BUSINESS

ALMOST ‘FABULOUS’

BUT THERE ARE STILL OBSTACLES IN THE WAY OF MAKING EUROPE THE WORLD’S LARGEST FREE TRADE ZONE

ANDREW PHILLIPS July 29 1991
BUSINESS

ALMOST ‘FABULOUS’

BUT THERE ARE STILL OBSTACLES IN THE WAY OF MAKING EUROPE THE WORLD’S LARGEST FREE TRADE ZONE

ANDREW PHILLIPS July 29 1991

ALMOST ‘FABULOUS’

BUSINESS

Sometimes, says Quebec businessman Harold Mueller, it is easier to win acceptance abroad than at home. Since it started in 1985, Mueller’s Eicon Technology Corp. of Lachine, Que., has had better sales in Europe than in North America for its main product—a software package that allows users to transmit data between personal computers and central mainframe units. Customers include a major British bank, the German federal parliament and the Spanish national police force. Eicon currently has a British office, opened in 1988, and one in Paris, opened last month. Next month, it plans

BUT THERE ARE STILL OBSTACLES IN THE WAY OF MAKING EUROPE THE WORLD’S LARGEST FREE TRADE ZONE

to open a third European office in Dusseldorf, Germany. The expansion is aimed partly at being closer to the company’s clients, but partly as well at seizing the opportunities offered by the European Community’s drive to create the world’s largest free trade zone by the end of next year—its much-vaunted “1992” program. Says Mueller, Eicon’s vicepresident of operations: “We were concerned that if we didn’t have a real presence in Europe, we might be left out.”

The EC’s ambitious program to tear down the remaining barriers to trade within its 12 member states by Dec. 31, 1992, has been

more than a public-relations triumph. In Europe, it has dominated business planning and helped to reinvigorate the EC’s once sclerotic economies. It also has lured thousands of foreign companies to Europe—from small players like Eicon to giant U.S. banks and Japanese automakers. But 18 months before the deadline for implementing all 282 separate measures in the freer trade program, there are fresh doubts that post-1992 Europe will be as open to unfettered trade within Europe and with the rest of the world as once promised. Planners overseeing the program have been forced to compromise on some measures that would ensure that the movement of people and goods becomes truly free. More ominously, slowing growth and rising unemployment have fuelled protectionist calls from several key industries.

Still, the program’s promise is alluring. Its ultimate goal is to create a single, unified market out of 12 diverse nations—Britain, Ireland, France, Belgium,

Luxembourg, Germany, the Netherlands, Denmark,

Italy, Greece, Spain and Portugal. In theory, that should make it more efficient and more profitable to do business in Europe.

The generally enthusiastic reception for “1992” has inspired even more ambitious plans for closer ties among EC countries. They include a new European currency to replace existing national currencies, a “social charter” that would standardize workers’ rights across the Community, and a still-vague scheme for European “political union.”

Although each of those proposals is the subject of fierce debate, the 1992 program itself has made impressive strides. In June, EC officials reported that about three-quarters of the program had already been adopted by the 12 member states. They added that the process of creating a single internal market was now “irreversible.”

The sticking points that remain, however, include some of the measures that most clearly symbolize to ordinary people the goal of a barrier-free Europe. Chief among them is the free movement of people across national borders, eliminating the need for passports or immigration checks. That almost certainly will not be a reality by the 1992 deadline: Britain and Denmark both insist on retaining frontier controls, arguing that an open-border policy would allow drug smugglers and terrorists to move around freely. Other countries favor fighting those problems with a pan-European police force, but the British object to that on grounds of national sovereignty and civil rights.

Other reservations concern provisions that would allow stockbrokers to market their services throughout the EC and an agreement on the free movement of live animals across borders. The British, once again, adamantly refuse to allow other countries to ship animals freely across their borders—claiming that such a development would encourage the spread of diseases such as rabies. Yet another obstacle is the need to equalize consumption taxes and excise duties among the 12 EC countries in order to do away with the need for tax controls at borders. In late June, the European Commission hammered out a partial agreement that fell short of what 1992 planners had sought. Instead of levying the same tax rates and excise duties, all 12 governments agreed on a minimum rate for value-added taxes—15 per cent. That still allows individual countries to impose higher rates on selected goods.

Although the taxation agreement amounted to a watered-down version of the original 1992 goal, the accord will result in an enormous cut in paperwork for businesses. It will eliminate the need for between 50 and 60 million customs documents a year—and allow goods ranging from cosmetics to computer parts to be trucked across borders without being stopped for inspection. Declared Christiane Scrivener, the EC commissioner responsible for tax matters: “Businesses will be able to export and import with no border formalities—no customs documents, no waiting for customs clearance, no holdups at the frontier.”

Those are the types of advantages that have lured foreign companies to establish operations in the European Community. Among the leaders in the investment drive are the Japanese, who began investing heavily in the EC in the late 1980s. By comparison, Canadian companies, preoccupied both with the recession and with the fallout from the 1989 Canada-U.S. Free Trade Agreement, have played a relatively minor role. But some large Canadian firms—including Power Corp., Northern Telecom and Bombardier—have undertaken major expansions in Europe in the past year. Says Bruno Picard, commercial counsellor in Canada’s mission to the EC in Brussels: “The big Canadian corporations are sticking to their game plans for Europe whatever the state of play with the single market—and that means steadily raising their stake.”

Bombardier, in particular, has moved into Europe in a decisive way. In May, it formed a Belgian holding company, Bombardier Eurorail

SA, which controls four railway construction firms employing 4,000 people. Company officials estimate that the four firms will have combined annual sales of $800 million. That would make Bombardier Europe's fourth-largest maker of railway equipment.

Bombardier’s commitment to Europe was heightened in 1989 when one of its Belgian subsidiaries, Brugoise Nivelle, won a $400-million contract to build railcars for the Channel Tunnel, which is due to open in June,

1993. The company’s job is to construct the custom-designed shuttle railcars upon which automobiles and trucks will be loaded for their 25minute journey through the tunnel.

proposals to expand Europe’s highspeed rail network. “We’re in this for the long haul,” said Jacques Laparé, Bombardier’s director of operations in Brussels. “The potential here for railway constructors is little short of fabulous.”

On a much more modest scale, Lachinebased Eicon Technology has its eye on the expanding computer market in Europe. The company, which employs 180 people at its head office in suburban Montreal, opened in early 1985. Six years later, more than half of its annual sales of $36 million are in Europe.

Eicon’s experiences, however, illustrate some of the pitfalls of doing business in Europe. Although common European specifications have already been agreed on for the types of computer boards and software that Eicon produces, local regulators still often interpret the rules differently from one country to another. That, says company vice-president Mueller, can result in a subtle form of discrimination against companies perceived to be foreign. “Acceptance could be delayed by a low-level bureaucrat, especially if you’re up against local competition,” Mueller says. “Everybody says that there won’t be protectionism after 1992, but we’re not so sure. It’s important to establish a credible European presence.”

Many non-European businessmen share the concern about possible protectionism in post1992 Europe. At a recent conference in London, Robert Hormats, vice-chairman of Goldman Sachs International, a New York Citybased investment firm, voiced the widespread fear that “Europe may become so preoccupied with its internal integration that it imposes new restrictions on foreign business or loses interest in strengthening the global trading system.”

In fact, several vulnerable European industries are already seeking shelter from the full blast of international competition. Hit by a severe slump in sales, European automakers have called for EC-wide quotas on Japanese imports for five or six years after 1992. Cur-

Since then, Bombardier has acquired two other Channel Tunnel contracts, worth another $350 million. Bombardier officials add that they expect to share in the business generated by

rently, only four EC countries—Italy, France, Spain and Portugal—restrict Japanese car imports. Some Japanese automakers have attempted to avoid the threat of additional quotas and import duties by building assembly plants in Britain, on the assumption that they would then have assured access to the entire European market after 1992. But continental car

companies, especially those in Italy, object even to the sale of Japanese automobiles produced in Europe. That has resulted in friction between Britain, which has welcomed Japanese manufacturers, and France and Italy, which accuse Britain of allowing the Japanese to use it as their “Trojan horse” in the fast-forming single European market.

Europe’s electronics industry also is lobbying for massive government aid to fend off competition from Japan. France has already proposed huge bail-outs for two state-owned electronics and computer firms, Thomson SA and Groupe Bull SA. In Germany, giant Siemens AG is seeking government help to compensate for losses by its semiconductor branch, and Daimler-Benz AG has asked for $600 million worth of state aid to finance aeronautics projects. Protectionist sentiments also appear to have influenced govemment funding for high-tech research and development. ICL PLC, Britain’s largest computer maker, was excluded from three European-funded research programs last year after it was taken over by Fujitsu Ltd. of Japan.

So far, hostility towards foreign firms has been directed mainly at the Japanese. Many European analysts have voiced concerns that Japan is poised to launch an economic invasion of the EC. And Japanese fears of possible protectionism were heightened in May when France’s new prime minister, Edith Cresson, took office. Cresson is an outspoken critic of Japan—once describing the Japanese as “ants” bent on taking over the Western world. “The Japanese have a strategy of world conquest,” Cresson said shortly after taking office. “Now, they are about to devour Europe.”

Most analysts and trade officials maintain that, so far at least, the 1992 program has not taken a protectionist turn. Canadian officials in Brussels who are responsible for monitoring the implementation of the single-market plan dismiss fears of a so-called Fortress Europe after 1992 as alarmist and exaggerated. Some experts, however, caution that such a potential exists if the heightened competition brought about by the 1992 program drives too many companies out of business. Michael Hodges, an expert on European integration at the London School of Economics, says that the elimination of trade barriers inside Europe will force companies to close down many local factories and distribution centres, and lead to bankruptcies among others that cannot compete. The resulting increase in unemployment, he says, may lead to a chorus of demands for renewed protection against foreign competitors. “Fortress Europe is not a reality right now,” Hodges adds, “but it is a real possibility if the aftershocks are severe.” For the moment, however, the new opportunities appear to outweigh the potential dangers.

PETER LEWIS

ANDREW PHILLIPS in London with PETER LEWIS in Brussels