The European Union imposed sanctions on the United States for the first time on Monday as a dispute over tax breaks for U.S. firms turned into a trade war that could cost American exporters $300 million this year.
The lower tax rates for exports for firms, including Boeing and Microsoft, were judged an illegal subsidy by the World Trade Organization (WTO), which ruled the EU could impose $4 billion in sanctions a year on U.S. goods.
But European Trade Commissioner Pascal Lamy decided to apply gradual pressure by phasing in the measures, which will hit a wide range of goods, including textiles, jewellery and toys.
The sanctions are intended to prod the U.S. Congress quickly to replace the tax breaks with measures in line with WTO rules.
They start at $16 million as an extra five percent duty on selected U.S. products in March and rise by one percent a month to $315 million in 2004 and $666 million if they run throughout 2005.
Based on the full $4.0 billion, the main sector to be hit would be U.S. jewellery at an estimated $1.43 billion.
“The EU’s objective remains the withdrawal of the U.S. illegal subsidy,” the Commission said in a statement. “The EU has opted for a response which is measured, gradual and geared towards focussing the mind of the U.S. legislature to comply.”
Officials have tried to play down the impact of the trade row, the first time since the WTO was created in 1995 that the EU has retaliated on U.S. goods.
“This is not the beginning of a trade war. WTO disputes are all part of the system,” one Washington official told reporters ahead of the March 1 deadline for the sanctions to apply.
EU firms worried
But EU firms have expressed worries over the escalation of a dispute that could lead to extra costs as the economy splutters back to life.
Lamy has said sanctions should be seen in the light of daily transatlantic trade of $1.0 billion, and the EU has coped since 1999 with more than $100 million of imposed U.S. sanctions a year in a fight over beef.
The dollar’s weakness is likely to lessen the pain on U.S. exporters and the administration of President George W. Bush has pressured Congress to change the disputed tax laws.
“The retaliatory tariffs on American exports pose a threat to ... growth and may retard the creation of jobs in certain sectors of the economy,” Treasury Secretary John Snow, Commerce Secretary Don Evans and U.S. Trade Representative Robert Zoellick said in a letter to Congress last week.
The U.S. Senate is expected to begin debate next week on a bill to repeal the provisions and use an estimated $50 billion in savings to lower the corporate tax rate for manufacturers.
The outlook for action on a similar bill in the House of Representatives is less certain, but industry officials hope lawmakers can agree a bill in the coming months to send to Bush.
EU-U.S. trade ties have seen bruising battles recently. The EU came close to sanctions after Bush ordered a rise in steel import duties, but the duties were ended in time.
At the same time, the EU and United States are major players in getting world trade talks back on track.