Rough Trade

The European Union plays hardball over U.S. tariffs.

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The European Union is threatening the U.S. with trade sanctions for operating a nifty tax break scheme and maintaining — isn’t free trade wonderful! — prohibitive tariffs on steel imports, both in violation of World Trade Organization rules. If the United States doesn’t comply, it risks a damaging trans-Atlantic trade war, not exactly what Bush needs in the run-up to the 2004 elections.

The tax breaks are known as the Foreign Sales Corporation (FSC) scheme. FSC law allows thousands of U.S. firms, operating through subsidiaries in offshore tax havens, to benefit from reduced export taxes. The long-standing law — which benefits major corporations like Boeing and Microsoft — allows American companies to exclude 15 percent of their net income from the export of goods made in the United States from federal income tax. This saves major exporting companies $5 billion a year.

The U.S. has been out of compliance for a long time. The World Trade Organization first ruled against the tax breaks in 1999. “When the WTO first ruled on the FSCs, it gave the United States until November 2000 to act,” EU Trade Commissioner Pascal Lamy said. “That was three years ago, we have been extremely patient.”

The BBC notes:

“The Commission also warned that the penalty would rise from the introductory rate by one percentage point a month for a year — by which time it hopes Washington will have repealed the measures.

Arancha Gonzalez, spokeswoman for the EU Trade Commissioner added: ‘The faster the US acts, the less the measures will bite. This should focus the minds of US legislators.’

She added the union had adopted a ‘measured but responsible’ approach which would give the US a ‘last chance to comply.'”

The U.S. now has until the end of this year to repeal the tax breaks. The sanctions, to take effect in March 1, 2004, would impose 100-percent tariffs on more than $4.0 billion of U.S. exports, making it difficult for U.S. producers to sell their goods in Europe.

Adding to the tense trans-Atlantic trade climate, there’s a separate dispute about steel tariffs with, again, sanctions as a possible consequence. The dispute goes back to March 2002, when President Bush imposed tariffs on steel imports of up to 30% in an effort to protect US steel producers from foreign competition. The move, which sits oddly with Bush’s ‘free-trade’ rhetoric, was loudly protested by the E.U. as illegal protectionism. The WTO ruled in the E.U.’s favor in May this year, but the U.S. appealed the ruling.

The Financial Times (subscription) has more details:

“The WTO is set to issue its final ruling in the next week on the steel tariffs, and is expected to uphold an earlier finding that the tariffs violated WTO rules. Mr Lamy said that if the US does not move on steel ‘retaliation is a racing certainty in mid-December.’ But he said the EU had little choice but to insist on compliance with the WTO rules, as the US did in previous disputes over bananas and beef hormones.

Grant Aldonas, US undersecretary of commerce for international trade, said yesterday President George W. Bush would soon make a decision on whether to maintain or repeal the steel tariffs.
He ruled out intermediate options such as expanding the number of steel products excluded from the tariffs, saying this would do little to help US manufacturers that have complained about higher prices on basic steel products.”

In case Bush decides to keep the tariffs, the European Union has already made a list of sanctions targeted at American products in ways specifically intended to maximize political pain for supporter’s of the Republican Party.

The transatlantic dispute could hurt Bush, as the Washington Post reports:

“The uncompromising language of EU Trade Commissioner Pascal Lamy raised the prospects of a politically and economically painful trade war during a U.S. presidential campaign. And it seemed to have left the Republican-controlled Congress and White House with an unsavory choice: take action now that could harm the vulnerable steel industry and other manufacturers or risk sanctions that could be even more uncomfortable closer to the 2004 election.

On Monday, the World Trade Organization is scheduled to issue its final ruling against steep tariffs that President Bush imposed on imported steel in March. Lamy said the European Union will then give Bush five days to lift the tariffs or face the imposition of up to $2.2 billion in retaliatory tariffs by Dec. 15 on U.S. exports selected for their own political resonance, such as Harley-Davidson motorcycles, Southeastern textiles and citrus fruit from Florida.

On steel, independent experts have said Bush could try to find a middle ground between lifting the tariffs and the status quo, perhaps by broadening exemptions from the tariffs for many European steel products. But Lamy made it clear there was no room for compromise there either.

‘You know, you can’t be half-pregnant,’ he said.”

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