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Eu warns against tax breaks microsoft caterpiller { November 6 2003 } Original Source Link: (May no longer be active)
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EU takes cautious step towards trade sanctions on US over tax breaks
By Tobias Buck in Brussels
Published: November 6 2003 4:00 | Last Updated: November 6 2003 4:00
The European Commission yesterday moved one step closer to imposing trade sanctions on the US in a long-running dispute over tax breaks for US exporters, but gave Washington additional breathing space to comply with its demands.
Sanctions would be imposed only from March next year and the value of the punitive import tariffs would fall below the $4bn (&euro3.5bn, £2.4bn) the European Union was empowered to levy by the World Trade Organisation.
This cautious approach reflects widespread fears that a more aggressive stance could seriously damage US-EU trade relations and the international trading system in general.
Pascal Lamy, EU trade commissioner, said: "We have opted for a measured approach and have actually left the door open for US action before countermeasures are to be applied in March 2004. I hope the US will seize this opportunity."
The WTO ruled last year that the US Foreign Sales Corporations provision, which benefits companies such as Boeing, Caterpillar and Microsoft, was illegal, and subsequently allowed the EU to impose sanctions worth $4bn if the US failed to comply with its decision.
Brussels has since urged the US to repeal the provision, but despite efforts in the US Senate and the House of Representatives to change the legislation, the US has still failed to do so.
In an attempt to "focus the minds in the US", as one Commission official put it, Brussels yesterday backed a plan setting out how and when the sanctions would be implemented. Crucially, the EU will only begin levying punitive import tariffs on US goods from March next year, giving Washington lawmakers more time to repeal the provision.
In addition, the EU plans to introduce the tariffs at a level of only 5 per cent, which would then be raised by one percentage point every month up to a ceiling of 17 per cent in March 2005. This means that the overall value of the sanctions would reach only &euro290m ($332m, £199m) in the first year and &euro614m in the second - a fraction of the $4bn the EU is entitled to.
The plan, which still needs to be approved by EU member states, was criticised by Rockwell Schnabel, US ambassador to the European Union. Reuters news agency reported him as telling a lunchtime meeting in Brussels that the EU approach was unhelpful and he reiterated that any changes to the provision should only be phased in over three years - a solution the EU has said is unacceptable.
"Something is going to happen [in Congress] so at this stage to retaliate, we think, is counter-productive," he said.
Even if the US manages to repeal the provision in time, the two sides face an uphill struggle to stave off the threat of an escalation in another long-running trade dispute over US steel tariffs. Mr Lamy said in Washington this week that EU retaliation in this case was a "racing certainty" if the US did not comply with a WTO ruling by mid-December.
In the steel case, the EU won the right to impose punitive import tariffs worth $2.2bn.
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