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EU Considers Next Move in US Trade Dispute - 2002-08-31

The European Union is considering its next move in a massive trade dispute with the United States. The World Trade Organization, in the largest ruling in its history, has said the EU may impose up to $4 billion in duties on U.S. goods to compensate for what the WTO calls an illegal system of tax breaks for American firms. While the European Union is happy with the victory, it also wants to avoid a costly trade war with Washington.

Analysts say businesses on both sides of the Atlantic have a strong interest in keeping the dispute under control. They argue that EU companies will probably seek to use a threat of tariffs to win concessions in other negotiations, but will avoid actually imposing tariffs.

The Financial Times newspaper reports the European business group, Unice, has warned the European Commission against rushing to sanctions before giving Washington time to comply. European businesses fear damage that would be caused by more expensive imports, if Europe put heavy tariffs on American goods.

EU Trade Commissioner Pascal Lamy says the path is now clear for the EU to adopt sanctions if the United States does not repeal the tax system found to be in violation of WTO rules. The so-called Foreign Sales Corporations system allows American companies with a foreign presence [to have offices in a foreign country] to exempt up to 30 percent of their export income from U.S. taxes.

Commissioner Lamy says the EU will begin consultations with its industries and 15 member states on a product list of possible countermeasures. But he emphasizes that, before any countermeasures are taken, the EU will carefully evaluate progress made by the United States in the dispute.

There have been recent proposals in the U.S. Congress for an alternative to the U.S. tax break system. American Trade Representative Robert Zoellick noted that President Bush has said the presidency will work with Congress to fully comply with WTO obligations. Mr. Zoellick said he believes the United States will change its tax break laws, meaning no European sanctions would have to be adopted.