Bureau of National Affairs
The World Trade Organization will issue an appeal decision Feb. 24 upholding an earlier dispute panel ruling that concluded tax breaks offered to U.S. foreign sales corporations (FSCs) constitute an illegal export subsidy under multilateral trading rules, BNA has learned.
The decision is being seen as the biggest setback for the United States in a trade dispute adjudicated by the WTO since the organization was established in January 1995.
Trade sources told BNA that copies of the WTO's Appellate Body ruling were issued Feb. 23 on a confidential basis to the United States and the European Union, which initiated the FSC complaint.
Calling the decision "a major setback for U.S. workers, farmers, and the shareholders of U.S. companies," Fred Murray, vice president for tax policy at the National Foreign Trade Council in Washington, said, "Such an outcome is simply unacceptable."
The ruling upholds the main conclusions of the panel ruling made public last Oct. 8, namely that the tax breaks provided to FSCs constituted a subsidy "contingent on export performance," which is classified as a prohibited subsidy under Article 3.1(a) of the WTO's Agreement on Subsidies and Countervailing Measures (SCM Agreement), and that the tax breaks also constitute a subsidy used "to reduce the costs of marketing exports of agricultural products" which are subject to reduction commitments under Article 9.1(d) of the WTO's Agreement on Agriculture.
EU Suffers Small Setback
The trade sources added that the only setback for the EU was the Appellate Body's refusal to issue findings on several arguments raised by Brussels and rejected by the panel.
The EU argued in its counter-appeal that the FSC system should also be found in violation of Article 3.1(b) of the SCM Agreement by limiting FSC tax exemptions to income from the export of products with at least 50 percent value-added U.S. content. Article 3.1(b) prohibits subsidies which are contingent upon the use of domestic over imported goods.
The original panel had said it was not necessary to make a finding with respect to this claim since it had already determined that the FSC tax exemptions represented an export subsidy prohibited under Article 3.1(a). The panel also refused on the same grounds to rule on the EU's claim that the administrative pricing rules of the FSC scheme--in particular Section 925 of the U.S. Internal Revenue Code providing alternatives to the arm's-length principle of adjusting prices between associated enterprises--were designed solely to provide favorable tax treatment to U.S. corporate taxpayers.
The Appellate Body ruling is expected to be formally adopted by WTO members within the next 30 days. The United States will then be obliged to inform members within the following 30 days when and how it intends to implement the ruling. Trade sources said they expect the United States to request the standard 15 months allowed under WTO rules to bring its domestic legislation into conformity with the ruling.
Bad Timing and Major Impact
The timing of the ruling is particularly inauspicious for the United States. President Clinton is expected to deliver within a matter of days a required report to Congress analyzing the benefits of U.S. participation in the WTO and a recommendation on the value of continued participation. Any member of Congress will then have the right to introduce a resolution calling for U.S. withdrawal from the WTO which must then be voted on within the next 90 days.
With thousands of U.S. companies benefiting from the FSC system, including major corporations such as General Electric, Microsoft, Boeing, and Ford, the impact of the ruling could be enormous. The European Union, which earlier estimated that U.S. firms were avoiding $2 billion in annual taxes through the illegal subsidy system, now says that the amount of revenue lost totaled $3.5 billion in 1999 and is likely to climb to almost $5.5 billion by 2006 if the system remains in place. The EU figures are based on U.S. Treasury Department estimates included in the FY 2001 budget proposal.
Australian Leather Case
The impact of the ruling may also be heightened by a controversial WTO panel ruling issued Jan 21.
In deciding whether the Australian government had complied with an earlier WTO decision striking down an export subsidy program for a local automotive leather producer, the panel said that the firm should be obliged to repay illegal subsidies--$30 million--which had been disbursed prior to the original ruling. Countries such as Japan, Brazil, Canada, and even the United States--which brought the complaint against Australia--criticized the finding on retroactive remedy as going beyond WTO and international law.
"As a result, it appears that the United States and Australia may try to negotiate some form of implementation other than what the arbitration panel determined," Andrew Shoyer, a trade attorney with Powell, Goldstein, Frazer & Murphy in Washington, told BNA, adding that the retroactive nature of the remedy was not consistent with the arguments made by the parties.
Shoyer said there are two important WTO jurisprudence issues to consider when comparing the Australian leather case with the FSC case:
- the government of Australia literally has to withdraw the subsidy in order to comply with the initial rulings, and
- the level of compensation owed or retaliation by the European Union must be determined in the case of an export subsidy.
"That means that although the figure of $2 billion is often discussed in the context of the FSC case as a ballpark figure ... that is not necessarily relevant to the measure of how much compensation the United States would owe, or the retaliation the EU could impose," Shoyer said.
Shoyer pointed out that there is no precedent yet involving export subsidies, but he said several cases that present the issue, such as the Australia leather case and regional civil aircraft cases between Brazil and Canada.
"One could argue that in the absence of precedent that the measure of the compensation owed or retaliation would be that amount of trade that EU exporters lost as a result of the FSC, which is obviously a very difficult number to determine," Shoyer said.
Murray said the Australian leather case will not affect the decision in the FSC case as the two are distinguishable by the fact that the Australia leather case involved a one-time payment.
Meanwhile, Export FSC International Ltd., an Albuquerque, N.M., firm offering FSC management services, told clients on its World Wide Web page that "you may want to consider expediting exports, since changes are seldom retroactive."
Retroactivity Not Brought Up
Trade sources said the retroactivity issue was not brought up in the Appellate Body decision and will not come up unless the European Union challenges U.S. compliance with the ruling and raises the matter as part of a request for WTO authorization to retaliate. Both sides appear eager to calm the waters and stave off a potential transatlantic trade war which could further weaken an already fragile WTO.
"If the United States doesn't comply we can retaliate, but that's not in the interest of anyone," an EU official told BNA. "Imposing billions of dollars in punitive duties on U.S. imports doesn't help our companies, just as we've seen that imposing punitive duties on EU imports in the banana dispute hasn't helped American companies. That's a general problem with the WTO dispute settlement system."
U.S. Trade Representative Charlene Barshefsky, who has come under pressure from members of Congress to reach a settlement with Brussels on the FSC dispute, has said she is prepared to go over the issue with her EU counterparts once the WTO Appellate Body ruling has been issued.
USTR had no comment on the decision but is expected to make a statement Feb. 24.
Copyright c 2000 by The Bureau of National Affairs, Inc., Washington D.C.:
