The General Agreement on Tariffs and Trade (GATT) was an international organization created in 1947 to reduce trade barriers through multilateral negotiations. In January 1995, after eight years of negotiation, the GATT was replaced by a stronger WTO. Today the WTO rules apply to more than 90% of international trade.
WTO rules emerge from negotiations between its members. Through these agreements, WTO members operate a nondiscriminatory trading system that outlines rights and responsibilities. Each country receives guarantees that its exports will be treated evenhandedly and consistently in other countries’ markets. Each promises to do the same for imports into its own market. Developing countries have some flexibility in implementing their commitments.
The WTO has a Dispute Settlement Understanding for resolving trade controversies between members. The system encourages countries to settle their disputes through consultation. If this is not satisfactory, there is a stage-by-stage procedure that includes the possibility of a ruling by a panel of experts, and ultimately trade sanctions approved by the WTO.
The WTO has been in existence nine years and its panels of experts have ruled, for example, that: the US clean air standards and laws protecting dolphins and sea turtles are barriers to “free trade” and that the E.U. law banning hormone-treated beef is illegal.
For more information or updates on the WTO or the EU, please contact Lee Hunter at (801) 328-3600 or by e-mail at lhunter@kmclaw.com.
On March 1, 2004, the E.U. began to impose retaliatory trade sanctions on a number of U.S. products. This change came as a result of the WTO ruling that the Foreign Sales Corporation/Extraterritorial Income (FSC/ETI) provisions of the U.S. Internal Revenue Code constitute a prohibited export subsidy and are in violation of WTO rules. After years of litigation, in May 2003, the WTO Dispute Settlement Body authorized the E.U. to impose sanctions on $4.043 billion worth of U.S. exports if the U.S. fails to comply with the WTO decision. The Bush Administration and Congress continue to work toward repealing the FSC/ETI provisions in order to achieve U.S. compliance with the WTO ruling.
The E.U. will initially impose an additional duty of 5% on 1,608 U.S. products. The duty will rise automatically by 1 percentage point each month until it reaches a ceiling of 17% in March 2005. At that point, the E.U. will make a determination on its next course of action if the U.S. still has not complied with the WTO ruling. Find a list of the U.S. products that will face sanctions by clicking on the following: http://europa.eu.int/eur-lex/pri/en/oj/dat/2003/l_328/l_32820031217en00030012.pdf. Although the E.U. is authorized to retaliate on $4.043 billion of U.S. exports, it has chosen not to implement retaliation on the full amount at once. The U.S. Department of Commerce estimates that the sanctions imposed on U.S. products from March 1, 2004 to March 31, 2005 could result in additional duties collected by the E.U. worth over $475 million.
Complying with the relevant WTO rulings requires a legislative repeal of the FSC Repeal and Extraterritorial Income Act (ETI Act) of 2000. Congress is currently considering three proposals to repeal the ETI Act:
Although the Bush Administration has not taken a formal position on any of the current legislative proposals, the Bush Administration has made clear its position that any legislative fix must be consistent with our international trade obligations. Any repeal must also not prejudice U.S. businesses operating in the global marketplace. Therefore, the repeal of the FSC/ETI provisions must be coupled with other tax law changes that promote the competitiveness of American job-creating sectors of the U.S. economy.
David Fiscus is an International Trade Specialist of the U.S Commercial Service in Salt Lake City, Utah. He can be reached at (801) 524-5116 or by e-mail at david.fiscus@mail.doc.gov.
You should refer to the following list: http://europa.eu.int/eur-lex/pri/en/oj/dat/2003/l_328/l_32820031217en00030012.pdf. Please bear in mind that E.U. tariff codes at the level on which duties will be raised (eight digits) differ from those used in the U.S. U.S. and E.U. tariff nomenclatures are harmonized only to the six digit level. If the first six digits of your product’s Harmonized Tariff Schedule (HTS) code appear on the retaliation list, there is a chance that your product will face E.U. sanctions. To confirm, you should obtain the eight digit E.U. Combined Nomenclature (CN) code under which your products fall, and see if this number appears on the retaliation list. Your company’s freight forwarder, European broker and/or distributor should be able to provide your product’s CN code. Alternatively, you can refer to E.U.’s Integrated Community Tariff (TARIC) database (http://europa.eu.int/comm/taxation_customs/dds/en/tarhome.htm), which will allow you to search for your product’s CN code by entering a product description.
The list contains 1,608 U.S. products that fall in 44 different HTS chapters. Product categories affected include: precious stones and metals, articles of jewelry, agricultural products (e.g. soybeans, linseed, sunflower seed, orange juice, horse meat), wood products, toys, sporting equipment, board games, textile and apparel products, refrigeration equipment, heavy machinery (engines, boilers, refrigerators), construction equipment and paper products.
Although the E.U. is authorized to retaliate on $4.043 billion of U.S. exports, it has chosen to phase in the sanctions. Starting on March 1, 2004, U.S. products on the E.U.’s retaliation list will face an additional duty of 5 percent. This duty will increase automatically by one percentage point each month until it peaks at 17 percent in March 2005.
Unfortunately, nothing can be done to remove products from the retaliation list. In late 2002, the E.U. sought input from its stakeholders, including European businesses, in finalizing its retaliation list. The E.U. then provided the list to the WTO for authorization to impose sanctions, which it received in 2003.
Starting on May 1, 2004, the additional duties will be applied to U.S. products exported to the 10 new Member States.
The Bush Administration has stated that the U.S. will honor its WTO obligations. Complying with the WTO ruling on the FSC/ETI case requires a legislative change by Congress. The Bush Administration continues to urge Congress to adopt such legislation in a timely manner. In addition, the Bush Administration has been and continues to urge the European Union to exercise restraint, because imposing sanctions will also hurt European businesses.
To learn about the status of the pending Congressional FSC/ETI bills—the American Jobs Creation Act of 2003 (H.R. 2896) and the Jumpstart Our Business Strengths Act (S. 1637)—you may refer to the following Congressional websites to obtain information, including contact names and numbers.
It is not appropriate for the Administration to comment on the likely time frame for passage of WTO-compliant legislation. The Administration continues to urge expedient action by Congress to avoid further consequences of the trade sanctions.
The sanctions will remain in place until they are lifted by the E.U. or the WTO finds that a U.S. legislative measure has removed the illegal export subsidy. The E.U. has indicated that it will lift the sanctions as soon as the U.S. Congress enacts repeal legislation.
The U.S.—E.U. dispute over FSC/ETI provisions has existed for decades. In 1972, seeking to redress tax disadvantages faced by U.S. companies exporting or operating overseas, the U.S. enacted the Domestic International Sales Corporation (DISC) provisions to the U.S. tax code, which allowed U.S. firms to defer taxation on a percentage of their export profits. The European Commission challenged the DISC provisions in the GATT, the pre-cursor of the WTO, on the grounds that it constituted an illegal export subsidy. The U.S. brought a counter-challenge against several European tax regimes.
In 1976, a GATT panel ruled against all contested tax measures, including both U.S. and European Commission measures. This decision led to a stalemate that was resolved with a GATT Council Understanding adopted in 1981 regarding the treatment of tax measures under GATT agreements. Pursuant to this Understanding, the U.S. repealed the DISC provisions and enacted the FSC provisions in 1984.
In 1997, the E.U. brought a case against the FSC provisions in the WTO. In 1999, the WTO panel ruled that the FSC provisions provide an export subsidy that is in violation of WTO rules. The U.S. argued forcefully that the FSC provisions were in keeping with the 1981 Understanding. The panel refused to be bound by the 1981 Understanding and instead analyzed the FSC under the WTO Agreement on Subsidies and Countervailing Measures (SCM), which was negotiated in the Uruguay Round. The U.S. appealed the panel’s decision. In February 2000, the WTO Appellate Body upheld the panel’s findings.
To comply with the WTO’s ruling against the FSC provisions, the U.S. enacted the FSC Repeal and Extraterritorial Income Exclusion Act in November 2000. This legislation replaced the FSC provisions with the ETI provisions, designed to ensure that U.S. companies are not disadvantaged by the differences between U.S. and foreign tax laws. The E.U. once again challenged the ETI Act and in August 2001, a WTO panel ruled that the ETI provisions also violate WTO rules. The U.S. again appealed and, in January 2002, the WTO Appellate Body affirmed the panel’s findings.
In 2000, the E.U. also requested authorization from the WTO to impose trade sanctions on $4.043 billion worth of U.S. exports. The U.S. initiated a WTO arbitration proceeding, arguing that the appropriate countermeasures should be approximately $956 million - the amount of injury suffered by the E.U. and its companies in the E.U. and in third markets. Although initiated in 2000, the arbitration was suspended until the resolution of the ETI challenge, which occurred in January 2002. In August 2002, the WTO Arbitration Panel ruled that the E.U. could impose sanctions on $4.043 billion worth of U.S. exports.
In May 2003, the E.U. received final authorization from the WTO Dispute Settlement Body to impose sanctions on the U.S. The E.U. in turn gave the U.S. a deadline of March 1, 2004 to repeal the ETI provisions from its tax code or face sanctions. Because the U.S. has not yet passed repeal legislation, the E.U. began its retaliatory measures on March 1, 2004.