By SALLY SCHUFF
Feedstuffs Washington Editor
WASHINGTON, D.C. -- The World Trade Organization (WTO) ruling last week that found tax breaks for U.S. foreign sales corporations (FSC) constitute illegal export subsidies could have far-reaching implications on future agricultural trade negotiations.
The ruling also immediately threatens a business structure used by some agribusinesses that export to Europe.
The ruling, won by the European Union, applies to all U.S. companies, including manufacturing giants. In the agribusiness sector, the most probable victims would be meat companies.
For instance, Jesse Sevcik, a Washington government affairs official for Farmland, told Feedstuffs, "It is a business structure that we've used in the past, and it's helped us stay competitive in export markets."
However, WTO confirmed Aug. 20 that income tax breaks for U.S. foreign sales corporation (FSCs) constitute illegal export subsidies under WTO rules.
The decision in the long-running dispute with the EU could trigger up to $4 billion in retaliatory duties against U.S. exports unless resolved -- either through appeal or negotiation -- before Oct. 19.
The U.S. apparently will attempt to resolve the immediate problems of the issue through negotiations with the EU, according to several sources.
Washington trade experts fear the impact of the ruling could go well beyond the immediate trade implications. The EU win "couldn't have come at a worse time," said Al Tank, who heads the National Pork Producers Council's Washington office.
Tank told Feedstuffs that there will be far-reaching effects by increasing the EU's clout in other sensitive negotiations. "The overarching implications are significant," he said. "This will empower the EU -- at least, from its perspective -- and make life very difficult on a range of issues from the farm bill, on how we construct farm payments and on the next WTO round."
He said the most immediate U.S. backlash might come in Congress on the September debate on trade promotion authority. Tank said he fears the ruling against the U.S. in the FSC case will erode votes in that contentious issue.
Tank noted that "in the ongoing growing relationship between the U.S. and EU, this can do nothing but escalate body temperatures on both sides of the Atlantic."
He confirmed that meat companies are among the U.S. corporations that have used the FSC business structure. He noted, though, that the tax structure that allows using FSCs to defer income taxes is only one reason companies find it appealing, he said.
More importantly, the FSC business structure can help U.S. companies gain access to markets. He pointed out that the EU has made it so difficult for the U.S. to export meat into its market that "it's about as appealing a running buck-naked through the brambles."
Currently, those trade barriers mean that no U.S. poultry and very little U.S. beef or pork can get into Europe, he said.
The National Cattlemen's Beef Assn., which has been locked in a dispute with the EU since 1987 over its ban on beef produced with growth hormones, issued a statement Aug. 22 saying that U.S. Trade Representative (USTR) Robert Zoellick will appeal the WTO ruling.
Just what strategy USTR will use remains unclear.
Sen. Chuck Grassley (R., Iowa) said last week that Zoellick told him the U.S. would seek to negotiate a settlement of the issue with the EU.
However, Grassley -- the ranking Republican on the Senate Finance Committee, which oversees trade and tax issues -- said he is asking Zoellick to lodge a formal U.S. appeal to WTO that would "give us another six months" to work on the tax code.
Grassley said Congress needs that time to revise -- again -- the U.S. FSC tax law to try to comply with WTO rules. He pointed out that EU corporations are exempted from the EU value-added tax, which gives them an unfair advantage if U.S. corporations lose the FSC tax treatment.
Last Nov. 1, as part of the ongoing WTO dispute, Congress passed legislation reforming the tax code for FSCs in an attempt to bring it into compliance with international trade law. It is that new U.S. law that WTO ruled against in the decision made public Aug. 20.
Now, Grassley said he would urge Zoellick to "play the same game the EU plays on beef hormones, genetically modified organisms and everything else." That means, he said, "using every stall available."
The EU noted in a press statement that the new U.S. law, FSC Replacement Act, enacted last November, was ruled "a prohibited export subsidy." The EU charged that it "violates the
Agriculture Agreement and discriminates in favor of U.S. goods in breach of WTO rules. The (WTO) compliance panel has also found that the U.S. also breached its WTO obligations by maintaining the FSC scheme in force beyond Nov. 1, 2000, under the transitional rules of the FSC Replacement Act."
One Washington trade expert, who asked not to be identified, said frankly that gaining clout in the ongoing WTO agricultural negotiations in Geneva, Switzerland, likely is the main motive behind the EU's pursuit of the FSC case.
The FSC case is a direct attack on key U.S. positions in those negotiations. The U.S. has two chief goals for those negotiations: (1) the elimination of exports subsidies, and (2) the elimination of the "blue box" subsidies, he pointed out. (The EU defends the blue box because it uses it for many of its own domestic farm payments.)
The FSC case makes the U.S. vulnerable on the export subsidy issue because WTO now has ruled that the U.S. uses $4 billion of illegal export subsidies, he said.
In a related issue, last week, EU Farm Commissioner Franz Fischler also condemned this year's U.S. supplemental income payments to farmers.
In veiled language, Fischler effectively said the U.S. weakened its own position on the blue box issue. He charged that the U.S. used a "loophole" by placing its farm bailout payments under the 5% de minimis category WTO allows for domestic farm subsidies.
A trade source said the de minimis rule and the blue box both come under the same heading in WTO regulations. The Europeans apparently hope to strengthen their defense of the blue box by attacking the U.S.'s use of the de minimis allowance, he concluded.
That was borne out in Fischler's promise last week to try to close what he termed the de minimis loophole during the ongoing WTO agricultural negotiations in Geneva.
Both of those strategies amount to an attempt by the EU to gain clout in the WTO negotiations by "poking a finger in the U.S. eye," said a Washington-based trade source. n
Copyright 2001, The Miller Publishing Company, a company of Rural Press Ltd.:
