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US braces for WTO decision on duties

"Congress clearly needs the urgency of a walk up to the gallows to focus its mind on the task of tax reform."

Brink Lindsey, director of the Cato Institute'sCenter for Trade Policy Studies

The WTO may rule as early as this week whether the EU can impose US$4 billion in duties on the US over an illegal tax break for exporters, in the costliest dispute the WTO has ever decided.

The ruling, which will affect US exporters from Boeing Co to Microsoft Corp, will add pressure on the US Congress to overhaul the nation's tax rules at a time when the lawmakers are at an impasse over the issue.

"Congress clearly needs the urgency of a walk up to the gallows to focus its mind on the task of tax reform," said Brink Lindsey, director of the Cato Institute's Center for Trade Policy Studies in Washington.

A WTO panel, which ruled in January that the tax break is an illegal export subsidy, said on July 29 the decision on the amount of retaliation, ranging from US$1 billion to US$4 billion, would come by mid-August. Arancha Gonzalez, a spokeswoman for European Trade Commissioner Pascal Lamy, said the EU expects the decision as early as Wednesday.

The two sides, which do US$600 billion in annual trade, are already at loggerheads over US steel tariffs, a US$51 billion boost in support for American farmers over the next six years and EU bans on genetically modified food and hormone-treated meat.

With US congressional elections approaching in November, European sanctions may trigger a backlash against free trade in the US and jeopardize a global economic rebound, analysts said.

That concern, plus the complication that US units of companies such as Germany's DaimlerChrysler AG also benefit from the tax break, may prompt EU Trade Commissioner Pascal Lamy to impose a smaller penalty, analysts said.

``Retaliation should always, always, be an absolute last resort because it's always business that suffers,'' says Gary Campkin, head of international trade at the Confederation of British Industry, the UK's largest business organization.

Lamy has said he won't impose sanctions as long as Congress is moving toward WTO compliance.

Legislation proposed in July by House Ways and Means Committee Chairman Bill Thomas may allow the US to head off the EU sanctions with more than 20 changes to the US tax code.

While that measure was praised last month by US Deputy Treasury Secretary Kenneth Dam, Senator Max Baucus, the chairman of the Finance Committee, said that at least for now ``there is no solution,'' suggesting a stalemate.

The 15-member EU wants permission to impose US$4.04 billion in sanctions on US imports. The US wants the penalty limited to the value of tax breaks to exports to the EU, or US$956 million.
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