001132 U.S. Eyes WTO Arbitration on EU Sanctions

Geneva - U.S. Ambassador Rita Hayes confirmed that the United States would request World Trade Organization arbitration on a European Union request for $4 billion sanctions in the row over the U.S. tax break system.

Hayes also said she was submitting to WTO later in the day a new U.S. law repealing the Foreign Sales Corporation (FSC) scheme to show it complies with free trade rules.

The 15-member EU, which says the new law does not comply with WTO rules, asked the 139-member watchdog on Friday for authorization to impose up to $4.04 billion of sanctions on the United States.

Under an agreement last September between the two trading partners to lower the heat in the transatlantic row, the United States is to ask for WTO arbitration by November 30.

Speaking at a news conference in Geneva, the U.S. trade envoy made clear that the U.S. administration believed its new legislation complied with WTO, which ruled that its Foreign Sales Corporation (FSC) program was an illegal export subsidy.

“Quite obviously the United States will reject the EU's contention that it is entitled to suspend $4 billion dollars worth of tariff reductions as a result of this dispute and will request arbitration,” Hayes said.

“I think we need to sit down and see how we can work through this without just immediately going and taking the steps that they have taken,” Hayes said.

Under the EU-US accord, both sides would ask the arbitrators to suspend work until a WTO dispute panel has decided whether or not the new U.S. law complies with global trade rules.

Time To Seek Solutions

Only if the WTO panel finds in the EU's favor would the arbitrators resume their work and decide on a value of U.S. exports on which the bloc could legally impose sanctions, probably in the form of punitive duties. That would take until the middle of next year, giving time to seek solutions.

The FSC granted about $4 billion a year in tax breaks, through offshore subsidiaries, to major U.S. exporters such as aircraft maker Boeing Co. and software giant Microsoft Corp.

The amended law, approved by both houses of Congress, was signed by President Clinton on Thursday.

“We feel very good about the legislation,” Hayes declared.

“We feel like we have implemented the recommendations that were made by the (WTO) Appellate Body in the dispute settlement system,” she added. “This is left up to the WTO to decide.”

Hayes was also at pains to point out that the new U.S. law, which excludes some types of foreign source income from U.S. taxes, incorporated some European taxation principals.

“If you look at the legislation, we have taken and... incorporated principles of the very same European-style territorial tax. A tax system that we have brought into our own Internal Revenue code which will exclude from taxation certain qualifying foreign source income rather than exempting such income from a general rule of taxation.

“So that is certainly very similar to what the EU does. Moreover, there's also excluded income which will very clearly derive from a new and broader category of particular transactions which will not require that there be exports from the United States,” the U.S. envoy said.

Asked about transatlantic relations, she replied: “I've often said we're going to have these disputes with the EU because they are our largest trading partner.”

The United States imposed punitive duties on $308 million of European goods last year after winning WTO cases against the EU's banana import rules and its ban on hormone-treated beef.

“I think it would be to the benefit of the EU if they could find a way to comply and get into compliance on bananas and beef,” Hayes said. “People here at the WTO look to the EU and the U.S. to set an example.”

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