In late February, Lamy paid a visit to Washington to meet with senior members of Congress and delivered an audacious demand: If Congress did not eliminate a large tax break for American exporters by March 1, the European Union would slap $4 billion in retaliatory trade sanctions against the United States. When it comes to taxes, President Bush hasn’t been swayed by angry Democrats, a burgeoning federal deficit, worried economists, a stagnant job market, or moderates of his own party. But faced with Lamy’s threat, he caved. A few days after the Exocet’s visit, the president called upon Congress to quickly bring America’s tax code in line with the E.U. Commissioner’s demands. House Speaker Dennis Hastert summed up his reaction to the pressured legislative changes at an earlier news conference: “My gut feeling about this is we fought a revolution 230 years ago to stop Europeans from telling us how we have to tax in this country, and it puts the hair up on the back of my neck that we have to consider this at all. But we have to do it.”

Conservative columnist Jonah Goldberg has popularized the phrase “cheese-eating surrender monkeys” to deride the French, but on one economic issue after another, it has been the United States that has raised the white flag. In December 2003, the Bush administration lifted tariffs on imported steel after Lamy threatened $2 billion in retaliatory tariffs on U.S. exports, targeting especially those produced in critical election states, such as oranges from Florida. Early this year, the administration had to back away from its unilateral demand for armed sky marshals on flights from Europe after strong resistance from E.U. member states.

Increasingly, decisions made in Washington are being overturned by bureaucrats in Brussels. Three years ago, the U.S. Department of Justice approved the merger of U.S.-based G.E. and Honeywell, only to watch the E.U.’s competition commissioner effectively block the deal. The E.U. claimed jurisdiction because the combined business sold more than $225 million annually in Europe. The trustbusters argued that if the businesses combined, the new company would potentially dominate some sectors of the global aerospace industry, which would have hurt European competitors. Now the European Commission is at it again. In late March, it was expected to levy a fine and require Microsoft to do something that the U.S. government couldn’t, or wouldn’t: force the company to change its dominant Windows operating system. Where the United States ultimately failed to get Microsoft to give its customers equal access to non-Microsoft browser software, the European Union reportedly wants a version of Windows that gives customers access to competitors of the company’s Media Player software.

The war in Iraq taught a clear lesson: Unilateral foreign policy, especially one that ignores Europe, doesn’t work. In the run-up to the invasion, the Bush administration gambled that it could isolate France and Germany and garner the support of the rest of the U.N. Security Council. Instead, “Old Europe” won the support of most of the other members, and America found itself fighting a bloody guerrilla war in Iraq largely alone. The same lesson now increasingly applies in the economic realm. More than previous administrations, the Bush White House has tried to make economic policy unilaterally, as if the only powers it need worry about are American opinion polls and Beltway trade groups. Yet from trade to taxation, antitrust to safety rules, the Europeans are proving to be powerful competitors who can work against our interests if we ignore theirs.

This simple truth has yet to fully sink in for many in Washington. But it will soon enough. Next month, the European Union will expand from 15 to 25 member nations, to create an entity that encompasses 450 million people. That’s half again the size of the United States, and bigger even than the North American free trade zone. In all of human history, it has rarely been the case that a smaller state could get away for long with telling a larger state what to do, given similar levels of technological development. Indeed, it has usually been the other way around. Which is why, more and more, the power barons of Washington are going to have to leave their comfortable K Street steakhouses and learn the murky, frustrating, rule-bound ways of a certain dull city on the Senne River in Belgium.

No one claims that Brussels is among the most stunning of European capitals. The weather is bleak year-round, and the neighborhood where the European Union is headquartered is a soulless collection of modern office buildings. The city boasts only a few quaint old squares. Down the block from the most impressive, the Grand Place, is the underwhelming, if not downright odd, symbol of the city: a tiny fountain-statue of a little boy, all of a foot high, urinating. Residents enjoy dressing the statue in hundreds of different costumes. If the boy’s garb can be seen as representing the various nationalities in the Union, his actions might symbolize the way in which the Union is increasingly able to treat the United States.

Last January, for instance, the European Union shut down efforts by Homeland Security Secretary Tom Ridge to negotiate with individual European countries to station U.S. Customs agents in their ports to better inspect cargo containers bound for America. The problem wasn’t with Ridge’s request per se, he was told, but with the way he was negotiating: bilaterally, country-by-country. If he wanted permission, sniffed the European Union, he would have to go through Brussels (which he did, eventually getting what he wanted).

The failure of many in Washington to understand that the rules of America’s relationship with Europe have changed is a source of frustration to U.S. officials whose task it is to maintain that relationship. U.S. ambassador to the European Union, Rockwell Schnabel, notes that it has often been difficult to convince Washington powerbrokers to pay attention to the European Union instead of the bilateral relationships they had known for decades. “Some days you get the feeling that maybe we are fighting battles but the people back [in Washington] don’t fully understand the battles that we’re fighting,” observes Schnabel, sitting in his office of the cramped, overcrowded building that houses the U.S. Mission to the European Union. There are signs that some administration officials get it. On the day I visited him, the ambassador had the pleasure of hosting the chairman of the Securities and Exchange Commission, William Donaldson. Such visits, said Schnabel, almost never happened until recently. Yet Schnabel’s organization itself symbolizes the inertia of Washington’s long indifference to Brussels. The U.S. mission employs a staff of 95 to manage relations with an entity (the European Union) of several hundred million people. Next door is the U.S. embassy to Belgium, which employs a staff of 440 to manage relations with a country of 10.3 million.

It’s said that if you want to know which celebrities are most popular, follow the paparazzi. Similarly, if you want to know which capitals are the most powerful, follow the lawyers. By that measure, Brussels’ day has arrived: More and more American attorneys are packing up and moving there. “You ignore it at your clients’ peril,” warns Bill Baer, of the Washington-based law firm Arnold & Porter, which opened its Brussels offices in September. Because he now spends a week there each month, Baer has rented an apartment near Luxembourg Square. Among other interests, Arnold & Porter represents GE, which suffered the previously mentioned Honeywell debacle, and pharmaceuticals giant Pfizer, whose $60 billion acquisition of Pharmacia was approved last year by the commission.

It’s not just fear that leads American companies to deploy their lawyers and lobbyists to Brussels, but opportunity. Under the Bush administration, Washington has taken a much more laissez-faire attitude towards corporate mergers than Europe. So U.S. firms that want to block mergers of their competitors turn to Brussels in search of more favorable rulings–just as smart defense lawyers “forum shop” for the most sympathetic judges. Sun Microsystems, for instance, sent its lobbyists to Brussels to urge the European Union to look at the “bundling” practices of its competitor Microsoft, while Disney fought the AOL-Time Warner merger before the European Union, helping to scuttle Time Warner’s plan to combine its music business with record company EMI in the process.

“Every company of a certain size has a Washington representative. Increasingly the same is true of Brussels,” says Raymond S. Calamaro, partner at Hogan & Hartson LLP in Washington, who travels to Brussels to work on trade and competition matters. In meetings with E.U. officials, he recommends modifications to proposed laws and regulations on behalf of his clients, in areas ranging from agriculture to financial services. His experience shows some of the surprising curve balls of trans-Atlantic regulation. Calamaro had to lobby the commission over its mad-cow regulations not on behalf of cattle ranchers but for medical-device manufacturers, because their devices included bovine collagen and consequently fell under the food regulations.

Despite the significance of the work being done in Brussels, the city has yet to exert an allure equal to its importance in the eyes of Washington’s heaviest hitters. Part of this is the entrenched bilateral mindset–the idea that the important action happens between nations. Even among foreign-service officers, an economic affairs slot in Brussels is still considered less prestigious than a political or national security assignment almost anywhere, especially in such attractive cities as London or Paris. Part of it is also the allure of bigger, more exciting cities; Brussels is to Paris what Albany is to New York City. One London-based lobbyist I spoke to says she tries to avoid even staying overnight when she has to go to Brussels. Other visitors joked that its biggest advantage was its proximity to Paris. It’s hard to blame them. Beau Phillips of Chlopak, Leonard, Schechter & Associates, a Washington, D.C., public-relations agency, was in town last fall on behalf of a technology trade association for meetings on the Microsoft case. He explained the dreary impression that many Americans have of the city: “You will often see little more than the inside of a drab government building, the inside of your hotel room, the inside of the law or lobbying firm conference room you are working from, and the view from the taxi between the three.”

Still, the lawyers keep coming. Every week, says Bill Drozdiak, executive director of the nonprofit German Marshall Fund’s Transatlantic Center in Brussels, he receives a fresh invitation to a grand opening of some firm’s new branch. “Sidley Austin Brown & Wood invite you to the opening of their new Brussels office,” he reads aloud from an invitation lying on his desk. After a moment thinking, he adds, “There are more American lawyers now in Brussels than any other capital in Europe.”

If the European Union has only recently been able to exert power over Washington, it has been quietly accumulating the strength to do so for years. The union began in 1950 as an effort by Germany and France to pool management of their respective coal and steel industries. By the 1980s it had grown into a Common Market for goods and services encompassing more than 12 nations. After the Berlin Wall fell in 1989, Europeans could focus less on threats from the east and even more on their own integration. Under the 1992 Maastricht Treaty, the nations of Europe committed themselves to giving up one bit of sovereignty after another, with authority over everything from tariffs to environmental regulations to fiscal and monetary policy migrating to the European Union.

This pooling of authority in a single entity is the first big reason why the European Union has become an economic counterweight to the United States. The second is that the United States was fast becoming more dependent on the European market. Trade in goods between the United States and the European Union has doubled from $187 billion in 1990 to $392 billion in 2003, a sum exceeded only by U.S. trade with its NAFTA neighbors. But when the economic activities of U.S. subsidiaries incorporated in EU countries are counted, Europe is by far our biggest commercial partner. For instance, during the 1990s, U.S. firms invested nearly twice as much in the Netherlands, $65.7 billion, as in Mexico, $34.1 billion, according to the Center for Transatlantic Relations.

A third lever of power came the European Union’s way in 1995, when the international community created the World Trade Organization, of which the European Union and the United States are members. The WTO provides an independent forum to adjudicate trade disputes, and its rulings give the winners the right to impose fines and other sanctions on the losers. The European Union has been aggressive in charging the United States with trade violations, and equally aggressive turning WTO decisions to its advantage as Pascal Lamy’s threats of sanctions over steel tariffs and tax breaks show.

The European Union gained a fourth means of influence in 1999, when most of its member states began the process (completed in 2002) of abandoning their national currencies in favor of a common one, the euro. By tying the fates of European economies more closely together, the common currency encouraged member states to present a much more united front on key economic issues than was the case before. “Boy, has it strengthened their hands on things like trade; they’re much more willing to act together,” said Barry Bosworth, an international economist at the Brookings Institution. Although the new currency showed signs of weakness after its debut, it is arguably now poised to make a run at the greenback’s status as the world’s premier reserve currency. The European Union now has its own Alan Greenspan, Jean-Claude Trichet, head of the European Central Bank based in Frankfurt. Though he’s even less of a household name in Washington than Pascal Lamy, a strongly worded statement from Trichet can cause drastic shifts in the dollar-euro exchange rate–making, for instance, American exports more or less competitive on world markets.

The Bush administration inadvertently handed the European Union a fifth source of power with its my-way-or-the-highway foreign policy. From invading Iraq to pulling out of the Kyoto climate change treaty, Bush’s decisions have so inflamed European public opinion that European Union officials feel obliged to take a much tougher line with America on economic issues than they might have otherwise. Some in Washington, for instance, had hoped the European Union would postpone sanctioning the United States over its export tax breaks, but thanks to Iraq, that didn’t happen. “Political leaders now have an interest in standing up to us,” notes Brookings Institution senior fellow Philip Gordon, former director of European affairs in the Clinton White House. Adds Gordon: “There’s a bit of payback there.”

Of course, it’s not as if Washington never wins battles with Brussels. A few years ago, for instance, the United States hammered Europe with $200 million in WTO-approved trade sanctions until the continent dropped its barriers to importing bananas from United States-owned firms. And after the European Union vetoed the proposed merger between GE and Honeywell, the Bush administration’s antitrust officials worked with Brussels to bring Europe’s competition laws more in line with those in the United States.

But in one component of power, the ability to absorb punishment, Europe seems to have an edge. While Washington abandoned its steel tariffs in the face of costly sanctions from Brussels, Europe has been willingly paying over $100 million annually in WTO-sanctioned penalties rather than give in to U.S. demands to import hormone-treated American beef. What explains Europe’s tough hide? Partly it’s that the bureaucrats who run the commission are unelected, insulating them from some of the demands placed on representatives who have to face voters every few years. Europeans are also more willing to pay a little extra to keep their food pure, and more comfortable allowing their bureaucrats to intervene in the free market.

Last December, attempts by Europe to agree on a common political constitution collapsed–a major blow to the dreams of European integrationists, but probably a temporary one. For decades, Europe has managed to overcome obstacles to unity. The betting is that closer political union is only a matter of time.

In any event, Europe’s clout will certainly grow after the European Union expands next month, for the simple reason that big markets tend to set the rules for everybody. In America, for instance, book publishers tend to bow to the preferences of their biggest customers, which means that schools in small states have to buy textbooks that reflect the conservative or liberal biases of educational commissions in Texas and California. Similarly, American consumers may soon have to get used to buying products tailored to the demands of Brussels. The European Union, for example, has long forced U.S. automakers to improve their emissions standards for cars sold in the European market. Might they go a step further, and pressure firms like GM and Ford to improve their records worldwide? It’s hypothetical, but Europeans would be thrilled if they could pull off a backdoor Kyoto, declaring that, since pollution is a global issue, only firms whose vehicle fleets meet worldwide standards could sell in the European market.

Or imagine what would happen if the WTO were to rule that Europe’s current ban on genetically modified corn–currently a contentious issue–was permissible. U.S. agribusinesses that sell GM corn would not only have to kiss the European market goodbye, but lose access to markets in Africa, Latin America, and Asia as well, says University of Maryland business professor Peter Morici. And farmers won’t grow strains of food that the big global manufactures aren’t buying.

Privacy is shaping up to be another major battleground of the future between U.S. and E.U. regulations. European citizens are much less willing to give up their personal information than Americans. Software companies have learned that tough privacy regulations written to protect E.U. consumers often are easiest or cheapest to implement by improving standards for all users around the globe. When Microsoft struck a deal with the commission last year to improve consumer privacy–giving users more control over where and how their personal data was shared–many of the changes ultimately were made for all Microsoft users worldwide.

The degree to which Europe may soon be dictating economic terms to America has not yet dawned on most of official Washington, but it will soon, and it will come as a shock. Why, politicians will ask, should the decisions of a bunch of bureaucrats in Brussels force our companies to raise fuel standards, rewrite food labels, or strengthen software privacy protections? Think tanks will host conferences to denounce the high regulatory costs of complying with Europe’s standards. Newspaper columnists will demand that the president show some backbone and fight for American economic freedom. After much heated rhetoric, it will dawn on Washington that we face a choice: stand forthrightly behind our principles of independence, or sell our products and services abroad. In the end, we will decide that in economics, as in foreign affairs, it is more in our interests to work with the Europeans than against them. For a proud and powerful nation like ours, it will not be easy. But as Dennis Hastert said, we’ll just have to do it.

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