EU Imposes 1st Tariff Penalties on U.S. Goods

By Warren Vieth

March 2, 2004 12 AM PT

Times Staff Writer

WASHINGTON —

The European Union slapped retaliatory tariffs Monday on a wide range of U.S. agricultural and manufactured goods, increasing pressure on Congress to make significant changes in the way U.S. corporations are taxed.

The EU sanctions start small -- $17 million this month -- but will gradually increase to a level of about $670 million a year unless Congress repeals an export tax break declared illegal by the World Trade Organization.

The sanctions are the largest authorized by the WTO since its creation in 1995 and the first imposed by the EU against the U.S. They apply to some 1,600 products, from California produce, toys and electrical machinery to Carolina textiles.

“This is big,” said University of Maryland trade economist Peter Morici. “You cannot get rid of this tax break without rejiggering the entire corporate tax. Once you get involved in that, it becomes a major piece of legislation.”

The Bush administration and congressional leaders have been promising for months to bring U.S. tax laws into compliance with the WTO ruling, and the Senate is poised to take up legislation this week. Progress has been stalled by competition among affected industries for new tax breaks, and by growing election-year anxiety about virtually any issue involving multinational corporations and global trade.

The standoff has exacerbated trade tensions. In the United States, trade critics have cited the WTO ruling as another example of the nation ceding sovereignty to global authorities.

U.S. trading partners have interpreted congressional inaction as evidence of U.S. unwillingness to play by the rules of the global trading system that it helped establish.

“Again and again and again, both the United States and the EU honor their WTO obligations only when their backs are absolutely against the wall,” said Brink Lindsey, director of trade policy studies at the conservative Cato Institute. “The signal we’re sending to the rest of the world is: Cheat on your WTO obligations until you’re caught red-handed, then drag it out as long as humanly possible.”

EU Trade Commissioner Pascal Lamy downplayed the dispute, stressing that the EU sanctions were much smaller than authorized by the WTO and would be rescinded if Congress went ahead and repealed the tax break for U.S. exporters that establish overseas subsidiaries known as foreign sales corporations.

“The U.S. has not brought its legislation in line with WTO rules. We are therefore left with no choice but to impose countermeasures,” Lamy said in a statement. “The name of the game is not retaliation but compliance. Countermeasures will be lifted the day the FSC is repealed.”

President Bush urged Congress to move quickly. “If we don’t act to replace the current ... provisions in the tax code, the tariffs that have been imposed today will, over the next year, impose an increasing burden on American exporters, their workers and the overall economy,” he said in a statement.

His appeal was echoed by U.S. Chamber of Commerce President Thomas Donohue, who said the tariffs could cost some U.S. workers their jobs just as the global economy is beginning to show signs of growth.

“The United States must lead by example and comply with adverse decisions if we are to expect similar behavior from our trading partners,” he said in a letter to Congress.

The retaliatory tariffs apply to U.S. exports worth $4 billion a year. They start at 5% this month and increase by 1 percentage point every month until they reach a maximum level of 17% in March 2005. Under the WTO ruling, the EU could have imposed tariffs of as much as $4 billion immediately.

“It is a very, very broad range of items across a very wide variety of industries,” said Domenick Gambardella, a partner with the accounting firm PricewaterhouseCoopers. “They’re starting out with a tariff number that is not that big, but it will ratchet up pretty quickly. Some businesses might be able to absorb 5%, but at some point they’ll start to really feel the pain.”

The dispute involves a tax break that allows U.S. exporters to exclude a portion of their foreign sales from the corporate income tax. It currently saves U.S. companies about $5 billion a year.

The WTO first ruled in 1999 that the tax break was an illegal export subsidy. Congress modified the law, but the revised provision was rejected by the WTO. The United States appealed but lost. In 2002, the WTO authorized the EU to impose as much as $4 billion in punitive tariffs, but the Europeans delayed doing so until now.

Efforts to revise the law have been held up by competing efforts to replace the subsidy with new forms of tax relief for U.S. corporations. Some House Republicans are pushing legislation that would provide tax breaks mainly to large multinational corporations. The Senate is considering a bill that would replace the subsidy with a tax break for a broader group of manufacturers.

Although the tariffs may add some urgency to the debate, analysts said the low initial rate and gradual escalation would give Congress more breathing room than would have been the case if the Europeans had levied the maximum penalty allowed by the WTO.

“They’ve got the frog in the kettle of water but they’re turning up the heat very, very slowly, so he’s not jumping out yet,” said Lindsey, the Cato Institute economist.

In addition, the bite of the tariffs will be lessened by the decline of the dollar against the euro, which makes American products cheaper and has the same effect as a tariff reduction on U.S. goods sold in Europe.

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Tariff targets

U.S. products subject to European Union trade sanctions imposed Monday include:

* Fruits, vegetables, nuts, eggs, honey and grains

* Precious and semiprecious stones, pearls and jewelry

* Cotton, wool, yarn, textiles, carpets, clothing and shoes

* Iron, steel, copper and aluminum products

* Furs, leather and leather goods

* Books, paper and wood products

* Ceramics and glassware

* Tools and cutlery

* Electrical machinery and sound and TV equipment