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Brussels gives us notice of 1bn trade war { November 6 2003 } Original Source Link: (May no longer be active)
http://www.guardian.co.uk/usa/story/0,12271,1078528,00.htmlhttp://www.guardian.co.uk/usa/story/0,12271,1078528,00.html
Brussels gives US notice of $1bn trade war
Andrew Osborn in Brussels
Thursday November 6, 2003
The Guardian
Transatlantic trade relations sank to a new low last night after Brussels gave Washington until March 1 to scrap an illegal multi-billion dollar tax-break scheme or face sanctions worth $1bn (£600m) in the next two years.
Signalling that its patience with the US on the issue was exhausted, the European Commission approved a formal proposal to automatically trigger the sanctions unless the scheme - known as the foreign sales corporation act - is abolished by that deadline.
The offending legislation, which has already been ruled illegal by the World Trade Organisation, offers tax concessions to the tune of about $4bn a year to big American exporters such as Boeing, Microsoft and Caterpillar.
Brussels has already won the right from the WTO to impose $4bn in sanctions on the US but said yesterday it had opted for a phased approach in order to avoid poisoning the EU-US trading relationship, which is worth about $1bn a day.
The sanctions are serious, nonetheless. US exports including precious metals, leather, nuclear reactor parts, shoes, soap, live animals, toys, jewellery and sporting goods will face a punitive EU import tariff of 5% from March 1, rising by one percentage point a month to 17% in March 2005.
The commission said the sanctions would net it $340m in 2004 and $680m in 2005.
It stressed, however, that it was not too late for America to abolish the tax breaks scheme and avoid a trade war.
"We have opted for a measured approach and have actually left the door open for US action before counter measures are to be applied in March 2004," Pascal Lamy, EU trade commissioner, said in a statement.
His spokeswoman, Arancha Gonzalez, said the sanctions were designed to ratchet up the pressure slowly to ensure compliance. "The faster the US acts, the less the measures will bite; the longer it takes to act, the more they will bite.
"If there is no compliance, they will enter into force on March 1 next year. This instrument is there to focus the mind of US legislators."
Reaction from the US was chilly. Calling the move "unhelpful", Rockwell Schnabel, the US ambassador to the EU, argued that Brussels should give the US three more years to comply. "Something is going to happen [in Congress], so at this stage to retaliate, we think, is counter-productive."
The EC has given the US several deadlines to scrap the tax scheme - the latest was the end of this year - but stressed yesterday that this was the final one, "cast in stone."
Whether the US will do what the EU wants is uncertain. Two bills aimed at repealing the offending legislation are making their way through Congress but do not appear to be nearing final approval.
Nor do they look likely, in their current form, to satisfy Brussels because both would phase out the tax breaks over three years and allow US firms to keep most of the scheme's benefits until 2006.
The commission's reluctance to levy $4bn in sanctions straight away - an option the Americans have called "the nuclear bomb" - is in part recognition that a trade war on that scale would damage the EU economy.
It is also recognition that the two parties are trying to restart stalled world trade talks. However, the EU is expected next month to opt for sanctions worth $2.2bn a year in retaliation for America's failure to scrap illegal tariffs on steel imports.
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