The United States lost an international trade case to the European Union yesterday that could result in the imposition of billions of dollars of punitive duties against U.S. exports to Europe, according to industry and official sources.
Such sanctions, if imposed, would far exceed any that have been allowed in previous cases decided by the World Trade Organization, which has handed its confidential decision to the U.S. and EU governments.
The decision involves a $4 billion tax break for U.S. exporters that a WTO panel found to be an export subsidy that violates international trade rules. Because of the amounts of money at stake, the ruling threatens to seriously inflame transatlantic tensions and could set back efforts tolaunch a new round of negotiations aimed at lowering trade barriers worldwide.
U.S. Trade Representative Robert B. Zoellick exhorted European officials last month to settle the dispute, warning that "it would be like using a nuclear weapon" on the global trading system if the European Union were to win the case and fully exercise its right to impose sanctions.
A U.S. appeal of the decision is virtually certain, and it would take months. But if that ruling also goes in the EU's favor -- and WTO panel decisions are rarely overturned on appeal -- Washington would face a painful prospect: If the United States failed to abandon or substantially alter its export tax system, the EU would be entitled to $4 billion in "compensation." That could involve duties of 100 percent and possibly more on selected U.S. products, enough to price the American products out of the European market.
It is impossible to say which U.S. products might be subject to European sanctions because WTO rules give the winner of a case considerable leeway in deciding how to take its compensation.
Many of the companies that would be vulnerable, though, would presumably be among the hundreds of U.S. multinationals, such as General Electric Co., Boeing Co., Caterpillar Inc. and Microsoft Corp., that benefit from the tax break in dispute.
The duties would hurt European importers, too, which is why companies on both sides of the Atlantic have been urging a negotiated settlement. Zoellick and his EU counterpart, Pascal Lamy, have expressed determination to keep the issue from damaging broader relations, but both are under severe pressure to stick to their guns.
Congress rewrote the export tax law last year when a previous version was ruled illegal by a WTO panel, and lawmakers are loath to change the current law. On the European side, many policymakers feel strongly that the United States shouldn't be allowed to wriggle out of WTO rulings.
Moreover, the ruling comes at a time when ties between Washington and Brussels are under strain because of disagreements over environmental and defense issues and the recent opposition by EU antitrust authorities to a proposed $45 billion merger of GE and Honeywell International Inc.
"This is a very dangerous case because of the size of any retaliation that might follow a U.S. loss," said Willard Berry, president of the European-American Business Council, a group that includes large U.S. and EU firms. "It's clear that both EU and U.S. companies would be terribly hurt."
U.S. exports to the EU totaled $152 billion last year. Although $4 billion might seem small by comparison, it would dwarf the $191 million in sanctions that Washington imposed on European products in a recently settled dispute over bananas and the $117 million in sanctions that remain on European products in another EU-U.S. dispute over hormone-treated beef. The WTO ruled in Washington's favor in both of those cases, and when prohibitive tariffs were raised on products such as French handbags, Italian cheese and Scottish sweaters, European manufacturers of those goods howled.
The export tax provision that was initially ruled illegal allowed U.S. exporters to exempt some foreign profits from tax by making sales through offshore companies, called foreign sales corporations. That arrangement was deemed to violate WTO rules after the EU complained that it favored sales to foreign customers over sales to domestic customers.
After Congress changed the law, the EU complained that the new version differed only in cosmetic ways from the old one, although Washington maintained that the changes brought the law into compliance with WTO rules.
One possibility raised by Zoellick last month is that if the EU pushes its case too far, the United States could retaliate by bringing complaints against European corporate tax preferences to the WTO. That scenario is of particular concern to trade experts on both sides because it could lead to a tit-for-tat trade war involving large amounts of goods.
Zoellick and Lamy, who enjoy a warm personal relationship, demonstrated remarkable comity earlier this year when they resolved the bananas dispute, which had dragged on since the mid-1990s. As the top trade negotiators for the two largest economies in the world, their cooperation is essential if a WTO ministerial meeting in Qatar scheduled for November is to succeed in launching a new round of trade liberalization talks.
Yesterday, both governments were mum on the WTO panel's decision. "The United States will respect the confidential nature of the report and will not comment on its findings, nor its implications, at this time," Zoellick's office said in a statement. A spokeswoman for the EU mission in Washington likewise declined to comment beyond confirming that the report had been delivered to Brussels.
In another development that doesn't augur well for transatlantic trade, Zoellick yesterday formally asked the U.S.International Trade Commission for a broad investigation into whether increased imports are causing serious damage to the U.S. steel industry. The independent commission could issue a finding that would lead to stiff duties on steel imports.
President Bush announced his decision to seek the probe June 5 but left unstated what type of steel products would be covered. Zoellick's announcement made clear it will cover many major types of steel.