EC fears confirmed as US pulls out of trade talks

The spectre of an early trade war between Europe and the US unexpectedly reared back into view last night after the new Clinton administration pulled out of negotiations in a row over telecommunications.

European officials reacted with amazement and dismay after the Trade Representative, Mickey Kantor, said his delegation would not attend talks in Brussels next week and threatened that sanctions against European companies would 'almost certainly' be applied. Mr Kantor told reporters that that EC negotiators had given no sign of showing sufficient flexibility to make further contacts worthwhile.

More than that, Mr Kantor said that unless Europe gave in to American demands threatened sanctions against European companies, barring them from bidding for federal supply contracts 'will almost certainly go into effect' on 22 March.

'It is most unusual that a party should cancel negotiations in this way and frankly intolerable,' said an EC spokeswoman in Washington.

The announcement is a serious blow for John Major, the Prime Minister, who returned from Washington recently claiming that the administration was set on improving trade relations. But it confirms the darkest fears of officials working for the EC's external trade commissioner, Sir Leon Brittan, who have repeatedly warned that the US and EC were on a collision course.

The announcement will only exacerbate hostility in Europe towards the US. Brussels has its own trade problems since France is threatening to veto a US-EC farm trade agreement - and the right- wing parties who are expected to win the forthcoming parliamentary election are much more hostile to the deal.

Separately the EC and the US are also squaring off over steel imports and the unresolved questions of the Gatt trade talks.

The present dispute centres on an EC directive that came into effect on 1 January, setting down common rules for awarding government contracts in the telecom, energy, transport and water sectors. The law says that where products, including those from the US, have less than 50 per cent European content, EC governments can discriminate against them regardless of price.

The US action would bar European firms from making any bid for some government contracts in the same sectors. The amount of trade affected would be fairly unimportant, with a total value of about dollars 50m. But Mr Kantor has indicated that if the row drags on he may widen the sanctions to cover potential business from Europe worth dollars 500m.

European capitals will see the move as confirmation of fears that the new administration plans to take an unnecessarily aggressive approach in trade matters. If Mr Kantor's style is to be one of up- front aggression, it may be that he believes a settlement will be reached more quickly by taking this kind of action.

But even if his decision to forsake next week's talks is posturing, it leaves little hope that sanctions can be avoided in the short term. The move seems to contradict a speech by President Bill Clinton two weeks ago promising that America would not resort to protectionist actions to get its way.