U.S. loses tax row with EU

January 14, 2002 Posted: 1712 GMT

GENEVA (Reuters) -- The World Trade Organization ruled against the U.S. on Monday in a row with the European Union over tax breaks for exporters, opening the way for a possible $4 billion in retaliatory duties by Brussels.

In a written ruling, its Appellate Body rejected a U.S. bid to overturn earlier WTO findings that the tax scheme was an illegal export subsidy, violating international trading norms.

EU Trade Commissioner Pascal Lamy quickly welcomed the decision and urged Washington to comply.

"Now it is up to the U.S. to comply with the WTO's finding to settle this matter once and for all. As to how, we look forward to rapid U.S. proposals," he said in a statement issued in Brussels.

Brussels can now ask another WTO panel to fix the level of retaliatory trade sanctions it can impose unless Washington revises the disputed tax scheme, which benefits major corporations such as Microsoft and Boeing.

The European Union has said it will seek up to $4.04 billion in additional duties on U.S. goods, the highest amount yet sought in the six-year life of the WTO. However, the panel, which has 60 days to decide, could opt for less.

Most European and U.S. trade experts had expected the judicial panel to support earlier findings by the WTO that the United States was in the wrong.

But they added that Brussels may hesitate before hitting back at U.S. goods for fear the dispute could degenerate into an all-out trade war which the EU might lose.

U.S. Trade Representative Robert Zoellick said the EU retaliation threat amounted to "usng a nuclear weapon" against the global trading system.

The ruling comes as both sides are about to face off over their steel industries, with Washington considering whether to give import protection through higher tariffs to struggling U.S. companies.

Brussels has dismissed any suggestion of a trade-off between the two trade issues.

But U.S. officials admit Washington's options are limited after the appeals court agreed the tax system gave illegal export subsidies, violated the trade body's agriculture agreement and discriminated in favour of U.S. goods in breach of WTO rules.

Washington has already tried redrafting the tax rules -- which grant cuts in tax payments by firms which use off-shore subsidiaries as exporting arms -- but Brussels said the new version was just as discriminatory as the old.

In any case, the United States would not have time to come up with an alternative before any sanctions came into force.

The United States could seek to defuse the issue by offering "compensation" through lower U.S. tariffs or by calling for the matter to be included in a new global round of trade talks due to begin this year under the auspices of the WTO.