U.S. subsidies remain critical in trade negotiations

WASHINGTON (AP) -- The Bush administration insists it still can reach a settlement with the European Union that would avert $4 billion in trade sanctions in the biggest case the United States has ever lost before the World Trade Organization.

The United States, however, could be running out of options fast in the long-running dispute. Without a breakthrough agreement, Europe could start in early April levying sanctions against U.S. products.

The fight involves tax breaks the United States provides to more than 6,000 U.S. exporters, including corporate giants such as Microsoft, Boeing and General Electric.

On Monday, a WTO appeals panel upheld an original WTO ruling that the U.S. tax break violates WTO rules because it represents an export subsidy.

U.S. Trade Representative Robert Zoellick, who warned last year that imposing trade sanctions would be like detonating a "nuclear bomb" on U.S.-EU relations, said on Monday he was disappointed that a WTO appeals panel had not overturned the original ruling.


He said the administration would decide on its next actions only after full consultation between Congress and U.S. businesses who take advantage of the tax break.

There has been speculation that the issue might be resolved in some sort of trade-off in which the United States would drop its effort to impose quotas on steel imports, which Europe strongly opposes, in return for an end to Europe's demand for sanctions in the tax case.

A U.S. trade official rejected any such trade-off Monday. "We have been working with the EU to resolve the (tax) issue, and it is not constructive to bring in extraneous issues," said the official, who spoke on condition of anonymity.

The official said a negotiated settlement remains possible, pointing to Zoellick's success in resolving a long-running fight with Europe over bananas last year.

EU officials are making it clear that time is running out for the United States to eliminate the subsidy and avert the allowed 100 percent tariffs on up to $4 billion in U.S. products. Such punitive tariffs essentially would eliminate targeted goods from European shelves.

The $4 billion figure compares with annual U.S. exports to Europe of more than $165 billion.

Under procedural rules accepted by the EU and the former Clinton administration, both sides will allow Monday's ruling to go into effect by Jan. 28. That would clear the way for a WTO arbitration panel to consider over the next 60 days the appropriate level for sanctions.

Some members of Congress have suggested the United States should consider scrapping the tax break in an overhaul of the U.S. tax system that would bring American policies into compliance with world trade rules.


Representatives of U.S. companies retort that such a move would come at a terrible time.

"As America struggles to recover from recession, U.S. companies shouldn't have to face an annual tax increase of more than $4 billion or comparably expensive trade sanctions imposed by the EU," said Michael Baroody, executive vice president of the National Association of Manufacturers.

Senate Finance Committee Chairman Max Baucus, D-Mont., said Monday it was crucial that the United States make changes in WTO rules a top negotiating priority in a new round of global trade talks which the organization began in Doha, Qatar, late last year.

Many trade experts contend those discussions will take too long to solve the administration's pressing problem of looming sanctions. They also doubt that Europe would be willing to revise the WTO rules given that its form of taxation already meets muster with the organization.

The problem is the United States operates under a global tax system, which subjects U.S. companies to a tax on earnings regardless of where they come from.

European nations operate under a territorial tax system, in which only companies' domestic earnings are subject to taxation.

The U.S. tax break was passed in 1984 to compensate American firms for an EU tax rebate given to European companies for products sold overseas.

House Ways and Means Committee Chairman Bill Thomas, R-Calif., has suggested resolving the dispute by scrapping the current U.S. system.


Given the sharp differences between Democrats and Republicans on taxation, however, it is considered unlikely that an election-year Congress will undertake such a sweeping overhaul of corporate tax law.


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