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The European Union Strikes Back

The long-standing trade dispute between the EU and the United States on U.S. tax breaks for exporters has taken a new twist. If Washington does not change its policies, the EU will begin slapping duties on U.S. imports.

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Even U.S. honey will be taxed.

The European Commission plans to impose additional tariffs on selected U.S. products beginning next year. The move comes as a response to the dispute over U.S. tax concessions for exporters, which have been a point of contention between Washington and Brussels for years.

U.S. tax law allows domestic exporters to set up mailbox companies in tax havens such as the Virgin Islands or Barbados. The company's exports are then processed via this offshore address which offers more favorable tax conditions.

The World Trade Organization (WTO) originally gave the United States until November 1, 2000, to withdraw its so-called Foreign Sales Corporations (FSC) scheme. But the United States has been slow to respond.

Now the EU is putting pressure on the U.S. to remove what it calls unfair subsidies. "The Commission hopes to pass a very clear message to the United States that their continued failure to implement [the withdrawal) three years after the expiry of the original WTO deadline is unacceptable," EU Trade Commissioner Pascal Lamy said in a statement.

In May 2003, the WTO gave the EU the final go-ahead to impose duties of up to $4 billion following the failure of the United States to comply with the previous WTO rulings.

Under the proposed plan, the countermeasures will be introduced gradually starting from March 1, 2004, and will be added on to products ranging from meat to jewelry and textiles to parts for nuclear reactors. Before the duties go into effect, the EU member states need to adopt the proposal.

Leaving the door open

Because the FSC scheme can bring U.S. companies tax breaks of up to 30 percent, many American-based companies are able to offer goods on foreign markets for prices significantly below those of the competition. The EU says the FSC system involves hidden government subsidies, which discriminate against European competitors.

However, as Trade Commissioner Lamy pointed out, the EU wanted to give the U.S. administration a reasonable time period to adopt the necessary legislation to repeal the FSC structure.

Pascal Lamy

Pascal Lamy

"We have opted for a measured approach and have actually left the door open for U.S. action before countermeasures are to be applied in March 2004," said Lamy (photo).

The Commission's proposal provides for a gradual imposition of tariffs, starting at just 5 percent. This will be followed by automatic, monthly increases of 1 percent up to a ceiling of 17 percent to be reached in March 2005.

"I hope the United States will seize this opportunity," Lamy said.

A counterproductive approach

According to Reuters news agency, the U.S. ambassador to the EU, Rockwell Schnabel, called Brussels' approach "unhelpful." He repeated the U.S. stance that any solution needs to be phased in over three additional years. "Something is going to happen (in Congress), so at this stage to retaliate, we think, is counterproductive," he said speaking at a lunch meeting on Wednesday.

U.S. Trade Representative Robert Zoellick told Lamy, who was in Washington earlier this week, that the U.S. administration was working hard on the "very difficult tax and trade issue," accoding to his spokesman Richard Mills. "Given the EU's focus on compliance with the WTO ruling, we would expect the EU to work with us to solve the problem, not retaliate," Mills said.

Independent of the FSC dispute, the EU and the United States are also fighting over U.S. protective tarifs on steel imports imposed by President George W. Bush. In this case, the EU has won the right to respond by imposing punitive import tariffs worth $2.2 billion.

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