EU-U.S. Economic Ties: Framework, Scope, and Magnitude







Prepared for Members and Committees of Congress



The United States and the European Union (EU) economic relationship is the largest in the
world—and it is growing. The modern U.S.-European economic relationship has evolved since
World War II, broadening as the six-member European Community expanded into the present 27-
member European Union. The ties have also become more complex and interdependent, covering
a growing number and type of trade and financial activities.
In 2007, $1,562.8 billion flowed between the United States and the EU on the current account, the
most comprehensive measure of U.S. trade flows. The EU as a unit is the largest merchandise
trading partner of the United States. In 2007, the EU accounted for $247.3 billion of total U.S.
exports (or 21.3%) and for $354.7 billion of total U.S. imports (or 18.2%) for a U.S. trade deficit
of $107.4 billion. The EU is also the largest U.S. trade partner when trade in services is added to
trade in merchandise, accounting for $167.6 billion (or 36.7% of the total in U.S. services
exports) and $144.1 billion (or 42.9% of total U.S. services imports) in 2007. In addition, in 2007,
a net $175.8 billion flowed from U.S. residents to EU countries into direct investments, while a
net $86.5 billion flowed from EU residents to direct investments in the United States.
Policy disputes arise between the United States and the EU generating tensions which sometimes
lead to bilateral trade disputes. Yet, in spite of these disputes, the U.S.-EU economic relationship
remains dynamic. It is a relationship that is likely to grow in importance assuming the trends
toward globalization and the enlargement of the EU continue, forcing more trade and investment
barriers to fall. Economists indicate that an expanded relationship would bring economic benefits
to both sides in the form of wider choices of goods and services and greater investment
opportunities.
But increasing economic interdependence brings challenges as well as benefits. As the U.S. and
EU economies continue to integrate, some sectors or firms will “lose out” to increased
competition and will resist the forces of change. Greater economic integration also challenges
long-held notions of “sovereignty,” as national or regional policies have extraterritorial impact.
Similarly, accepted understanding of “competition,” “markets,” and other economic concepts are
tested as national borders dissolve with closer integration of economies.
U.S. and EU policymakers are likely to face the task of how to manage the increasingly complex
bilateral economic relationship in ways that maximize benefits and keep frictions to a minimum, th
including developing new frameworks. For Members during the second session of the 110
Congress, it could mean weighing the benefits of greater economic integration against the costs to
constituents in the context of overall U.S. national interests. This report will be updated as events
warrant.






U.S. Interests...................................................................................................................................1
The Framework of U.S.-EU Economic Ties...................................................................................2
U.S.-EU Trade in Goods and Services............................................................................................3
U.S.-EU Investment Flows and Positions.......................................................................................6
Conclusions and Policy Implications..............................................................................................7
CRS Reports....................................................................................................................................8
Table 1. U.S. Merchandise Trade with Selected Trade Partners, 2007............................................3
Table 2. U.S. Trade with the European Union in Goods and Services, 1997-2007.........................5
Table 3. U.S. Current Account Balance with EU, 2007..................................................................6
Author Contact Information............................................................................................................8





The bilateral economic relationship between the United States and the European Union (EU) is 1
the largest such relationship in the world—and it is growing. It is a relationship forged over
several centuries, since the European colonization of North America.
The modern U.S.-European economic relationship has evolved since World War II. It has
broadened as the six-member European Community expanded into the present 27-member
European Union. The ties have also become more complex, covering a growing number and type
of trade and financial activities that intertwine the economies on both sides of the Atlantic into an
increasingly interdependent relationship. For Members of Congress and other policymakers, the
EU remains a significant participant in the U.S. economy and a major factor in policy
considerations. For example, the EU and its members are influential members of the World Trade
Organization (WTO), the Organization for Economic Cooperation and Development (OECD), the
International Monetary Fund (IMF) and the World Bank. These countries, together with the
United States, play decisive roles in developing and implementing the missions of those
institutions.
Despite the tightness of the bilateral relationship, policy tensions arise generating tensions within 2
the relationship, sometimes leading to bilateral trade disputes. The issues that arise are becoming
more complex, reflecting the growing integration of the U.S. and EU economies. Yet, in spite of
these disputes, the U.S.-EU economic relationship remains dynamic and one within which
trillions of dollars of economic activity transpire.
This report provides background information and analysis of the U.S.-EU economic relationship th
for Members of the 110 Congress as they contemplate the costs and benefits of closer U.S.
economic ties with the EU. It examines the economic and political framework of the relationship
and the scope and magnitude of the ties based on data from various sources. In addition, the
report analyzes the implications these factors have for U.S. economic policy toward the EU. The
report will be revised as events warrant.

The United States has been a strong advocate for the construction of close economic ties among
the West European countries since the end of World War II. During the Cold War, the European
Community served U.S. foreign policy and national security interests as a force of stability that
drew former enemies—(West) Germany and France—closer together and that helped to build
Western Europe into an economic bulwark against the Soviet Bloc.
The formation of an economically unified Europe has served U.S. economic interests as well by
accelerating European economic growth and development which has opened trade and investment
opportunities for the United States. Many studies have concluded that the formation of the EU has
had a net positive economic impact on the world as a whole because it has led on balance to more
trade creation than diversion of trade from other countries.

1 The EU consists of Austria, Belgium, Bulgaria, Cyprus (Greek), Czech Republic, Denmark, Estonia, Finland, France,
Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, Netherlands, Poland, Portugal,
Romania ,Slovakia, Slovenia, Spain, Sweden, and the United Kingdom.
2 For more information on U.S.-EU disputes, see CRS Report RL30732, Trade Conflict and the U.S.-European Union
Economic Relationship, by Raymond J. Ahearn.





The EU continues to become a more closely knit entity with the formation of the European
Monetary Union comprising 12 of the 27 members of the EU and their adoption of a common
currency, the euro. These developments have already had an impact on U.S.-EU trade ties.

U.S.-EU economic relations exist within a framework of economic, political and security factors.
Some of these factors have promoted closer economic relationships, while others have created
tensions that have, at times, threatened to undermine the relationship.
The U.S.-EU economic relationship dominates the world economy by the sheer size of their
combined economies. The combined population of United States and the EU members
approaches 800 million people who generate a combined gross domestic product (GDP) that is 3
roughly equivalent to 57% of world GDP in 2007. Combined EU and U.S. world trade accounts
for over half of all world trade. In other words, the U.S.-EU economic relationship has clout.
The United States and the EU member countries are of roughly equivalent levels of economic
development and are among the most advanced in the world. As a group they include the world’s
wealthiest and most educated populations. The United States and the members of the EU, with a
few exceptions, are major producers of advanced technologies and services. As a result U.S.-EU
trade tends to be intra-industry trade; that is trade in similar products, such as cars and computers,
dominate two-way trade flows. Furthermore, the United States and the EU have advanced and
integrated financial sectors which facilitate large volumes of capital flows across the Atlantic.
These capital flows account for a significant portion of the bilateral economic activity.
The dominance of security and defense matters is another factor influencing U.S.-EU ties.
Twenty-two of the EU-27 are members of NATO, and represent an overwhelming majority of
NATO’s 26 members. NATO members must deal with a number of issues that pertain to foreign
trade, such as defense-related government procurement, product standardization, controls of
exports of dual-use technologies and related products, and economic sanctions. National security
and foreign policy concerns strongly dominated the U.S.-European relationship during the Cold 4
War.
The 152-member WTO (and its predecessor, the General Agreement on Tariffs and Trade
(GATT)) is a critical part of the EU-U.S. bilateral economic framework. The WTO provides the
principles and rules under which the U.S. and the EU conduct much of their trade. The basic
principles of most-favored-nation(MFN), or nondiscriminatory, treatment and of national
treatment of imports of goods and services and of foreign investments, along with WTO rules on

3 CIA. World Factbook. 2008. http://www.cia.org.
4 But even the dominance of national security concerns did not prevent at least some major disputes to surface between
the United States and the EU. For example, in June 1982, the United States imposed controls on exports to the Soviet
Union of oil and gas equipment technology that was produced by U.S.-owned firms in foreign countries. The
restrictions were in response to Soviet support of martial law in Poland and to hamper the construction of a natural gas
pipeline that would deliver Soviet gas to Western Europe. The measures led to an open confrontation with the
European Community which argued that the United States could not apply U.S. controls outside the United States. The
United States rescinded the controls in November 1982. Featherstone, Kevin and Roy H. Ginsburg. The United States
and the European Community in the 1990s: Partners in Transition. St. Martins Press. United Kingdom. 1993. p. 179-
180.





trade-related intellectual property rights, investment, and trade remedy practices (antidumping
and countervailing duties and safeguards) are the foundation of U.S. and European trade and
investment policies. The WTO also provides the mechanism by which the United States and the
EU resolve many of their bilateral trade disputes.
To a lesser extent, the OECD is an important element in the U.S.-EU framework. Largely
consisting of fully industrialized countries, the 30-member OECD coordinates economic policies
and reviews economic conditions and polices of its members and those of some non-members.
The OECD also has some rules and guidelines for trade and investment practices of its members.
For example, the OECD Arrangement on Official Export Credits curbs the subsidization of
exports.
EU and U.S. policies and practices form another element of the bilateral economic framework.
The United States and the EU share a commitment to open trade and investment. The United
States and European countries were largely instrumental in establishing the post-World War II
foundation for an open international economic system. This commitment has played a large role
in the strong economic ties between them. Yet, the two sides differ in some significant policy
areas, for example, the EU’s Common Agricultural Policy, conflicting competition policies, and
the U.S. extraterritorial application of economic sanctions against Cuba and other countries.
These policy differences have been a source of significant bitterness and controversy.

The EU as a unit is the largest merchandise trading partner of the United States. In 2007, the EU
accounted for $247.3 billion of total U.S. exports (or 21.3%) and for $54.7 billion of total U.S.
imports (or 18.2%) for a U.S. trade deficit of $107.4 billion. At the same time, the United States is
the largest non-EU trading partner of the EU as a whole. In 2007, EU exports to the United States
accounted for 20.9% of total exports to non-EU countries, while EU imports from the United 5
States accounted for 12.7% of total imports from non-EU countries.
Table 1. U.S. Merchandise Trade with Selected Trade Partners, 2007
(billions of dollars)
Partner U.S. Exports U.S. Imports U.S. Trade Turnover U.S. Trade Balances
EU-27 247.3 354.7 602.0 -107.4
Canada 248.9 313.1 562.0 -64.2
Mexico 136.5 210.8 347.3 -74.3
China 65.3 321.5 386.8 -256.3
Japan 62.3 145.5 207.8 -82.8
World 1,163.3 1,953.6 3,116.9 -790.3
Source: U.S. Department of Commerce. Bureau of the Census.

5 Calculations for U.S. trade based on data from the U.S. Department of Commerce. Bureau of the Census. EU trade
data from Eurostat. Both sets of data were compiled by Global Trade Information Systems, Inc. as part of World Trade
Atlas.





For a number of years, the United States realized trade surpluses with the EU. However, since
1993, the United States has been incurring growing trade deficits with the EU ($107.4 billion in
2007). Economists attribute the growth in the U.S. trade deficit with the EU to, among other
factors, differences in U.S. and economic growth rates and the weakening of the dollar compared
to the euro.
Among the top U.S. exports to the EU have been aircraft, and machinery of various kinds,
including computers, integrated circuits, and office machine parts. A large share of U.S. imports
from the EU has consisted of passenger cars, machinery of various types, including gas turbines,
computers and components, office machinery, and parts and organic chemicals. Within the EU,
Germany, the United Kingdom, and France are the leading U.S. trading partners, followed by the
Netherlands and Italy.
The EU is the largest U.S. trade partner when trade in services is added to trade in merchandise.
In 2007 the EU accounted for $167.6 billion (or 36.3% of the total in U.S. services exports). Of
this amount, $28.7 billion derived from receipts for various travel services, $7.3 billion from
payments for passenger fares, and $17.3 billion for other transportation fees (freight and port
services). Another $27.1 billion were in receipts for royalties and licensing fees and $84.0 billion
derived from other private sector services, including business, professional and technical services
(including legal services), and insurance. Also included under services are revenues from
transfers under U.S. military contracts which equaled $3.0 billion in 2007.
In 2007, the EU accounted for $144.1 billion (or 42.9% of total U.S. services imports)—including
travel services ($22.8 billion), passenger fees ($13.6 billion), and freight and port fees ($22.8
billion). Royalties and licensing fees accounted for another $13.1 billion. In addition, other
private sector services accounted for $59.4 billion of imports. Also included were payments of 6
$10.8 billion in defense-related expenditures.

6 U.S. Department of Commerce. Bureau of Economic Analysis. U.S. International Transactions Accounts Data.
October 16, 2007.




Table 2. U.S. Trade with the European Union in Goods and Services, 1997-2007
(billions of dollars)
U.S. Exports
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Goods & Services 240.5 232.4 236.4 257.5 244.5 238.4 250.7 283.2 314.3 353.5 409.9
Goodsa 153.0 145.9 148.9 162.3 155.8 140.4 147.6 167.6 183.4 210.2 242.3
Services 87.5 86.5 87.6 95.2 88.7 98.0 103.2 115.6 130.8 143.3 167.6
U.S. Imports
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Goods & Services 243.5 242.3 264.4 298.6 293.2 311.3 338.6 387.6 427.3 459.4 500.4
Goodsa 175.8 176.1 194.5 219.9 219.5 225.4 244.9 278.9 309.0 330.4 356.2
Services 67.7 66.2 69.9 78.7 73.7 85.2 93.7 108.7 118.3 129.0 144.1
iki/CRS-RL30608U.S. Trade Balances
g/w
s.or 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
leakGoods & Services -3.0 -9.9 -28.0 -41.1 -48.7 -72.9 -87.8 -104.4 -113.0 -105.9 -90.5
://wiki Goodsa -22.8 -30.2 -45.6 -57.6 -63.7 -85.0 -97.3 -111.3 -125.5 -120.2 -113.9
http Services 19.8 20.3 17.7 16.5 15.0 9.7 9.5 6.9 12.5 14.3 23.4
a. The figures for goods trade while essentially equivalent to those for merchandise trade in Table 2, are slightly lower as they are measured on a balance of payments
basis, rather than a census basis.
Source: U.S. Department of Commerce. Bureau of Economic Analysis. Survey of Current Business. Various issues.





Table 3 indicates that the United States has consistently run surpluses in services trade with the
EU. These surpluses helped, albeit modestly, to offset the U.S. merchandise trade deficits.
A substantial amount of funds flows between the United States and the EU as receipts of income
derived from assets, including direct and portfolio investments and government securities. In

2007, $341.4 billion flowed to the United States from income earned on EU assets held by U.S.


residents. In 2007, $305.4 billion flowed to the EU as income earned on assets held in the United
States by EU residents. In addition, a net $5.2 billion flowed into the EU as unilateral transfers.
Trade in goods and services, plus income receipts and payments, plus unilateral transfers, make
up the U.S. current account, the most comprehensive measure of U.S. trade flows. In 2007, the 7
United States incurred a current account deficit with the EU of $60.1 billion.
Table 3. U.S. Current Account Balance with EU, 2007
(billions of dollars)
Exports Goods and Services 409.9
Imports Goods and Services 500.4
Income Receipts 341.4
Income Payments 305.9
Unilateral Transfers (Net) 5.2
Total Current Account Flows 1,562.8
Current Account Balance -60.1
Source: U.S. Department of Commerce. Bureau of Economic Analysis. U.S. International Transactions Accounts
Data. June 11, 2008. http://www.bea.doc.gov
In sum, the flows of merchandise or goods trade, services trade, and income between the United
States and the EU manifest a very active, strong, and large economic relationship. In 2007 alone, 8
a total of more than $1,562.8 billion flowed between the United States and the EU.

Transactions on the current account represented only a part of the volume of international
financial flows between the United States and EU in 2006. The remaining transactions are on the
capital account which derive from payments by the U.S. government and residents to obtain 9
assets in the EU and by EU residents to obtain assets in the United States. These assets include
government purchases of gold and foreign currencies for their official reserves and government
purchases of other foreign assets. The capital account also includes payments by U.S. residents
for portfolio investments (including bank deposits, government securities, corporate stocks, and
bonds, and other private sector securities) and payments to obtain direct investments (including

7 U.S. Department of Commerce. Bureau of Economic Analysis. U.S. International Transactions Accounts Data.
October 16, 2007.
8 Ibid.
9 The Department of Commerce only reports net, rather than total, capital inflows and outflows. The capital account is
also the mirror image of the current account in U.S. balance of payments accounts.





real estate, plants, factories, and commercial establishments). In 2007, the net flow of U.S. capital
to EU members was $845.7 billion and the net flow of capital from EU countries into the United 10
States was $874.8 billion.
Foreign direct investments (FDI) represent long-term commitments on the part of the investor. In

2007, a net $111.9 billion flowed from U.S. residents to EU countries into direct investments, 11


while a net $175.8 billion flowed from EU residents to direct investments in the United States.
By the end of 2006 (the latest data available), the position of U.S. direct investment in EU 12
countries stood at $1,113.3 billion, or 47.1% of all foreign direct investment by U.S. residents.
Of that total, $240.6 billion, or 21.4%, was in the manufacturing sector. Another 22.63% was in
banking and other financial establishments, and insurance firms. The United Kingdom –
accounting for 32.4% – is by the far the largest destination of U.S. FDI in the EU followed by the
Netherlands at 19.2%, Germany at 8.8%, and France at 5.9%. At the end of 2006 (the latest data
available), EU residents had foreign direct investments in the United States valued at $855.7
billion. The United Kingdom was the largest source of those investments with 26.9% of the total 13
in 2006.

Foreign trade and investment data depict a strong, interdependent, and significant U.S.-EU
bilateral economic relationship. It is a relationship that is likely to grow in importance as
advancements in technology and other forces of globalization, plus the future enlargement of the
EU, force more trade and investment barriers to fall. The expanded relationship is widely seen as
bringing economic benefits to both sides in the form of wider choices of goods and services and
greater investment opportunities.
But increasing economic interdependence brings challenges as well as benefits. U.S.-EU trade
ties have been plagued by disputes that at times have reached the highest levels of policymaking.
While these disputes have covered a range of sectors and issues, the most contentious and public
have been related to trade in agricultural and agricultural-related products. The United States has
taken the EU to task for its ban on hormone-enhanced beef imports and for its policy regarding
banana imports.
Yet, the agriculture sector accounts for a very small portion of not only U.S.-EU bilateral trade
but also for the total world trade of the two entities. In 2007, agriculture accounted for 4.0 % of
total U.S. exports to the EU and for 5.5% of total imports from the EU. Similarly, in 2007
agriculture accounted for 8.3% of total U.S. world exports and for 6.1% of total EU world 14
exports. It is beyond the scope of this report to analyze this contrast between U.S. and EU trade

10 U.S. Department of Commerce. Bureau of Economic Analysis. U.S. International Transactions Accounts Data.
March 15, 2005.
11 Ibid.
12 The foreign investment position represents the value of total accumulated investments in place and is valued on an
historical-cost basis, that is, the value at the time of purchase. Foreign investment flows represent the net value of
investment transaction during a particular year.
13 U.S. Department of Commerce. Bureau of Economic Analysis.
14 Calculations made on data obtained from the U.S. Department of Agricultures Foreign Agricultural Service and
from Global Trade Information Systems, Inc., The World Trade Atlas.





policies and trade volume. But the contrast suggests that the attention received by these disputes
at the official level, as well as from the press, reflects the domestic political salience of these
issues to a much further extent than their overall commercial or economic significance.
Greater economic integration also challenges long-held notions of “sovereignty,” as national or
regional policies have extraterritorial impact. For example, the U.S. use of foreign policy trade
sanctions against such “rogue states” as Cuba and Iran affected EU firms and investors and
caused sharp U.S.-EU friction. Similarly, accepted understandings of “competition,” “markets,”
and other economic concepts are tested as national borders dissolve with closer integration of
economies.
U.S. and EU policymakers, therefore, continually face the task of how to manage the increasingly
complex bilateral economic relationship in ways that maximize benefits and keep frictions to a
minimum. For Members of Congress it means weighing the benefits and costs to constituents of
greater economic integration and placing this calculation in the context of overall U.S. national
interests.

CRS Report RS22547, Europe’s New Trade Agenda, by Raymond J. Ahearn.
CRS Report RS22163, The United States and Europe: Current Issues, by Kristin Archick
.CRS Report RL30732, Trade Conflict and the U.S.-European Union Economic Relationship, by
Raymond J. Ahearn.
William H. Cooper
Specialist in International Trade and Finance
wcooper@crs.loc.gov, 7-7749