United States’ Foreign Sales Corporations: European Commission publishes revised list of products, February 2003

The European Commission issued a revised draft list of US exports on 26 February 2003 that could be subject to tariffs aimed at countering the negative effect of the United States' foreign sales corporation programme (FSC). The revised list follows a period of public consultation on a number of possible sanctions that began in September 2002 and it whittles down the total value of products to 4 billion dollars, in line with the amount awarded by the World Trade Organisation in August 2002.

The European Commission has sought to take action against the United States since the decision of a World Trade Organisation panel on 30 August 2002 to grant the EU permission to implement countermeasures against the Foreign Sales Corporation scheme. The programme was established in 1984 to replace a previous Domestic International Sales Corporation scheme, which was declared an illegal export subsidy by a GATT panel in 1976. The FSC aims to increase exports by US manufacturers by providing them with a tax benefit. In essence, rather than tax 100% of foreign profits and then returning some form of a rebate, the FSC approach generally allows exporters to simply reduce their tax bill on foreign profits by a minimum of 15% and up to a maximum of 30%. The EU immediately contested the legality of the FSC but did not pursue it due to the opening of the Uruguay Round trade negotiations. It did raise the issue again in 1997 in bilateral discussions with the US following complaints by EU companies and in view of the increasing amount of FSC. However no progress was made and so the EU requested a WTO panel ruling on the dispute (Case DS108). In October 1999, the Panel found the FSC to constitute an illegal export and gave the US until 1 October 2000 (extended to 1 November 2000) to withdraw the FSC scheme. In an effort to comply an FSC Replacement Act (ETI Act) became law on 15 November 2000 but the new act did not modify the substance of the export subsidy scheme and so the EU immediately requested a further Panel. On 20 August 2001, the WTO compliance panel found that the ETI Act also constituted a prohibited export subsidy under WTO rules. The US appealed but in January 2002 the WTO Appellate Body once more confirmed the panel findings and the arbitration procedure was reactivated. The report of the arbitrators was originally due on 29 March 2002 but it was delayed until the end of August 2002.

Following the WTO's decision in August 2002, the European Commission immediately began to draw up a list of possible US exports that could be subject to tariffs of up to 100% in certain cases. In an unprecedented move, the European Commission set up a 60 day public consultation on the list of products in order to minimise the negative effects that any eventual sanctions could create to EU industry. The revised list, which includes about 1,800 US products compared to almost 2,800 products on the original list, will require the approval of the Member States before it can be authorised by the WTO Dispute Settlement Body and implemented. Although the list of products has not as yet been made public, it is believed to include two key US exports - soya beans and aluminium - which may be subject to up to 100 percent tariffs.

Yet the European Commission has emphasised that it would much prefer the United States to repeal the law rather than the EU find itself in the position where it is forced to impose sanctions. Commenting on the possible sanctions, EU Trade Commissioner Pascal Lamy said:

'The EU's objective remains to ensure the repeal of this WTO-incompatible legislation. In the meantime the EU is following the necessary procedural steps to launch countermeasures if the compliance process does not deliver swift results'

The United States Trade Representative, Robert Zoellick, is pressing the US Congress to repeal the legislation rather than face EU sanctions and President Bush has proposed such a repeal in his budget for fiscal year 2004. On 26 February 2002 Mr. Zoellick met with the House of Representatives Ways and Means Committee and urged them to bring the United States into compliance with World Trade Organization (WTO) rulings against corporate tax breaks for exporters. Mr. Zoellick suggested that although the EU did not favour retaliation, a US solution to the issue was urgent, saying:

'Personally, I think the EU will hold off for a while, but I don't know for how long. We have got to get this fixed.'

The foreign sales corporation scheme is one of a number of ongoing trade disputes between the European Union and the United States. The United States is considering filing a WTO challenge to the EU's four-year moratorium on approvals of agriculture products produced by biotechnology for import into Europe whilst the EU is challenging US tariffs on steel imports.

Links:
European Commission:
	26.02.03:	Press Release: Foreign Sales Corporations: European Commission submits to Member States draft list of products that could be subject to countermeasures [IP/03/285]
	DG Trade: WTO Dispute Settlement
United States Trade Representative:
	Homepage
	Press Release: Zoellick urges compliance with WTO rulings on tax breaks
European Sources Online: Financial Times:
	27.02.03:	EU lists US exports for possible trade sanctions
European Sources Online: In Focus
	United States' Foreign Sales Corporation programme: European Commission names products that could be subject to countermeasures

Helen Bower

Compiled: Thursday, 27 February 2003

The European Commission published a list of products on 13 September 2002 that could be subject to tariffs aimed at countering the negative effect of the United States' foreign sales corporation programme (FSC).