WASHINGTON — The World Trade Organization handed the EU another victory Friday in a ruling that authorizes the trade bloc to impose $4.04 billion in sanctions on a wide range of U.S. products.
The ruling, which could provoke a trade war, stems from a long-simmering dispute the U.S. lost eight months ago over tax breaks for U.S. corporations operating abroad. The WTO deemed those breaks an illegal subsidy in January.
“We are satisfied by today’s decision that makes the cost of noncompliance with the WTO crystal clear,” EU Trade Commissioner Pascal Lamy said in a statement Friday. “The arbitrators have endorsed the EU’s request, i.e., they have given us an amount of potential countermeasures, which will create a major incentive for the U.S. to eliminate this huge illegal subsidy.”
In the latest round of the dispute, the EU had argued the $4.04 billion of U.S. products it wants to retaliate against equals the foreign income tax-break edge provided to U.S. companies. The U.S. claimed the value of tax breaks was $1 billion.
“I’m disappointed that the arbitrator did not accept the lower figure put forward by the U.S.,” said U.S. Trade Representative Robert Zoellick. “I believe that today’s findings will ultimately be rendered moot by U.S. compliance with the WTO’s recommendations and rulings in this dispute.”
The EU has said it will levy duties of up to 100 percent on a wide range of U.S. products, including knit and woven apparel, accessories, footwear, cosmetics and fine jewelry in a proposed list.
Lamy assured the U.S. that before any countermeasures are taken, the 15 EU member states will “carefully evaluate progress made on U.S. implementation” of a legislative fix.
He warned, however, that the U.S. must repeal the tax scheme “expeditiously.”
EU officials must now submit a final list of products to the WTO dispute panel. Countermeasures can be taken any time after the final WTO authorization has been granted.
Wal-Mart Stores Inc., of Bentonville, Ark., is very concerned about the legislative fix currently under way in Congress.
In late July, David Bullington, Wal-Mart’s vice president for taxes joined executives from other major U.S. companies in warning a Senate panel that U.S. companies with foreign operations could lose millions and be less competitive globally if Congress isn’t careful in fixing the tax-break issue.
Bullington told the Senate Finance Committee a simple solution would be to reduce the corporate tax rate across the board, which would benefit all businesses.
But cutting corporate taxes, always a contentious issue in Washington, has been set aside as a GOP priority since federal coffers are being hit by the slow economy and the cost of the war on terrorism.
The House Ways and Means Committee, where any tax change must originate, has been working on changing the tax code but progress has been slow.
Committee Chairman Bill Thomas (R., Calif.) has introduced a bill that calls for outright repeal of the offending tax break, but his proposal is meeting with opposition among GOP colleagues in the Republican-controlled House.
An estimated 4,000 U.S. corporations now benefit from the foreign income tax break, but most apparel manufacturers and retailers do not benefit from the program.
It is unclear what kind of impact EU retaliation on apparel and other related items would have on the majority of U.S. retailers and apparel vendors. Most U.S.-brand apparel sold in Europe is manufactured in Asia or other third-party nations and shipped directly to Europe, and those shipments would not be affected.
“Most of our goods go directly from vendors in Asia to the EU,” said Frank Kelley, vice president of international trade and government affairs at Liz Claiborne. “We do very little production in the U.S. that is sent to Europe.”
However, U.S. companies who do ship U.S.-made goods to the EU could be affected.
“Europe is one of our larger export markets for finished products,” said Stephen Lamar, vice president at the American Apparel & Footwear Association.