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Brussels gives Washington 60 days to end the FSC program once and for all

GENEVA, Switzerland - 03/17/06 - The European Union (EU) has told the World Trade Organization that it will reintroduce trade sanctions against the US in 60 days unless Washington complies with a WTO ruling condemning tax breaks for US companies operating overseas.

The EU said, however, that it is still offering the US alternatives to end the long-standing dispute without having to incur sanctions on a list of targeted products that includes certain textiles, foodstuffs, auto parts, and steel.

The announcement by the 25-member EU comes just one month after a WTO panel upheld a decision condemning the tax breaks, affirming previous judgments that the so-called Foreign Sales Corporation, or FSC, law breached global trade rules by providing some US companies with illegal subsidies.

The FSC law gave tax exemptions on part of the income of more than 6,000 US multinationals, including such global giants as Microsoft, Boeing, and General Electric.

Last month's WTO decision "made it absolutely clear that the US has yet to come into full compliance with earlier rulings and recommendations," the EU told the WTO's dispute settlement body.

The panel's ruling was officially adopted by the global commerce body at a meeting earlier this week and means that the retaliatory measures, suspended in January 2005, will automatically go back into force in two months. 

But the EU noted its "utmost restraint in applying countermeasures" and called on the US "to ensure full compliance with the applicable rulings and recommendations."

The European Commission in Brussels told the WTO body it was ready "to explore with the US ways and means to put an end to this long-standing dispute," but rejected Washington's repeated claims that the tax breaks were "insignificant."

The EU responded, saying, "We believe the remaining benefit to be over $750 million, and this is ... not insignificant."

According to press sources, US trade officials in Geneva would not comment on the EU position, and a statement to the dispute settlement body was not immediately released.

Washington has repealed the FSC law and claims it has fallen in line with previous WTO rulings.
Last month, however, the appeal body upheld that transitional provisions under the 2004 American Jobs Creation Act were still in violation of WTO rules because they permit tax exemptions to continue for a transition period through the end of this year and potentially longer.

In 2002, the WTO authorized $4 billion in sanctions by the EU, although Brussels decided to impose only $300 million and suspended them after January 1, 2005.

The EU estimates the tax advantages from the jobs creation act will benefit airplane maker Boeing alone by at least $615 million over the next decade.

One Washington, DC-based trade consultant close to the issue told the CalTrade Report that "this FSC issue has to have a stake driven through its heart." 

"This has gone on long enough," he said, speaking on the condition of anonymity. "This situation is creating unnecessary tension between two trading partners that rely very heavily on each other's business."

The US, he asserted, "can't well ask its trading partners to toe the line when it comes to adhering to their WTO obligations and then turn around and diddle on implementing a ruling certain elements in Congress may not like."

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