EU going ahead with tariffs after Congress fails to act on tax

WASHINGTON -- For the first time, the United States will be hit with trade sanctions approved by the World Trade Organization because of a fight in Congress over how to restructure $5 billion in corporate tax breaks.

Starting Monday, a wide range of U.S. exports to Europe from roller skates to jewelry, steel, textiles and various farm products will be subject to a 5 percent penalty tariff that will ratchet higher by 1 percentage point each month over the next year unless Congress acts.

EU trade commissioner Pascal Lamy, who wrapped up meetings with key lawmakers and administration officials on Friday, insisted that the penalty tariffs were being imposed only reluctantly and would be lifted as soon as Congress passes a WTO-compatible tax law dealing with U.S. corporations.

"We have been extremely patient, but there is no way we can avoid these sanctions which will hopefully concentrate minds on the urgency of passing legislation," Lamy told reporters late Friday.

But resolution of the issue could be months away, given the wide difference of opinions among Republicans who control Congress.

The Bush administration, already being pummeled for pursuing trade policies that Democratic presidential candidates are blaming for the loss of millions of U.S. manufacturing jobs, expressed disappointment that the EU had gone ahead with retaliatory tariffs while Congress was considering replacement legislation.

"We regret that they are moving forward," said Richard Mills, spokesman for U.S. trade representative Robert Zoellick.

The problem in Congress stems from competing visions of which U.S. corporations should be helped by the replacement legislation for exporter tax breaks. The WTO ruled them illegal four years ago. The cost of the breaks at the time was estimated at $4 billion annually, a price tag that has now risen to $5 billion annually.

Many in Congress want to target substitute corporate tax breaks to U.S. manufacturers, especially in light of the 3 million factory jobs -- one in six -- that the country has lost in the past 3 1/2 years.

Other lawmakers, including House Ways and Means Chairman Bill Thomas, R-Calif., want to let U.S.-based companies with overseas factories share in the breaks.

A Thomas-backed bill that passed his committee last fall would have cost $60 billion over 10 years and would have cut taxes not only for U.S. manufacturers but for many corporations doing business overseas.

That measure is opposed by legislation being sponsored by many Democrats, including Rep. Charles Rangel, D-N.Y., and several Republicans including Reps. Philip Crane and Donald Manzullo. Their bill would limit the future tax breaks to U.S. manufacturing operations.

Complicating the matter, a bill being supported by the Republican chairman of the Senate Finance Committee, Sen. Charles Grassley of Iowa, is closer to the Rangel approach than to Thomas's proposal.

And two other key Republicans have called for an across-the-board cut on the corporate tax rate for all companies rather than just targeting manufacturing companies.

Gary Hufbauer, a trade economist at the Institute of International Economics, a Washington think tank, said Congress' difficulty in reaching agreement is being exacerbated by the huge budget deficits which make many corporate lobbyists think this bill will be their last chance to get a tax break for some time.

"This will be the last bill out," Hufbauer said. "Everybody wants their benefits."

But the struggle to get agreement is not only holding up further relief for U.S. manufacturers but penalizing American manufacturing companies who will be hit by the EU tariffs.

The tariffs will start at the relatively low level of 5 percent, but will rise by 1 percentage point a month until they hit 17 percent a year from now. The EU has left the door open to raise the tariffs higher after next March 2005. But Lamy told reporters Friday he certainly hoped that Congress will have acted by then.

The EU's target list includes a wide array of products selected in many cases in an effort to bring maximum political pressure on key lawmakers.

One of the biggest target areas is jewelry. Other manufactured goods targeted include certain types of iron and steel, paper, soap, footwear, carpets, copper, aluminum, toys and games, nuclear reactors, electrical machinery and textiles.

"We have a terrible crisis in the textile industry ... so any negative development is not good," said Augustine D. Tantillo with the American Manufacturing Trade Action Coalition, which represents a number of textile companies.

Some analysts said it may be some time before U.S. manufacturers start to feel the pinch from the higher tariffs because of the dollar's sharp decline over the past year in relationship to the euro, a drop that means American products are now cheaper on European markets.

Some worried that the WTO ruling against the United States, one of a number of adverse rulings recently, could undermine support for the body that enforces the rules of world trade as well as further harm U.S.-European relations, already strained by the Iraq war.

"I see a bigger backlash on this," Manzullo said Friday. "Americans are still mad at the Europeans, especially the French."