I f Mr. Supachai had any idea of easing into his new job, that fantasy was recently put to rest. On Aug. 30, the WTO ruled that tax breaks offered U.S. export companies violate international trade rules. In response, the European Union can impose billions of dollars in sanctions against the United States. Coming on top of other trade rows, this decision could set off another trans-Atlantic scuffle. Fortunately, both the U.S. and the EU seem determined to minimize the damage.
The tax break in question is the Foreign Sales Corporation, which allows U.S. exporters to claim $4 billion a year in tax breaks merely by setting up a foreign office. The loophole was set up in the 1970s to help U.S. companies become more competitive. According to the National Foreign Trade Council, 3.5 million American jobs and more than $300 billion in goods and services exported from the U.S., about 3.4 percent of U.S. GDP, are supported by the tax break.
The EU challenged the law and a WTO panel ruled last January that it is an illegal subsidy; the panel recently determined that the EU can levy 100 percent tariffs against U.S. exports, a move that could be worth $4 billion. It is unlikely that the EU will impose sanctions. The decision, like the suit itself, is designed to get the U.S. to eliminate the tax breaks. U.S. President George W. Bush has promised compliance, but Congress must ultimately change the law.
We do not need another U.S.-EU trade dispute. The two have recently had trade tussles over steel, bananas and genetically modified food. Meanwhile, foreign policy issues seem to be widening the trans-Atlantic divide. As the world prepares for another round of trade negotiations, it is crucial that its two biggest economies work together instead of at cross-purposes.
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