European Trade Retaliation: The FSC-ETI Case (CRS Report for Congress)
| Release Date |
Revised July 26, 2006 |
| Report Number |
RS21742 |
| Report Type |
Report |
| Authors |
Raymond J. Ahearn, Foreign Affairs, Defense, and Trade Division |
| Source Agency |
Congressional Research Service |
| Older Revisions |
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Summary:
Foreign Sales Corporations (FSCs) are subsidiaries of U.S. companies that conduct export sales on the behalf of their parents and the ETI is a successor tax regime. The FSC law initially was found to be inconsistent with U.S. WTO obligations in early 2000. Following the ruling, Congress passed the replacement ETI tax provision, but this law was also found inconsistent with WTO obligations in 2002. Subsequently, the WTO authorized the EU to retaliate in the absence of U.S. compliance, and the EU began imposing escalating retaliatory duties (starting at 5%) on $4 billion of U.S. exports on March 1, 2004. After reaching 14% in December 2004, these sanctions were lifted in January 2005 subsequent to congressional repeal of the FSC-ETI provisions in the American Jobs Creation Act (P.L. 108-357) of October 2004. But a February 12, 2006 WTO ruling determined that the act perpetuated the illegal subsidies with a two-year phase-out of the tax breaks and a grandfather clause covering exporters that had sales contracts dated before September 17, 2003. In announcing the EU's decision to reimpose sanctions, Peter Mandelson, the EU's top trade official, said that "the EU will not accept a system of tax benefits which give U.S. exporters, including Boeing, unfair advantage against their European competitors." The EU had planned to reimpose the sanctions on May 16, 2006, but Congress passed on May 11, 2006, a tax bill which, among other things, repealed the grandfathered FSC-ETI benefits for sales contracts and leases. Subsequently, the EU repealed the countermeasures, thus ending one of the longest-running and most bitter transatlantic trade dispute in recent years. This report describes the EU action within the context of the WTO, evaluates the old EU retaliation list, and the outcome. The report will be not be updated.
