European Union (EU) Trade Sanctions Against the United States
Resulting from the Foreign Sales Corporation/Extraterritorial Income
(FSC/ETI) Dispute in the World Trade Organization (WTO)

On March 1, 2004, the EU began to impose retaliatory trade sanctions on a number of U.S. products, as a result of the WTO ruling that the 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 EU to impose sanctions on $4.043 billion worth of U.S. exports, if the United States fails to comply with the WTO decision. The Administration and Congress continue to work towards repealing the FSC/ETI provisions in order to achieve U.S. compliance with the WTO ruling.

The EU will initially impose an additional duty of 5 percent on 1,608 U.S. products. The duty will rise automatically by 1 percentage point each month until it reaches a ceiling of 17 percent in March 2005. At that point, the EU will make a determination on its next course of action if the United States still has not complied with the WTO ruling. A list of U.S. products that will face sanctions is attached. Although the EU 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. Instead, the EU is phasing in the trade sanctions. The U.S. Department of Commerce estimates that the sanctions imposed on U.S. products from March 1, 2004 - March 31, 2005 could result in additional duties collected by the EU 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:

• the Jumpstart Our Business Strengths Act (S. 1637), co-sponsored by Senator Chuck Grassley (R-Iowa), Chairman of the Senate Finance Committee and Senator Max Baucus (D-Montana), Ranking Member of the Senate Finance Committee;
• the American Jobs Creation Act of 2003 (H.R. 2896), sponsored by Congressman Bill Thomas (R-California), Chairman of the House Ways and Means Committee; and,
• the Job Protection Act of 2003, (H.R. 1769), jointly sponsored by Congressmen Phil Crane (R-Illinois), Vice Chairman of the House Ways and Means Committee, Charles Rangel (D-New York), Ranking Member of the House Ways and Means Committee, and Don Manzullo (R- Illinois), Chairman of the House Committee on Small Business.

Although the Administration has not taken a formal position on any of the current legislative proposals, the 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.

Questions and Answers on the EU Retaliation on the FSC/ETI WTO Dispute

How do I know if my product will face sanctions?

You should refer to the attached retaliation list. Please bear in mind that EU tariff codes at the level on which duties will be raised (eight digits) differ from those used in the United States. U.S. and EU 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 EU sanctions. To confirm, you should obtain the eight digit EU 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 EU’s TARIC (Integrated Community Tariff) database, which will allow you to search for your product’s CN code by entering a product description.

What types of products are on the retaliation list?

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.

How will the EU impose the sanctions?

Although the EU 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 EU’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.

What can I do to get my product removed from the retaliation list?

Unfortunately, nothing can be done to remove products from the retaliation list. In late 2002, the EU sought input from its stakeholders, including European businesses, in finalizing its retaliation list. The EU then provided the list to the WTO for authorization to impose sanctions, which it received in 2003.

Will trade sanctions be applied to U.S. products exported to new EU Member States?

Starting on May 1, 2004, the additional duties will be applied to U.S. products exported to the 10 new Member States.

What is the Administration doing to resolve this situation?

The Administration has stated that the United States will honor its WTO obligations. Complying with the WTO ruling on the FSC/ETI case requires a legislative change by Congress. The Administration continues to urge Congress to adopt such legislation in a timely manner. In addition, the Administration has been and continues to urge the European Union to exercise restraint, because imposing sanctions will also hurt European businesses.

Where can I find the status of U.S. compliance with the WTO ruling?

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: http://thomas.loc.gov, http://www.senate.gov, http://www.house.gov

What is the time frame for U.S. compliance?

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.

How long will the EU’s sanctions remain in place?

The sanctions will remain in place until they are lifted by the EU or the WTO finds that a U.S. legislative measure has removed the illegal export subsidy. The EU has indicated that it will lift the sanctions as soon as the U.S. Congress enacts repeal legislation.

Background on WTO FSC/ETI Dispute

The U.S. - EU 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 United States 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 General Agreement on Tariffs and Trade (GATT), the pre-cursor of the WTO, on the grounds that it constituted an illegal export subsidy. The United States 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 United States repealed the DISC provisions and enacted the FSC provisions in 1984.

In 1997, the EU 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 United States 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 analysed the FSC under the WTO Agreement on Subsidies and Countervailing Measures (SCM), which was negotiated in the Uruguay Round. The United States 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 United States 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 EU once again challenged the ETI Act and in August 2001, a WTO panel ruled that the ETI provisions also violate WTO rules. The United States again appealed and, in January 2002, the WTO Appellate Body affirmed the panel’s findings.

In 2000, the EU also requested authorization from the WTO to impose trade sanctions on $4.043 billion worth of U.S. exports. The United States initiated a WTO arbitration proceeding, arguing that the appropriate countermeasures should be approximately $956 million - the amount of injury suffered by the EU and its companies in the EU 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 EU could impose sanctions on $4.043 billion worth of U.S. exports.

In May 2003, the EU received final authorization from the WTO Dispute Settlement Body to impose sanctions on the United States. The EU in turn gave the United States a deadline of March 1, 2004 to repeal the ETI provisions from its tax code or face sanctions. Because the United States has not yet passed repeal legislation, the EU began its retaliatory measures on March 1, 2004.