The US must do more to scrap a disputed system of tax breaks for exports by year's end if it wants to avoid up to US$4 billion of EU sanctions, the European Comm-ission said on Thursday.
The WTO let the EU impose the sanctions after it ruled the tax breaks, called the Foreign Sales Corporation, or FSC, were illegal export subsidies. The US Senate Finance Committee passed a bill on Wednesday aimed at meeting the EU demands.
But Arancha Gonzalez, spokeswoman for EU Trade Commissioner Pascal Lamy, said the proposed law still had holes in it as it included a three-year transition period to end the FSC system.
"We have already waited for three years to get the legislation repealed and therefore an extra three-year period could not be acceptable to us," she told a news conference.
The EU was encouraged that the process to repeal the disputed law was moving ahead in Congress, but Gonzalez added: "We would impose sanctions if and when the illegal FSC is not replaced by the end of the year."
In Washington, Senate Finance Committee chairman Senator Charles Grassley bristled at the renewed sanctions threat.
"I would think the European Union would have some appreciation for the extent of this undertaking and show some restraint and patience," the Iowa Republican said. "The imposition of sanctions now will only contribute to soften the economic recovery and slow economic growth worldwide."
He took issue with the EU's claim that the three-year transition period ran afoul of WTO rules. Unlike current tax breaks, which require a company to export in order to receive the benefit, "there is absolutely no requirement in our bill to export a single item to benefit from the transition," he said.
Democratic Representatives also objected to Gonzalez's remarks, saying they violated a pledge by Lamy not to take sides in the congressional debate.
Lawmakers also complained the EU's recent demand for final congressional action by the end of the year contradicts earlier statements indicating Brussels would not impose sanctions if lawmakers were making significant progress on the issue.
The launch of the sanctions, the biggest awarded by the WTO, would hurt US exporters and damage trans-Atlantic trade ties, already strained by other disputes and seeking new direction after the collapse of world trade talks.
Lamy has given Washington until autumn to change its tax laws or he will launch the EU internal legislative process that would result in the sanctions, in the form of punitive duties on a wide range of US goods, from Jan. 1.
US President George W. Bush proposed repealing the FSC system, which grants tax breaks for giants such as Boeing and Microsoft, in his budget for next year.
But Congress has come under pressure from industry not to hastily scrap the scheme.
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