Trade war between EU and US for 30 years

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Last updated at: (Beijing Time) Thursday, March 04, 2004

Trade war between EU and US for 30 years

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From Mar. 1 the EU for the first time began levying additional punitive tariffs on imported US products with WTO authorization in a bid to force the United States to annul its Foreign Sales Corporation designed to subsidize American exports.

In line with the resolution passed by the EU Ministerial Council in December last year, from March this year the EU began levying an additional 5 percent tariff on more than 1600 kinds of imports from the United States. From now on, 1 percentage point will be added monthly to this punitive tax rate which will reach 17 percent by March 2005.

The EU estimated that this would generate an extra tariff of US$315 million for the EU this year. The figure would rise to US$666 million in 2005. A spokesperson for the EU indicated that the EU would stop its punitive measure once the United States repealed its Foreign Sales Corporation.

Lawsuits in 30-year disputes

Rows between the EU and the US over the Foreign Sales Corporation have a long history. In 1971, the US government enacted "Domestic Foreign Sales Corporation" in order to encourage exports and reduce trade deficits, under which US external sales companies were given the preference "permanent delayed payment" of 50 percent tax on their export profits.

Regarding this measure as disguised subsidies for American export-oriented businesses, the EU lodged a complaint against the United States at the GATT (General Agreement on Tariffs and Trade). The GATT ruled in 1981 that the US bill violated relevant anti-subsidy stipulations and so it should revise its domestic tax bill. In this circumstance, Washington had to formulate the Foreign Sales Corporation Bill in 1984 to replace the "Scheme for Tax on Foreign Sales Corporation".

The EU took a stand of opposition to the Foreign Sales Corporation ever since its enactment, thinking that the American tax reduction and exemption for export-oriented companies actually constitute export subsidies. But considering the needs for the Uruguay round at that time, the EU did not take immediate legal actions against the United States.

There were increasing complaints lodged by EU members against the US Foreign Sales Corporation in the mid- and late-1990s. According to the EU estimation, American export companies got a rapid increase in export subsidy through this bill, coming to around US$4billion annually. As a result, EU members' chemicals pharmaceutical, mechanical, electronic and transportation equipment industries were confronted with unfair competitions and suffered heavy losses.

In 1997, the EU lodged an accusation against the US to the WTO after its consultations with the US failed. The WTO ruled in October 2000 that the Foreign Sales Corporation was inconsistent with WTO rules and must therefore be abrogated. However, one month afterwards, the American government promulgated the Foreign Sales Corporation Replacement Act.

The EU was very dissatisfied with it and once again brought a charge to the WTO against the United States. In August 2000 the WTO made a final verdict, saying that the United States should annul its Foreign Sales Corporation, and the EU had the right to levy extra punitive tariffs totaling US$4billion on imports from the United States.

In May last year, the WTO approved the retaliation list submitted by the EU and empowered the EU to implement its retaliatory measures against the US if the latter failed to repeal the Foreign Sales Corporation by the end of 2003.

Finding no sign that America would soon repeal this bill in December last year, the EU Ministerial Council decided that the EU trade sanction measures against the US be carried out as of March this year.

Five enlightenments from the dispute

The battle between the EU and the US over the Foreign Sales Corporation reflects a common difficult problem in today's world trade, that is, how to handle inter-state trade disputes and protect the national economic benefits by using WTO rules. On this issue, the more than 30-year-long trial of strength between the EU and the US over the Foreign Sales Corporation has given people lots of enlightenments.

Firstly, WTO rules must be observed in the enactment of laws involving trade problems to avoid any possible rule-breaking legislation.

Secondly, the WTO verdict is of great importance to the final settlement of trade disputes, winning WTO rulings in one's own favor is a reliable way in the defense of one's own interests and in settlement of disputes. This makes it necessary to fully use various WTO trade protection and legal tools.

Thirdly, while striving for a WTO verdict in one's own favor, one should adopt a variety of coordination measures. In order to compel the United States to abolish the Foreign Sales Corporation, the EU, on the one hand, kept the threat of trade sanctions against the United States and, on the other hand, maintained consultations and negotiations with the United States.

Fourthly, in the waves of economic globalization, the economic ties among various countries have become closer, with the result that when one economy suffers loss or enjoys prosperity, all other economies suffer losses or enjoy prosperity. In view of this, how to reduce one's own losses while imposing sanctions on the other party is also a complicated matter. The products chosen by the EU this time for retaliation are those the EU depends not so much on them. In addition, while making the retaliatory list, the EU solicited opinions from various parties and sought a consensus.

Fifthly, the EU stops before going too far and leaves leeway in its retaliation. Retaliation should be regarded as means rather than ends. The WTO agreed that the EU could levy tariffs as high as 100 percent on American products. However, the EU did not do so in the process of implementation. It lifted the big stick high but put it down lightly. The EU made it clear that it took the retaliatory measures for the ultimate purpose of pressing the United States to abide by the WTO ruling and to annul its Foreign Sales Corporation as early as possible.

By People's Daily Online

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