- The Washington Times - Friday, September 30, 2005

Congress spent two years repealing an export subsidy in order to comply with a World Trade Organization ruling. The WTO said yesterday that Congress didn’t finish the job.

A panel of WTO judges said that despite Congress’s effort the United States continues to break global trade rules with tax breaks that benefit aircraft manufacturer Boeing Co., General Electric and other major exporters.

The European Union, which first challenged U.S. tax laws at the WTO in 1998, said the decision would allow it to punish U.S. firms with trade sanctions unless Congress repeals the illegal tax provisions.

“These provisions … are unacceptable in view of the large benefits involved. We estimate these advantages, for example, to add up to over [$903] million for Boeing alone,” said Peter Mandelson, EU trade commissioner.

The WTO in a 2002 decision said tax breaks, known alternately as Foreign Sales Corporation and Extraterritorial Income provisions, are illegal. A follow-on ruling in 2003 allowed the European Union to slap up to $4 billion in duties on American exports, a figure a Bush administration official called the equivalent of dropping a nuclear bomb on international trade.

Congress in October 2004 passed a bill, known as the American Jobs Creation Act, that repealed the subsidy, worth about $50 billion over 10 years, and replaced it with $76.5 billion in cuts for U.S.-based “production” and $42 billion to reduce taxes on overseas operations of American firms.

But Congress also created a two-year transition to phase out the subsidy, and grandfathered existing contracts so that companies could honor long-term deals they had already signed. The WTO faulted those measures.

The United States “continues to fail to implement fully the operative … recommendations and rulings to withdraw the prohibited subsidies and to bring its measures into conformity with its obligations under the relevant covered agreements,” judges said at the end of a 34-page report.

The U.S. can appeal the report.

“We are still in the process of studying the report. As always, we will consult with Congress before making any decisions in this regard,” said Christin Baker, spokeswoman for the U.S. trade representative’s office.

Lawmakers are likely to urge an appeal.

“Any threat to reimpose sanctions because of these [transition] measures is outrageous,” Sen. Max Baucus, Montana Democrat, said last October after the EU announced it would ask the WTO to examine the revamped U.S. tax provisions.

Mr. Baucus said the challenge was an attempt to gain leverage in an unrelated dispute between Boeing and European aircraft manufacturer Airbus.

Yesterday’s public announcement by the WTO confirmed a confidential decision released in July.


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