US faces $4bn in sanctions

Boeing is one of America's biggest exporters

The European Union has asked the World Trade Organisation to impose up to $4bn (£2.8bn) worth of trade sanctions against the United States in a dispute over US tax concessions for companies selling abroad.

The EU says that America's foreign sales corporation exemption gives unfair tax breaks to big US companies like Microsoft, Boeing, and GE, and has already won a preliminary ruling in its favour from the WTO.

If they are forced to, they [the US government] will find another way of supporting US exporters

Phillip Bentley, trade lawyer

The move will revive fears of a trade war between Europe and the United States.

The US has already won two trade rulings against the EU in relation to beef and bananas, and has imposed hundreds of millions of dollars worth of sanctions on EU products.

It was planning to rotate the list of products targeted by the sanctions - which might jeopardise UK exports like Scottish cashmere - but has held off as negotiations continued.

The EU has now indicated it wants to apply its own sanctions against a raft of US goods, including farm products, glassware, steel and aluminum, aircraft, footwear, toys and games.

Trade wars

On Thursday, the US Congress passed a bill designed to defuse the EU complaint.

This request is designed to protect our rights in the WTO

Pascal Lamy, EU Trade Commissioner

"We plan to continue working with the EU to manage this difference of views responsibly and to avoid any harm to our strong bilateral relationship," President Bill Clinton said in a statement issued from Hanoi.

EU Trade Commissioner Pascal Lamy said he had to retain the option of retaliation, and that did not believe that the changes in the US law went far enough.

"This request is designed to protect our rights in the WTO, fully in line with the procedural agreement reached with the US in September," European Trade Commissioner Pascal Lamy said.

But US ambassador to the WTO Rita Hayes said that "we feel very good about the (new) legislation."

"We certainly have always complied and we'll continue to comply. We feel we have met our obligations," she added.

Observers believe that the US will find a way to continue helping its exporters in an increasingly competitive global marketplace.

"It is unlikely the US government will walk away from them. If they are forced to, they will find another way of supporting US exporters," said trade lawyer Phillip Bentley.

Disputes procedure

Under the rules of the World Trade Organisation, the disputes panel - which has already ruled against the US in February - will have to examine again the new US tax laws to see whether they still give an unfair subsidy to US exporters.

If the panel backs the EU, the US would again be able to appeal, and if it lost, another panel would decide what level of sanctions were justified to compensate the EU for the damage suffered.

In practice, both parties may try and negotiate solutions to several trade disputes at once.

EU attempts to restrict imports of US beef treated with growth hormones have already been ruled illegal by the WTO, and the US has in place $116m in trade sanctions, with an additional $191m in sanctions designed to force the EU to give up its preferential treatment of Caribbean banana producers.

"I think it would be to the benefit of the EU if they could find a way to get into compliance on bananas and beef," US Ambassador Hayes said.