US-Europe ties muddied by farm 'subsidies war'

United States Vice-President George Bush had a surprise waiting for him when he arrived at European Community (EC) headquarters in Brussels last week: the EC is opening legal proceedings against the United States over a trade subsidy.

The bone of contention is not with pipelines or steel . . . but agricultural products. And the ''subsidies war'' over farm exports is escalating between the US and several West European countries.

In a meeting initially designed to ease trade tensions, the vice-president was told about the planned EC legal proceedings against alleged US subsidizing of a $1 million sale of wheat flour to Egypt. Europeans consider Egypt their ''traditional'' export market. The complaint will be heard under procedures of the General Agreement on Tariffs and Trade (GATT) in Geneva.

In addition, the EC reserved the right to take ''counteraction if any further action of this kind were taken'' by the US. What this threat means is that the EC could increase its own subsidies on exports of certain farm products, enabling its exporters to squeeze the US out of ''traditional'' US markets and touching off a ''subsidies war.''

At the core of the problem has been the remarkable productivity of modern farms when aided by generous price support systems. The result has been huge surpluses of certain goods, especially in Western Europe and the US.

Several years ago, intent on unloading its surpluses, the EC began subsidizing exports of wheat and other farm products. This meant that exporters in Western Europe could undercut the price offered by the US and other exporters.

The US government was angered. It argued that the EC system violates GATT rules and leads to the displacement of the US from ''traditional American'' markets. For months now, the Reagan administration has been pressing the EC to dismantle its export subsidy system or face retaliation in the form of US countersubsidies. The EC has refused to budge, saying its system conforms with international trading rules.

Last December, five US Cabinet members, including US Secretary of State George Shultz, flew to Brussels and met with EC officials in an attempt to cool tempers. Indeed, officials from both sides said after the meeting that they had arranged a ''truce,'' and that an EC-US working group would be set up to try to iron out the differences.

''There will be no agricultural trade war,'' US Agriculture Secretary John Block said in December. There was considerable optimism that the dispute could be settled ''out of court'' by a joint unofficial deadline of March - possibly by reaching an agreement to stay out of each other's markets

But that optimism quickly faded when the EC-US working group failed to make progress at its first meeting in early January. And on Jan. 18 the US Agriculture Department fired what some saw as the first shot in the long-awaited farm trade war between the US and the EC by announcing that, for the first time, the US would subsidize exports of farm products, selling wheat flour to Egypt at below world market prices.

One EC official described the sale as ''a brutal takeover of one of our major markets.'' Until this year, the EC had been supplying Egypt with about half of its wheat flour imports, totaling about 1.5 million tons a year.

On Feb. 10, the EC-US working group plans to hold its second meeting, this time in Brussels. Officials here say the meeting could be more acrimonious than helpful. Other officials have been talking of ''damage limitation'' and have stopped saying an agreement is in sight.

The Reagan administration, meanwhile, has threatened to fire the second shot in what could become a full-fledged farm war. It says it may soon dump tons of surplus dairy products on the world market, forcing prices lower and closing the EC, which has massive dairy stocks of its own, out of many existing and potential markets.

For their part, officials in Western Europe have begun to warn that if the US pushes its quarrel with the export-subsidy system too far this could prompt retaliation against US agricultural trade with the EC.

''Since the US has an agricultural trade surplus of about $6.8 billion over the EC,'' West Germany's Economics Minister Otto Lambsdorff said last week, ''Washington should think again about introducing (export) subsidies.''

One EC official summed up the mood last week saying, ''Vice-President Bush came here last week looking to calm the waters. Instead, he walked into a raging storm.''