TRADE: European Union and US on Verge of Trade War

By Gustavo Capdevila Reprint | | Print |

Gustavo Capdevila

GENEVA, Jan 30 2002 (IPS) - A World Trade Organisation (WTO) arbitration panel has two months to decide whether the European Union (EU) can slap four billion dollars worth of sanctions on the United States in retaliation for protectionist U.S. tax legislation.

The arbitration panel took up the reports of a special panel and the appellate body, which ruled that U.S. tax breaks granted to exporters – including giants like Boeing, Motorola, Microsoft, General Electric and Kodak – were incompatible with international trading norms.

The case threatens to unleash a major transatlantic trade war between the world’s two leading export powers, which do over 500 billion dollars a year in trade in goods and services with each other.

The EU had complained to the WTO about the tax relief extended by the United States to nearly 7,000 export companies, consisting of cuts in tax payments for firms that use off-shore subsidiaries as exporting arms.

The tax cuts were granted in recognition of the dividends brought into the United States by the exports of the subsidiaries of the firms in question, which are scattered all over the world.

The WTO ruled in 1999 that the U.S. tax breaks constituted illegal export subsidies.

Two weeks ago, the WTO once again ruled against the United States, this time against the law on Extraterritorial Income Exclusion (ETI), which was passed by Washington in 2000 to give a new face to the subsidies.

On the legal front, all of the precedents favour the EU, which is now waiting for the arbitration panel to determine a “fair” level of tariff penalties that the bloc can impose.

EU representative to the WTO, Carlo Trojan, recalled that in October 2000 the two sides reached an understanding which now opens the door automatically to arbitration on the level of retaliatory trade sanctions.

The panel is to hand down its ruling within two months, said WTO spokesman Nuch Nazeer, who reported the results of a Tuesday hearing of the dispute settlement mechanism.

EU officials believe the bloc could be authorised by the panel to impose four billion dollars worth of sanctions on U.S. exports to Europe.

European authorities have said the reprisals could be slapped on U.S. exports like livestock, grains, books, iron, steel and electrical machinery.

But on the political front, the outlook is not so promising for the EU, because trade sanctions are seen in the multilateral trading system as double-edged weapons, since they can trigger an all-out trade war.

“The European bloc has won a major bet but is not in a position to cash in its chips,” said a Latin American diplomat who asked to remain anonymous.

Two years ago, the WTO authorised Ecuador to impose 201 million dollars in trade sanctions on the EU in reprisal for the bloc’s protectionist banana imports scheme.

But Ecuador moved very carefully, aware that it was not in a position to respond to any retaliation by the EU, the diplomat pointed out.

The WTO rulings against the United States would normally push the U.S. Congress to overhaul its tax rules. But the EU has publicly stated that it understands the difficulties successive U.S. administrations have run into in attempts to modify that legislation.

European Trade Commissioner Pascal Lamy and U.S. Trade Representative Robert Zoellick have begun to discuss possible solutions that would respect WTO trading norms.

However, other countries point out that the question is not limited to the two large trading powers.

The WTO ruling affects global trade as a whole, because the U.S. tax breaks in question do not only have an impact on the parties involved in the dispute, said a representative from India.

Hence, the only solution would be for the United States to repeal the export subsidy laws that have been declared incompatible with international trade rules, said the Indian delegate.