EC seeks WTO sanctions against US over FSC regime

by Chakravarthi Raghavan

Geneva, 17 Nov 2000 - The European Community has asked for authority from the World Trade Organization to impose trade sanctions for a maximum of $4.043 billion against imports from the United States over the latter’s non-compliance with the ruling over the Foreign Sales Corporation (FSC) law and the export subsidies for US corporations under this law.

While seeking authorization for trade sanctions, and publishing a list of products (covering at least some $100 billion of bilateral trade) out of which products to be hit would be chosen, the EC is also seeking the establishment of a compliance panel to rule on the new FSC replacement legislation, signed into law on 16 November by US President Bill Clinton.

The entire process can easily take some months, well into the second half of 2001, the EC ambassador to the WTO, Mr.Carlo Trojan told the media Friday, insisting that the EC did not want to escalate the dispute, but wanted to ensure that WTO-incompatible FSC export subsidies were removed.

The EC has sought a special meeting of the Dispute Settlement Body (DSB) on 28 November to consider the request.

The US itself is expected to invoke arbitration on the extent of trade damage to the EC, because of the FSC law, before sanctions can be imposed.

The original panel that gave the ruling against the US will be reconvened as compliance panel, and also as arbitrators. The compliance panel has a 90-day time-limit for ruling on compliance—and this could be appealed—while the arbitrators have a 60-day limit.

But as happened in the banana dispute, the compliance has first to be judged, and in that light the trade damage is to be assessed. A new FSC legislation has been signed into law by US President Bill Clinton on 16 November, but the EC contends that this law not only does not remove the illegal export subsidies enjoyed by US corporations, but may in fact aggravate the violations of the WTO subsidies agreement.

Both the EC and the US were due to make oral statements at the DSB meeting Friday, under any other business and thus not amenable to any decision at the meeting. A decision, virtually automatic unless the two parties settle bilaterally, would come only at the 28 Nov meeting of the DSB.

The FSC law, which US critics have described as ‘corporate gravy train’, provides for tax-credits and other benefits to US corporations that set up subsidiaries in certain jurisdictions and export products through them, but subject to a limitation of use of at least 50 percent US origin goods and services.

A WTO panel (and appellate body) held the law to be violative of the Subsidies Agreement, and this was adopted in March 2000. The US got time till 1 October to change its law to bring the provisions into compliance, a time-limit that was extended to 1 November under a bilateral procedural agreement.

Under the 30 September procedural agreement, the two sides agreed that the compatibility of the new FSC law would be reviewed by a panel which would report before sanctions could be imposed, but that in parallel the EC would seek necessary WTO authorization to preserve its rights. The agreement also provided that EC was to request authorization for sanctions by 17 November, and set out an indicative list of products for sanctions, for the US to request arbitration on the amount of sanctions, for the EU to seek a compliance panel, and for the work of the arbitrators to be suspended pending the ruling of the compliance panel.

The EC complained Friday that the new FSC law, far from complying with the WTO obligations, might in fact aggravate the violations. The new law, the EC said, would continue to provide a significant illegal export subsidy to more than half of total US exports, and would maintain in place the existing FSC regime till year 2002 (beyond the 1 November 2000 deadline give to the US for compliance).

The sectors of the US economy benefiting most from the FSC subsidies are chemical, pharmaceutical, mechanical machinery, electrical equipment and transport equipment.

The tentative list of products, under 42 two-digit Customs Nomenclature classification chapters, published by the EC Friday excludes the pharmaceutical sector for any trade retaliation.

The EC will hold consultations with its own trade and industry, before selecting the actual list of products to be hit, to ensure that neither industry nor consumers would be hit, Trojan said. .

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