Bonn refuses to apply sanctions: EC threatens Germans with court action if they break ranks in US trade row

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GERMANY yesterday appeared to deliver a body-blow to the EC's credibility as a trade bloc by agreeing to bust sanctions against the US that all 12 EC member states agreed last month should be applied to American telecommunications industry.

The apparent move sparked a row between the EC's partners. However, the controversy began after comments by Mickey Kantor, the US special trade representative. Some claimed that his remarks represented a deliberate attempt to divide Community members on trade policy.

Following scheduled talks with German representatives, Mr Kantor was quoted as saying that Germany had agreed to open its government telecommunications contracts to US companies. As a result both countries would drop the sanctions applied at the end of last month, he said.

The Commission, which negotiates for the 12 on trade matters, immediately said it would take Germany to the European Court of Justice, if necessary, though it was still awaiting clarification from Bonn on its plans.

Gunter Rexrodt, the Economics Minister, issued a statement confirming that Germany would not be applying sanctions against the US. But he denied that Germany had concluded a 'special' deal with the US.

He said that the arrangements arose from a 1954 treaty, of which the EC was fully aware, between the US and Germany, which bound them to mutual non-discrimination in trade. 'The European Commission and other EC states have known of this legal situation for a long time,' he said.

The row turns on the terms under which the recent US-EC trade battle over public procurement contracts was settled. Under article 29 of the EC Utilities Directive, which took effect at the beginning of the year, EC utilities companies must grant public contracts to an EC company even if the bid is up to 3 per cent more expensive than that of a non-EC enterprise.

Following last-minute negotiations that article now applies only to telecommunications. Nevertheless, the US ruled at the end of the month that it was protectionist and imposed sanctions on the EC worth dollars 20m. The EC immediately replied with counter-sanctions for the same value.

Germany argues that its 1954 commitment, which predates the Community itself, is permitted by the Treaty of Rome, which founded the Community. It also insists that the Utilities Directive was drafted, at German insistence, saying only the 'EC may apply Community preference' and that any agreement was 'not withstanding existing commitments to third countries'.

However, EC diplomats warned that Germany risks falling foul of the law on two counts: for failing to implement EC legislation properly and for going against a unanimous regulation imposing sanctions.

In the long run the issue may reflect badly on the US. Privately some EC officials confirmed Germany's position was well known and suggested that the US, in making the German case so very public, was hoping to exploit Community divisions.

However, Robert Urbain, the Belgian foreign trade minister, said he was surprised by the decision. Germany's decision to break ranks would have serious implications if confirmed, he added, and would probably be aired at the EC summit in Copenhagen on 21 June.

Germany's hand may be strengthened by the fact the Utilities Directive is not uniform in its effect. Under a transitional arrangement, Spain, Portugal and Greece are exempt from article 29. This measure was agreed largely to protect domestic markets in those countries, which are less developed than in the rest of the Community.

Mr Kantor, whose aggressive style on taking office has already raised EC hackles, reportedly told a House of Representatives subcommittee on Thursday: 'Now four of the 12 European Community countries are not invoking article 29 with regard to telecommunications, we hope and trust we can begin to get agreement on the other eight as well.'

Pressure for avoiding sanctions came principally from Siemens, Germany's second-largest corporation. Although its US telecommunications activities are still small - DM550m out of total sectoral sales of DM13bn - analysts say it sees the US as its 'market of the future'.