WTO likely to back hefty sanctions against U.S.

Thursday, June 13, 2002

By BLAIR PETHEL
BLOOMBERG NEWS

GENEVA -- The World Trade Organization next week is likely to permit the European Union to levy tariffs of at least $956 million on U.S. exports because of illegal tax breaks given to U.S. exporters such as Microsoft Corp. and The Boeing Co.

The 15-member EU has asked for $4.04 billion worth of sanctions, yet even if the award is only $956 million, an amount that U.S. Trade Representative Robert Zoellick called "the proper amount," it will be almost five times higher than the largest damages previously set by the 7-year-old WTO.

"It's unfortunate the administration came in with that high a floor," said Stuart Eizenstat, who was a deputy Treasury secretary under former President Clinton.

"It'll be by light-years the largest award ever made."

The EU brought the WTO complaint in 1997, saying Boeing, Microsoft, Caterpillar Inc. and other U.S. exporters save $4 billion a year on their U.S. taxes because of the law, putting their European competitors at a disadvantage.

The United States fought the complaint through a series of appeals, exhausting the process and finally losing in January.

The WTO retaliation decision will force a showdown between the EU, which has demanded that the U.S. repeal the tax break or face retaliation, and the Bush administration, which has said it will comply with the ruling but can do so only with cooperation from Congress.

The award also will escalate trans-Atlantic trade tensions that have been heightened by President Bush's imposition of tariffs on steel, and by a U.S. farm bill that boosts payments to U.S. farmers by $51 billion over the next six years.

After the WTO approves the sanctions, the EU won't be keen to apply them for fear of triggering a trade war.

Last year, Zoellick likened the prospect of EU sanctions to dropping a "nuclear bomb" on the world's biggest trading partnership, with $390 billion worth of goods crossing the Atlantic in 2000.

Analysts and company officials agree.

Judy Scarbello, vice president of the National Foreign Trade Council, a group representing Boeing, Microsoft, General Electric Co. and dozens of other U.S. companies that benefit from the tax break, said the "No. 1 priority" is for the European Union to refrain from retaliating, because doing so would alienate lawmakers whose support is needed to rewrite the law.

The European Commission, the union's regulatory arm, wants the White House to give it what European Trade Commissioner Pascal Lamy calls a "road map" showing a timetable for repeal of the law by Congress.

The law allows U.S.-based companies to shield much of their foreign income from taxes as long as they have paid taxes overseas. The WTO said that is an illegal subsidy because the U.S. Treasury is forgoing revenue that is otherwise due.

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