EU suspends tariff, but discord lingers

<b>Photo courtesy of Bloomberg News</b><br>In northern France, a container is loaded onto a cargo ship in this Bloomberg News file photo. European Union officials are challenging certain U.S. trade tax clauses that affect many of their imports.
Photo courtesy of Bloomberg News
In northern France, a container is loaded onto a cargo ship in this Bloomberg News file photo. European Union officials are challenging certain U.S. trade tax clauses that affect many of their imports.

European Union challenges provisions outlined in tax bill signed by President Bush

U.S. trade officials and the European Union are at an impasse. After a year, retaliatory tariffs placed on $4 billion in U.S. goods by the European Union have been repealed. But there’s a catch.

The EU approved a regulation formally suspending the tariffs on Jan. 31, retroactive to Jan. 1, the original date the EU pledged to suspend them. The tariffs were in response to the Extraterritorial Income tax program, deemed illegal by the World Trade Organization.

Simultaneously, however, the Union issued a list of domestic products, including some jewelry items, which would be subject to a 14 percent retaliatory tariff if the EU is successful in challenging the grandfathering and transition terms of the U.S. tax bill President Bush signed in October, the American Jobs Creation Act of 2004.

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“We were hoping they’d drop the automatic retaliatory tariff, but we weren’t successful,” said Rosemary Gallant, deputy senior commercial officer for the U.S. Mission to the EU in Brussels.

“Next fall, when this comes up (for a decision), the EU members have said they wouldn’t let it happen. We thought the agreement though was for the U.S. to change the tax law and they’d drop the tariff period.”

The bill Bush signed provided tax breaks for manufacturers and reformed the U.S. tobacco subsidies, effective Jan. 1, but the EU objected to the methods used to phase out the Extraterritorial Income tax program Congress enacted.

The ETI, which replaced the Foreign Sales Corporation program in 2000, gave tax relief to U.S. companies for certain sales including foreign-based transactions. The resulting tariff imposed by the EU sought to obtain lost revenue because of the ETI.

The Union objects to the transition and grandfathering provisions in the law, and has taken the case back to the WTO and asks for a ruling that the changes are not consistent with the original WTO panel decision that the ETI was illegal. The provisions in the U.S. law leave in place about 1 percent of the benefits of the ETI – which would largely benefit major long-term contracts – and most of the remaining benefits will be phased out over two years.

“According to the WTO, you can’t have a transition period, but we have it (in the U.S.) and so does Europe,” Gallant said. “If we came up with an explanation of the value of the grandfathering clause, our hope is that the EU would determine it’s not a large amount,” and they’d allow it.

“But the EU’s estimate and ours are far apart.”

A decision on the challenge is expected this fall, and the EU and the United States have yet to determine how the retroactive taxes will be repaid, Gallant said. In the meantime, discussions continue on the grandfather and transition stipulations in the bill.

“Our sense is that generally people (in Rhode Island) thought it was resolved, but now we’re not so sure,” said Maureen Mezei, international trade director for the R.I. Economic Development Corporation. “It’s going to take companies some time to repair the damage done to their sales and distribution. It seemed to take Congress a long time to fix something that everyone agreed needed to be done and to the satisfaction of the EU.”

The jewelry industry was among the industries hardest hit by the tariff, which reached 15 percent in January. Thirty-six percent of its exports were taxed. For local manufacturers, the tariffs meant a loss of sales, demand drought in Europe for popular products, frozen deals and contracts, a drop in orders, lost clients and strained business relationships.

“The loss of future business that companies had is immeasurable, and a lot of companies were absorbing that cost, not wanting to pass it onto their customers,” said Dorothy Coleman, vice president of tax policy at the National Association for Manufacturers in Washington, D.C. “That puts them at a loss for future business too.”

Ray Fogarty, director of the R.I. Export Assistance Center and the World Trade Center Rhode Island at Bryant University’s Chafee Center, is optimistic that the WTO will rule in the U.S.’ favor.

“The EU didn’t voice their opinions much on the grandfathering during negotiations,” he said. “I think the EU (members) got what they wanted with the passage of the law, so now they don’t have a leg to stand on. The WTO will resolve it one way or another.”

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