US Loses Decades-Old Trade Dispute

A day after the World Trade Organization ruled against the United States in a decades-old transatlantic trade dispute with the European Union, politicians and businessmen warned against escalating tensions between the two sides.

The WTO panel ruled on Monday that a corporate tax law that gave tax breaks to large US exporters like Microsoft and Kodak violated global trade laws. The decision, made on a US appeal of the first ruling last summer, effectively exhausted the Bush administration's options, giving victory to the EU.

The EU now has the option of seeking punitive duties on about $4.04 billion worth of US exports. The two sides have until April to resolve the tax dispute. If they don’t the WTO will step in and decide the amount of sanctions and give the EU the go-ahead to begin imposing them.

Resolving the dispute with reason and speed

Both sides say they don’t want the dispute to escalate to that point. There is already transatlantic friction regarding the U.S.’s threats to place protective tariffs on European imported steel. After the WTO’s announcement Monday, the European Union’s trade chief asked the US to resolve the dispute with reason and speed.

"We have made a point of handling this dispute in a very reasonable manner," Pascal Lamy said in a statement. "Now it is up to the US to comply with the WTO’s findings and to settle this matter for once and for all. As to how, we look forward to rapid US proposals."

Heavy EU duties on specific products made in America would harm European importers and, as a result, European customers, something that concerns the continent's trade groups.

"Those responsible must make sure that this dispute doesn’t lead to duties that reach the billions," of dollars, said Ludolf von Wartenberg, chairman of the German Association of Industries.

US Trade Representative Robert Zoellick said the United States would work with the WTO to "manage and resolve this dispute."

He is sending his chief legal advisor to Brussels this week to discuss resolution possibilities with his European counterparts. But Zoellick stopped short of saying Congress would complete rewrite the tax law, and said he would consult industry and Congress before making any decisions.

Law favored America's foreign customers

The corporate tax law allowed some of the foreign profits of American exporters to be tax exempt. The EU complained that the tax breaks were unfair because they favored sales to foreign customers over domestic ones.

After an earlier WTO panel ruled the law illegal, the US Congress rewrote it in 2000. But that revision apparently didn’t go far enough, leading to the WTO’s second decision in June 2001. It was that decision that was upheld over the weekend.

What to do with the old law?

The chairman of the House of Representatives Ways and Means Committee, urged a rewrite of the law as soon as possible so that US exporters were not hurt by the ruling.

"It is now clear that we have to reform the U.S. tax code, not out of desire, but out of necessity to maintain international competitiveness," said Representative Bill Thomas.

But some US trade organizations and politicians warned against a complete rewrite of the US tax system. Rather, they preferred the two sides to negotiate new tax rules as part of a new round of WTO talks 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," said Michael Barody, executive vice president of the National Association of Manufacturers. "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."