The US lost on Monday its final appeal in a dispute with Europe over tax policies.
The ruling is sure to renew trans-Atlantic trade tensions and could cost American companies billions of dollars in higher taxes.
Affirming earlier rulings, an appeals panel of the WTO, the Geneva-based organization that regulates trade, ruled that the offshore tax havens allowed by US tax law amounted to an illegal trade subsidy and must be scrapped.
The dispute between the US and the EU over tax havens has been going on for years, but negotiations were suspended while the case was before the appeals board.
Robert Zoellick, the US trade representative, said that Monday's ruling was not unexpected but that he was "disappointed by the outcome."
"We will be consulting closely with Congress and affected US interests regarding next steps," he said.
The next step is for a WTO arbitration panel to determine the level of trade sanctions Europe will be allowed to impose. That will probably occur in April.
Under US law, exporters can avoid paying taxes on some overseas sales by channeling sales through subsidiaries in places like Guam, the Virgin Islands and Barbados. This saves American companies - including giants like General Electric, General Motors, Microsoft and Boeing -- more than US$4 billion a year in taxes.
In dollar terms, that makes this the largest trade case in history.
The EU contends that the tax breaks give American exporters an unfair edge in international commerce. The US holds that the tax advantage is no greater than comparable tax breaks in Europe. European companies, for example, do not have to pay value-added taxes on exported goods.
There is no difference between the positions of the Clinton and Bush administrations on the issue.
Many academic tax experts have argued for years that it was bad tax policy to lower companies' taxes simply because they have subsidiaries overseas.
But lawmakers have accepted the argument that tax havens are necessary to allow American companies to compete in international trade, and the law has strong support in both parties in Congress. Companies will continue to receive the tax breaks unless the law is changed.
US trade authorities say they think Europe brought this case primarily out of bitterness against the US for using the WTO to pry open European markets for imported bananas and hormone-treated beef. But European officials say that is not the case, and they point particularly to the advantage the tax break gives Boeing in its competition with the European consortium Airbus Industrie for global aircraft sales.
The WTO first ruled against the US in February 2000. In response, Congress tinkered with the law that fall. But the EU said the new law was no better than the old one, and last August, the trade organization agreed.
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