US pleads for trade sanction limits

Cap in hand, the American way

The United States has urged the World Trade Organisation (WTO) to limit to less than $1bn (£700m) a set of trade sanctions due to be imposed by the European Union (EU).

That would be less than a quarter of the $4bn sanctions the EU wants to impose in retaliation for US tax breaks which were deemed by the WTO as illegal export subsidies.

This amount would be excessive since the US tax breaks would not have caused such severe damage to EU trade interests, the US said in a filing to the WTO.

"The United States believes that this amount is no more than $956m per annum," the filing said.

'Horse-trading'

The US filing kicks off what is expected to be a lengthy political wrangle over the size of the sanctions.

The EU-US banana trade war lasted for three years

The EU has stressed that retaliation is not its preferred option.

Not least since any trade war is likely to hit the economies of both sides - with the United States in the throes of a recession and the European Union suffering a sharp economic slowdown.

The hope is that the 'horse-trading' will lead to an alternative solution.

Illegal tax breaks

The WTO last month found that massive tax breaks for firms like GE, Boeing and Microsoft amounted to illegal export subsidies.

It was the fourth time in five years that the WTO ruled the tax breaks illegal.

The ruling paved the way for the EU to impose punitive tariffs on imports from the US.

This is just the latest in a host of transatlantic trade disputes.

In previous quarrels - over beef and bananas - the WTO had found in favour of the United States, resulting in sanctions on EU exports.

Arbitration

The next step in the dispute is the creation of a WTO arbitration panel.

The US and the EU fell out over imports of genetically modified beef

The panel will decide on the amount of sanctions to be imposed on imports from the US by 29 April.

In deciding on an amount, the WTO would aim to reflect the damage caused to European firms by the tax breaks in the US.

Once an amount is approved by the WTO, the EU could impose the sanctions right away.

Possible solutions

To avoid sanctions, the US would have to either change the current tax legislation, compensate the EU by slashing tariffs or take other actions to enable the EU to export more to the US.

It would have to persuade the EU to delay imposing sanctions and deal with the issue as a part of the next round of WTO trade talks which are due to start this year, and are expected to last until 2005

The first option is unlikely: The US would be hard-pressed to push through a new tax reform legislation package in time.

And with the US recession still biting, the US is increasing its tariff barriers on many products, such as steel, rather than cutting them.

Instead, the US may threaten counter-retaliation.

Different tax breaks

The EU may be amenable to some form of compromise since the US is expected to argue that Europe also uses export tax breaks, and that its whole corporate tax structure is unfair to US companies.

Indeed, the WTO panel did itself query whether some EU tax regimes comply with its rules.

Alternatively, the EU has lost other trade disputes with the US recently and could use this latest one to regain lost ground in other areas.

Although the two trade blocs reached agreement on a long-running dispute over imports of bananas from the Caribbean, there are still conflicts over the import of US hormone-treated beef and genetically-modified foods.

Long-running conflict

The current conflict arose in 1997 when the EU began objecting to US tax breaks for exporters.

The tax breaks put the exporters at an advantage when competing with European firms, the EU argued.

The WTO agreed in four rulings, but the US appealed on each occasion, while at the same time moving part of the way towards compliance by extending the tax breaks to foreign companies based in the US.

The EU dismissed this as "window dressing," and said the new tax regimes introduced were as bad as the old ones.

Finally, in November 2000, the EU asked the WTO for permission to retaliate.