Steel Dispute To Force Changes in U.S. Tax Policy

7 MINS READMay 2, 2002 | 01:44 GMT

The European Union is preparing to retaliate against a U.S. export subsidy by imposing import duties on key U.S. industries. Washington will likely eliminate the subsidy — and compensate U.S. companies with new tax breaks — in order to cool tensions with Europe and keep Republican mid-term election chances from taking a hit.


The World Trade Organization April 29 postponed a key arbitration decision that will put a dollar figure to the level of retaliatory measures the European Union can impose on the United States, in order to mitigate a U.S. export subsidy that the WTO has ruled as illegal. That decision is now scheduled for June 17.

This gives the U.S. Congress time to discuss a new bill authored by Rep. Amo Houghton that would do away with the tax break, now called the Extraterritorial Income Exclusion (ETI). Under Houghton's plan, ETI would be replaced by broader tax breaks for multinational companies designed to improve their overseas competitiveness, the Wall Street Journal reported May 1. Despite wide industry opposition to doing away with ETI, Congress and the White House may have little choice.

The current export subsidy, which reimburses U.S. companies for taxes charged on certain export earnings, saved American multinationals more than $4 billion last year. In January the WTO ruled in favor of a European Union complaint that the tax credit is an illegal subsidy and gives U.S. exporters an unfair advantage by allowing them to sell their products more cheaply.

The issue has since become a centerpiece of the running trade dispute between the United States and Europe over steel tariffs. Bush's decision in March to protect the domestic steel industry — with tariffs of up to 30 percent of the value of the products covered — upped the ante on the ETI issue, giving Europe a greater justification to use the WTO ruling to respond.

In remarks to the U.S. Chamber of Commerce April 26, U.S. Trade Representative Robert Zoellick noted that the ETI dispute dwarfs the steel issue in terms of immediacy and size and that Europe might take retaliation measures by mid-year that would likely range between $1 billion and $4 billion.

Congressional Republicans and the Bush administration are faced with a tough political calculation. If they do nothing and allow the EU to retaliate in line with the WTO's arbitration ruling, key industry sectors in "swing" states could be hurt in advance of November's mid-term elections.

European Trade Commissioner Pascal Lamy has already hinted that Europe would seek to target politically sensitive industries — such as orange juice, steel and textiles — by imposing heavy import duties. Voters with jobs in these industries could decide that Bush was willing to sacrifice their livelihoods in order to save big steel and could take it out on Republicans who will be fighting to maintain their thin majority in the House of Representatives.

On the other hand, doing away with the ETI will anger important corporate donors that benefit tremendously from the tax subsidy.

Top Corporate Beneficiaries of ETI, 1991 - 2000

Company $ million
Boeing 1,207
General Electric 1,155
Motorola 551
Honeywell 459
Caterpillar 433
Cisco Systems 314
Applied Materials 253
Monsanto 199
ADM 198
Raytheon 165

SOURCE: Wall Street Journal

In the end, Bush and the Republicans will likely decide — after much stalling — that eliminating the ETI is the better of two evils, as it will at least give them greater control over their own destiny and could help defuse tensions with Europe. The Houghton plan will seek to compensate multinationals with a new range of tax benefits, and it aims to simplify the complex U.S. international tax code. The Bush administration may hope that these changes will be enough to compensate for the damage done by eliminating ETI.

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