The Grapes of Wrath

By Barbara Rudolph

IT LOOKED TO U.S. TRADE NEGOTIATOR Carla Hills as if six years of tortuous bargaining to reach a global free-trade agreement were about to collapse over a mere hill of beans. Frustrated, she decided to risk it all by announcing that the U.S. would slap 200% tariffs on $300 million worth of European farm exports, notably white wine, if a deal were not concluded in a month. Suddenly, an all-out trade war between the U.S. and Europe seemed imminent.

Hills' threat was intended as shock therapy -- to force the European Community to reduce its agricultural subsidies, the issue that has thwarted all recent attempts to forge a new global General Agreement on Tariffs and Trade among the U.S. and 107 other trading partners. As Americans fretted about prohibitively priced Chablis and Europeans contemplated retaliation, puzzled observers tried to sort out a complex question: Who's really to blame?

THE HILL OF BEANS. What Hills and her European counterparts were specifically wrangling about was oilseeds: soybean, sunflower and rapeseed used as animal feed and in cooking oil. The U.S. has long claimed that European farmers receive excessive government subsidies that make it difficult for foreign rivals to compete. Washington contends that American oilseed farmers have lost nearly $1 billion worth of E.C. business. Though European negotiators made significant concessions on subsidies, they have refused to sign off on the long-term guarantees that the U.S. demands.

Washington officials are quick to point out that the U.S. twice brought its grievance to GATT panels and won both times. The first ruling was issued in 1989, and the second, handed down last March, awarded the U.S. $1 billion in compensation for 20 years' worth of lost business. That decision set off a new round of negotiations, but at the last minute a proposed settlement was scuttled over a plan to cap annual oilseed production in Europe. The E.C. agreed to reduce the production limit from 12.5 million tons to 11 million tons but refused to accede to American requests to slash it again to 8.5 million tons. It was this standoff that finally drove Hills to take action.

THE REAL ISSUE. The battle is only incidentally about oilseeds. "At stake," says Robert Hormats, vice chairman of Goldman Sachs International, "is the credibility of the international trading system." At risk too is the recession-ravaged world economy: an all-out trade war would be tantamount to mutually assured economic destruction.

To sew up a comprehensive GATT agreement, expected to boost global commerce substantially, U.S. and European negotiators need to settle their long-running dispute over agricultural subsidies. The U.S. has demanded that European governments trim their healthy price supports, although they have shrunk already under a recent reform package. The E.C. has agreed, but the two sides cannot come to terms on the details.

Politically powerful Community farmers -- 11 million strong out of a total population of 340 million -- are fighting a remarkably effective rearguard action. Nowhere is their clout more in evidence than in France. With good reason, President Francois Mitterrand fears that giving in to the U.S. will inflame the truculent farm lobby and damage his faltering Socialist Party's prospects in legislative elections next March. Luc Guyau, president of the French federation of farmers' unions, warns that the French President had better stay his course. "We will put ourselves in the front lines," he says.

But France seems increasingly lonely. Though it claims support from Italy, Spain and Belgium, its isolation deepened when the E.C.'s point man in the agriculture negotiations, commissioner Ray MacSharry of Ireland, resigned, blaming E.C. Commission President Jacques Delors for excessive sympathy for his fellow French. The chief farm negotiator eventually resumed his duties, but only after apparently winning support to conduct the talks without interference.

As both sides calm down and return to the negotiating table, Washington enjoys the upper hand. "On this case the U.S. is right," says Gary Hufbauer, a trade specialist at the Brookings Institution in Washington, voicing a widely held judgment among economists. Still, no one can deny that the U.S. zealously protects its domestic sugar, peanut and tobacco industries, among others. U.S. farmers retain considerable political power themselves: one of their lobbies reportedly twice foiled a GATT deal just as the two sides had come close to an agreement.

Advocates on both sides of the subsidy issue acknowledge that in the long run, free trade benefits everyone. Seven successful GATT negotiations since 1947 have helped lift global commerce from $57 billion to nearly $3.5 trillion. The U.S. and the E.C. may very well patch together a compromise. "My prediction is that France will back off just enough to make a deal possible," said Lawrence Veit, international economist at Brown Bros. Harriman & Co. in New York City.

It will probably fall to Bill Clinton to work out the details, since a final resolution is not likely before he takes office. In Little Rock, Arkansas, a spokesman warned that if foreign countries failed to open their markets, the U.S. would "get tough." Like Carla Hills before him, though, Bill Clinton can only hope that he never has to make good on the threat.

With reporting by S.C. Gwynne/Washington and Adam Zagorin/Brussels