EU warned: don’t mess with US over tax breaks

Date: 22/03/01

By Simon Taylor

THE EU risks undermining American support for the global trading system if it imposes multi-billion-euro sanctions in its transatlantic dispute over export tax breaks, the US ambassador to the Union has warned.

Richard Morningstar said retaliation against US firms to the tune of €4 billion a year would cause enormous damage to World Trade Organisation rules for international business and harm EU interests.

"If there was three or four billion dollars in retaliation there would be much more damage to both sides," he told a European Voice conference on Tuesday.

Morningstar was referring to the EU's challenge to the US Foreign Sales Corporation (FSC) system, which cuts taxes for American companies selling goods and services outside the US. The Union argues the scheme, which was altered by Congress last year in response to a WTO ruling, is still an illegal subsidy to US exporters.

Morningstar stressed that he is confident the WTO will rule later this year that the new FSC system meets international trade rules. But he said that if the verdict goes against the US both sides would have to find a way to resolve the dispute without resorting to sanctions.

"If we have to pay some recompense we are going to have to think outside of the box because the ramifications are unacceptable," Morningstar said.

Speaking at the same conference, John Richardson, deputy head of the EU's delegation in Washington, said the revised US tax breaks system continues to breach international rules. "Congress changed the law but it still leaves a relative advantage to exporters," he said, warning that the EU will get the backing of the WTO to force Washington to overhaul the system - causing serious political fallout on Capitol Hill.

"We will win this and Congress will not be pleased because we will be accused of interfering in US tax policy," he added.

Morningstar said the FSC case illustrated the importance of considering all the political implications of trade disputes. "Dispute resolution is getting more and more difficult because we are talking about sensitive political issues like taxation and environmental policy," he said. If trading partners did not consider political aspects they would bring the WTO into disrepute, he warned.

The US ambassador expressed confidence that the two sides would resolve one of their major disputes in the near future. "It's a positive sign that [Trade Commissioner Pascal] Lamy and [US Trade Representative Robert] Zoellick are personally committed to solving the banana dispute," Morningstar said.

But he warned that Washington would go ahead with plans to impose €100 million in sanctions on a new batch of EU exports if the Union introduces a first-come, first-served system for banana imports.

Other speakers at the conference, backed by public affairs consultancy APCO Europe and law firm Freshfields Bruckhaus Deringer, included Competition Commissioner Mario Monti and Dean O'Hare, chief executive of the Chubb Corporation.

The EU risks undermining American support for the global trading system if it imposes multi-billion-euro sanctions in its transatlantic dispute over export tax breaks, the US Ambassador to the Union has warned.