Analysis: Europe ponders free trade or fair trade PARIS (Reuters) - Europe has opened a can of worms by trying to reconcile free trade with fair trade. Under pressure from French President Nicolas Sarkozy, the European Commission adopted proposals on March 21 that could shut foreign companies out of bidding for public contracts in the European Union unless their home countries provide similar access to European firms. The EU executive, which has historically promoted free trade and opposed protectionism, insists the measure is intended as a crowbar to open lucrative government contracts in countries such as Japan, the United States and China, not to close EU markets. Public procurement worldwide, ranging from building roads and railways to supplying software and running data networks, is worth some 1 trillion euros a year, and Europe's market is far more open than those of competitors, the Commission says. Japan allows foreign bidders on less than 3 percent of public contracts, and the United States is only slightly more open. EU officials are irked by more "Buy American" provisions creeping into recent U.S. legislation. The plan has to be approved by the European Parliament and a qualified majority of EU governments, which is far from assured, but it has already prompted fierce debate. Critics, notably the free-trading British, say the proposals send the wrong signal and would put Europe on a slippery slope towards fencing off markets rather than opening them. A 2011 British government policy paper on trade said the principle of reciprocity might sound "superficially reasonable," but it could open the door to protectionism. The government does not think that the EU should close its own markets if others' markets are not opened. This could weaken competitive forces, drive up costs and (in procurement) reduce value for money for the EU taxpayer," it said. Germany, Europe's biggest exporter, is also unenthusiastic, fearing retaliation against its cars, chemicals and industrial machinery, which are still conquering Asian growth markets. Sarkozy, who has long banged the drum for trade reciprocity and branded Europe "naive," has gone further and demanded that the EU adopt a Buy European Act similar to the Buy American Act reserving certain markets for domestic producers. In an election campaign speech last month, he threatened to impose unilateral restrictions on public contracts if the EU does not act - a move that would breach European law. Like many trade battles, the dispute pits the interests of producers against those of consumers and exposes the limits of Europe's ability to spread its own system of rules-based governance worldwide. A study produced for the French government argues that aside from public procurement markets, European manufacturers face a growing problem of "unfair competition" from countries with lower labor, environment and safety standards. The report entitled "Ending Unfair Globalization" by veteran industrialist Yvon Jacob and Economy Ministry official Serge Guillon rehearses familiar complaints about China's subsidized finance for companies, intellectual property theft and exchange rate management. But it also pinpoints issues such as the failure of European authorities to police the usage of the "CE" quality label, meant to reassure consumers that goods meet EU safety norms. In practice, importers put the CE stamp on products ranging from household appliances to toys that are rarely examined by national customs officials at the port of entry. It's Europe's own fault. Europe does not supervise its own market, which is the largest in the world," Jacob, a former conservative lawmaker who calls himself a "liberal internationalist," said in an interview. "The European Union has imposed technical standards and safety norms on our own industry that don't apply elsewhere and are not checked on imported goods," he told Reuters, citing tires, lighters and chemical products as examples. European tire manufacturers estimated that 15 percent of imported tires entering the EU market are below European safety standards, but no one inspects them, Jacob said. When it comes to throw-away lighters, 76 percent of imports, mostly from China, do not meet the ISO 9994 safety norm that French producer Bic has to respect, he said. The EU's so-called REACH directive has forced European businesses to find substitutes for chemicals deemed unsafe, imposing costs that competitors do not face and inciting some companies to produce offshore at lower standards. It costs aerospace company EADS 80 million euros a year just to change the paint on the wings of its Airbus planes to conform with REACH, while rival Boeing faces no such cost, the president of EADS told Jacob. That is peanuts compared to the EADS aircraft sales that are at risk in another dispute over Brussels efforts to make foreign airlines flying into Europe buy EU carbon emissions permits. China has suspended the purchase of $14 billion worth of Airbus jets as a result. Jacob and Guillon want the EU to put in place quality controls backed by sanctions to enforce the EC label on imports. They propose creating a European office for the surveillance of the internal market modeled on the EU's anti-fraud agency, and hiring more staff to follow up industry complaints of dumping at below-cost price. Whatever the justice of their complaints, it is hard to imagine governments in gateway states such as the Netherlands, Belgium or Britain hiring armies of customs officials to filter Chinese imports more thoroughly. The balance of power in Brussels is likely to remain with the free marketers because the EU treaty puts the Commission in the driver's seat on trade. Even if the new public procurement powers are adopted, the EU executive's agreement would be required to trigger them. Writing by Paul Taylor, editing by Mike Peacock