European Union to impose retaliatory trade sanctions March 1 if Congress fails to act

Repeal of illegal U.S. export subsidy will save taxpayers billions, but will be offset by lower corporate taxes

The European Union (EU) will impose trade sanctions on billions of dollars of U.S. goods starting March 1 if Congress fails to repeal an export subsidy ruled illegal by the World Trade Organization (WTO). The export subsidy provision — known as the “extraterritorial income” deduction — gives U.S. companies a big leg up on competitors, but is paid for by the U.S. taxpayer, said William J. Streeter, a professor of international business at the Olin School of Business at Washington University in St. Louis. Streeter says legislation to repeal the export subsidy that has yet to be passed by Congress is projected to save U.S. taxpayers $80 billion over the next decade, but will be offset by lower corporate taxes on the earnings of U.S. firms abroad.

William Streeter
William Streeter

“The new, lower corporate tax benefits that will offset the illegal export subsidy will go to companies such as Ford, General Motors and Proctor & Gamble with more overseas operations than exports,” Streeter said. “There’s the ‘hot potato.’ At a time when politicians are decrying the loss of U.S. workers’ jobs to low wage countries, this fundamentally sound restructuring of corporate taxation which benefits U.S. foreign operations is very hard to explain.”

Last year, the EU passed a measure that will automatically trigger higher tariffs on a wide range of U.S. goods starting March 1 if the export subsidy is not repealed, including clothing, carpets, electrical machinery, jewelry and meat products. The EU tariff rate will jump by 5% and will increase to 17% by March 2005. The WTO ruled that the European Union can impose up to $4 billion a year on U.S. goods.

World Trade Organization

Streeter notes that while the net impact of the retaliatory tariffs on U.S. economic growth will likely be negligible this year, it is a political reality that the extraterritorial income deduction, just like the massive U.S. agricultural subsidies and the recently repealed steel tariffs, were imposed to benefit an “influential few at a cost to all consumers and taxpayers.”

“The WTO made the obvious and correct decision on the U.S. export subsidy, and now the Bush administration is working to comply with it,” Streeter said. “It might get messy if this is not resolved by March 1, but the administration will comply. It’s not going to lead to an all out trade war, but the situation could really haunt the administration in an election year.”

Professor Streeter served as President and CEO of Western Lithotech, a subsidiary of Mitsubishi Chemical Corporation, prior to joining the Olin School of Business at Washington University in St. Louis. He also served as President and CEO of Chemco Europe N.V., based in The Netherlands, for 24 years. In 1986, Streeter received the Prince Henrik Medal of Honour and Diploma of the National Association for Danish Enterprise in recognition of outstanding services to trade relations between Denmark and The Netherlands.