US and Japan size up new kid on the block

Western Europe is gearing up to compete economically on a united front with the US and Japan. In the last of a four-part series, John Yemma looks at whether as these 12 nations lower their internal barriers, they will become more open to world trade. ``Fortress Europe.''

It's a loaded term, evoking images of Europe's coastlines bristling with cannons and bunkers to hold off the outside world.

``Fortress Europe'' is the catch phrase to describe the worst fears of free traders about what might happen when the 12 nations of the European Community (EC) unite as a single market in a phased-in program running up to 1992.

``When the inside walls fall,'' a United States diplomat in Europe worries, ``the outside walls could rise.''

European political and business leaders say they understand the concern. But they point out that it will do Europeans little good to create a competitive domestic market and then block off their companies from international commerce. Notes Helen Wallace of the Royal Institute for International Affairs in London: ``It would be ridiculous to liberalize internally to get more efficiency and then put a wall around Europe.''

Jean Paul Tranthiet in France's Ministry of European Affairs sees ``legitimate fears outside the Community'' and notes that the actual policies of the Community are not yet determined.

``But at the base of the Community,'' he says, ``the philosophy is not protectionistic. Europe wants an open market, but it must be conditioned on the Japanese opening their market and the US not closing its market.''

Access to the 325-million person European consumer market, with the second highest gross domestic product in the world, could become a powerful tool in the hands of Europeans. On a recent trip to Washington, Lord Francis Cockfield, vice-president of the European Commission, noted ``anxiety in Europe'' about recurring attempts to pass protectionist legislation in the US Congress. His implied message: Congress should consider the consequences in Europe of any new US trade protection.

They are important consequences. The EC is the US's most important trading partner - ahead of Canada and Japan - when two-way sales and sales of subsidiaries are considered. The US Commerce Department estimates this economic relationship at $1 trillion - good reason for US trade officials to keep a weather eye on Europe-1992.

Charles Ludolph, director of the US Commerce Department's office of European Affairs, says most aspects of the 1992 program look positive for US companies. He is concerned, however, that the devising of Euro-standards for products such as electrical equipment, computers, and software could present new problems for US companies if the standards become more restrictive.

Mitsuo Takii of the Japan External Trade Organization's New York office says there is modest but growing concern in Japan that 1992 could make Europe more closed to Japanese exporters. Japan's concern is intensified, he says, by the new US-Canada free-trade agreement, which would create another huge, integrated trading bloc with potential protectionist tendencies.

The worst case for Japan would be to get locked out of both trading zones. Although the Japanese government has talked of the East Asian market as a ``Pacific Economic Community,'' there is currently no push in this direction. For this reason, overall ``liberal world trade is still the most important to Japan,'' Mr. Takii says.

Nevertheless, showing how European you are is a common strategy today, especially with Japanese companies. Sony, for instance, recently marked the 15th anniversary of its factory in Britain. It emphasizes its Queen's awards for exporting from Britain and the Sony brand wine produced in a vineyard it owns in France.

Many big American companies already act very European in Europe. IBM has subsidiaries throughout the Community, Ford operates assembly plants in six European nations, AT&T is in partnership with Olivetti in Italy, Philips in the Netherlands, and Telef'onica in Spain. Inside-Europe sales by US subsidiaries dwarf US exports to Europe: Subsidiaries sold $500 billion last year, while US exports to Europe amounted to $75 billion.

``The American multinationals are already well dug in,'' notes Michael Emerson, senior EC economist in Brussels. ``For them, 1992 is the best possible news. They are very well placed to reap the potential benefits.''

The benefits might look like they did for Boston-based Gillette. Several years ago, says John Symons, president of Gillette North Atlantic, the company's four European factories were reorganized to produce for all Europe, not just national markets. This reduced the number of different Gillette products from 1,800 to 200. The same marketing strategy was used in 15 different European nations, with changes only in language. Mr. Symons says this boosted profit margins dramatically, making Europe Gillette's most lucrative region.

Mr. Ludolph of the Commerce Department is concerned, however, that small and medium-sized US firms are ``woefully uninformed'' about the unified European market. US companies thinking about exports to Europe, he says, should be examining the 300 changes in rules and regulations - from open government procurement to smoother intra-European trucking - that make up the 1992 program. The Commerce Department is beginning to speak to trade groups and is preparing publications on the subject.

The European market could be a bonanza for US and Asian exporters if a recent study by Data Resources Inc. (DRI) proves correct.

DRI says EC imports should increase 4 percent, while exports rise only 2.5 percent after 1992. The gap is an exporter's delight. It will come mostly from ``quota harmonization,'' notes Jean-Michel Six, director of DRI-Europe in London. Hundreds of different national quotas on various imports will be brought into line in the EC. In most cases, EC quotas are becoming more liberal.

``The bottom line is that most countries would have their quotas cut,'' Dr. Six says. ``That has obvious benefits for Japanese, Korean, and American car manufacturers.''

Fiat, the Italian automaker, won't be happy, however. The Italian government limits Japanese auto companies to only 1 percent (about 3,500 cars) of the market. Although Fiat's loss of market share in 1992 to foreign carmakers could be offset by new sales elsewhere in the European market, no one expects Fiat or other European companies or trade unions to go gently into free trade after enjoying decades of barriers to foreign competition.

Reaction seems inevitable. But free traders watching Europe can take comfort from the anti-protectionist policies of the Netherlands, West Germany, and Britain, strong voices within the EC.

European specialist Michael Calingaert at the National Planning Association in Washington, D.C., considers it ``premature to leap to conclusions'' about European protectionism. He says that although Europe-1992 is being done for Europeans - not as a gift to the outside world - it is not in Europe's long-term interest to raise barriers.

Swapping 12 national fortresses for a Fortress Europe would simply replace 12 inefficient, protected markets with one big one. That's not what European leaders have in mind. As Lord Cockfield puts it: ``If Europe is strengthened internally, there will be less fear, less need for trade protection, not more. Because at the end of the day, we have the drive and determination to stand on our feet in Europe against anybody in the world.''

This is the last in a four-part series which began Monday, June 27.