New York, NY, Feb. 26--Trade sanctions that U.S. exporters are to start paying the European Union could top a hefty $300 million this year, but the standoff also could undermine confidence in the international body charged with resolving trade disputes.
The sanctions, due to take effect Monday, are the first to be paid by the U.S. in a World Trade Organization case. They come as a response to U.S. tax breaks for exporters using so-called Foreign Sales Corporations, which were ruled illegal by the WTO four years ago based on a complaint from the EU. Under a schedule for gradually increasing the sanctions, the payments by U.S. exporters would reach a WTO record for penalties by August.
The situation sends a signal to the WTO's other 145 members: Violate the law as long as you can. The U.S. delays are refueling a debate within the WTO about whether its way of resolving disputes needs to be overhauled. Many WTO member countries long have complained that a body that exists to ease trade barriers shouldn't be using tariffs to enforce its orders.
Now the U.S. appears to be showing that even such measures don't ensure speedy compliance. "The U.S. failure to comply with dispute-settlement system rulings is alarming," said Daniel Ikenson, a trade-policy analyst at the Cato Institute, a Washington think tank. "If they don't honor their commitments, what's the point of having any?"
The sanctions will further stoke trade tensions between the U.S. and its allies. At a time of increased attention on trade battles around the world, it also will hand Congress an election-year political hot potato in having to choose between watching tariffs mount on 1,600 U.S. products and changing a U.S. tax law to comply with an international body.
While the sanctions slowly creep into effect, U.S. exporters still will benefit from the tax break, valued at at least $4 billion. The WTO last year gave European officials permission to levy that much in punitive tariffs, but the EU decided to start smaller and raise the penalties each month that the U.S. fails to change its law.
Meanwhile, members of some industries, including apparel makers, already are scrambling to lessen the effects of the sanctions by using third countries to export to Europe or preshipping goods to beat the Monday deadline.
The penalties mark another chapter in the string of recent conflicts between the two trading titans, despite efforts in Washington and the EU to keep relations smooth. In another case brought by Europe, Washington instituted steel tariffs for 21 months, dropping them after the WTO ruled them illegal--but only days before sanctions were to kick in.
Several EU decisions about how to apply the penalties have tamped down the urgency for the U.S. to act. The impacts of the EU penalties are spread across industries including wood and paper, apparel, jewelry and electrical machinery, lessening the effect on any one business. The tariffs start at just 5%--for an estimated $16.5 million in March--before rising one percentage point each month to reach an estimated $315 million for 2004 and a high of 17% monthly by March 2005, if the U.S. still hasn't acted.
The EU exempted several industries and companies, such as aircraft maker Boeing Co., because their products were too important to EU companies that are subcontractors. It didn't apply the sanctions to any area where the U.S. represents more than 20% of imports to Europe, to avoid hurting consumers.
The effect on companies, therefore, varies widely. If the sanctions were to reach their maximum, and the U.S. still didn't comply, the U.S. jewelry industry estimates it would lose as much as $2.5 billion in sales over a year.
