August 21, 2001
The European Union announced today that it would seek more than $ 4 billion in trade sanctions unless the United States amends a tax-credit program for American corporations that the World Trade Organization has declared violates international law.
The WTO judgment, reached by a panel of experts last month and made public today, found that billions of dollars' worth of special tax breaks offered to Microsoft Corp., Boeing Co. and hundreds of other U.S. exporters amounted to an illegal subsidy that discriminates in favor of American products.
The decision comes at a sensitive time for the world's biggest commercial powers. They are struggling to resolve festering bilateral disputes and reach agreement on an agenda for a new round of global trade talks while the economies of the United States, Europe and Japan suffer from a steep downturn. The United States has warned the EU that pursuing the course of multibillion-dollar trade sanctions would provoke a wave of retaliatory measures by Congress that could disrupt global trade and plunge the world into an economic crisis.
U.S. Special Trade Representative Robert B. Zoellick has likened any EU sanctions of that magnitude to "dropping a nuclear bomb" on the global trading system.
The Bush administration must now decide whether to appeal the decision, change the tax law or face sanctions on exports to Europe. Under WTO rules, the United States has 60 days to file an appeal. "We are weighing our options," said Richard Mills, a spokesman for the U.S. trade representative.
Earlier this month, chief executives of major U.S. companies that benefit from the law urged President Bush to appeal any negative ruling to buy more time to negotiate a solution.
Zoellick said in a prepared statement that he has been consulting closely with Congress and U.S. business executives. "In seeking a resolution, we are focusing on how to promote America's economic interests while fulfilling our WTO obligations," he said.
EU officials said they recognize the dangers of waging a major trade war with the United States at a time when the global economy seems particularly fragile. But they contended that the United States has the responsibility of bringing its tax regime into line with world trade rules.
The Bush administration has come under sharp criticism from European allies for its unilateral approach in challenging several international treaties, including those governing climate change, biological warfare and missile defense systems.
The United States has generally backed the authority of the WTO as the court of last resort in trade disputes. In several key cases -- notably over banana imports -- the WTO has sided with the United States against the European Union.
The latest case dwarfs other trade disputes, however, because of the size of the proposed sanctions. If WTO arbitrators agree with EU claims for $ 4 billion to $ 5 billion in damages, it will far surpass any commercial penalty applied by the Geneva-based organization since it took over the responsibilities of the General Agreement on Tariffs and Trade.
The EU has been challenging U.S. tax breaks to exporters for years. The WTO acted on an earlier EU complaint by declaring that the Foreign Sales Corporation Act provided illegal export subsidies. That law allowed major exporters to shelter some overseas earnings from tax by funneling sales through offshore shell companies, called "foreign sales corporations," that were mainly in the Caribbean.
After Congress approved changes in November designed to conform to WTO rules, the EU complained that the amended law only increased the size of the tax breaks. The WTO panel agreed that the latest version was also illegal.
The EU's executive commission released a statement saying it was "fully satisfied" with the latest WTO ruling and now expects the United States to comply by making "wholesale changes" in the tax laws.
European Commission officials said the EU was prepared to delay applying any sanctions if the U.S. Congress agreed to consider new legislation that would change the tax laws. "We can hold off on this for as long as we like if we think that the U.S. is making a serious effort to change its law and bring itself into compliance, even by the start of the next tax year," said Stephen Gospage, a senior EU trade representative.
He said that if the United States decided to appeal the decision, the EU would press ahead by requesting WTO permission to impose the sanctions on American exports. "We are very confident that we can defend our position," Gospage said.
The outcome could depend on how Congress responds to calls for reform of the business tax system. The United States now applies a tax on worldwide company profits. But Rep. Bill Thomas (R-Calif.), chairman of the House Ways and Means Committee, favors a "territorial" system under which only domestic earnings would be subject to U.S. tax. He and other advocates say this approach would still benefit American companies while bringing the United States into compliance with WTO rules.
In their ruling, WTO judges said they would not offer an opinion on the relative merits of "worldwide" vs. "territorial" systems of taxation. They said it was up to Congress "to choose any kind of tax system it wishes -- so long as that system is consistent with WTO obligations."
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