The European Commission said yesterday that the WTO had deferred until 22nd June its preliminary ruling on the legality of the revised US Foreign Sales Corporation (FSC) regime, which it had been due to issue yesterday.
The original FSC regime gives a 15% tax break to US exporters who establish sales subsidiaries in foreign (meaning, offshore) countries. The EU attacked the FSC regime as being discriminatory, and the WTO upheld the complaint; then the US appealed, but the appeals panel upheld the original ruling, allowing the EU to impose sanctions worth $4bn if the US didn't change its rules. This was in mid-2000, and the US Congress rapidly cobbled together a compromise version of the FSC rules which extended them to a wider range of exporters and 'repatriated' them, potentially threatening offshore jurisdictions with the loss of the lucrative FSC business.
The EU refused to accept the revised scheme, and it is this renewed complaint on which a ruling is currently expected.
If the panel again found in favour of the EU, and its ruling was upheld on appeal, a process which could be completed by late this year, Brussels could again ask the WTO to authorise sanctions of $4bn on US exports - by far the biggest retaliation in WTO history.
Robert Zoellick, US trade representative, last week said sanctions would be a "nuclear bomb" that would severely damage the global trade system. The US has maintained that the FSC rules are no different from the zero-rating of exports for VAT purposes in Europe, and has threatened to respond by challenging this and other EU tax policies.
Both sides are worried that the dispute may reach crunch-point just before the WTO's ministerial meeting in Qatar in mid-November, which they hope will agree to launch a world trade round. But neither side has shown any flexibility in past negotiations over the FSC regime and it's difficult to see what new element could now enter the dispute after such a long time.
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