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  3. EU Trade Commissioner Pascal Lamy Announces $4bn Sanctions In EU/US Dispute

EU Trade Commissioner Pascal Lamy Announces $4bn Sanctions In EU/US Dispute

Ulrika Lomas,, Brussels

20 November 2000

As expected. the European Union on Friday asked the World Trade Organisation (WTO) for approval of a list of trade sanctions against the US to compensate it for damage sustained through the US's Foreign Sales Corporation (FSC) export tax break legislation. Friday was the last day that the EU could apply for sanctions approval under WTO rules, following the organisation's rejection of the first US attempt at a compromise proposal in the spring.

Since then, the US has developed a further set of proposals which were approved by the lame-duck Congress and signed by President Clinton just one day before the November 17th deadline for Europe to ask for sanctions. As a result, pending a WTO ruling on the amended proposals, which does not have to be given until next June, the EU will not apply the sanctions.

The request for sanctions worth more than $4bn (the amount the Europeans say they have lost through what amounts to unfair competition) included a list of 99 product groups including cereals, meat and dairy products as well as more specialized products like fur skins, nuclear reactors and imitation jewelry. The product groups on the list are ones where European dependence on products from the United States is low and where the sanctions would not affect consumers and industry in Europe, said an EU official. The United States exports $160 billion worth of products to Europe annually. The law President Clinton signed on Thursday actually offers more tax relief than the old FSC programme — up to $6 billion annually — to companies that export goods or manufacture them abroad. But instead of having to channel their export sales through offshore subsidiaries, companies would get the tax breaks directly.

EU Trade Commissioner Pascal Lamy said: "this request is designed to protect our rights in the WTO, fully in line with the procedural agreement reached with the US in September. Whilst wishing to de-escalate this dispute, our aim is to see the WTO-incompatible FSC export subsidies removed. Although we believe the FSC replacement legislation does not solve the problem, the EU will leave it to the WTO to rule on this question. That's what the WTO is there for."

United States Trade Representative Charlene Barshefsky and Deputy Treasury Secretary Stuart Eizenstat said in a joint statement that the United States would contest the level of damages alleged by the EU. 'We regret that the E.U. has not accepted our new legislation. We continue to strongly believe that it is WTO-compliant,' they said.

The case is of major importance for European companies as the sectors that benefit the most from the arrangement are the ones in which US and European companies compete most fiercely, including chemicals, pharmaceuticals, machinery, electrical equipment and transportation equipment.

Both sides say they believe that the WTO will decide in their favour, ending the matter; but neither side wishes to aggravate the already tense stand-off between them due to the beef and bananas disputes which rumble on and seem well-nigh insoluble. The WTO's inability to solve such disputes is seem as damaging to its standing and hence its role in the process of globalisation of world trading regimes. The world doesn't needs another intractable dispute between its two largest trading partners and they both know it.

Text of the European Union announcement, November 17th

Today the EU has requested the WTO to authorise trade sanctions on the United States up to a maximum amount of $4.043 billion in the Foreign Sales Corporation (FSC) trade dispute. This amount is based on the value of the subsidy granted by the US under the FSC scheme which the WTO found to be illegal earlier this year. As required by the WTO, the EU has also submitted an indicative list of those products that would be eligible for sanctions. The EU will also ask for a WTO compliance panel to rule on the FSC replacement legislation signed into law on 16 November.

Although the FSC replacement legislation was signed into law by President Clinton on 16 November, the EU believes that the new law not only maintains the violations found by the WTO in the FSC case but may even aggravate them. Therefore, the EU has today requested a WTO compliance panel on the FSC replacement legislation.

The new legislation continues to provide a significant illegal export subsidy to more than half of total US exports, to the direct detriment of European companies. Furthermore, the legislation maintains in place the FSC regime at least until the year 2002, despite the WTO ruling and implementation deadlines. The EU believes that it is for the WTO, not any one WTO party, to decide on questions of WTO compatibility. In particular, it does not propose to proceed in the way the US handled the banana case in early 1999.

In addition, the EU regrets the fact that the US has missed the WTO's deadline of 1 November, even though the WTO granted an extension of one month from 1 October in order to give the US Congress some additional time to implement the WTO ruling. Nonetheless, the EU remains prepared to implement the EU-US agreement signed at the end of September in the spirit of continued de-escalation of EU-US trade disputes - whilst fully protecting its rights under the WTO agreements.


The US decided to introduce the FSC scheme in 1984 as a replacement of its old export promoting tax scheme, the so-called DISC, that was condemned by a GATT panel in 1981. According to the US administration, the FSC would be functionally equivalent to DISC while being easier to defend under the GATT. However, the EC contested the legality of the FSC scheme since its adoption but did not pursued this matter further until 1997 due to the Uruguay Round trade negotiations. After unsuccessful rounds of consultations the EC decided to request the establishment of a WTO Panel in September 1998.

Panel proceedings

WTO consultations took place in December 1997, February 1998, and April 1998, but without resolution. The EC therefore requested a WTO panel to look at the issue, which reported on 8 October 1999. The FSC was found to constitute a prohibited export subsidy under the Subsidies Agreement, and (in relation to agricultural products) an export subsidy in violation of the Agriculture Agreement. The US appealed to the WTO Appellate Body on 26 November 1999. The Appellate Body confirmed on 24 February 2000 all the findings of the Panel as to the WTO compatibility of the FSC.

Both the Panel and the Appellate Body report were adopted by the WTO on March 2000. The US was giving until 1 October 2000 at the latest to implement the WTO recommendations and rulings.

Economic importance

This case is of major importance for European companies as the sectors that benefit the most from FSC: chemical, pharmaceutical, mechanical machinery, electrical equipment and transport equipment, are sectors where US and EC companies fiercely compete. So any subsidised increase of US export will invariably result in a loss for EC companies.

Moreover, the amounts of subsidies granted are substantial. In the year 2000, the amount is estimated at around $4 billion according to the fiscal year 2001 US Budget proposal. This amount is expected to grow year on year.

Implementation of the WTO ruling

On 2 May 2000, Mr Eizenstat, Deputy Secretary of the US Treasury, visited Brussels to present to Commissioner Lamy the US proposal to replace the FSC. On 26 May 2000, Commissioner Lamy sent a letter of response stating clearly that for the Commission the US proposal continued to be in violation of the WTO Subsidies agreement as it was export contingent and maintained the US content requirement.

On 27 July the US House Ways and Means Committee approved the draft legislation to replace the FSC, the so-called "FSC Repeal and Extraterritorial Income Exclusion Act of 2000". Deputy Secretary of the Treasury Stuart Eizenstat presented Commissioner Lamy the proposed legislation by letter of 31 July. On 31 August, Commissioner Lamy wrote back expressing his concerns about the WTO compatibility of the proposed legislation and offering Mr Eizenstat his views on what a WTO compatible solution might require.

As explained in the Commissioner's letter, and contrary to what it was expected, the new proposal maintained the export contingency of the regime and the US content rule in violation of the WTO Subsidies Agreement. Furthermore, it included some "transitional" provisions that would in fact extend the FSC regime well beyond 1 October 2000, perpetuating the violation condemned by the WTO.

EU-US Agreement on WTO Procedures for FSC

On 30 September, the EC and the US agreed on the procedural agreements for the handling of this dispute. One of the key elements of the EU-US agreement is that the two sides agree that a WTO panel would review the compatibility of the FSC replacement legislation once adopted. This panel would report before sanctions could be imposed. In parallel, the EU would seek the necessary WTO authorisations in the appropriate time, in order to preserve its WTO rights.

In addition as the US was unable to approve the FSC replacement legislation by 1 October, the US asked the WTO Dispute Settlement Body to postpone the 1 October deadline until 1 November, delaying any further procedural steps until later in the month. The WTO agreed to the extension on 12 October 2000.

The September agreement specifically provides for: - the EU to request the suspension of concessions in the WTO by 17 November, including an indication of the maximum amount, and the submission of an indicative list, to be authorised by 28 November:

the US to request arbitration on the amount;
the EU to challenge the WTO compatibility of the US legislation by requesting a compliance panel in the WTO; and
the arbitration work to be suspended pending the ruling of the compliance panel.
For further information, please see annexed indicative list of products.

Please see also Background note.


History of the case:

EC clarifies position on Foreign Sales Corporation dispute
Brussels, 12 October 2000
European Commision says U.S. FSC proposal still WTO-incompatible
Brussels, 1 September 2000
European Commission expresses concern on WTO compatibility of US proposals on Foreign Sales Corporations (FSC)
Brussels, 29 May 2000
Foreign Sales Corporations: EU and US try to find an agreement
4 May 2000
Appellate Body issues report on FSC dispute
24 February 2000
WTO Appellate Body Confirms that US Export Subsidies Breach international Trade Rules
Brussels, 24 February 2000
"Summary of the first submission of the EU"
Geneva, 5 January 1999


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