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Remnants of the FSC/ETI tax mechanism remain at the heart of the dispute

BRUSSELS, Belgium - 01/25/05 - The European Union has said it will lift its punitive trade sanctions on a wide variety of US-produced goods now that Congress has repealed tax cuts for exporters that were declared illegal two years ago by the World Trade Organization.

The EU couched the announcement as another gesture of good will in their trade relationship with the US.

Earlier this month, Brussels agreed to a request from Washington that they both back-off of threats to file complaints with the World Trade Organization (WTO) over the billions of dollars in subsidies that the US and the EU each gives to its biggest civilian aircraft maker - Boeing and Airbus, respectively.

"We think this is good news... We hope to get this dispute out of the way, put it to bed and turn off the light," said Anthony Gooch, spokesman for the European Union delegation to the US in Washington, DC.

The penalty tariffs - which covered more than 1,500 products from rolled steel and motorcycles to jewelry and apparel - had increased by one percentage point each month since they went into effect March 1 at a rate of 5% in an effort to bring pressure on Congress to repeal a $5 billion annual tax break provided to American exporters that had been ruled illegal by the WTO.

The sanctions will be lifted retroactively from January 1.
 
The EU announcement reportedly followed intense debate among the member states of the union, with some countries insisting that the sanctions be kept in place until the US removed several provisions in a new corporate tax bill passed last October to bring it into closer conformity with the WTO ruling.

Those provisions allow some US industries to continue benefiting from the subsidy mechanism - originally known as the Foreign Sales Corporation (FSC), and later as the Extraterritorial Income Act (ETI) program - for up to three years as a transition.

Other provisions allow some firms to keep the subsidies in contracts that were signed before the new law was enacted.
 
Brussels had originally asked that the Geneva-headquartered WTO resolve the dispute with hopes that negotiations between the EU and Washington over the next few months could find a mutually agreeable resolution to the dispute.
 
But, the EU is holding open the possibility that it could re-impose penalty tariffs on up to 60% of the original $4 billion in targeted products if the dispute over the transition period is not resolved "within a reasonable period of time."

That is why, observers have said, the Bush Administration, joined by a number of Democratic lawmakers, expressed dissatisfaction with the EU announcement.

Both the Administration and Democratic lawmakers have gone on the record saying that they want the Europeans to drop the WTO complaint altogether.

"After years of hard work and close consultation with the European Commission, Congress fully addressed the EU's major concerns. It is harmful for the EU to needlessly prolong this matter in the face of Congress's good-faith action," said Richard Mills, spokesman for the Office of the US Trade Representative (USTR). 

Last October, Congress approved a corporate tax bill that did away with the $5 billion export subsidy mechanism, but the measure, some three years in the making, included $136 billion in new tax breaks to companies ranging from multi-national giants such as Boeing and Hewlett Packard to several shopping mall developers and even restaurants.

It was reportedly one of the most heavily lobbied pieces of legislation in several decades with Pascal Lamy, then the EU's chief trade negotiator, repeatedly telling US legislators that the bill would fall short of satisfying the EU if it contained the transition and grandfather clauses.

Lawmakers from both parties now say that Brussels is being unreasonable.

"Democrats have always advocated a reasonable transition to preserve American jobs while complying with WTO rulings," Dan Maffei, spokesman for the Democratic members of the House Ways and Means Committee, told the press. 

More troublesome, the dispute over the tax subsidy is entwined in the larger trans-Atlantic disagreement over government subsidies to Boeing and Airbus.

The EU has complained that the long transition periods in the new corporate tax law helped Boeing just as the US was filing suit against Europe for the government subsidies it gives commercial aircraft maker Airbus.

USTR spokesman Richard Mills has said throughout the negotiations that this is not the case and that the EU "should pause before linking the two trade cases," adding that global trading rules "prohibit using one trade case to influence another."

Any rift in the trade relationship between the US and the European Union could have serious implications for California, say trade experts.

The latest figures show that the 25-member EU buys more than 20% of the state's total export output and is it's largest regional global market, while some 50% of the foreign direct investment in California comes from the regional economic bloc.

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