Jul 24, 1998
EC SEEKS PANEL ON US EXPORT SUBSIDIES
Geneva, 23 July (Chakravarthi Raghavan) -- The European Communities brought its complaint over US 'subsidisation" of exports under the Foreign Sales Corporation (FSC) law which provides tax-incentives and breaks to US exporters resulting in prohibited subsidies and unfair competition.
The EC said the dispute, involving the largest amount of trade in dispute, sought the establishment of a panel, but this being the first time the issue came up, the US was able to block it.
Two other disputes brought up by the EC, and which were sent to a panel, were complaints against Korea for "safeguard" measures against dairy products, and Argentine safeguard measures against footwear imports. In both cases, the EC argues that the procedures have not been complied with in judging the injury to domestic industry and source of injury attributable to sudden influx of imports etc.
The FSC dispute is a one that came up at the old GATT in the late 1970s where the then US law (DISC) exempted US exporters using domestic material to get tax refunds, and was challenged as a prohibited subsidy. The panel ruling, after having been held up from adoption for four years by the US, was ultimately accepted, and the US agreed to change its laws and regulations to comply with the GATT provisions. It did this in 1985.
The FSC was the result.
Under the FSC, there is exemption for the exporters from US direct taxes of a portion of a FSC income related to the exports and dividends distributed to US parent companies. But the tax exemption is limited to receipts from exports of products having at least 50% US origin by market value.
This subsidy, contingent on using a domestic over imported goods is prohibited by Art. 3.1 (b) of the Agreement on Subsidies and Countervailing Measures (ASCM).
Under the FSC, US corporations set up subsidiaries abroad, export products from the US corporation to its subsidiary, which in turn exports it to the foreign country. The profits of this transaction in the hands of the subsidiary is for the most part not taxed in the US, and to the extent it is revenues foregone by the US treasury, it is a subsidy under the WTO subsidies agreement.
In a large number of cases, the US subsidiary is 'registered' in off-shore centres like Bahamas or other Caribbean islands, and the export transaction of the US corporation is via these subsidiaries, which are "shell" companies, with no activity of their own.
According to the US treasury report of 1997 cited by the EC Amb. Roderick Abbot, in 1992, US exports under the system amounted to $152 billion, compared to $84 billion in 1987, resulting in a profit to the US exporters, through this tax-incentive, of $10 ten billion.
No report of the operation of the DISC law, and the revenues foregone under it by the treasury, appears to have been published after 1992, but EC officials estimate that by 1998, the exports covered by the FSC law could be between 175 and 200 billion dollars.
Recently, the US has extended the benefits of the DISC law to exports of US software, which will bring in $600 million of benefits over a 5-year period to the US software firms. The US has also plans to allow agricultural exports too to be covered by the FSC.
The US in blocking the panel at this meeting, said it was a dispute going back to 26 years which the EC was "resurrecting" and this was "legally unwarranted, commercially unjustified and unlikely to prove helpful to the multilateral trading system and the bilateral relations of the US and the EU and member states:"
EC officials explain their bringing up the dispute now, as due to their wanting to see (after their accord with the US in the old GATT that the US would change its law to comply with the GATT provisions) how the US system, under the changes in law, would develop. Later, with the launch of the Uruguay Round, and the negotiations on subsidies, the EC had put the complaint aside. With the WTO in being, and its automatic procedures for panel rulings and their acceptance, the EC has now brought up the dispute, following failure (over several months) of bilateral consultations to resolve the differences.
EC trade officials note that while the US and Boeings Aircrafts complain about EC subsidisation of Airbus, Boeings and Mcdonnal Douglas have been using the FSC law to subsidise their exports.
Asked whether the complaints about subsidisation through revenue foregone extends to other areas, beyond the FSC law and the shell corporations, such as those recently figuring in the media about US transnationals, using their subsidiaries to "lend" money to other manufacturing subsidiaries inside Europe, and taking a tax-deduction, and under the changes in US tax law, escaping the tax on the profits of this lending operations, EC officials explain that there were problems relating to tax laws and fiscal matters, and others having an effect on 'trade' as the US FSC law is. Under the FSC law, the benefits to the exporting corporations come out of revenues foregone by the treasury, and thus a violation of the WTO rules.
Where there is a failure to carry out an obligation, there is no further need to show 'injury', they note.
In other actions, separate panels were established over the Brazilian and Canadian complaints against each over aircraft subsidies. Though this was the first time both requests came, they were brought up under Art. 4.4 of the ASCM, which enable panels to be set at the first time it comes before the DSB.
No explanation was immediately available why the EC complaint against
the US on the FSC law, which also involved prohibited subsidies was similarly not sent to a panel.
However, the EC consultations with the US on this has been going on since 18 November last year.
The DSB also adopted a panel ruling against Indonesia over its national car project.
Indonesia explained that though it disagreed with several points, it was not taking up the case to the appellate body in view of the country's agreement with the IMF, and the termination of the project itself under the IMF conditions.
Among the many criticisms of the IMF conditionality packages to the East Asian countries affected by the financial crisis, there has been some sharply expressed views that the IMF has been using the conditionality to advance the commercial interests of the US - in Thailand, Korea and Indonesia.
Several trade observers have denounced this as an example of how in practice, the IMF/WTO cooperation and coordination among secretariats for "coherence" would work against developing world.