WTO allows EU to impose $4 billion in sanctions against U.S.

<br>GENEVA (AP) _ The World Trade Organization said Friday that the European Union can impose $4 billion in sanctions against the United States _ a figure 20 times bigger than any sanction allowed in the

Friday, August 30th 2002, 12:00 am

By: News On 6

GENEVA (AP) _ The World Trade Organization said Friday that the European Union can impose $4 billion in sanctions against the United States _ a figure 20 times bigger than any sanction allowed in the past _ because of tax breaks given to U.S. corporations operating abroad.

Delighted by the verdict, the EU vowed to go ahead with plans to impose the sanctions by working on lists of targeted products, including everything from textiles, foodstuffs and automotive parts to nuclear reactors, unless Washington ends the tax policy.

``The cost of noncompliance with WTO is crystal clear,'' said EU Trade Commissioner Pascal Lamy in a statement. ``The path is now clear for the EU to adopt sanctions if the United States does not repeal the ... scheme expeditiously.''

Aside from the rhetoric, however, the amount was so huge _ and the stakes for U.S.-American trade relations so high _ that there seemed little chance of Brussels actually implementing its threat.

Instead, experts said that the EU would likely use the figure as a yard stick in bargaining to force Washington to amend its law quickly.

Kimberly Pinter, director of corporate finance and tax for the Washington-based National Association of Manufacturers, said the EU may have been given too much to use.

``They're like the little dog that caught the bus,'' she said. ``They've gotten something larger than they can use.''

As for any change to the U.S. law, a repeal would happen if an ``adequate replacement'' was on hand, she said.

The ``foreign sales corporations'' system lets companies with a foreign presence, such as Boeing Co. and Microsoft Corp., to exempt between 15 percent and 30 percent of their export income from U.S. taxes. By doing that, the price of their goods are lowered and more competitive than foreign rivals. Last year, the WTO ruled that it constituted an illegal subsidy.

The tax break, coupled with a second benefit not challenged by the EU, is expected to save U.S. companies an estimated $4.8 billion this year.

A WTO arbitrator ruled that the European Union was entitled to impose as much as $4 billion a year in trade sanctions to make up for European business lost because of the U.S. law. Washington had claimed the figure should be less than $1 billion.

U.S. Trade Representative Robert Zoellick said he was disappointed, but confident that the sanctions would never be put in place because Congress is considering legislation that would change its tax regime while at the same time improving the competitiveness of U.S. companies in overseas markets.

``One of the ironies of this case is that when the dust has settled, we hope to find that the competitiveness of U.S. firms has been strengthened, rather than diminished,'' Zoellick said.

WTO Director-General Mike Moore _ who leaves office this week after three years _ issued a statement calling on both sides to try to resolve the dispute ``in an amicable and constructive fashion.''

``The European Union and the United States are among the most important members of this organization and both hold a special responsibility to ensure the continued health and soundness of the WTO and global trading system,'' Moore said.

Lamy said the EU would start consultations with member nations and industry groups on which products should be hit with the sanctions _ which come in the form of import tariff hikes that effectively price the U.S. products out of the European market.

The ruling had been postponed several times since April, officially because of problems with the translation of documents and the complexity of determining an exact figure for fines. But both sides have been happy with the delays, not wanting to inflame trans-Atlantic trade tensions.

The United States and EU also have been trying to defuse a battle over steel tariffs.

In the past, the United States has imposed WTO-approved trade sanctions on the European Union, including in disputes over banana imports and hormone-treated beef, but the sums of money involved were much smaller.