- The Washington Times - Thursday, September 7, 2000

The United States will hit the European Union soon with more than $300 million in trade sanctions, even though the potential inclusion of Scottish cashmere on the list threatens to infuriate British Prime Minister Tony Blair.

But the tariffs, a response to European stonewalling on banana and beef imports, may complicate efforts to resolve a more serious dispute over tax provisions, one in which the United States is on the defensive, industry and government officials said.

The trade war originated with European restrictions on banana imports and with its ban on beef treated with growth hormones. But the fight has taken on a new dimension as the United States, which imposed the sanctions last year, prepares to adjust the sanctions under a new law in an effort to turn up the pressure on Europe.

U.S. Trade Representative Charlene Barshefsky and key senators like Majority Leader Trent Lott, Mississippi Republican, have argued that including cashmere on the retaliation list would help persuade Europe to relax its restrictions on beef and bananas.

But the cashmere industry employs 2,500 people in an otherwise economically depressed area of Scotland, and it is dependent on exports to the United States. Inclusion on the list promises duties of at least 100 percent, ensuring that affected products are knocked out of the United States.

The list is certain to include luxury goods and foods, such as cheese, beef products and expensive handbags.

Mr. Blair not for the first time spoke with President Clinton about the issue Tuesday night by telephone, and they were scheduled to meet in person yesterday at the U.N. Millennium Summit of world leaders. The diplomatic dustup, combined with the pressure in the United States for a tough stance toward Europe, left the timing of the new list's release, originally scheduled for this week, up in the air.

"It has been a very complicated process, and we hope to make an announcement as soon as possible," said Brendan Daly, Mrs. Barshefsky's spokesman.

The Clinton administration has told British officials that cashmere would be included on the sanctions list, prompting Mr. Blair's call. The United States tried to soften the blow by saying that, while most duties would take effect Oct. 1, tariffs on cashmere would be imposed on Nov. 15, giving negotiators additional time to resolve the banana dispute.

But British officials rejected the option, saying the long-running banana dispute stands no chance of resolution by then.

"There's no way the banana dispute will be resolved by then," one European diplomat said. "It's a nuclear weapon that has already been triggered."

The United States challenged the European rules on beef and bananas at the World Trade Organization and won favorable rulings on both issues. The WTO concluded that the European ban on hormone-treated beef does not rest on sound science and that the banana system discriminates against U.S. importers.

But the European Union, citing internal pressure to maintain the rules, refused to budge, so the WTO authorized the United States to impose retaliatory sanctions.

Accordingly, the Clinton administration last year slapped $191 million in trade sanctions on European products over the banana fight and another $116 million in response to the beef ban. In the face of continuing European intransigence, Mr. Lott this year pushed through a provision known as "carousel," which requires the president to rotate the menu of sanctions in an effort to force Europe's hand.

But alienating Britain by penalizing cashmere imports would leave the United States in a precarious position in a separate trade dispute with Europe over a U.S. tax break that saves major American exporters, including Boeing, Microsoft and General Electric, $4 billion each year. At Europe's behest, the WTO this year concluded that the provision, known as the Foreign Sales Corporation rule, violates rules against export subsidies.

Now, the United States has until Oct. 1 to change the law or face European retaliation under the same rules that led to American sanctions over bananas and beef, possibly as early as December. The commercial value of the European retaliation against the United States undoubtedly would dwarf the current U.S. sanctions, though estimates have varied wildly.

Britain has typically been a voice of moderation in trans-Atlantic trade disputes, but British officials made clear that they would not stand in the way of retaliation against the United States if its cashmere exports are subject to trade sanctions.

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