EU weighs sanctions over US tax dispute

Date: 14/09/00

By Simon Taylor

THE EU could begin drawing up a list of US exports to be hit with sanctions in the ongoing dispute over tax breaks for American companies within weeks, according to trade diplomats.

But they say the Union is considering suspending the penalties as soon as they have been announced to avoid worsening already-strained transatlantic relations.

The World Trade Organisation has given the US until 1 October to revamp the €4.5-billion foreign sales corporations (FSC) scheme. EU trade officials agreed last week to ask the WTO to deliver a swift verdict after the deadline on whether the planned changes to the system being discussed by Congress would stop American firms getting unfair export subsidies. European Commission trade director-general Peter Carl told MEPs that the new legislation would still violate international trade rules because companies' exports would continue to be subsidised. "It is a wolf dressed in sheep's clothing but it is still a wolf," he said. Diplomats say that if the WTO upholds the Union's objections, the EU would start drawing up a list of US exports which would face penalty duties by the end of next month. The sanctions could affect exports worth as much as the illegal subsidy, but the final figure would have to be approved by the WTO.

The US is currently applying sanctions on more than €300 million of EU goods to punish the Union for failing to end its discrimination against Latin American banana growers and lift its ban on hormone-treated beef.

Trade officials acknowledge that beginning preparations for introducing sanctions would damage relations with the US still further, but insist they have no option because Washington has established a precedent. In the US' dispute with the EU over bananas, the administration began drawing up a list of goods to be targeted before the WTO had agreed that it could impose penalties. "It is a case of your sins coming back to haunt you," said one senior Commission trade official.

But diplomats said that in a bid to defuse tensions, the Commission would try to negotiate a deal with Washington under which the sanctions would be suspended if the US promised to overhaul the FSC system after the country's presidential elections on 7 November. "We are not going to heap any more fuel on the fire," said one.

Senior Commission officials have confirmed that this approach is being explored with the US. "Pre-election there is really nothing more they can do," said one. "It is to give us all breathing space." But diplomats stress the retaliatory measures would only be suspended if the US demonstrated that it was serious about ending the unfair tax breaks. "We want to make it clear that we are not going soft on the US," said one.

The EU could begin drawing up a list of US exports to be hit with sanctions in the ongoing dispute over tax breaks for American companies within weeks, according to trade diplomats.