The World Trade Organization has ruled against the U.S. in a final report on whether a U.S. export tax credit violates international trade rules, E.U. trade diplomats said Tuesday.
According to a report from Dow Jones Newswires, an E.U. trade source said the WTO confirmed a June 22 interim ruling that found that the tax breaks offered to U.S. exporters still breached trade rules despite changes made last year to meet European Union objections.
“The WTO found that the export tax credit is a prohibited export subsidy and it violates national treatment rules,” the source told Dow Jones.
Another E.U. trade source told the news service that the decision wasn’t a surprise and was widely expected after the first ruling. The final ruling allows the U.S. to make an appeal against the decision, he said.
At the heart of the dispute is the U.S. export-tax regime, known as the Foreign Sales Corporation tax credit.
Anthony Gooch, spokesman for E.U. Trade Commissioner Pascal Lamy, told Dow Jones that the U.S. and E.U. have been in contact and the U.S. “is working hard on various options” to resolve the dispute.
“Our view on this case is simple: the key is to bring oneself into line with the WTO rules,” Gooch told Dow Jones. “The key point for us is compliance in dispute settlement cases, whether on our side or the U.S. side or other members of the WTO. The signals we’ve heard from the U.S. side have gone in that direction.”
E.U. needs to wait for the U.S. to decide whether it will appeal the ruling, E.U. trade diplomats said.
Because the tax credit to U.S. exporters is estimated at around $4 billion, the magnitude of potential E.U. trade sanctions is immense, says Dow Jones.
When asked whether the E.U. would seek sanctions if the U.S. doesn’t appeal and refuses to change its tax legislation to conform with the WTO ruling, Gooch said it’s too early to say.
However, the E.U. is aware that imposing sanctions would harm relations with the U.S. and founder efforts to launch a new trade round – a key E.U. trade priority, analysts have said.
Trade diplomats said Lamy and U.S. Trade Representative Robert Zoellick have been working hard to diffuse transatlantic trade tensions, says Dow Jones. The two agreed in April to resolve the long- standing dispute on the E.U.’s banana import regime, which resulted in the U.S. lifting $191 million worth of sanctions on E.U. products July 1.
“Lamy is saying that this (tax credit system) is a big problem, but he’s also saying ‘How can we deal with it together?’,” an E.U. trade diplomat told the news service.
The E.U. is unclear what kind of compromise solution could be worked out.
The two sides agree that starting a trade war would heighten trade tensions, particular when the U.S. and E.U. are struggling over differences on climate change and missile defense and U.S. moves to protect its steel industry, says Dow Jones.
Zoellick has said that E.U. sanctions on the tax credit system would be like setting off a nuclear bomb in the trading system.
is also eager to have Congress pass fast-track negotiating authority, now known as trade promotion authority, this year, says Dow Jones. With the threat of E.U. sanctions hanging over Congress, the mood to expand trade and launch a new WTO round could be soured.
However, the fact that the WTO appeals process postpones a ruling on the dispute until the end of the year gives much-needed breathing room for the U.S. and E.U, says Dow Jones. They can concentrate on negotiating an agenda for a new round of tariff-cutting trade talks in Doha, Qatar, in November without worrying about potential E.U. sanctions, trade experts have said.