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The World Trade Organization ruled yesterday that the European Union can impose trade sanctions of up to US$4 billion against the United States in a tax dispute, the biggest penalty it has ever allowed.
The sanctions are 20 times the amount levied in any previous WTO dispute.
Experts say their potential effect on EU-US trade would be so serious that the ruling will likely prompt a new compromise between the two sides.
The result is a big victory for the EU, which had requested the US$4 billion amount. The United States claimed the award should be less than US$1 billion.
The WTO considered the request from the EU after ruling last year that a system of tax breaks for companies from the United States was an illegal subsidy and violated international trade rules.
"We are satisfied by today's decision that makes the cost of noncompliance with WTO crystal clear," EU Trade Commissioner Pascal Lamy said in a statement. "The path is now clear for the EU to adopt sanctions if the United States does not repeal the... scheme expeditiously."
US Trade Representative Robert Zoellick said he was disappointed that the WTO arbitrator had accepted the higher figure.
"Nevertheless, the key point, as the president has said, is that the executive branch will work with Congress to fully comply with our WTO obligations. I believe that today's findings will ultimately be rendered moot by US compliance with the WTO's recommendations and rulings in this dispute," Zoellick said.
The US program, known as "Foreign Sales Corporations," allows US companies with a foreign presence to exempt between 15 percent and 30 percent of their export income from US taxes. Congress passed this system in 2000 to replace an earlier version also ruled an illegal subsidy by the WTO.
The tax break, coupled with a second benefit not challenged by the EU, is expected to save US companies an estimated US$4.8 billion this year.
WTO Director-General Mike Moore, who leaves office this week after three years, issued a statement calling on both sides to try to resolve the dispute "in an amicable and constructive fashion."
"The European Union and the United States are among the most important members of this organization and both hold a special responsibility to ensure the continued health and soundness of the WTO and global trading system," Moore said.
The WTO decision had been postponed several times since April, officially because of problems with translating documents and the complexity of determining an exact figure for fines.
But both sides have been happy with the delays, not wanting to inflame trans-Atlantic trade tensions at a sensitive time.
The United States and EU also have been trying to defuse a battle over steel tariffs.
The decision does not require the retaliatory tariffs but gives the Europeans the option to impose them.
Lamy has said he is more interested in US elimination of the tax breaks than in retaliation. Washington has agreed. On July 11, Ways and Means Committee Chairman Bill Thomas introduced proposed tax legislation designed to settle the dispute.
It would repeal the existing program of tax breaks and put in place a new international tax system.
(eastday.com August 31, 2002)
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