Wall Street Journal | By HELENE COOPER, Staff Reporter of THE WALL STREET JOURNAL
WASHINGTON -- With the World Trade Organization yet again ruling against a U.S. tax break for exporters, President Bush finds himself in a political and diplomatic bind that will test his commitment to free trade.
A WTO panel, in an interim report Friday, said that despite changes Congress last year made in the law allowing U.S. companies to set up foreign sales corporations to shield some overseas profits from taxes, the system still provides an illegal subsidy and violates trade rules. If the interim ruling is confirmed by the WTO in August, as is expected, it could put the European Union on track to hit the U.S. with as much as $4 billion in retaliatory sanctions.
At this point, however, nobody expects that to happen, as that would be the trade-world equivalent of a ballistic missile. Indeed, U.S. Trade Representative Robert Zoellick said as much while in Brussels last month, warning that such sanctions would be like a "nuclear weapon" on the global trade system.
Nonetheless, the WTO ruling puts Mr. Bush and U.S. industry on the spot, Bush administration officials acknowledged: Is corporate America willing to give up a tax break valued at $4 billion to $6 billion a year in order to sustain a liberalized international trade regime?
The U.S. is under fire already from its trading partners for plans to invoke a rarely used U.S. trade law that could partially close America's market to foreign steel imports. Indeed, the Bush administration Friday formally requested the International Trade Commission begin a study of whether U.S. steel companies have been injured by cheap foreign steel, an investigation that would technically start the process of invoking the law.
In the tax case, one senior Bush official said the administration has yet to decide what to do. On the surface, Bush officials have three options:
They can appeal the ruling; they can try to comply with the ruling by eliminating the tax break; or they can allow sanctions to go into effect and absorb the hit.
Appealing the ruling will likely just delay the inevitable, trade experts said. Complying with the ruling by eliminating the tax break would look good on the diplomatic stage, but would arouse the ire of the U.S. companies that enjoy the tax break. Allowing the case to go to sanctions would exacerbate trans-Atlantic tensions.
Administration officials say a fourth -- and more likely -- option would be to continue to negotiate with the Europeans on a compromise that would keep part of the tax break without going to sanctions. Mr. Zoellick and his EU counterpart, Pascal Lamy, like to highlight their good personal relationship, and both men are loath to start a trade war over the tax case.
Added to that, the EU's recent opposition to General Electric Co.'s recent bid for Honeywell International Inc., and the uproar the EU objections raised in the U.S., puts pressure on the Europeans to make nice for a while. So Bush officials are hoping that Mr. Lamy won't want to further inflame trade tensions.
Last year a WTO panel ruled that the tax break, which provided sales-tax rebates on U.S.-produced goods sold abroad through offshore units of American companies, breached WTO rules. Businesses benefiting from the tax break included big exporters like Boeing Co. and Microsoft Corp.
In response to the first WTO ruling, Congress passed a law to replace the $4.1 billion-a-year tax break with one that lawmakers claimed would comply with global trade rules.
But since the new proposal, valued as much as $6 billion a year, is even more lucrative for companies than the original proposal, few were surprised that the Europeans rejected it and went back to the WTO. Few are surprised that the WTO panel has ruled against it.
"It was doomed to fail from the outset," said Rep. Lloyd Doggett (D., Texas), a longtime critic of corporate tax breaks. He called the law "unjustifiable."Wall Street Journal:
