EU May Pursue Sanctions Against U.S.

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President Clinton signed a new law last Thursday, November 16, reforming the Foreign Sales Corporations system and attempting to achieve compliance with World Trade Organization requirements that US exporters not be given an unfair advantage in the world trade marketplace.

H.R. 4986, the FSC Repeal and Extraterritorial Act, was passed in Congress and signed last week in an attempt to catch up with the November 1 deadline for U.S. action on the issue. The European Union had previously asked the WTO to impose sanctions on U.S. exports if new legislation was not in place by November 17.

The FSC bill had gotten bogged down in Congress as U.S. legislators attempted to tack on last minute tax reductions and Medicare benefits to the same legislation. Ultimately, the FSC bill stood alone while the other issues are still being debated in the lame duck Congress. The new law provides a tax break to US exporters by allowing them to deduct a portion of the taxes based on overseas sales. The resulting tax break enables US exporters to sell internationally at a price competitive with and even lower than that of international competitors.

The White House Office of Management and Budget contends that the tax breaks enable US companies to enjoy equal footing in the international marketplace and is not "export contingent."

The EU claims the new FSC bill provides a subsidy in excess of $4 billion to US exporters and that such subsidy was found illegal by the WTO earlier this year. EU Trade Commissioner Pascal Lamy stated, "Whilst wishing to de-escalate this dispute, our aim is to see the WTO-incompatible FSC export subsidies removed. Although we believe the FSC replacement legislation does not solve the problem, the EU will leave it to the WTO to rule on this question." Lamy went on to say that the new U.S. law will be "found noncompliant. We have no doubts about that."

Lamy contends that the FSC replacement legislation "in a way is even worse than the previous one in terms of export subsidies. It's a system which is clearly export-dependent to get a rebate on corporate taxation."

U.S. supporters of the new FSC bill compare the tax breaks to the practice of EU member states receiving rebates on the European value-added tax (VAT) for export sales. The EU counters that the VAT is a consumer tax, much like the U.S. sales tax, and EU corporations have never paid the VAT. In a similar fashion, U.S. corporations pass through the sales tax to consumers.

The requested sanctions will be delayed at least until mid-2001 as the WTO compliance panel examines the new legislation and its impact.

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