EU Aims for Huge Sanctions On the U.S. in Retaliatory Move

GEOFF WINESTOCK / WALL STREET JOURNAL 20nov00

Text of EU Request to WTO below

BRUSSELS -- The European Union has asked the World Trade Organization for permission to slap a record-breaking $4.04 billion in trade sanctions on a broad range of U.S. goods in retaliation for an allegedly unfair tax break for U.S. exporters.

The request represents the single biggest claim ever for trade sanctions in a case before the WTO and could test the fledgling organization's ability to manage disputes without triggering a wildfire trade war. But that showdown won't come until the middle of next year because, in lodging its request in Geneva Friday, the EU agreed to hold off imposing sanctions until it gets a final green light from a panel of WTO experts.

This will give the U.S. the chance to argue that a law rushed through Congress -- dealing with Foreign Sales Corporations, or FSCs -- and finally signed into law Friday has brought the U.S. into compliance with WTO rules. "We believe that this legislation specifically addresses the concerns raised by the WTO Appellate Body and will be found to be WTO-compliant," President Clinton said Friday in Vietnam, after interrupting his trip to sign the bill into law.

The EU says that the new law doesn't meet WTO rules but it will wait for a final WTO hearing, because, EU officials say, they want to avoid an unnecessary escalation of the dispute. "Although we believe the FSC replacement legislation does not solve the problem, the EU will leave it to the WTO to rule on this question. That's what the WTO is there for," said European Trade Commissioner Pascal Lamy.

The U.S. tax program in question allows about 6,000 U.S. corporations, including Boeing Co. and General Electric Co., to reduce their income taxes by channeling exports of U.S. manufactured goods through shell companies known as Foreign Sales Corporations, usually registered in offshore tax havens. A WTO appellate body ruled in March that this represented an export subsidy, thus breaching WTO rules against unfair distortion in world trade. The U.S. fix-it bill passed last week rewrites the legal basis for the program and eliminates the need to set up an offshore company. But it maintains roughly the same level of benefits for the same companies, even increasing them for arms exporters that previously only qualified for a partial benefit.

The EU's claim for $4 billion a year in sanctions would far exceed other claims or requests in WTO cases. For example, the U.S. has currently imposed $308 million in penalty duties on EU goods in unrelated disputes over market access for U.S. hormone-treated beef and banana traders. But the request is at the low end of expectations, which ran to as high as $26 billion a year and is roughly in line with a U.S .Treasury estimate compiled for Congress which valued the FSC benefit to U.S. corporations this year at about $4.1 billion.

In a statement, Deputy Treasury Secretary Stuart Eizenstat and U.S. Trade Representative Charlene Barshefsky said that the U.S. would challenge the EU request for $4 billion in sanctions on American goods. "We do not believe that European companies have been disadvantaged," the officials said.

The two senior officials noted that the U.S. hoped for further discussions with the EU aimed at resolving the dispute. The WTO has typically authorized trade sanctions lower than those requested by the litigating country, but, given the size of the numbers in the FSC case, any award for sanctions will likely be a major dent in EU-U.S. trade. "If the EU actually imposes sanctions, the reality is that the exact number is secondary. Any number will be so huge that it will seriously disrupt EU-U.S. trade," said Richard Weiner, a Brussels-based trade lawyer for Hogan & Hartson.

In another gesture calculated to reduce tension, the EU on Friday published only an indicative list of the U.S. goods it intends to target with penalty tariffs, mentioning 46 general categories of products ranging from live animals to spacecraft. An EU spokesman said that a detailed list naming specific products would be compiled only after the WTO made its final decision on the new U.S. law. In general, sanctions take the form of penalty tariffs of 100% on imports of goods up to the value allowed by the WTO.

The EU says that the FSC dispute should remain separate from the bananas and hormone-treated beef disputes. On the U.S. side, officials say they are trying to reduce trade tensions by resolving the bananas and hormone-treated beef disputes, where the EU recently made new proposals. The White House has also refrained from imposing a so-called carousel of its existing trade sanctions against EU products. Under this measure mandated by Congress in May, the White House is supposed to remove periodically some EU goods from its sanctions list and add others.

The threat of these wildcat sanctions angered the EU but the White House has chosen not to implement the measure, citing ambiguities about deadlines in the congressional law. A spokesman for the U.S. trade representative said that the U.S. had no plans to issue a carousel list in the near future. "We are working very hard to resolve the beef and banana disputes, and while we're making progress, we do not think it is productive to issue the carousel lists."

EU requests WTO compliance panel and authorisation to impose sanctions against the US in Foreign Sales Corporation trade dispute

Brussels 17nov00

IP/00/1321

EU requests WTO compliance panel and authorisation to impose sanctions against the US in Foreign Sales Corporation trade dispute

Today the EU has requested the WTO to authorise trade sanctions on the United States up to a maximum amount of $4.043 billion in the Foreign Sales Corporation (FSC) trade dispute. This amount is based on the value of the subsidy granted by the US under the FSC scheme which the WTO found to be illegal earlier this year. As required by the WTO, the EU has also submitted an indicative list of those products that would be eligible for sanctions. The EU will also ask for a WTO compliance panel to rule on the FSC replacement legislation signed into law on 16 November. EU Trade Commissioner Pascal Lamy said: "this request is designed to protect our rights in the WTO, fully in line with the procedural agreement reached with the US in September. Whilst wishing to de-escalate this dispute, our aim is to see the WTO-incompatible FSC export subsidies removed. Although we believe the FSC replacement legislation does not solve the problem, the EU will leave it to the WTO to rule on this question. That's what the WTO is there for."

Although the FSC replacement legislation was signed into law by President Clinton on 16 November, the EU believes that the new law not only maintains the violations found by the WTO in the FSC case but may even aggravate them. Therefore, the EU has today requested a WTO compliance panel on the FSC replacement legislation.

The new legislation continues to provide a significant illegal export subsidy to more than half of total US exports, to the direct detriment of European companies. Furthermore, the legislation maintains in place the FSC regime at least until the year 2002, despite the WTO ruling and implementation deadlines. The EU believes that it is for the WTO, not any one WTO party, to decide on questions of WTO compatibility. In particular, it does not propose to proceed in the way the US handled the banana case in early 1999.

In addition, the EU regrets the fact that the US has missed the WTO's deadline of 1 November, even though the WTO granted an extension of one month from 1 October in order to give the US Congress some additional time to implement the WTO ruling. Nonetheless, the EU remains prepared to implement the EU-US agreement signed at the end of September in the spirit of continued de-escalation of EU-US trade disputes - whilst fully protecting its rights under the WTO agreements.

Background

The US decided to introduce the FSC scheme in 1984 as a replacement of its old export promoting tax scheme, the so-called DISC, that was condemned by a GATT panel in 1981. According to the US administration, the FSC would be functionally equivalent to DISC while being easier to defend under the GATT. However, the EC contested the legality of the FSC scheme since its adoption but did not pursued this matter further until 1997 due to the Uruguay Round trade negotiations. After unsuccessful rounds of consultations the EC decided to request the establishment of a WTO Panel in September 1998.

Panel proceedings

WTO consultations took place in December 1997, February 1998, and April 1998, but without resolution. The EC therefore requested a WTO panel to look at the issue, which reported on 8 October 1999. The FSC was found to constitute a prohibited export subsidy under the Subsidies Agreement, and (in relation to agricultural products) an export subsidy in violation of the Agriculture Agreement. The US appealed to the WTO Appellate Body on 26 November 1999. The Appellate Body confirmed on 24 February 2000 all the findings of the Panel as to the WTO compatibility of the FSC.

Both the Panel and the Appellate Body report were adopted by the WTO on March 2000. The US was giving until 1 October 2000 at the latest to implement the WTO recommendations and rulings.

Economic importance

This case is of major importance for European companies as the sectors that benefit the most from FSC: chemical, pharmaceutical, mechanical machinery, electrical equipment and transport equipment, are sectors where US and EC companies fiercely compete. So any subsidised increase of US export will invariably result in a loss for EC companies.

Moreover, the amounts of subsidies granted are substantial. In the year 2000, the amount is estimated at around $4 billion according to the fiscal year 2001 US Budget proposal. This amount is expected to grow year on year.

Implementation of the WTO ruling

On 2 May 2000, Mr Eizenstat, Deputy Secretary of the US Treasury, visited Brussels to present to Commissioner Lamy the US proposal to replace the FSC. On 26 May 2000, Commissioner Lamy sent a letter of response stating clearly that for the Commission the US proposal continued to be in violation of the WTO Subsidies agreement as it was export contingent and maintained the US content requirement.

On 27 July the US House Ways and Means Committee approved the draft legislation to replace the FSC, the so-called "FSC Repeal and Extraterritorial Income Exclusion Act of 2000". Deputy Secretary of the Treasury Stuart Eizenstat presented Commissioner Lamy the proposed legislation by letter of 31 July. On 31 August, Commissioner Lamy wrote back expressing his concerns about the WTO compatibility of the proposed legislation and offering Mr Eizenstat his views on what a WTO compatible solution might require.

As explained in the Commissioner's letter, and contrary to what it was expected, the new proposal maintained the export contingency of the regime and the US content rule in violation of the WTO Subsidies Agreement. Furthermore, it included some "transitional" provisions that would in fact extend the FSC regime well beyond 1 October 2000, perpetuating the violation condemned by the WTO.

EU-US Agreement on WTO Procedures for FSC

On 30 September, the EC and the US agreed on the procedural agreements for the handling of this dispute. One of the key elements of the EU-US agreement is that the two sides agree that a WTO panel would review the compatibility of the FSC replacement legislation once adopted. This panel would report before sanctions could be imposed. In parallel, the EU would seek the necessary WTO authorisations in the appropriate time, in order to preserve its WTO rights.

In addition as the US was unable to approve the FSC replacement legislation by 1 October, the US asked the WTO Dispute Settlement Body to postpone the 1 October deadline until 1 November, delaying any further procedural steps until later in the month. The WTO agreed to the extension on 12 October 2000.

The September agreement specifically provides for:

• the EU to request the suspension of concessions in the WTO by 17 November, including an indication of the maximum amount, and the submission of an indicative list, to be authorised by 28 November;
• the US to request arbitration on the amount;
• the EU to challenge the WTO compatibility of the US legislation by requesting a compliance panel in the WTO; and
• the arbitration work to be suspended pending the ruling of the compliance panel.

For further information, please see annexed indicative list of products and MEMO/00/