The Great Brie and BMW Battle

To be sure, the level of vitriol on Capitol Hill over the course of the Iraq debate even by normally more level-headed Members of Congress, has been startling. This is particularly true with regards to the French. This has led to a variety of proposed bills which range from the ridiculous to the bizarre.

For starters, U.S. Defense Secretary Donald Rumsfeld was asked by Representative Jack Kingston (R-GA) to boycott Sodexho. The French firm has a $881 million contract to cater for the U.S. Marines.

Other Republicans like Senator John Ensign (R-NV) — with their eyes on Iraq's reconstruction — have tried to keep French or German involvement at a minimum. All the hoopla could eventually result in a bill or two aimed directly at French wine or brie.

But even the angriest lawmakers in the U.S. Congress realize that there is little scope for punishing France and Germany directly without hurting other EU allies.

Any retribution would also risk counter measures by the European Union, which has authority over the region's single trade policy — not to mention running afoul of the WTO.

But the political troubles with France and Germany do not stop there. They may further complicate the already difficult Doha round trade talks between the United States and the EU.

And Europeans are bracing for a WTO dispute with the United States over GMOs. The United States shelved its complaint while campaigning for war support, but the administration sees a green light to proceed now.

French wine sales will undoubtedly slump, but sales to the United States amount to less than 10% of total French wine exports, and 2.7% of French exports to the United States.

In contrast, a boycott of German cars could do damage. After all, cars make up 25.3% of German exports to the United States — but there's no sign yet that Americans are shunning Volkswagens.

The potential effect on BMW or Porsche is bound to be miniscule. Those Americans who buy them do so for the symbolic value of the brand, the style and the German engineering. The will not be easily persuaded to go with a Cadillac for patriotic reasons.

Moreover, most of the biggest U.S. import items from both countries — machinery, pharmaceuticals, chemicals — aren't as closely associated with nationality by U.S. consumers. That's the case with several consumer products as well.

The majority of Americans surveyed said they would boycott Yoplait yogurt — a U.S. product that sounds French — but did not recognize that Dannon yogurt is French-owned.

And in the auto, pharmaceuticals and chemicals industries, foreign affiliates have set up shop in the United States to produce/finish and sell their products. That creates jobs and tax revenues in the United States.

There's also the multinational ownership issue that obfuscates things. Did you realize that the U.S. sales operation of Evian, a potential "French" target, is 51% owned by Coca-Cola. So who would be hurting whom?

This is one area where we could see some direct backlash. Particularly when it comes to parceling out contracts for reconstruction in Iraq, French and German firms are not likely to get any action on the deals — as long as the U.S. government has its say.

But that discrimination cannot go too far. CEOs of U.S. competitor firms — even Boeing — have expressed their opposition to the idea of a boycott.

They fear that their European contracts could be jeopardized.

Note, too, that Airbus is not a clear and easy target. While France and Germany each own a hefty 37.5%, it is 20% owned by the UK and 6% by Spain — the United States' major allies in Iraq.

U.S. investments could be affected, if political animosity persists. Meanwhile, the message U.S. companies operating in Europe are sending to their French and German employees is this: "It's business as usual, as far as we're concerned."

U.S. companies with long-standing investments in Europe will certainly not change course based on short-term political tensions.

The longer the political dispute is prolonged, of course, the greater the chances that companies will begin to take it into account in their investment decisions.

The same can be said for private equity firms and mutual funds, which may disinvest from France and Germany if political tensions persist. Clearly, however, the major issue for US FDI to Europe (and European FDI to the US) is whether growth and investment start picking up — and whether labor regulations make such an investment attractive.

Yes, Germany will lose more U.S. troops. However, that process was underway well before Iraq — with U.S. forces diminishing from 200,000 to under 100,000 over the past decade. The current tension will accelerate the movement of bases from Germany into Poland, Hungary, etc.

And that will have some negative regional economic impact. But the move will take time and several high-tech military stations operated by the United States are likely to remain in Germany.

In conclusion, French and German defense and aerospace companies are probably most at risk from fallout from the current transatlantic dispute over Iraq.

But overall, the economic fallout from the Iraq war on the United States and Europe will have a much greater impact on the French and German economies than any potential politically-motivated backlash by the U.S. government or American businesses and consumers.

What happens to oil prices, investor and consumer confidence, interest rates and exchange rates will be crucial in determining the timing and degree of economic recovery on both sides of the Atlantic. In contrast, the number of Americans eating Brie and drinking French champagne over the next six months may make for some splashy news features, but will be an irrelevancy in economic terms.