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WTO Rules Against U.S. On Tax Law

By Paul Blustein
Washington Post Staff Writer
October 1, 2005

Months after it had been presumed dead, an international trade case brought by the European Union against U.S. tax law again reared its head yesterday, as the E.U. won a new decision by a World Trade Organization panel and threatened to reimpose sanctions on U.S. goods.

The long-running WTO case, one of the biggest ever in terms of the money involved, was thought by many in Congress to have been settled a year ago, but yesterday's ruling disabused them of that notion. It also showed that the case may have important implications for another transatlantic trade dispute, in which the United States and the E.U. have accused each other of illegally subsidizing their flagship aircraft manufacturers, Boeing Co. and Airbus SAS.

Yesterday's ruling is based on European complaints that the United States violates international trade rules by subsidizing U.S. export firms through tax benefits. After the WTO ruled in the E.U.'s favor in 2001 and authorized up to $4 billion in sanctions on U.S. products, Congress forged a major revision to U.S. corporate tax law, which it enacted in October 2004. The E.U. soon thereafter suspended duties of 14 percent that it had imposed on U.S.-made jewelry, wood, clothing and other goods.

But the E.U. was not satisfied that the new law went far enough and yesterday the WTO agreed. The decision -- based in part on loopholes in the law that allowed some companies to temporarily keep their tax breaks-- means that Congress must change the tax code again or face renewed duties on U.S. goods.

Since it is highly unlikely that Congress would seek a new compromise on taxes, the upshot of yesterday's ruling may be that "the Europeans now have an extremely large club in the aircraft case," said Gary C. Hufbauer, a trade expert at the Institute for International Economics.

"If the U.S. were to prevail in that case, the Europeans would have a remedy they could apply," Hufbauer noted -- meaning that the E.U., which never imposed as much in sanctions as the $4 billion authorized, could threaten higher duties on U.S. goods and thus force Washington to compromise on the aircraft matter.

E.U. Trade Commissioner Peter Mandelson, in a written statement, praised the WTO's "clear language and conclusions" and noted that Boeing had benefited from the loopholes in the October 2004 tax law revision.

The United States is almost certain to buy some time by appealing the panel's decision, trade experts said. Even though such appeals rarely succeed, they usually take several months to resolve. The U.S. trade representative's office said it was studying the decision.

In an expression of congressional indignation with the outcome, Senate Finance Committee Chairman Charles E. Grassley (R-Iowa) said in a prepared statement: "I'm extremely disappointed that the European Commission has insisted on perpetuating this dispute." The E.U. did so, he said, "in an ill-conceived effort to gain some sort of leverage in the civil aircraft dispute. Their blatant linkage of WTO disputes serves as a dangerous precedent."

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