EU to lift sanctions on U.S. goods on Jan. 1 with repeal of tax breaks

Trade official continues to hold doubts about American compliance

October 26, 2004|By BLOOMBERG NEWS

The European Union said yesterday that it would end sanctions on $4 billion in American imports Jan. 1 when the repeal of illegal U.S. export subsidies takes effect.

But the EU warned the United States not to extend the breaks for companies such as Boeing Co. and Microsoft Corp. beyond the end of 2006.

The import penalties, which began at 5 percent in March and reached 12 percent Oct. 1, will be lifted Jan. 1, even though the European Union still has doubts about the repeal, said EU Trade Commissioner Pascal Lamy.

The sanctions were imposed on American products, ranging from meat and clothing to toys and jewelry, in retaliation for tax credits that provided $5 billion a year in benefits to U.S. companies. The credits were ruled illegal by the World Trade Organization in 2002.

"This has been the biggest of the trans-Atlantic disputes that we have experienced in the last 50 years," Lamy told a news conference in Brussels, Belgium. "We're lifting the sanctions, and that is the essential part of the agreement, but we still have a few doubts about a small part of the system."

President Bush signed a bill Friday that repealed the tax breaks, substituted a $145 billion package of corporate tax cuts and included a buyout for tobacco farmers.

Lamy said he was still concerned that U.S. companies would benefit from the export tax break until the end of 2006 and some would maintain the benefits even beyond then. The sanctions have yielded $200 million to $300 million since March, he said.

"There are still a few provisions on which we have our doubts as to the conformity with the decision taken by the WTO," he said. "We were ready to accept a transition period provided any tax advantage emanating from this comes to the end at the end of this period. We have a few doubts about this."

The tax credits being phased out primarily benefit a dozen exporters including Microsoft, Boeing and Caterpillar Inc. The U.S. trade representative's office in Washington said in a statement that it "welcomed" the EU's decision to end sanctions and pledged to "continue to explain to the EU and others how the new law brings the U.S. into compliance" with the WTO ruling.

The EU first challenged the tax breaks at the WTO in 1997 on the grounds that they provide a de facto subsidy that gave American companies an unfair advantage. While Congress overhauled the law in 2000 after the WTO ruled against it, the EU complained the changes were inadequate and filed a new case.

The WTO ruled in January 2002 that the credits were an illegal subsidy that flouted global trade rules. The regulations allowed U.S. companies to benefit from lower export taxes by operating through subsidiaries in offshore tax havens.

Lamy said the sanctions could return should the WTO determine that the legislation signed by Bush doesn't comply with its previous ruling, as happened to the first overhaul passed by Congress in 2000.

"We are concerned that this is not in conformity with the decision made by the dispute settlement mechanism," Lamy said.

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