the WTO case that won't die

["Ian Murray" <seamus2001@xxxxxxxxx>]

Thursday January 10, 3:10 pm Eastern Time
WTO ruling could reignite US-EU export tax spat
By Doug Palmer

WASHINGTON, Jan 10 (Reuters) - A high-stakes trade dispute between the
United States and the European Union over tax breaks for exporters
comes to a head next Monday with a World Trade Organization ruling
that could open the door for Brussels to impose sanctions on more than
$4 billion of U.S. goods.

The case dates back to November 1997 when former President Bill
Clinton and former European Commission President Jacques Santer were
still in office. Since then, the WTO has thrice ruled against the
United States in the spat over whether U.S. tax breaks for exporters
amount to an illegal export subsidy.

If the upcoming appellate decision goes against the United States, the
case would move next to a WTO arbitration panel for a ruling on the
amount of sanctions the EU could impose.

Brussels asked permission in November 2000 to retaliate on $4.043
billion worth of U.S. goods in the dispute, which originally centered
on the U.S. Foreign Sales Corporation (FSC) program that doled out
billions of dollars of tax breaks each year to companies such as
Boeing (NYSE:BA - news) and Microsoft (NasdaqNM:MSFT - news).

``I expect the (appeals panel) ruling will be against the United
States, but I also expect the Europeans will move very slowly in
imposing any penalties,'' said Clyde Prestowitz, president of the
Economic Strategy Institute and former U.S. trade negotiator. ``The
timing for the Europeans to do something very Draconian isn't very
good.''

After losing twice in the FSC case -- once before the original WTO
dispute settlement panel and once on appeal -- the Clinton
administration pushed a package of reforms known as the
Extraterritorial Income Exclusion Act (ETI) through Congress during
its final year in office to comply with WTO rules.

The EU, complaining the new system was just as bad as the old,
challenged the ETI at the WTO while also seeking permission to
retaliate against the United States. Under a ``process agreement''
worked out between the two sides, the EU suspended action on its
sanctions request until the WTO made a final determination on the ETI.

LIMITED OPTIONS

If the United States loses again on Monday, the arbitration panel
would have 60 days after the WTO officially adopts the rulings in late
January to decide on the amount of sanctions the EU could impose. Once
the final figure is approved, the EU could immediately lower the boom
unless it has reached agreement with the United States on alternative
action.

U.S. Trade Representative Robert Zoellick has been loathe to say how
the United States would comply with the ruling if it loses again on
appeal. But U.S. trade officials note there is a relatively limited
range of options to avoid sanctions.

One choice would be to push through a new package of tax reform
legislation, but there is little chance of that happening before the
arbitration panel would be due to rule on the EU's sanctions request
in late March or early April.

Another would be for the United States to pay ``compensation'' by
lowering U.S. tariffs on some EU goods or taking other action to allow
EU companies to sell more of their goods and services in the United
States.

A third possibility would be to try to persuade the EU to fold the
issue into a new round of world trade talks that begin this year and
are scheduled for completion in 2005.

U.S. Treasury officials say the WTO's rulings in August unfairly
discriminated against the United States, by siding with one system of
export tax breaks over another.

But they also contend that the panel report raised questions about
whether some European territorial tax systems are in compliance with
WTO rules.

Before heading to Geneva in late November for a WTO appeals panel
hearing, U.S. Deputy Treasury Secretary Kenneth Dam told reporters he
would argue that the August ruling put a number of European countries
``at risk.''

RAY OF HOPE

A senior U.S. trade official told reporters in late December he saw a
``ray of hope'' that the U.S. could avoid sanctions in the dispute,
even if it loses the appeal.

That's because many European companies and countries recognize the
damage they could do to themselves if sanctions are imposed, the
official said.

Kimberly Pinter, a tax specialist with the National Association of
Manufacturers, agreed with that analysis.

``They don't want to sanction us any more than we want to be
sanctioned,'' she said. ``The European Union and the United States are
incredibly economically interdependent and to try to do that would
hurt them as much as it would hurt us.''

EU officials acknowledge the difficulty of constructing a retaliation
list that would not harm EU exporters and have stressed retaliation is
not their preferred option.

However, some observers doubt the EU would simply drop its sanctions
threat without getting something in return.