Euro Clash

Removing tariffs is easy. Breaking down social barriers to trade is hard.

Reinsch is critical of this failure to “assert our rights,” which he says creates the impression that the WTO is skewed against the United States. “Now we pay the price in this raft of cases against us,” he huffs. The United States has recently lost several cases in which the EU challenged American trade laws, particularly those dealing with dumping (see “Dumping Gets the Byrd,” at the end of this article). In two of those cases, the WTO ruled that U.S. law went overboard in punishing foreign companies for trading violations. And in two other notable wins for the EU, the WTO ruled that U.S. laws provided unfair advantages to U.S. corporations.

The most publicized of these was the dispute over steel tariffs, imposed in March 2002 by President Bush, who cited U.S. law giving him power to provide temporary aid to industries suffering from imports. Although WTO rules also allow such actions, most observers agree that the U.S. steel industry’s woes were of its own making, and that the tariffs were transparently protectionist. The EU immediately filed a complaint, and the WTO declared the tariffs illegal in March 2003. Facing the threat of $2.2 billion in retaliatory sanctions from the EU — as well as complaints from domestic steel-consuming industries — the Bush Administration withdrew the tariffs at the end of last year.

Two months ago, the EU began imposing trade sanctions as the result of a long-simmering dispute over a tax break for U.S. exporters. The Foreign Sales Corporation (FSC) tax law, passed in 1984, provided a tax exemption for a portion of the income U.S. companies earned from export transactions conducted through foreign subsidiaries. The law was intended to help U.S. companies — which pay taxes on income earned overseas — compete with European businesses, which tend to be taxed only on income earned within their country’s borders. But the EU challenged the FSC law in 1998, and in March 2000, the WTO ruled that the FSC amounted to an illegal subsidy. Congress replaced the law with the Extraterritorial Income Exclusion Act of 2000 (ETI Act), but that too failed to pass muster with the WTO. Since then, U.S. lawmakers have been divided over how to remedy the situation (see “A Taxing Dispute,” CFO, August 2003).

Authorized in August 2002 to impose annual tariff sanctions of $4 billion on U.S. exports, the EU held off until this past March. “Despite waiting for more than two years, the United States has not brought its [export tax] legislation in line with WTO rules,” said EU trade commissioner Pascal Lamy on March 1. “We are therefore left with no choice but to impose countermeasures.” The punitive tariffs are being phased in.

The FSC/ETI case and the dumping cases also put Congress in the awkward position of complying with the rulings of the supranational WTO. These days, that’s a problem because Europe has been slow to respond to complaints against its own practices, says Reinsch. “If Congress thinks the deck is stacked against us, it is not going to be all that interested in further participation in the WTO,” he warns.

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