U.S. faces sanctions in 2nd trade rift

EU to press for tariffs unless Washington ends illegal company tax breaks


LONDON - One day after President Bush dropped U.S. protective tariffs on imported steel to avert a trade war with Europe, Pascal Lamy, the European Union's trade commissioner, said yesterday that he would use the same tactics again in another long-running trade dispute with the United States.

Lamy said the European Union would press ahead with punitive tariffs on about $4 billion in goods from politically pivotal regions of the United States if Washington did not end tax breaks for American corporations' offshore operations.

The tax breaks have already been found by the World Trade Organization to be an illegal export subsidy.

Lamy's remarks reflected assessments by some European trade experts that, after the U.S. retreat on steel, the power balance of global trade had shifted in Europe's favor.

"We in Europe, by standing together, by using the World Trade Organization and saying we're going to uphold the rules of world trade, we've played our hand very, very effectively indeed," said Patricia Hewitt, Britain's trade minister.

In a telephone interview from Brussels, Belgium, Lamy said the outcome of the steel dispute should demonstrate that Europe "punches its weight."

"It's a message sent within Europe," he said. `'It's a basic lesson: Union equals might and strength. It's why we are building Europe."

In fact, though, the euphoria of the moment - a rare instance of the European Union besting the United States in a trade dispute - seemed to cloud two other issues that have as much bearing on the future of trans-Atlantic and global trade as the steel dispute.

Stalled trade talks

One is the stalled negotiations on a new world trade agreement. The WTO's 148 member nations have yet to formally restart the talks, known as the Doha Round, after the collapse of their ministerial gathering in Cancun, Mexico, in September.

Senior officials of the organization are scheduled to meet at its headquarters in Geneva Dec. 15 to discuss the situation. But many trade experts say the setback in Cancun may mean the negotiations will fail to meet a Jan. 1, 2005, deadline for reaching a broad new agreement to lower farm subsidies and open markets.

"We are ready to negotiate," Lamy said. "The problem is that there is no negotiation."

More immediately, a deadline of March 1 looms for the United States to comply with another WTO ruling in the offshore tax-break dispute.

As in the steel case, the trade organization - which functions both as a negotiating forum and as an adjudicator of disputes - has ruled against the United States and in favor of the European Union.

Bush's decision to lift the protective steel tariffs he had imposed in 2002 headed off a threat of reprisals against $2.2 billion in U.S. exports, directed specifically at the economies of states like Florida and Michigan that are expected to be crucial to Bush's hopes for re-election next year.

In the offshore tax-break dispute, the European Union has said it will begin to impose progressive tariffs starting in March on up to $4 billion in goods, beginning with a 5 percent tariff and increasing 1 percentage point each month to a total of 17 percent. Again, the targets of the tariff have been chosen for their potential political effect.

A trade negotiator in Geneva who spoke on condition of anonymity said the dispute "is hanging like the sword of Damocles."

Remain neutral

In the telephone interview, Lamy said the European Union planned to go ahead with the reprisals if the U.S. authorities `'have not complied - which we hope they will do" by the March 1 deadline.

Europe, he said, would "proceed with the sort of clear, constant and predictable behavior" it used in the steel dispute to persuade Washington to comply.

The WTO made no formal statement in reaction to Bush's decision to withdraw the steel tariffs, in line with the organization's desire to remain a neutral arbiter of global trade.

But trade experts in Geneva said that the U.S. retreat on steel was likely to be interpreted as a huge boost for the organization's credibility at a time when the collapse of the Cancun talks had left it in the doldrums.

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