EU opens new front in trade war

The EU and US are the world's largest trading partners

The European Union has imposed escalating tariffs on US companies that will cost American business hundreds of millions of dollars.

It is the first time that the EU has hit US firms with sanctions as part of a trade dispute.

The EU is imposing a 5% increase in duty on a range of goods, from honey to roller skates to nuclear reactors.

The aim is to force the US Congress to change a law that gives an unfair tax advantage to US exporters.

The EU sanctions will increase by a further 1% each month until they affect US exports worth $666m (£356m) a year.

We have been extremely patient, but there is no way we can avoid these sanctions Pascal Lamy, EU trade commissioner

John Disharoon, of the American Chamber of Commerce, said that it was "a sad day for trade relations between the US and Europe".

The trade row is just one of a growing number of disputes between the EU and the US, the world's largest trading partners.

The US was forced to withdraw sanctions against EU and other steel producers after the World Trade Organisation (WTO) ruled them illegal in the autumn.

However, the US is still pursuing a trade case against the EU at the WTO, concerning Europe's reluctance to import GM foods and crops.

And trade is threatening to become an election issue, with both leading Democratic candidates for president, claiming they will get tough over trade and consider protectionist measures.

Tax breaks

The current dispute has been simmering for years.

In 2002, the WTO, which polices world trade, ruled a tax break given to American exporters, such as Boeing and Microsoft, gives them an illegal unfair advantage.

THE DISPUTE The EU argued that US exporters received unfair help from their government It said US firms were exempt from paying tax on profits from exports if they set up 'foreign sales corporations' based in overseas tax havens That gives Boeing, for example, an advantage over European rival Airbus in competing for business Under the rules that govern the world trading system, such behaviour is illegal The EU raised the issue with the WTO, who accepted its case Under WTO rules, the EU was then given the right to raise its tariffs in compensation for the damage caused to its firms

The trade body authorised up to $4bn in punitive sanctions in compensation.

On Friday, EU trade commissioner Pascal Lamy visited Washington in a last-ditch attempt to persuade American legislators to end the deadlock on revising the corporate tax law.

"We have been extremely patient, but there is no way we can avoid these sanctions which will hopefully concentrate minds on the urgency of passing legislation," Mr Lamy said.

Steve Woolcock, a trade expert at the London School of Economics, said the sanctions would initially have relatively little impact.

"I don't think the impact will be that great because the dollar is weak at the moment, so an extra 5% on duties may not have that much effect to start off with," he told the BBC's World Business Report.

The weak dollar has already hit European exporters hard by making their goods more expensive in American markets.

US GOODS HIT Jewellery Toys Honey Refrigerators Paper Nuclear reactors Roller skates

With jobs an issue for US elected officials, there will be grassroots pressure not to back down to an international body like the WTO or to what they will see as European politicians.

And while the US adminstration has urged Congress repeatedly to change the tax law, Congressional leaders are deadlocked over whether to offer additional corporate tax breaks to US companies in compensation.

Last week, Treasury Secretary John Snow, Commerce Secretary Don Evans and Trade Representative Robert Zoellick warned Congress that "the retaliatory tariffs on American exports pose a threat to... growth and may retard the creation of jobs in certain sectors of the economy".