WASHINGTON — A potential trade war between the U.S. and European Union is festering, as Congress remains divided over how to keep the EU from levying $4 billion in sanctions against American goods.

Matters came to a head on Wednesday as the EU in Brussels sent its 15 member nations a final draft of U.S. goods that could face 100 percent tariffs, if U.S. lawmakers don’t change a sales tax law deemed by the World Trade Organization to be an illegal subsidy for U.S. corporations with operations abroad.

The final draft was not made available to reporters in Europe, where officials said it was an “internal” document subject to change after EU member review. However, the Associated Press in Brussels reported American textiles and apparel, along with agriculture products and paper, apparently have been excluded from the final draft.

In addition, the EU allowed the value of the of U.S. goods in the draft to be pared down to $4 billion from an earlier $12 billion list issued last year and that included most of the $1 billion in apparel and textiles the U.S. exports to Europe.

EU Trade Commissioner Pascal Lamy, who’s scheduled to meet Monday and Tuesday in Washington with Bush administration officials and Capitol Hill lawmakers to discuss progress being made on repeal of the tax law, sought to downplay any significance of the new retaliation list being drawn up in advance of his trip.

“The EU’s objective remains to ensure the repeal of this WTO-incompatible legislation,” Lamy said in a statement, adding he was “encouraged” by attention being paid to the issue by the White House.

However, Lamy said, “In the meantime, the EU is following the necessary procedural steps to launch countermeasures if the compliance process does not deliver swift results.”

The dispute over the U.S. tax break is one of several squabbles between the U.S. and EU on trade that have yet to result in retaliation, but are teetering between diplomatic finger-pointing and seeking revenge.

For example, the EU is awaiting a WTO decision on whether protective tariffs levied by the U.S. on steel imports break with fair-trade rules set by the global body. The U.S. is weighing whether to file its own dispute against the EU for its moratorium on new biotech food products and ban on beef imports in which cattle were treated with hormones.The immediate U.S.-EU dustup involves a tax break amounting to around $50 billion given U.S. multinationals for sales abroad. In four separate proceedings, the WTO has deemed the tax break an illegal subsidy and the Bush administration and Capitol Hill lawmakers vow to bring the law in compliance.

But reaching a politically viable substitute is proving exceptionally sticky and Bush officials are wondering how long the EU might wait, especially since one earlier legislative fix was rejected by the WTO.

U.S. Trade Representative Robert Zoellick on Wednesday warned House Ways and Means Committee members: “You can’t make this go away. If we don’t get this fixed before too long, they are going to retaliate.”

Committee chairman Bill Thomas (R., Calif.) has proposed a fix of the tax break that would result in some benefits still directed to multinational corporations with sales operations abroad. Backers of the Thomas plan note that multinationals deserve an offset for their foreign businesses, since one-quarter of U.S. GDP is generated by these companies.

However, the plan is facing fierce opposition among some of his fellow GOP members, as well as Democrats, who are positioning the issue as U.S. manufacturing versus foreign competition.

At the hearing, Rep. Charles Rangel (D., N.Y.) said he plans to introduce a bill that would direct the $50 billion in current multinational tax breaks into tax incentives for U.S.-based manufacturing. Rangel suggested the “politically packed issue” is facing a potential stalemate and the administration should seek new solutions to avoid EU retaliation.

“If you don’t want to see a train wreck,” Rangel advised Zoellick, “I suggest you go to the Treasury and ask for guidance.”

Meanwhile, Rep. E. Clay Shaw (R., Fla.), at the same hearing on Bush administration trade policy, said he plans to introduce a bill today that would grant duty-free status to Haitian apparel. Shaw wants to help beleaguered Haiti in hopes of stemming the flow of its economic refugees to the U.S. The apparel would have to be made of textiles from the U.S., the Caribbean Basin, Andean countries or countries with which the U.S. has free-trade pacts.

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