The European Union has begun imposing sanctions amounting to $4 billion a year on U.S. products in retaliation for U.S. non-compliance with a World Trade Organization (WTO) ruling. The ruling found that US Foreign Sales Corporation law and the subsequent Extraterritorial Act were in conflict with U.S. commitments to the WTO.

Effective March 1, 2004 the EU added an additional 5% tariff to current duty rates on a variety of U.S. products. The EU intends to raise the rate an additional 1% each month, up to a maximum of 17%.

The affected products cover a wide range of U.S. exports and a full list can be found at http://europa.eu.int/eur-lex/pri/en/oj/dat/2003/l_328/l_32820031217en00030012.pdf.

Some of the affected products that may originate in Wisconsin include:

• disposable diapers and sanitary paper products
  
• toilet tissue
  
• self-copy paper, in rolls or sheets over 36cm wide
  
• lifting or handling machinery for road vehicles
• ancillary machinery for the printing industry
• spark-ignition reciprocating piston engine etc > 1000 cc
• electrical cells and batteries
• jib cranes
• centrifigual pumps
• leather footwear and other articles of leather clothing
• prepared frozen potatoes

On October 8, 1999 the World Trade Organization's Dispute Panel ruled that the United States provided "illegal export subsidies" by means of its Foreign Sales Corporation (FSC) regime. In November 2000 the Extraterritorial Income Exclusion (ETI) Act replaced the FSC. It did not substantially change the U.S.'s export subsidy scheme and it was also found to be in non-compliance with WTO rules.

On May 11, 2004 the Senate passed a bill to repeal current export tax breaks, but many obstacles remain to congressional passage. The Senate bill provides new business tax cuts worth $160-170 billion over 10 years, many of them aimed at specific industries most notably the energy industry. The Senate-passed bill would offset the tax cuts by closing widely abused tax shelters and tax loopholes, including some infrastructure-leasing deals widely regarded as scams.

The Senate bill's main provision would, over three years, repeal FSC/ETI and reduce the tax rate for all U.S.-based manufacturing companies (not just for certain exporting companies and not for offshore manufacturing) to 32 percent from 35 percent. The $160-170 billion in tax breaks in the Senate-passed bill is more than three times the value of the export tax breaks being repealed.

A rival bill in the House of Representatives has been stalled. The tax cuts proposed in the House bill would increase the U.S. federal debt by about $60 billion. House and Senate differences over offsetting the cost could present an obstacle to final passage.

-- Stanley Pfrang

The newsletter is issued electronically every other month.

Please send comments or questions to Barbro McGinn, editor.