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WTO rules in favour of EU, India in case against US

The World Trade Organisation ruled against Washington on Monday in a dispute with the European Union, India, Australia, Japan and Canada over tax breaks for exporters, opening the way for EU alone to seek some $4 billion in retaliatory duties.

In a written ruling, the WTO Appellate Body rejected a US bid to overturn earlier WTO findings that the tax scheme was an illegal export subsidy under international trade rules.

EU Trade Commissioner Pascal Lamy welcomed the decision and urged Washington to comply quickly with the finding and end the long-running dispute.

"Now it is up to the US to comply with the WTO's finding to settle this matter once and for all. As to how, we look forward to rapid US proposals," Lamy said in a statement issued in Brussels.

However, US Trade Representative Robert Zoellick said the Bush administration would consult with Congress and US industry before deciding its next step.

US questions fairness of WTO rules

"This is an especially sensitive dispute that, at its core, raises questions of a level playing field with regard to tax policy," Zoellick said in a statement.

"The United States respects it WTO obligations, which serve America's interest, and we intend to cooperate with the EU in order to manage and resolve this dispute, he said.

The United States argued in its appeal that the WTO ruling unfairly singled out the American taxation system against other systems that also provide tax breaks for exporters.

Michael Barody, executive vice president of the National Association of Manufacturers, a US industry group, made the same point in calling on the United States and the European Union to negotiate new international tax rules as part of a round of WTO talks that are set to begin this year.

"The WTO rules clearly favor the territorial tax systems used by European countries over the worldwide tax system employed by the United States," Barody said.

"Those discrepancies need to be addressed in the context of a new round to truly and permanently solve the problem that led to this case in the first place."

Sen Charles Grassley of Iowa, the top Republican on the Senate Finance Committee, also said the issue should be folded into the WTO talks. A bill pending in the Senate to give President George W. Bush expanded trade negotiating powers endorses WTO negotiation on the issue, he said.

Heavy consequences

Meanwhile, Brussels can now ask another WTO panel to fix the level of retaliatory trade sanctions it can impose unless Washington revises the disputed tax scheme, which benefits major corporations such as such as Microsoft and Boeing.

The European Union has said it will seek up to $4.04 billion in additional duties on US goods, the highest amount yet sought in the six-year life of the WTO. However, the panel, which has 60 days to decide, could opt for less.

In 2000, the EU issued a broad list of goods that could be targeted for sanctions, ranging from live animals, cereals and books to iron, steel, electrical machinery and aircraft.

The United States is expected to argue that the amount of trade affected by tax breaks under the Extraterritorial Income Exclusion Act of 2000 is less than the $4.0 billion in benefits that companies receive.

Most European and US trade experts had expected the judicial panel to rule against Washington.

But they added that Brussels may hesitate before hitting back at US goods for fear the dispute could degenerate into an all-out trade war that would also harm the European Union.

"For the EU to try to impose that level of sanctions on us would be extraordinarily detrimental to both sides," said Kimberly Pinter, an international tax policy expert at NAM. "It basically would lead to mutually assured destruction."

Zoellick used a similar analogy last year, when he described the EU retaliation threat as amounting to "using a nuclear weapon" against the global trading system.

US officials admit Washington's options are limited after the appeals court agreed the tax system gave illegal export subsidies, violated the trade body's agriculture agreement and discriminated in favor of US goods in breach of WTO rules.

Washington has already tried redrafting the tax rules -- which grant cuts in tax payments by firms that use offshore subsidiaries as exporting arms -- but Brussels said the new version was just as discriminatory as the old.

In any case, the United States would not have time to come up with an alternative before any sanctions came into force.

The United States could offer to pay compensation in the dispute by lowering US tariffs on EU goods or providing other opportunities for EU firms to increase sales of their goods and services in the US market.

The ruling comes as both sides are about to face off over their steel industries, with Washington considering whether to give import protection through higher tariffs to struggling US companies.

The European Union has dismissed any suggestion of a trade-off between the two trade issues.

Additional input: Agencies

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