The $4 billion sanction threat — 20 times the amount imposed in any previous WTO disputes — is a major victory for the EU over what it calls the “huge illegal export subsidy” provided to U.S. exporters. But EU officials have indicated that they will hold off on imposing the sanctions if the U.S. changes its tax policies and comes into compliance with WTO rules.
“We are satisfied by today’s decision that makes the cost of non-compliance with the WTO crystal clear,” Trade Commissioner Pascal Lamay said in a statement issued by the European Commission.
The U.S. tax break program, known as “Foreign Sales Corporations,” allows U.S. companies with foreign interests to exempt between 15 and 30 percent of their export income from U.S. taxes. Approved by Congress in 2000, the provision allows major U.S. exporters such as Boeing, Microsoft and Disney to pay less tax, making their products cheaper and giving them an advantage over foreign competitors.
The EU asked the WTO for the right to retaliate on $4.043 billion worth of goods, based on the amount of damage done to EU companies struggling to compete with U.S. corporations taking advantage of the tax breaks. A special panel of trade arbitrators decided on the sanctions figure after a series of starts and stops on the case since January.
U.S. Trade Representative Robert Zoellick said in a statement that he believed the sanctions “will ultimately be rendered moot” by the U.S. bringing its tax laws into compliance with the WTO’s international trade rules.
The U.S. had originally argued that $1 billion was a more appropriate fine, since it better represented the harm done to EU exporters by the U.S. tax provision.
“I’m disappointed the (WTO) arbitrator did not accept the lower figure put forward by the United States,” Zoellick said. “We believe that $1 billion is much more accurate.”
The award puts pressure on Congress to write and approve new legislation that would bring the U.S. into compliance with international trade rules.
“We call on the U.S. Congress to act quickly so that legislation will move forward and enable repeal of the FSC/ETI scheme within a short period of time,” the European Commission said in a statement.