by Abid Aslam

Washington,25 Feb 2000 (IPS) -- US officials find themselves in a political tight spot after a World Trade Organisation (WTO) body rejected their appeal of a ruling against tax breaks for US-based multinational corporations.

At issue was the US government's Foreign Sales Corporation (FSC) programme, set up in 1984 to enable U.S. software, chemicals, machinery and agribusiness firms to cut taxes on their export earnings by opening offshore subsidiaries. Most of these were established in such tax havens as the US Virgin Islands, Barbados, and Guam.

US officials argued that the scheme was necessary to counteract rebates enjoyed by European firms selling products outside the EU, but European trade officials in September persuaded a WTO dispute settlement panel that the US tax breaks were tantamount to illegal export subsidies.

"Of course we think that WTO members should be free to decide their own tax systems," EU Trade Commissioner Pascal Lamy said in a statement welcoming Thursday's appeal outcome. "But each member must do so fairly and in line with the rules."

However, said US Trade Representative Charlene Barshefsky, "our view remains that the FSC is completely consistent with US-WTO obligations. We respect our WTO obligations and will seek a solution that ensures that US firms and workers are not at a competitive disadvantage with their European counterparts."

US Treasury Secretary Lawrence Summers was quoted as saying that the administration of President Bill Clinton was "clear in our commitment to finding a way to maintain the important incentives for US exports that have been provided in the past. I'm sure we'll find a way to do that."

The officials' comments reflected a need to appear to be standing their ground at a time when political support for the WTO is ebbing here - but also to leave open the possibility of negotiating a final settlement rather than risk running battles, according to commentators.

The FSC dispute was the largest handled by the WTO. Under the trade body's rules, the United States has until Oct. 1 to eliminate the tax break. Officials here might be able to put that off for a few months but the United States ultimately would become vulnerable to retaliation by the EU - in the form of higher tariffs, for example.

Yet, no politician here would welcome the prospect of having to change the U.S. tax code. This was so particularly during an election year because the scheme's main beneficiaries included such political heavy-weights as software titan Microsoft Corp., aircraft leader Boeing Corp., and automotive giant General Motors.

FSC tax breaks for these companies over the next five years could be worth some 15 billion dollars, according to Congressional estimates.

Congressional leaders wrote to the Clinton administration recently to urge a quick, negotiated settlement. This would be better than an all-out trade war and would reduce the chances of trade activists targeting the FSC programme as "corporate welfare," or the use of public money to subsidise private firms' operations.

"We are concerned that if this matter is not resolved bilaterally...this is likely to lead to a highly charged tax and trade environment that we are sure all parties would like to avoid," the lawmakers said.

Other options before the United States include a WTO counter-complaint against similar EU tax breaks. It might not come to that, however.

Rather, according to diplomats and trade analysts here, the FSC programme could be used as a bargaining chip in other disputes between the United States and the Europeans.

These include US demands that the EU:

* open its markets to Central and Latin American bananas - many grown by subsidiaries of US companies - and drop preferential treatment for harvests from former European colonies in Africa and the Caribbean;

* open its gates to hormone-treated US beef;

* loosen data privacy laws seen by US Internet firms as an impediment to E-commerce; and

* abandon or amend proposed noise pollution rules that would make it harder for US air carriers to service European airports.

Whatever the ultimate outcome, the FSC matter was "a huge case that will irritate a good many companies and Congressmen," said Gary Hufbauer, trade economist at the Institute for International Economics, a Washington-based think tank. (SUNS4615)