News Release

August 30, 2002

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WTO Allows Massive Sanctions Against the United States
EU poised to impose $4 billion retaliation

GENEVA -- The World Trade Organization (WTO) ruled today that the European Union can impose sanctions of up to $4 billion against the United States in a tax dispute, the largest penalty it has ever allowed. Brink Lindsey, director of the Cato Institute's Center for Trade Policy Studies, had this to say:

"The jig is up. We've been stalling and stringing out this dispute for years, but we've reached the end of the road. We now face a stark and unavoidable choice: reform our tax laws and live up to our WTO obligations, or else fall into a ruinous trade war with Europe."

The dispute focuses on a provision in U.S. tax law -- formerly known as the "foreign sales corporation" or FSC -- that grants special tax breaks for U.S. exporters. The tax preference constitutes an illegal export subsidy, violating international trade rules. Wrangling over FSC has been ongoing for a number of years. The WTO found that the U.S. provision was inconsistent with WTO obligations in a March 2000 ruling. The United States passed a new law in November 2000 to comply with U.S. obligations, but the EU challenged this measure. In January this year, the WTO found that the new law was still inconsistent with U.S. WTO obligations. The sanctions decision had been postponed several times as the two sides tried, unsuccessfully, to reach an agreement. Although the U.S. has admitted to violating WTO rules, efforts to eliminate the tax breaks have made little progress. "It makes no sense to get trade promotion authority to negotiate new trade deals if we won't live up to the deals we've already signed," Lindsey commented, referring to the trade negotiating powers Congress recently granted President Bush.

Meanwhile, Lindsey urges the European Union to exercise restraint. "Imposing these massive trade sanctions would be a terrible mistake. Trade sanctions would wreak havoc on European importers and consumers as well as American exporters, and so going through with them really amounts to cutting off your nose to spite your face. It's incumbent on both parties now to resolve the issue without coming to blows."