The Washington Post put it bluntly: Last week's World Trade Organisation ruling for the EU against US Foreign Sales Corporations "is potentially the most important loss the United States has suffered in a trade dispute".
It is an assessment that IBEC's European Director, Peter Brennan, agrees with. He adds that many US multinationals based in Ireland will be affected.
Just as important as the trade impact, however, is the likely political fallout. The decision will test the limits of the political support in the US for the WTO at a time of extreme vulnerability, only three months after a disastrous attempt to launch a new world trade round in Seattle. Senator Charles E. Grassley (Republican - Iowa), chairman of the US Senate's subcommittee on international trade, has already warned the decision will complicate a vote due later this year in Congress on whether the US should remain in the WTO. "It comes at a very bad time," Grassley told the Washington Post. ". . . For a lot of people, the WTO is a questionable institution."
What is at stake is the legality of some $3.5 billion in annual tax breaks for US exporters, subsidies which the EU, supported from the touchline by many of the US's trading competitors in Asia and Canada, says distort trade.
Now that the WTO has endorsed the EU position on appeal, Washington has until October to comply - October, please note, of a US presidential election year. Some chance! In reality the FSC (Foreign Sales Corporations) system is extremely simple. US companies whose exports consist of at least 50 per cent US content can set up a $2,000 FSC in a tax haven - 90 per cent of them are based in the Virgin Islands, Barbados or Guam - and route exports on paper through such shell companies, reducing their tax liability by between 15 and 30 per cent.
About half of all US exports are run through the scheme, according to the EU, with US-based multinationals such as Microsoft, Boeing, Ford and Motorola all operating FSC subsidiaries. (To complicate matters, however, it is true that some European companies also avail of the privileges.) The ruling is the latest in an important series of acrimonious testings by the US and EU of the international trading system's ability to police itself through the WTO. Last year the US won WTO permission to impose more than $300 million a year in sanctions on EU exports after winning cases against the EU's banana import rules and its ban on the import of US hormone-treated beef.
The WTO disputes procedure's success lay in forestalling the dangers of a damaging round of escalating, tit-for-tat retaliation. Privately, US officials say that with its FSC complaint, filed two years ago, the EU reneged on an understanding that FSC was acceptable and that the EU is actually retaliating for the successful US complaints at the WTO. Brussels denies there was ever such an understanding on FSC.
One way or another a period of hard bargaining is in prospect, with the WTO rules providing for negotiations to agree on the form of compliance.
Anxious not to contribute to the anti-WTO climate in the US, its senior trade representative, Ms Charlene Barchevsky, has pledged to uphold the rule of law, and Brennan and other EU observers were pleased to see a moderate tone in her response. But she insisted on Friday the US strongly disagreed with the WTO ruling, adding: "We will seek a solution that ensures US firms and workers are not at a competitive disadvantage with their European counterparts." Spokesmen bemoan the serious US trade deficit with Europe. "However this comes out," said the Deputy US Treasury Secretary, Mr Stuart Eizenstat, "we have to make sure we have not put our exporting companies at a competitive disadvantage" And yet, as the purpose of the complaint was precisely that, it is difficult to see what room both are leaving for manoeuvre.
A deal involving a quid pro quo on bananas and beef might be a step in the right direction, but the FSC financial implications are of a completely different magnitude. It is clear, Brennan argues, the EU now has powerful leverage in trying to force the US to open more realistic talks on the millennium trade round.
The European Commission has also responded with moderate language and has been sending out signals that it accepts that a negotiated solution based on a transitional period is the only way forward. The October 1st deadline for compliance is seen as largely notional. If the WTO system survives the test it will truly have come of age.
