Copyright 2000 Journal of Commerce, Inc.
Journal of
Commerce
February 28, 2000, Monday
SECTION: EDITORIAL/OPINION; Pg. 7
LENGTH: 858 words
HEADLINE: A
US loss at WTO
BODY:
he United States has won
high-profile cases at the World Trade Organization over bananas and beef, but
now it's lost a big one. A WTO appeals panel upheld a European Union charge that
an obscure provision in the U.S. tax code unlawfully subsidizes
exports to the tune of about $3.5 billion a year.
Under the Internal
Revenue Service code, American exporters are permitted to establish
Foreign Sales Corporations, offshore subsidiaries that receive
favorable treatment when corporate income taxes are assessed.
U.S. companies can eliminate 15 percent to 30 percent of the federal
tax burden on their export profit when they take advantage of
the program.
The WTO appeals panel held that the tax
breaks give U.S. exporters unfair advantage over their foreign
competitors and violate world-trade rules. As we have said before, Washington
and Brussels should have settled this issue out of court. They didn't. And this
is the decision that must be faced.
The underlying disagreement dates
back 30 years. But the firefight over the FSC was launched in 1998 by Sir Leon
Brittan, then the EU's trade commissioner, as the United States pressed its
campaign against Europe's unfair banana-import regime.
The battle has
raged long enough. It needs to be resolved swiftly before it sets off a real
trans-Atlantic trade war. There must be a way to solve the problem short of
sanctions.
Both sides should sit down together immediately and keep
negotiating until a solution is reached. Fortunately, both sides seem amenable
to a rational approach, if their sober initial responses are any indication.
There has been a softening in the EU stance since Pascal Lamy became
trade commissioner in September, and that is encouraging. But it is incumbent on
Washington to make the first move, acknowledging that it lost the case and
addressing the issue calmly and realistically - just as it expects other nations
to do when WTO decisions go against them.
Brussels, for its part, needs
to react with equal calmness and pragmatism. The FSC, after all, is not an odd,
one-of-a-kind creature. While the parallel may not be exact, EU member nations
nonetheless refund value-added tax on all exports; U.S. companies can't be
faulted for desiring similar treatment from Washington.
Although the WTO
appellate body had been widely expected to uphold the EU position, the blow to
the United States came at a particularly inopportune time fraught with political
ballyhoo and anti-trade sentiment.
The U.S. Congress, in effect, is
being told by an international organization to change U.S. tax law - and to do
it by Oct. 1, only five weeks before the U.S. elections. Congress also faces a
controversial vote on permanent normal trade relations for China, and an even
more contentious one on a more basic issue, continuing America's WTO membership.
However, the United States is one of the founding members of the WTO and
must uphold its rules. Otherwise, the organization cannot function. If
Washington withdraws its support, this would spell the end for the WTO and
dramatically raise the threat of protectionism around the world.
The FSC
ruling follows several setbacks for the EU at the world-trade body. The United
States imposed 100 percent duties last year on $116.8 million of EU exports,
including French pate and Italian tomatoes. This was in retaliation for the EU's
refusal to comply with a WTO ruling against its ban on imports of
hormone-treated beef.
The United States placed another $191 million of
sanctions on EU goods after it prevailed in a long-running dispute over the EU's
banana-import rules.
Flush with victory in the latest case, the EU said
it would prefer to see the United States implement the WTO appellate ruling on
FSCs rather than negotiate compensation. U.S. Treasury Secretary Larry Summers
said the United States will not abandon its program, despite the WTO ruling, and
will instead start consultations with the EU to negotiate compensation.
If a compensation package cannot be worked out between the two sides,
the EU can then seek authorization from the WTO to retaliate.
The United
States should not be forced to adopt a European-style tax system. And it should
not be forced to unilaterally disarm in trade fights.
Nonetheless, we
need to focus on coming up with a fix to bring U.S. tax laws into compliance
with the WTO ruling. Perhaps this will bring export tax breaks out into the open
and not force them to be channeled through offshore tax havens.
Many
European companies with subsidiaries in the United States take advantage of the
U.S. tax break. They don't call it a VAT rebate, but it amounts to much of the
same thing.
Treasury Secretary Summers said the Clinton administration
""will work closely with our European counterparts, Congress and the business
community to achieve a solution.'' That's good. It is a matter of the utmost
urgency.
Sharp disagreement between the United States and Europe was one
factor that led to the collapse of global trade talks in Seattle late last year.
Both sides need to stop squabbling and decide how to better promote
international trade.
LOAD-DATE: February 28, 2000
