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Us exporters face eu tariffs { February 25 2004 }

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Wednesday, February 25, 2004, 12:00 A.M. Pacific

U.S. exporters face EU tariffs

By Heidi Przybyla
Bloomberg News

WASHINGTON Hundreds of U.S. exporters from Tiffany & Co., the nation's largest luxury jewelry retailer, to Weyerhaeuser, the world's biggest lumber company, will face $200 million in European Union tariffs unless the U.S. ends an export-tax credit by Monday.

The EU will impose a 5 percent duty next week on $4 billion worth of U.S. imports such as gems, wood and toys after the World Trade Organization last May gave the Europeans the right to retaliate against the export subsidy. The U.S. Congress has failed to agree on a way to revise the law as some lawmakers press for broader tax incentives that would help domestic manufacturers.

"It could really shut down the exporting of a lot of American goods," said James Marquart, head of the Manufacturing Jewelers and Suppliers of America, which represents New York-based Tiffany and 1,500 other U.S. jewelry companies that sell $2 billion in pearls, diamonds and other gems in Europe each year.

The dispute marks the first time the United States will have to pay tariffs approved by the WTO, a Geneva-based agency set up in 1995 to oversee the rules for world trade. The EU duties, which may be increased through the end of the year to about $315 million, are aimed at a tax credit worth $5 billion a year to companies including Boeing, Microsoft and General Electric, according to the Treasury Department.

For now, the EU isn't targeting the top beneficiaries of the credit because European companies need their goods, Arancha Gonzalez, a spokeswoman for EU Trade Commissioner Pascal Lamy, said earlier this month. If European companies rely on the United States for more than 20 percent of their supply of any product, the EU excluded it from the sanctions list, Gonzalez said.

The EU targeted jewelry makers and paper companies, for instance, because it deemed their products less vital than those of exporters such as Boeing.

The EU, which does about $1.3 billion a day in trade with the United States, will phase in the duties to limit damage to its importers, Lamy said in November.

Microsoft, Caterpillar, General Electric, Intel and Motorola were among 15 U.S. companies that received $6.2 billion in export-tax benefits from 1997 to 2002. Boeing and General Electric alone received $1 billion each in benefits during the period, according to a report by the U.S. General Accounting Office. Those companies are pressing lawmakers to retain those advantages.

Congress is deadlocked over plans to change the tax law, which allows U.S.-based exporters to exclude from federal income tax 15 percent of their profit from exports. Lawmakers are seeking to minimize the pain to U.S. manufacturers, which have cut about 1.7 million jobs since the end of the recession in November 2001.

The House of Representatives is debating a bill that would mainly help companies such as 3M and American Express with extensive operations outside the United States, while giving some aid to exporters such as Boeing, which makes almost 70 percent of its products in the United States. A Senate alternative would replace the subsidy with a tax break for a wider group of manufacturers.

Sen. Charles Grassley, R-Iowa, chairman of the Senate Finance Committee, said the panel won't even begin considering a bill until next month. Gonzalez said last week the Europeans won't bend on the March 1 deadline.

The WTO, which represents 146 nations, gave the EU the right to impose $4 billion in duties, dwarfing penalties of less than $200 million the United States has levied on Europe in disputes over beef and bananas.

The EU scaled back the sanctions Nov. 5 and has delayed imposing them to give Congress time to act.

The EU first said it would seek WTO permission for sanctions in 2000.

Rick Grafmeyer, former deputy chief of staff of Congress' joint committee on taxation, said there has been less urgency among U.S. lawmakers since the EU said it would phase in the sanctions.

The dollar's 15 percent decline against the euro in the past year will also mitigate the tariffs' impact, because the weaker currency makes U.S. exports less expensive in Europe, he said.

"The sanctions almost have to start hitting to get some of the malcontents in the House to take them seriously," said Grafmeyer, who's now a tax lobbyist. "The feeling is we need to let this play out a bit."

U.S. companies such as International Paper and Cargill face the 5 percent duty starting next week. The tariffs will rise 1 percent a month until they reach 17 percent in March 2005, or Congress rewrites the law.

The tariffs are "going to have a strong impact" on U.S. wood and paper exports to Europe, said Barry Polsky, an American Forest and Paper Association spokesman. "It's something we don't need at this time, that's for sure."

U.S. wood products on the EU's retaliation list accounted for 7 percent, or $210 million, of the industry's exports to Europe last year, he said.

"We're concerned," said Frank Mendizabal, a spokesman for Federal Way-based Weyerhaeuser. "We just want to make sure this thing gets resolved." About $30 million of the $565 million in wood products that Weyerhaeuser exported to Europe in 2002 will face sanctions.

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