- The Washington Times - Saturday, August 31, 2002

The World Trade Organization yesterday authorized the European Union to slap $4 billion in tariffs on U.S. exports over a corporate tax break that violates international rules, ratcheting up pressure on Congress to repeal the law as soon as possible.
Arbitrators with the Geneva group whose members set global trade rules concluded that a measure allowing U.S.-based companies to escape $4 billion in taxes each year amounts to an unfair subsidy for exports.
"The path is now clear for the EU to adopt sanctions if the U.S. does not repeal the [tax] scheme expeditiously," said Pascal Lamy, trade commissioner for the 15-nation European Union.
The law, which has caused the largest trade dispute in the WTO's history, allows U.S. corporations to funnel their earnings from exports through paper companies, known as Foreign Sales Corporations (FSC), that are set up in tax havens such as the U.S. Virgin Islands. The main beneficiaries include Boeing, Caterpillar, General Electric and Microsoft.
Europe could retaliate by the fall, but Mr. Lamy has said the union will wait as long as Congress is making progress in changing the law. The tax bill is stalled on Capitol Hill because of objections from the law's major beneficiaries, but U.S. Trade Representative Robert B. Zoellick expressed optimism that legislators would fall in line.
"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," he said.
If Europe hit back at the United States with $4 billion in levies, it would be by far the most serious fight since the WTO was created in 1995. By contrast, a high-profile European-American spat over bananas that the two sides resolved last year involved $191 million in tariffs.
Under WTO rules, the United States would not be allowed to counter with duties against European products. But some business groups have urged the Bush administration to file its own WTO complaints over the European Union's ban on genetically modified crops or on subsidies for the European plane manufacturer Airbus.
WTO Director-General Mike Moore urged restraint after the decision.
"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 the global trading system."
The next steps will be for Europe to draft a retaliation plan naming specific products that will face tariffs and notify the WTO of its plans, an EU official said.
In the meantime, both sides are hoping that Congress can make enough progress on changing the FSC rules that Europe will agree to delay retaliation until the next Congress can pass a law that President Bush can sign, American and European sources said.
Most European officials acknowledge privately that the tight integration of the European and American economies would make retaliation commercially disastrous for both sides, a point German Economics Minister Werner Mueller made publicly yesterday.
"Neither Germany nor the European Union have an interest in imposing duties," he said in a statement.
The House may act this year, but Senate Finance Committee Chairman Max Baucus, Montana Democrat, has said his chamber is unlikely to pass a law this year.
Rep. Bill Thomas, the California Republican who heads the House Ways and Means Committee, this summer introduced a bill that would repeal the FSC and replace it with a variety of rules designed to benefit some American companies, but it has run into opposition. Mr. Thomas said in early August he plans to redraft the bill in the fall.
The main part of the bill would create tax breaks that benefit companies with plants overseas. Boeing in particular has objected that it would lose money on the change because it manufactures largely in the United States.
House Speaker J. Dennis Hastert, Illinois Republican, also has objected to this provision. Caterpillar, another company that operates mostly in the United States, is the largest employer in his district.
Another section of the legislation would drastically restrict the ability of foreign-owned subsidiaries to deduct the interest on loans from their U.S. taxes. These companies, which contribute substantially to employment in the United States, have argued they should not be penalized for being foreign-owned.

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