Yesterday the WTO (World Trade Organisation) compliance panel examining the US legislation replacing the WTO-incompatible US Foreign Sales Corporations (FSC) scheme issued a report, as expected, concluding that the FSC Replacement Act, enacted by the US on 15 November 2000 in order to comply with the WTO ruling, is a prohibited export subsidy, violates the Agriculture Agreement and discriminates in favour of US goods in breach of WTO rules.
The compliance panel also found that the US breached its WTO obligations by maintaining the FSC scheme in force beyond 1 November 2000 under the transitional rules of the FSC Replacement Act (although the EU agreed at the time not to pursue its right to call for sanctions while the WTO continued its examination of the Replacement Act),
The ruling against the US will be adopted at the latest by 19 October by the WTO (just in time for Qatar!) unless the US decides to appeal against its findings. In accordance with the agreement on procedures concluded by the parties in September 2000, the arbitration procedure to establish the amount of countermeasures the EC would be entitled to impose will be reactivated on the date of adoption of the panel or Appellate Body report.
The EU has estimated the damage it suffers from the FSC at $4bn to $5bn annually and will call for sanctions at that level; yesterday the Commission issued a triumphalist declaration saying it was fully satisfied with the results of the panel and calling on the US to comply with the ruling.
European Commission trade official Stephen Gospage said that (if the US does not appeal) the EU would have to let the arbitration go ahead so as not to lose the right to impose sanctions. But he made clear that the EU did not have to apply the sanctions and was open to talks with the United States on how it could comply with the WTO ruling.
'We can hold off on this (sanctions) for as long as we like if we think for instance that the U.S. is making a serious effort to change its law and bring itself into compliance, even by the start of the next tax year,' he told reporters.
He said the Commission saw no link between the dispute and attempts to launch a new round of world trade liberalization talks in Qatar in November.
Arbitration won't necessarily accept the EU's damage estimates, and in fact is likely to agree a much lower figure.
In early August, chief executives of major American companies urged President Bush in a letter to appeal the WTO ruling to buy more time to negotiate a solution with the EU. US Trade Representative Robert Zoellick has likened the EU's threatened sanctions to using a 'nuclear weapon' on the trade system. Both he and Pascal Lamy, the EU's chief trade negotiator, have said that they want to resolve the issue, not fight over it.
But, as the US says, its FSC tax break is comparable in scale and its effects to the EU's exemption of exports from VAT, and it seems odd that the WTO has to make its judgements on a case-by-case basis, when surely the right answer can only be arrived at by considering all aspects together?
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