[PEN-L:29975] WTO -- FSC penalty

["Ian Murray" <seamus2001@xxxxxxxxx>]

WTO Gives EU OK for U.S. Sanctions
Reuters
Friday, August 30, 2002; 11:42 AM


GENEVA/BRUSSELS - The World Trade Organization (WTO) ruled on Friday the European Union
could slam sanctions worth a record $4 billion on U.S. exports in retaliation for tax
breaks to U.S. companies.

The figure was set by a special panel of trade arbitrators who had been debating since
January how much the European Union was being hurt by a tax system that the WTO has
repeatedly ruled to be in breach of international trade rules.

"We find that the amount of $4.043 billion ... can be considered to be a reasonable
approximation of the actual value of the subsidy," the panel said.

The finding, which could stoke simmering transatlantic trade tensions, is by far the
highest level of retaliation authorized since the Geneva-based international trade body
was established in January 1995.

The $4.043 billion figure met exactly the EU calculations for trade losses it said
companies in the 15-state bloc were suffering as a result of the disputed tax concessions,
granted to U.S. giants like Microsoft and Boeing.

U.S. officials had argued that just under $1.1 billion would be a fairer estimate.

But the panel said that on the basis of figures provided by the United States, it
calculated the annual damage to the EU at $3.74 billion, while the EU's numbers pointed to
$5.33 billion -- suggesting it could have awarded Brussels even more.

In a statement, U.S. Trade Representative Robert Zoellick said he believed the ruling will
"ultimately be rendered moot" by the United States changing its tax laws to comply with
international trade rules.

"I'm disappointed the (WTO) arbitrator did not accept the lower figure put forward by the
United States," Zoellick said in a statement. "We believe that $1 billion is much more
accurate."

"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 U.S. compliance with
the WTO's recommendations and rulings in this dispute," Zoellick said.

"We are satisfied by today's decision that makes the cost of non-compliance with WTO
crystal clear," said EU Trade Commissioner Pascal Lamy in a statement.

"The arbitrators have endorsed the EU's request, i.e. they have given us an amount of
potential countermeasures which will create a major incentive for the U.S. to eliminate
this huge illegal export subsidy," he said.

Commission trade official Nikos Zaimis said the European Union sought fast implementation
of the WTO ruling.

"We know that they (United States) have (congressional) elections in November. This is an
important date for the future. Of course, we would like to see the US comply before that
date," he told a news conference.

The ruling, however, is unlikely to lead to immediate sanctions because the EU has given
abundant hints that it is prepared to stay its hand as long as Washington is making
serious efforts to revise the offending legislation.

"But obviously it is our concern to have everybody playing by the rules, it is our concern
to minimize the fallout from problems with our biggest trade partner," said European
External Affairs Commissioner Chris Patten.

There have been calls by some U.S. congressmen for the administration to hit back over
losing the FSC case by challenging parts of the complicated EU tax laws which they say
help European exporters.

In a bid to hold off EU retaliation, President Bush pledged in May that the United States
would comply with the WTO rulings and there have been moves in the U.S. Congress on an
alternative bill to aid U.S. exporters.

But the proposals are opposed by Boeing and other beneficiaries of the tax breaks, which
say that they do not go far enough.

The aeronautics company has warned that nearly 10,000 jobs could be lost unless a
comparable system is devised, a powerful argument with congressional elections looming.

The U.S. administration has made various attempts in the past to reform the Foreign Sales
Corporation (FSC), as the tax system is known, but each time it has fallen foul of the
WTO.

The EU last month steered clear at the last minute of hitting Washington with sanctions
over steel after the U.S. administration agreed to exclude more European products from
emergency duties it imposed in March.

But the bloc's patience on the tax issue could be tested to the limit if Congress fails to
come up with a package that meets WTO rules before lawmakers adjourn for the year in
October.

Trade officials have expressed concern that rows between the world's two most powerful
economies could hamper attempts by the WTO's 144 member states to negotiate a new round of
trade liberalization, which many economists see as vital to revive a sagging world
economy. (additional reporting by Robert Evans in Geneva, Doug Palmer in Washington)