- The Washington Times - Tuesday, September 12, 2000

The House is set to pass legislation as early as today that is designed to defuse the most explosive trans-Atlantic trade dispute in a decade.

But the bill, which would rejigger a U.S. tax provision that has run afoul of international trade rules, nevertheless may unleash a trade war after Oct. 1 that could cost the United States billions of dollars a year and divide Europe from its closest ally.

Congress, rushing through a raft of legislation with only 19 working days left before it adjourns Oct. 6, is considering a major change to a tax rule that the World Trade Organization (WTO) has said is an unfair subsidy to U.S. exporters.

Failure to pass the legislation would almost guarantee that Europe would slap sanctions on U.S. exports by early next year. Though estimates of the potential damage to commerce vary wildly, even $1 billion in sanctions annually would be an unprecedented escalation of U.S.-European trade tensions.

"Anyone who says they're not nervous about the timing of this bill is lying," said Kimberly Pinter, director of corporate finance and tax issues for the National Association of Manufacturers.

The House was scheduled to take up the tax legislation today on its "suspension calendar," a parliamentary maneuver under which bills are passed quickly without debate. But congressional sources said passage could be delayed by a few days over a separate procedural dispute between Democrats and Republicans.

The Clinton administration and the companies that use the tax provision are pushing for swift Senate action shortly thereafter.

The legislation would revamp a tax law that allows major U.S. exporters like Boeing, Microsoft and General Electric to save $4 billion each year by routing income from exports through paper companies in tax havens like Barbados and the U.S. Virgin Islands.

Prodded by the European Union, the WTO ruled in February that these "foreign sales corporations" give U.S. exporters an unfair advantage over competitors. Now, under WTO rules, the United States has until Oct. 1 to change the law.

In an effort to meet this deadline, the House Ways and Means Committee overwhelmingly approved a new version of the tax law in July. The change, a complicated attempt to separate subsidy from exports, would cost the Treasury Department an additional $1.5 billion over the next five years.

But the European Union already has rejected the revised provision. Europe almost certainly will request another WTO ruling on whether the new law complies with trade rules, but the alternative is immediate retaliation against U.S. exporters.

"We will ask for a WTO ruling if we think the problem is not fixed," said John Richardson, deputy chief of the European Union diplomatic mission in Washington.

Crucially, changing the tax law by Oct. 1 will buy the United States time, pushing further action on the issue into the next administration. Failure to act at all would bring on sanctions by the end of the year.

"We just have to move this bill forward," said Kenneth Kies, a lawyer for a group of corporations that use the tax provision. "And if we have to defend it again in the WTO, we'll defend it."

Asking for another WTO review sets in motion procedures that could lead to trade sanctions. However, this process is rather murky owing to a lack of clarity in WTO rules, trade lawyers said. If the new tax provision fails the second WTO review, the European Union could retaliate against U.S. exports.

Since WTO procedures are not clear on this point, the United States and Europe have room to negotiate a time line for resolving the dispute, officials said. But avoiding sanctions would become more difficult if the revamped measure fails the second review, they said.

Two disputes over bananas and hormone-treated beef also threaten to complicate matters, European officials said. The Clinton administration is deciding how to penalize the 15-nation European Union for its failure to comply with WTO rules on those two disputes and is considering tough tariffs on Scottish cashmere.

But British Prime Minister Tony Blair, mindful that 2,500 jobs in Scotland depend on exports to the United States, has lobbied President Clinton to exclude the cashmere from any duties. British officials, normally a moderating voice in trans-Atlantic trade spats, have told U.S. counterparts that they would not help solve the tax dispute if the United States impedes Scottish cashmere exports.

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