Bridges Weekly Trade News Digest • Volume 6 • Number 30 • 13th September 2002

FSC Case Sees Largest WTO Settlement


On 30 August 2002, WTO arbitrators gave the EU permission to apply sanctions (in the form of duties) on US goods valued at more than USD$ 4 billion until the US changed its tax policy to comply with the ‘Foreign Sales Corporations’ (FSC) case ruling. This amount is roughly equivalent to twenty times the amount of sanctions previous awarded at the WTO.

The longstanding case, dating back to the 1999, saw a final ruling in January 2002, when the WTO’s Appellate Body upheld the 20 August 2001 compliance panel, which ruled the US FSC Repeal and Extraterritorial Income Exclusion Act of 2000 (ETI Act) inconsistent with WTO rules (see BRIDGES Weekly, 6 January 2002). This FSC law essentially provided for a corporate export tax credit directed at US subsidiaries acting abroad — which the WTO found to be equivalent to a prohibited export subsidy. In its submissions, the US had asked the arbitrator to limit any sanctions to about USD$ 1 billion.

EU officials have urged Congress to pass legislation before it adjourns for the year so as to avoid possible sanctions. A bill attempting to bring about such compliance has been introduced to the US House of Representatives, but has run into staunch opposition by powerful industry interests groups (such as US airplane manufacturer Boeing) who argue that the new legislation does not do enough to help them.

Experts on the issue offer serious doubts whether a bill that will sufficiently appease both sides can be ready before the end of the year. The US has indicated, however, that it hopes the EU will recognize the seriousness with which the US Senate is taking the issue and thus will be willing to wait until they are able replace the current FSC legislation.

On 12 September, the EU published its initial list of possible US goods that could be hit with the retaliatory duties, including politically sensitive farm exports such as oil seeds and wheat gluten, as well as iron and steel exports — over which the two countries already have a number of disputes in the works or on the horizon. Many experts familiar with the case do not expect the EU to actually apply this list, but rather to use it as leverage to coerce the US into speeding up the legislative process and arriving at a bill as soon as possible. As well, some experts have speculated that the EU will use it to weaken certain US initiatives against them, such as the EU ban on genetically- modified (GM) foods, of which the US has notified its intent to start dispute proceedings if the ban is not lifted soon (see BRIDGES Weekly, 16 January).

"WTO Gives EU OK for U.S. Sanctions," REUTERS, 30 August 2002; "EU Has U.S. Trade Sanctions List," AP, 12 September 2002.