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U.S. Takes Step to Break EU Tax Impasse

WASHINGTON — Congress edged closer Thursday to preventing the European Union from levying $4 billion in punitive tariffs on U.S. imports, including $100 million in apparel and textiles, but the issue is far from resolved.<br><br>Come Tuesday,...

WASHINGTON — Congress edged closer Thursday to preventing the European Union from levying $4 billion in punitive tariffs on U.S. imports, including $100 million in apparel and textiles, but the issue is far from resolved.

Come Tuesday, the EU will be authorized by the World Trade Organization to levy the 100 percent tariffs. The proposed sanctions arose when the WTO sided last year with the EU in declaring a U.S. tax break an illegal subsidy for American corporations operating abroad that also manufacture in America for export.

So far, EU officials have expressed patience in waiting for Congress to repeal the offending tax break and even now there are no immediate plans for retaliation, said a Washington spokesman for the European Commission, the EU’s legislative branch.

“We’re still looking for progress,” said the spokesman, while noting it has been one year since President Bush, after the U.S. lost its last WTO appeal on the issue, said the U.S. would bring its tax code in compliance with the global trade body’s ruling.

On Thursday, four members of the House Ways & Means Committee — where tax legislation by law has to originate — proposed a change to the export subsidy that would benefit some of the original corporations, but go further in helping domestic manufacturers.

The sponsors — two Republicans and two Democrats — call the bill the Jobs Protection Act and claim that shifting the offending tax break to all domestic manufacturers should help bolster the flagging sector, while satisfying the EU and WTO.

Under the bill, U.S. manufacturers producing goods entirely in the U.S. would receive a 3.5 percent tax break on net income, and if goods are partially produced abroad, manufacturers would receive the tax break on a sliding scale, depending on content.

“Response to the WTO ruling has to be done so by preserving U.S. jobs,” said Rep. Phil Crane (R., Ill.), chairman of Ways & Means’ Trade Subcommittee.

Other co-sponsors are Reps. Charles Rangel (D., N.Y.), Don Manzullo (R., Ill.) and Sander Levin (D., Mich.). The bill’s sponsors are all advocates of international trade and the GOP members are avidly free trade. The lawmakers said they are joining forces to help domestic manufacturers, a flagging sector that’s lost more than 2 million jobs since 2001, including 164,400 in apparel and textiles.

This story first appeared in the May 2, 2003 issue of WWD.  Subscribe Today.

“Something has to be done dramatically and immediately to restore manufacturing jobs,” said Manzullo, adding that the bill “could be the last attempt to stop the hemorrhaging of manufacturing.”

The EC spokesman said European officials aren’t commenting on the bill and will weigh its progress and content at a later date.

Although sponsors said they expect the bill to get widespread support, it has yet to receive backing from Ways & Means Chairman Bill Thomas (R., Calif.), who last year proposed legislation that would redirect the export tax break, but it would still largely benefit the same corporations with overseas operations.

That bill, backed by companies like Boeing and Microsoft, got a chilly reception, and Thomas is planning to resubmit a new version, probably before Memorial Day. A spokeswoman for Thomas would not give details of the new bill. The Bush administration has yet to back either legislation.

The Jobs Protection Act also is causing a stir because it pits Thomas against Crane. When the Ways & Means chairman’s job was vacant two years ago, Crane, who is next in line for the job according to seniority, was passed over by GOP leadership for Thomas.

The new domestic manufacturing tax breaks proposed would amount to $126 million over 10 years, compared with $50 million in lower taxes for companies under the current system for offshore entities with export production in the U.S.

While domestic mills favor tax breaks for domestic manufacturers as an edge to compete with low-cost imports, retailers so far aren’t taking a position on how best to appease the EU and stave off retaliatory tariffs.

“We don’t care as long as they get the bloody issue resolved,” said Erik Autor, vice president and international trade counsel with the National Retail Federation, with European members who stock U.S. apparel. “It’s been such a political football in Ways & Means.”