the EU Utilities Directive.

Italy: Italy's fragmented, often non-transparent government procurement practices and previous problems with corruption have created obstacles to U.S. firms' participation in Italian government procurement. Italy has, however, made some progress over the past year in making the laws and regulations concerning government procurement more transparent, although Italy has not yet fully implemented its government procurement obligations under either the WTO Government Procurement Agreement or EU directives.

EXPORT SUBSIDIES

Agricultural Product Subsidies

The Uruguay Round agreement requires the EU to reduce export subsidies over six years by 21 percent in volume and 36 percent in value from a 1986-90 base period. Under the agreement, the EU is required to cut export subsidies by about $5-7 billion from recent levels.

LACK OF INTELLECTUAL PROPERTY PROTECTION

The proposal submitted to the Council in 1993 to expand the regulation of counterfeit goods from trademarks to copyrights, related rights, and design rights is a positive development. The American business community would like it to be expanded even further to include patents and be made to apply to parallel imports from outside the community. However, progress remains slow on other directives in the copyright area. These include directives on home copying and reprography. Some of these directives would establish rights based on reciprocity, rather than on national treatment. One possible consequence of providing protection based on reciprocity is that in certain areas U.S. right holders and their assignees might not be granted those rights in EU Member States unless the United States were to enact the same rights under its laws. The U.S. Government is monitoring developments in these areas closely, and senior U.S. officials have intervened a number of times to discourage the EU from adopting directives establishing rights based on the principle of reciprocity.

Patent filing and maintenance fees in the EU and in its Member States are extraordinarily expensive relative to other countries. Fees associated with the filing, issuance and maintenance of a patent over its life far exceed those in the United States. However, it is encouraging that the EU has lobbied the European Patent Office (EPO) to reduce its fees. It appears that the Administrative Council of the EPO has decided to enact a 35 percent reduction.

In March 1995, the European Parliament rejected the text agreed by the Conciliation Committee that had been set up to work out differences between the Parliament, the Council, and the Commission on the directive on biotechnological inventions, including revised language on the patentability of human body parts. In December 1995, the Commission approved a new proposal for a directive aimed at striking a balance between the need to promote research in the biotechnology field and the need to address ethical concerns. It distinguishes clearly between inventions and discoveries; excludes completely from patentability methods of germ line gene therapy on humans; and makes an explicit derogation for farmers as regards breeding stock. With these changes, the directive may get approval more readily from both the Council of Ministers and the Parliament, which may complete its first reading by mid-1997. The 1993 Council regulation setting up a centralized marketing authorization procedure for human and veterinary medicinal products requires applicants to use a single trademark. This compromises pharmaceutical companies' ability to select different trademarks in different Member States, which they might prefer to do for linguistic or legal reasons, and sets an unfortunate precedent that might in the future affect other sectors.

Member State Practices

Austria: Austria's April 1, 1996, amendment to its copyright law introduced a statutory license requirement for exhibiting films via video cassettes in hotel rooms and other lodging accommodations. The United States has urged the government to rescind this provision of the law, which appears to be inconsistent with Austria's international obligations.

Belgium, France, Germany, and Spain: Belgium, France, Germany, and Spain collect levies on blank tapes and recording equipment to compensate right holders for the private, home copying of their works and to provide a source of funding for local productions. These levies are distributed by national collecting societies to the various categories of right holders according to statutory provisions. National treatment is denied to some U.S. right holders, however, and the U.S. motion picture and recording industries have not been able to collect their rightful share of these proceeds. Recently, the Motion Picture Association (MPA) and the General Society of Authors of Spain (SGAE) reached an agreement granting MPA access to levies collected on behalf of screenplay authors through the levy on blank video cassettes and recording equipment. This agreement does not, however, include performers' or producers' rights. According to SGAE, some payment has already been remitted to the Hollywood studios, and the United States will continue to watch very closely to see impact from this agreement.

Denmark: Denmark's intellectual property law are generally adequate. However, certain problems exist. Enforcement is made difficult by the fact that the Danish Government does not make available provisional relief to prevent ongoing infringement or preserve evidence in the context of civil litigation, both after a case is filed and on an ex parte basis. The TRIPs Agreement requires that such provisional relief be made available in civil or criminal litigation. The availability of such relief is particularly important to the U.S. software industry because of the ease with which the evidence of infringing use can be eliminated if the infringers are forewarned of the right holder's interest. Furthermore, Denmark's equivalent of the Environmental Protection Agency is permitting competitors, in contravention of TRIPs Article 39.3, to rely upon extremely valuable test data that a U.S. firm must submit in order to receive approval to market its biocide chemical product in Denmark.

Germany: The level of software piracy continues to be a source of concern in Germany, as in other large developed markets. The effects of Germany's 1993 implementation of the EU's software directive, as well as an educational campaign by the software industry, may have helped reduce piracy from previous levels.

Greece: Copyright protection in Greece, especially of U.S. films and television programs, is inadequate and Greece remains on the Special 301 "priority watch list," where it was placed in November 1994, after several years on the Special 301 "watch list." Just prior to an out-of-cycle review in December 1996, the Greek Government presented an "action plan" of specific steps it will take by April 1997 to enforce its 1995 media law to end piracy of copyrighted audio-visual products and to protect copyrighted software.

Another IPR protection problem is lack of effective protection of trademarks, particularly in the apparel sector.

Ireland: U.S. motion picture industry representatives maintain that Ireland's 1963 copyright law does not comply with EU directives or the TRIPs Agreement (the latter's obligations came into effect for Ireland in January U.S. industry estimates video piracy at 26 percent of all rentals/sales, costing the industry an estimated $15 million in lost revenue annually. U.S. software producers claim that Ireland has the highest incidence of software piracy in the EU, estimated at 70 percent. Although government officials have begun drafting a new copyright law intended to implement Ireland's TRIPs obligations, it is unlikely to be submitted to the Parliament until sometime in 1998, at the earliest, due to funding and staffing constraints. In addition, compulsory licensing provisions of Ireland's patent law fail to conform to the TRIPs Agreement, and Irish officials have not yet decided what legal action is required to bring them into compliance.

Italy: Italy has been on the Special 301 "watch list" since 1989, primarily due to problems with protection of copyrighted audio and visual material and computer software, despite substantially increased enforcement actions against copyright piracy.

Computer software piracy, while according to industry estimates falling from 60 percent in 1995 to 58 percent in 1996, remains a problem. In March 1996, the Italian Government raised criminal penalties (fines and prison sentences) for software piracy. Nonetheless, duplication of software internally by some Italian companies remains a problem, and there are reports of illicit software holdings in public institutions such as schools and universities.

Film video piracy remains a serious problem. U.S. motion picture distributors estimate that some 40 percent of the video market consists of pirated material copied in Italy. U.S. industry has noted persistent enforcement efforts involving police raids and confiscation of illegal cassettes and copying equipment.

Piracy of musical recordings is also a problem and may be on the rise due to the availability of more sophisticated reproduction equipment and rapid growth of the lucrative market for compact discs. Pirated products accounted for 22 percent of the market in 1996, down from 33 percent in 1995, according to industry estimates. There have also been reports of large-scale illegal photocopying of textbooks in and around Italian universities.

The U.S. Government has been monitoring the progress of an Italian Government bill to enhance protection of copyrighted material in Italy. The Italian Government introduced the bill in October 1996. In the November 1996 out-of-cycle review of Italy under "Special 301," the U.S. Government took note of the Italian Government's bill. However, the United States also expressed concern that the bill did not raise criminal penalties for most copyright violations, and urged Italy to enact penalties sufficient to deter piracy prior to the April 1997 "Special 301" review.

Spain: Public and private sector enforcement actions (especially private sector initiatives), using Spain's patent, copyright, and trademark legal framework, have sharply reduced the level of video piracy. Unlicensed "community video" systems illegally operating in neighborhoods and apartment blocks remain a concern, especially with regard to enforcement in Andalucia. A new legal framework for granting commercial cable television franchises has been created. As cable television becomes established, illegal "community video" systems are likely to disappear. Copyright holders also remain concerned with unauthorized public performances on local television stations and in buses and bars, and unauthorized exports to Latin America.

Despite overall improvement, software piracy remains a serious problem in Spain. Although the rate has been declining, U.S. software producers estimate that approximately 73 percent of the off-the-shelf personal computer software in use in Spain has been copied illegally, resulting in one of the highest piracy rates within the European Union. In 1993 the Spanish Government enacted legislation that transposed the EU's Software Directive, including a provision that allows authorities to conduct unannounced searches in civil cases. However, judges have been reluctant to exercise these powers. In any event, pursuing piracy cases through the Spanish courts remains a lengthy process, which diminishes the deterrent power of initial searches and arrests.

In October 1992, Spain finally modernized its patent regime to provide protection for pharmaceutical products as required by the EU. However, the law offers no pipeline protection for products in the research and development stage, effectively postponing any practical effects another 10 years. The U.S. industry remains concerned about Spanish reluctance to provide full protection for pharmaceutical products and points to Spanish efforts to dilute EU requirements. These efforts include exempting itself from parts of EU rules, postponing implementation of other parts, challenging EU protection in the European Court of Justice and maintaining the most extensive system of compulsory licenses in Europe.

Sweden: While Sweden's intellectual property laws are adequate, its enforcement of them has been problematic. The Swedish Government has not provided sufficient financial and personnel resources or training to the police and to the prosecutor's office nor has it indicated that IPR enforcement is a top priority. Enforcement is made more difficult by the Swedish determination that it need not change its laws to establish provisional relief in the context of civil searches. This forces companies to pursue cumbersome criminal actions that militate against settlements between the parties involved, which harms the copyright holders' interests. Sweden has also invoked its constitutional guarantee of freedom of information to publicly disseminate a copyrighted but apparently unpublished work against the wishes of the copyright holder.

United Kingdom: The UK maintained for some time that compulsory patent licensing provisions inconsistent with the TRIPs Agreement are rendered void by Section 53 (5) of the Patents Act 1977. This section provides that no compulsory patent shall be granted if to do so "would be at variance with any treaty or international convention to which the UK is a party." Therefore, in the UK view, its ratification of the TRIPs Agreement voided existing compulsory licensing provisions in UK law. The UK has, however, come around to the view that specific amendments to the Patents Act to incorporate TRIPs commitments would make UK patent law more transparent. Amending legislation has been prepared and circulated for public comment. The UK patent office believes that legislation will be passed in 1997 although, with a general election scheduled for no later than May, passage could slip into 1998.

SERVICES BARRIERS

Computer Reservation Services

Swedish data protection regulations also are discriminating against non-EU CRS firms. One U.S.-owned CRS firm maintains that Sweden is the only EU Member State in which it has not either already received or will soon receive data protection-related permits for its operations. Proposed Swedish requirements related to data privacy would be more stringent for U.S.-based CRS firms than for those based in the EU, based apparently on the assumption that U.S. data privacy laws are insufficient when compared to Swedish statutes (even though U.S. laws are regarded as sufficient by all other EU Member State data protection authorities).

Airport Ground Handling

Postal Services

Discriminatory Value-Added Tax Treatment

Exemptions from Most-Favored-Nation Treatment

Legal Services

Auditing Barriers

Shipping Restrictions

Telecommunications Market Access

The European Union is in the midst of proposing and implementing the legal framework necessary to prepare Europe for facilities- and, hopefully, resale-based competition in the infrastructure and voice telephony markets by January 1, 1998. Certain Member States received derogations from this requirement so they could open voice telephony to competition at a later date (provided below). Specific EU commitments regarding third country access to EU telecommunications markets will flow from the results of the recently concluded WTO negotiations on basic telecommunications services (WTO/GBT).

In the WTO/GBT, EU Member States made a variety of individual commitments, summarized in brief below:

France: France allowed 100 percent indirect investment in all telecommunications services and facilities. It retained a 20 percent direct investment limit for radio-based networks and a limit on investment in France Telecom.

Greece: Greece made commitments on all basic telecom services, with phase- in of some commitments. For instance, market access and national treatment for public voice telephony and facilities-based services will be provided in 2003. Greece adopted the reference paper on regulatory commitments.

Ireland: Ireland made commitments on all basic telecom services, with phase- in of some commitments. For instance, market access and national treatment for public voice telephony and facilities-based services will be provided as of January 1, 2000. Ireland adopted the reference paper on regulatory commitments.

Italy: Italy made commitments on all basic telecom services. It adopted the reference paper on regulatory commitments. Italy retained the ability to limit foreign investment in Stet.

Portugal: Portugal made commitments on all basic telecom services, with phase-in of some commitments. For instance, market access and national treatment for public voice telephony, telex, and telegraph will be provided as of January 1, 2000. It adopted the reference paper on regulatory commitments. Portugal made no commitment regarding investment limits and establishment requirements.

Spain: In the recently concluded WTO negotiations on basic telecommunications services, Spain made commitments on all basic telecom services as of December 1, 1998. It adopted the reference paper on regulatory commitments.

With respect to access to the EU telecommunications market generally, the United States will continue to have direct interest in EU and Member State implementation of EU liberalization directives, the effects of those directives on suppliers outside the EU, and the ultimate effects of adjusting EU and national practices to the results of the WTO/GBT.

INVESTMENT BARRIERS

In general, the EU supports the notion of national treatment for foreign investors, and the Commission has traditionally argued that any company established under the laws of one Member State must, as a "Community company," receive national treatment in all Member States, regardless of its ultimate ownership. However, some restrictions on U.S. investment do exist under EU law and others have been proposed:

Ownership Restrictions

Reciprocity Provisions

Foreign Trade Barriers 119 Access to Government Grant Programs

International Negotiations

Member State Practices Principal national barriers include: Austria: U.S. firms report that the Austrian Government's generally positive attitude toward foreign direct investment often contrasts with the arbitrary behavior of various authorities administering and enforcing regulations. In purchasing land for commercial purposes and in obtaining resident and work permits for key personnel (from countries outside the EU), U.S. firms are clearly at a disadvantage vis-a-vis EU competitors. Although no formal discrimination exists or is sanctioned by the Austrian Government, U.S. and other foreign investors must confront a complex and cumbersome regulatory system. Obtaining permits for operating plants is often cited as particularly complicated.

France: Effective in 1996, the French Government eliminated general screening and prior approval requirements for non-EU foreign investment. Certain restrictions, including notification requirements, continue to apply to all foreign investments, EU and non-EU, which affect national defense, public safety, or public health. The French Government also eliminated the restriction in the 1993 Privatization Law that prevented the French Government from selling to non-EU investors more than 20 percent of state-holdings in a firm being privatized. The Government has retained the ability the exert influence over privatized firms through "golden share" provisions, which it has invoked in a number of cases. France continues to apply reciprocity requirements to non-EU investments in a number of sectors. For the purpose of applying these requirements, the French Government generally determines a firm's residency based on the residency of its ultimate owners rather than on the basis of the firm's place of establishment or incorporation.

Greece: Both local content and export performance are elements which are seriously taken into consideration by Greek authorities in evaluating applications for tax and investment incentives. However, they are not legally mandatory prerequisites for approving investments. Foreign exchange controls have been progressively relaxed since 1985. Medium and long term capital movements for EU and non-EU countries have been fully liberalized. Most restrictions on short term capital movements were lifted in 1994. This move brought Greece in line with EU rules on the movement of capital. However, some administrative obstacles in short-term capital movements still remain. For example, compliance with tax laws must be demonstrated prior to the transfer of capital.

Greece restricts foreign and domestic private investment in public utilities. Private power production for sale to the national grid is currently limited to "non-traditional" energy sources (e.g., wind and solar). U.S. and other non-EU investors also receive less advantageous treatment than domestic or other EU investors in the banking, mining, maritime and air transport sectors, and in land purchases in border regions and on islands near Turkey.

Italy: Implementation of EU financial market Directives in 1996 voided a 1992 Italian law requiring financial service firms to incorporate in Italy to operate on the Italian stock exchange. U.S. financial service firms wishing to trade on the Italian exchange no longer need to establish a subsidiary, and can operate based on administrative approval granted by the securities oversight body CONSOB.

Portugal: Portugal amended its foreign investment law via decree-law 321/95, effective December 4, 1995. Foreign investments are now subject only to post facto registration. The new regime replaces the prior declaration regime that in principle constituted a latent barrier to foreign investment. A new "safeguards" provision applies only in situations involving public order and security and applies equally to investment by EU and non-EU firms. Portugal limits foreign investment in state-owned companies being privatized on a case-by-case basis. This barrier is relevant to U.S. business in the energy and telecommunications sectors. It is estimated that the potential increase in U.S. exports associated with greater U.S. investment in the energy and telecommunications sectors is in the range of $10-15 million.

OTHER BARRIERS

Canned Fruit

France's Poultry Regulations

Government Support for Airbus

Government funds facilitated the growth of Airbus Industrie and its introduction of a range of large transport aircraft by allowing the Airbus consortium companies to avoid bearing the commercial risks that U.S. manufacturers face when investing in new civil aircraft programs. The Airbus partner governments bore 75 to 100 percent of the development costs for all major lines of Airbus aircraft and also provided other forms of support including equity infusions, debt forgiveness, debt rollovers and marketing assistance. Airbus had approximately one third of the total value of the outstanding orders for large civil aircraft at the end of 1996.

In 1992, the United States and the EU signed a bilateral Agreement on the Application of the GATT Agreement on Trade in Civil Aircraft. This agreement expands on the 1979 GATT Agreement on Trade in Civil Aircraft to limit government support, both direct and indirect, for aircraft development and requires adherence to established repayment schedules for past supports, although in some cases those repayment arrangements were lax. In addition, the bilateral agreement includes a prohibition on production support for large civil aircraft programs and a clarification of disciplines on government intervention in aircraft marketing and procurement decisions. It also provides for increased transparency of direct and indirect government support and government-funded research activities.

The United States held formal consultations with the European Commission in February and October 1996 under the terms of the bilateral aircraft agreement. At these meetings, the parties discussed the operation of the agreement, information previously exchanged under its transparency provisions on direct and indirect government supports, and government aeronautic research activities, as well as other issues of concern. These included concerns about increased pressure for additional support on Airbus partner governments from their aircraft manufacturers which continued to experience profit and cash flow difficulties.

At the end of 1996, the Airbus partners agreed to transform Airbus into a limited public company by 1999; at present, it is an "economic interest group," meaning that all its profits and losses go directly to the four partners and work shares are allocated among the partners rather than determined by business efficiency criteria. At the beginning of 1997, Airbus stated its intention to pursue development of a 550-seat aircraft despite serious questions raised about the extent of the market for a super- Jumbo aircraft. These decisions could lead to Airbus requests for additional government direct and indirect support.

In 1996, the U.S. Government received reports that the EU and its Member States attempted to influence several commercial aircraft competitions in favor of Airbus aircraft in a manner inconsistent with the 1992 aircraft agreement, for example: In Fiji, the EU and EU Member State ambassadors were reported to have linked, in meetings with government officials, Fiji's access to preferential treatment for sugar under the Lome Convention to the purchase of Airbus aircraft by Fiji's national airline. In Croatia, EU- member governments reportedly tried to influence the Government of Croatia on the purchase of aircraft by Croatia Airlines by suggesting a linkage between acceptance of Croatia's application to join the Council of Europe and the purchase of Airbus aircraft by Croatian Airlines. In France, the French Minister of Transport said in Parliament, in November 1996, that he had instructed the government's three directors on the board of Air France to support the purchase of Airbus aircraft in a commercial competition in order to promote the interests of France's aircraft manufacturing industry. The Minister further indicated that the French Government had persuaded Air France to be the launch company for the Airbus A340-600 aircraft.

Political pressure may be less direct than in the above examples. In its most recent report on Japanese trade barriers, the EU cited Japan for Airbus' low penetration of that market, implying that the Japanese Government should encourage its airlines to substitute purchases of U.S. aircraft with Airbus aircraft to help ease European-Japanese trade frictions.

The United States will continue to monitor compliance with the terms of the 1992 U.S.-EU large aircraft agreement and the 1979 Agreement on Trade in Civil Aircraft.

Belgium: The Government of Belgium and Belgium regional authorities are reported to subsidize Belgian aircraft component manufacturers which supply parts to Airbus Industrie. According to information received, the subsidy is provided in a foreign exchange rate guarantee program under which payments are made to a consortium of Belgian companies, Belairbus, which is an "associate member" of Airbus. The Government of Belgium and Belgian regional governments provide payments to the Belairbus companies to cover the difference between actual (i.e., marketplace) foreign exchange rates and a guaranteed rate. The specific level at which the guaranteed exchange rate was established has varied with different levels set for various Airbus aircraft programs and for different numbers of aircraft within each aircraft program. The Belgium program appears similar to a foreign exchange rate guarantee program provided by the German Government to the benefit of its Airbus partner and its suppliers which, following a GATT Subsidies Code complaint by the United States, was found to be a prohibited export subsidy by a reviewing dismantled in 1992. The United States has undertaken consultations with the European Union to address the Belgian foreign exchange rate program.

Government Shipbuilding Industry Support Member

An agreement was reached in July 1994 and signed in December 1994, to take effect on January 1, 1996, with a review after three years. The agreement will restrict direct and indirect subsidies for shipbuilding, extend antidumping rules to the industry, establish strict rules for government financing of shipbuilding, and authorize sanctions on imports of goods from participants found to be violating the agreement. Belgium, Portugal, and Spain have temporary derogations for their restructuring aid predating the accord. The agreement must be ratified by all Parties to it, including the United States, before it can enter into force. Korea, Norway, and the EU deposited their instruments of ratification in 1995. Japan ratified the Agreement in May 1996, leaving the United States as the only remaining non-ratifying Party.

U.S. implementing legislation was introduced in Congress in Fall of 1995, but was not acted upon in that year. In June, 1996, the U.S. House of Representatives passed, by a large margin, an amended form of implementing legislation that was inconsistent with the agreement and did not constitute a basis for U.S. ratification of the agreement. Subsequent attempts to develop compromise legislation in the Senate were unsuccessful and the 104th Congress adjourned without taking action on implementing legislation. At a March 1997 meeting of WP6, the United States pledged its intent to submit new implementing legislation to the 105th Congress that addresses the concerns previously expressed by the Congress. Other Parties expressed a willingness to consider U.S. legislative proposals to facilitate ratification but also warned against altering the agreement's text.

The EU's Seventh Directive governing shipbuilding aid was scheduled to expire on December 31, 1995. It has been extended until the OECD agreement enters into force, but not beyond December 31, 1997. If the agreement is not in force by June 1, 1997, the Commission will submit a proposal regarding shipbuilding aid rules as of 1998.

Data Privacy

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