Surprisingly, transatlantic business relationships are unlikely to suffer because of the difference of diplomatic opinion over how to handle Iraq, says Dermott White.

The growing bitterness between France and the US over how to deal with Saddam Hussein now has some American restaurants reportedly serving 'Freedom fries' instead of 'French fries'. A small gesture perhaps but one that could be indicative of a cooling in relations that reaches beyond political and diplomatic disagreements between the two countries.

Indeed, both the US and the economies of 'old Europe' could suffer if they disengaged, but there is little sign as yet of any 'business patriotism' causing companies from either region to cut their ties with each other.

Could be costly
On a broader scale, France, for example, has much to lose if its economic relationship with the US becomes too fraught.

In the worst case, trade between the two countries could suffer from a consumer backlash. In the US, some Republican congressmen have already called for a consumer boycott of French goods. But US companies could also suffer if it emerged that they have close ties with French companies.

Another vulnerable industry is tourism. The number of US visitors to France is already down since September 11 - it fell by 18% in 2002 to 2.9m - and there is little doubt that the French tourism industry would suffer if the two countries' relationship disintegrated.

US direct investment in France could also be affected. France's share of US investment in Europe fell to 7% in 2000, according to the Financial Times, and might deteriorate further as it competes with its neighbours in 'new Europe' which have adopted a more cooperative approach in their dealings with the US. This too could have ramifications for French companies looking to raise capital in the US. Several UK newspapers have pointed to France Telecom's upcoming e15bn capital raising exercise as a potential casualty of the diplomatic standoff.

The head of corporate finance at accountancy firm Grant Thornton in London, David Brooks, says he has already noticed the US divestment trend in Europe: "What we have seen from the US over the last two years is that American companies have been divesting in the UK rather than investing," he says. But he adds that at this stage the movement of funds away from Europe has been in response to the toughening economic climate and a desire by US companies to focus their efforts at home.

"I think if the US company is struggling and its got a smallish bit of business in Europe somewhere ... they are just saying: 'Its time to be more focussed at home at the moment.'

Hard-nosed businessmen
Something that has surprised Mr Brooks, he says, is that many of the businesses he deals with have already assessed the impact of war and are not willing to let the threat further influence their decisions. He says the majority of them are pressing on with their plans because they believe in them, war or no war.

Mr Brooks adds it is possible that US companies will be influenced by the diplomatic dispute over Iraq but he would be surprised if there was any long term impact on business alliances.

"I think there may well be a bit of emotional irritation ... but if you leave aside the Iraqi question, business is pretty tough," he says. "So I don't see a lot of people we deal with being very emotional about making heart over head decisions. They are pretty hardnosed, calculating guys who will try and do the right thing for the business."

This view is echoed by Dr Louis Klarevas, defence analysis research fellow at the London School of Economics.

He says: "Now the question is: are companies really prepared to sever major economic contracts, relationships with their counterparts in Europe, in particular 'old Europe'? Yes, it might happen, but it's not really that likely because I think economic relations are far more important than pride and trading insults across the Atlantic."

Losing out?
The main concern for France and the rest of 'old Europe' seems to have been identified, in the UK at least, as the risk of being excluded from the reconstruction of post-war Iraq. The US, once the war is over, will undoubtedly have the most influence in Iraq and this could pose problems for businesses from countries that opposed US policy, when it comes to handing out contracts for rebuilding.

However, the US government has already promised that oil fields will be held 'in trust' for the Iraqi people, with proceeds going towards the country's reconstruction. Thus, if there is an Iraqi bonanza for Western firms, it is likely to be for oil service companies, engineers and construction firms, not oil refiners.

By Dermott White
Dermott White is assistant editor on Global Reinsurance.