EU Threatens Tariffs on US Exports
Foreign Sales Corporations at the heart of dispute
BRUSSELS - 11/06/03 - The European Union has proposed phasing in tariffs on US-sourced goods starting at $334 million in sanctions next year if Washington fails to dismantle the hotly-contested Foreign Sales Corporation (FSC) tax mechanism.
According to the Associated Press, the recommendation aims to increase pressure on Washington to repeal the law without totally disrupting trans-Atlantic trade, which would hurt European as well as US companies.
EU Trade Commissioner Pascal Lamy said he wanted to send "a very clear message" to Washington that further delays in complying with the World Trade Organization ruling was "unacceptable."
In August, 2002 the World Trade Organization authorized the EU to impose up to an unprecedented $4 billion in retaliatory tariffs after it found the FSC program violated WTO rules.
Until now, the EU has held off, hoping that Congress would repeal the breaks by the end of this year. Now it is ratcheting up the pressure - but only gradually.
The EU plan, which now goes to individual EU governments for their approval, calls for imposing tariffs of only 5% on the $4 billion worth of US exports to Europe. This rate would then rise by one percentage point a month to a maximum of 17% by March, 2005.
The mounting tariffs would add up to $334 million in 2004 and $690 million in 2005, said Lamy's spokeswoman, Arancha Gonzalez.
"The faster the US acts, the less the measures will bite," she said.
Lamy has warned Washington that the EU would start phasing in sanctions next March 1 if the FSC mechanism isn't dismantled by the end of this year.
Both House and Senate committees have passed legislation that would replace the export subsidy the WTO found illegal with a different type of tax break for US companies, but the two bills remain far apart in the approaches they would take.
Lamy refused to be drawn into a dispute over the merits of the bills, although he said a three-year phaseout of the current export subsidies, which is included in both bills, would be too long.
The EU published a wide-ranging list of potential targets in September, 2002 ranging from soap to live animals to nuclear reactors.
Sanctions hurt US producers by making it harder for them to sell their products in Europe. But they can also backfire by pushing up prices in Europe or disrupting production if other suppliers can't be found.
If enacted, the threatened tariffs could have a significant impact on California's export profile, say trade analysts.
California exported some $22.8 billion, or almost 22% of the state's total overseas sales, in 2001 with transportation equipment, agricultural products, chemicals, computers and electronic equipment, and non-electric machinery topping the list.?
According to the US Census Bureau, exports to the EU from California supported an estimated 188,600 jobs that year.
In addition, the European Union ranked as the primary foreign investor in California in 2001 with approximately $57.2 billion - or 47% of the?its total direct foreign investment - pumped into the state.?
US Trade Representative Robert Zoellick has warned the levying of $4 billion in sanctions would be like a "nuclear bomb" on trade relations. European business groups have also called on the EU to act "responsibly" in choosing its targets to avoid hurting European consumers and industry.
Separately, the EU plans to impose sanctions on the US as early as mid-December if it receives a favorable ruling next week from the WTO in the on-going dispute over US tariffs on imported steel.
Brussels has drafted a list of $435 million worth of US imports ranging from cigarettes to frozen vegetables to paper products.
To increase political pressure, many of the products are produced in so-called "swing" states seen as crucial to President Bush's re-election campaign next year.
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