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The never ending fight between European Union and the US has taken another twist. The EU has threatened to impose up to $4-billion-worth of sanctions on the US, after the WTO upheld a ruling that the latter failed to end an illegal tax rebate for exporters. Analysts believe that us now has three months to act to avoid the reimposition of retaliatory measures. A look at the flare up. By Manu Kaushik
The $4 billion sanction threat -- 20 times the amount imposed in any previous WTO disputes -- is a major victory for the EU over what it calls the "huge illegal export subsidy" provided to US exporters including Microsoft, Boeing and General Electric. However, the Bush Administration has criticised the European Union intention to re-impose trade sanctions, the EU may be able to use the recent ruling in the broader standoff with the United States over subsidies to the US and European aircraft manufacturers. The ruling is the second in four years involving tax breaks that the United States granted to 6,000 exporters, initially under the Foreign Sales Corporation programme and subsequently under the American Jobs Creation Act. Also, The decision has paved the way for the European Union to hit US exports with new duties that could reach billions of euros. In 2004, the European Union imposed only 5 percent of the $4 billion worth of sanctions it was allowed to charge. This time trade officials said they plan to impose 14 percent, or $560 million, of the $4 billion in the form of additional customs duties on American imports. The decision is a significant development in the continuing dispute between Washington and Brussels over foreign sales corporation taxes. In a 2003 landmark ruling, the WTO authorised the EU to impose up to $4 billion worth of sanctions on certain American-made exports to Europe, the biggest sanctions in WTO history. In March 2004, the EU began imposing sanctions against a range of goods including steel, agricultural goods, paper and textiles. After the US Congress agreed to repeal the tax subsidy in October 2004, the EU suspended the sanctions in January this year. However, the U.S. kept a special two-year transition period in force, and at the same time maintained the tax benefits for long-term contracts signed before the tax plan was suspended. The EU challenged that measure, saying that it did not follow the WTO's recommendation to do away with the tax breaks entirely. In a written statement, Neena Moorjani, a spokeswoman for the United States trade representative (USTR) Rob Portman, explained that the transition period expired at the end of this year, and that benefits from the long-term contracts signed before the tax plan was suspended would be "extremely small". New sanctions by the European Commission will reinforce the perception that the EC is primarily acting in response to the U.S. filing of a WTO complaint against Airbus subsidies. But a spokesman for Mandelson played down the political implications of the WTO ruling by saying that the EU wanted to avoid imposing sanctions. He also insisted that the case should not be seen in the wider context of the dispute over Boeing and Airbus. The EU said that sanctions would be reintroduced at the earliest on April 24 and at the latest on May 14 unless the United States acted to bring its legislation and practice into line with its international obligations. It said that Boeing was the single largest beneficiary of the tax breaks, estimating that the aircraft maker has received about $1.6 billion in subsidies under the plan between 1995 and 2005 and is likely to benefit from a further $615 million over the next 10 years. Meanwhile, The United States says the EU must break the deadlock in the Doha talks by making a more generous offer on agriculture. The EU says the next move has to come from developing economies opening up their markets in industrial goods and services. Nevertheless, the EU suspended the sanctions at the beginning of 2005 to give the WTO time to make another ruling in a case which has rumbled on for eight years.
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