Strategy

WTO Denies U.S. Appeal on Tax Breaks

''The U.S. now has three months to act to avoid the re-imposition of retaliatory measures,'' says the E.U. trade commissioner.
Stephen TaubFebruary 13, 2006

Look for trade tensions to rise once again between the United States and the European Union.

On Monday, the World Trade Organization rejected a U.S. appeal and ruled that Washington has granted illegal tax breaks to certain exporters. As a result, the EU is expected to retaliate by imposing sanctions on up to $4 billion of U.S. goods.

In rejecting the appeal, a three-judge panel in Geneva asserted that Congress ignored the WTO’s order to eliminate the tax credit immediately, according to Bloomberg. According to the wire service, Congress voted to phase out the breaks over a two-year period ending in 2006.

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“The U.S. now has three months to act to avoid the re-imposition of retaliatory measures,” said trade commissioner Peter Mandelson in a statement, reported Bloomberg. “The EU will not accept a system of tax benefits which give U.S. exporters including Boeing an unfair advantage. We are seeking nothing more than the re-establishment of a level playing field.”

In October 2004, Congress voted to replace $50 billion in export credits with $145 billion in tax cuts for manufacturers and companies with overseas operations, Bloomberg noted. According to The Wall Street Journal, more than 6,000 exporters — including Caterpillar Inc. and Microsoft Corp., in addition to the largest recipient, Boeing Co., — were beneficiaries of the tax exemptions.

Reportedly, the United States is expected to lobby the E.U. not to resume its sanctions, but Senate Finance Committee Chairman Charles Grassley said in a statement that he doubts Congress will revisit the legislation. “That’s especially so since the two-year transition is over at the end of this year,” he said.

In March 2004, noted Bloomberg, the E.U. imposed an extra 5 percent duty on a wide range of goods; the duty had reached 14 percent nine months later, when the E.U. suspended it after the October congressional vote.

The E.U. announced that sanctions will resume at 14 percent, rising 1 percentage point per month to a maximum of 17 percent, the wire service reported.