U.S. Reaches Agreement to Delay Possible Sanctions in Trade Dispute

The United States and the European Union reached agreement Saturday to delay imposition of a possible $4 billion in economic sanctions against the United States in a trade dispute involving tax breaks for American exports.

The deal was announced by the Clinton administration, which had been negotiating against a midnight Saturday deadline for overhauling U.S. tax laws to come into compliance with the adverse ruling from the World Trade Organization.

Under the procedural agreement, Congress will have until Nov. 1 to pass the legislation. The EU agreed not to impose any penalties until a separate WTO panel can rule on whether the new legislation complies with WTO rules.

“The United States and European Union today demonstrated a commitment to avoid escalating trans-Atlantic trade tensions and managing this WTO trade dispute responsibly,” U.S. Trade Representative Charlene Barshefsky said in a statement.

The European Commission, in a statement, said the EU “prefers to avoid escalation of the dispute at this stage.”

The dispute involves the biggest case the United States has lost before the Geneva-based WTO, which ruled that America’s system of granting tax breaks to U.S. companies that send goods abroad did not comply with WTO rules.

Congress faced a deadline today from the WTO for passing new legislation. When it became clear that the deadline would not be met, the administration began negotiations with the EU in an effort to postpone any threatened sanctions.

Deputy Treasury Secretary Stuart Eizenstat stressed that it was critical that Congress pass legislation before it adjourns for the fall campaign.

“We cannot emphasize strongly enough how critical it is that Congress complete action on the [Foreign Sales Corporation] repeal and replacement legislation as expeditiously as possible,” Eizenstat said in a statement.

Created to offset an EU tax rebate for its exporters, the tax program permits U.S. companies to reduce income taxes by 15% through export subsidiaries set up in offshore tax havens such as Barbados. Microsoft, Boeing and General Motors are only a few of the 6,000 companies, with 4.8 million workers, that get the $4.1-billion annual tax break.

Saturday’s agreement with the 15-nation EU does not involve the substance of the dispute; rather, it establishes the procedural guidelines by which both sides will abide.

It is important, however, because it will protect the United States from EU trade sanctions while a WTO panel rules on the replacement legislation sought from Congress.

The EU contends that the changes in the export tax law under consideration by Congress do not go far enough to meet the WTO’s objections that the tax breaks amount to an illegal trade subsidy.