Global Policy Forum

By Richard Quest

The European Union has won a major trade case against the United States in the World Trade Organisation. The WTO has ruled that the US is unfairly subsidising the exports of its multinational companies by giving them a special tax break - the so-called foreign sales corporation tax exemption (FSC).

US officials have reacted angrily to the ruling, but promised not to ignore the findings. A spokesman for the European Union said Brussels was open for talks with the US administration to find a solution acceptable to both sides. $3bn tax break The FSC tax break is worth about $3bn a year to US companies. It allows big exporters like Microsoft and Boeing to shield some of their export income from US taxes by setting up a foreign subsidiary. The programme was established in 1984 to offset the tax breaks European companies get when they sell outside the EU.

We will seek a solution that ensures that US firms and workers are not at a competitive disadvantage said Charlene Barshefsky, US Trade Representative. EU Trade Commissioner Pascal Lamy welcomed the decision. "The FSC (Foreign Sales Corporation) system, and its predecessor, have had a major negative effect on international trade to the detriment of European companies," he said.

US attacks ruling

The ruling was immediately attacked by the US trade representative, Charlene Barshefsky. (This tax) has had a major negative effect on international trade to the detriment of European companies

Pascal Lamy, EU Trade Commissioner "We strongly disagree with the appellate body's ruling," Ms. Barshefsky said. "Our view remains that the FSC is completely consistent with US WTO obligations. We respect our WTO obligations, and will seek a solution that ensures that US firms and workers are not at a competitive disadvantage with their European counterparts."

The US Treasury Secretary, Larry Summers said that the United States would not back down. US industry representatives expressed concern that the ruling could lead to a further escalation of the trade war with Europe. "We stand to lose tax parity with our trading partners," said Steve Elkins of the Chemical Manufacturers Association. "And we stand to be retaliated against through tariffs against US exports."

EU strategy undecided

Under international trade rules, the United States has until 1 October to repeal the tax law. US jobs and exports could be affected If it does not, the EU would be allowed to introduce penalty tariff rates on a range of US products to compensate for any losses caused by the illegal US tax subsidy.

The United States imposed similar penalties on EU products last year in disputes over the import of bananas and beef. It was at that time that the EU decided to take the US to the World Trade Organisation over the subsidies. It also objected to another provision of US trade law, called "Super 301", which allows the US to unilaterally introduce trade sanctions against other countries. That dispute was settled peacefully, with the US more or less conceding that it would not be able to implement the discretionary provisions.

Sensitive timing

The current dispute is likely to prove politically explosive, especially during a US election year. US Congressional leaders urged the government to reach a negotiated settlement with the EU, warning that there were not enough votes to change the law. "This is likely to lead to a highly charged tax and trade environment that we are sure all parties would like to avoid," warned Senator William Roth and Representative Bill Archer in a joint letter. With the failure of attempts to launch a new round of world trade talks in Seattle in December, trade disputes are threatening to escalate, undermining support for the system of free trade that was established after World War II.

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