EU Plans To Reimpose Sanctions

The European Union announced on Feb. 13 that it would reinstate $4 billion in annual trade sanctions on U.S. goods later this year because of a U.S. corporate tax break on foreign earnings.

Initially, the EU slapped those punitive tariffs, which have the blessings of the World Trade Organization (WTO), on U.S. exports in early 2004. The EU lifted them later that year after Congress passed a law phasing out the tax break at the end of 2006 (C&EN, Nov. 1, 2004, page 8).

Under the disputed tax break, U.S. companies, including chemical producers, can exclude a portion of their foreign sales income from federal taxes. Basic chemical manufacturers have pocketed about $500 million a year from this provision.

The EU challenged the corporate tax break at WTO. Arbiters for the global trade group determined that the tax break amounts to an unfair subsidy for U.S. exporters.

The U.S. law phasing out the disputed provision includes a loophole???it extends the tax break to exported goods made to fulfill contracts signed before Sept. 17, 2003. According to the American Chemistry Council, some U.S. chemical manufacturers hold contracts that will qualify export sales for the tax break beyond 2006.

The EU announcement came after WTO arbiters said on Feb. 13 that both the two-year phaseout of the tax break and the loophole for contracted goods violate international trade rules. Under the WTO ruling, total and immediate elimination of the tax break is the only way that the U.S. can stop the EU from again imposing the tariffs.

EU Trade Commissioner Peter Mandelson says he's willing to work with the U.S. to avoid reimposition of the sanctions. But, he adds, "the EU will not accept a system of tax benefits which give U.S. exporters an unfair advantage against their European competitors."