Trade penalties begin as Congress debates response to Europe

WASHINGTON -- The United States comes under World Trade Organization penalties for the first time today, the result of congressional failure to steer through presidential politics, employment anxiety and budget deficits and head off the tariffs.

A 5 percent penalty tariff awaits U.S. exports such as jewelry and refrigerators, toys and paper. The penalty climbs by 1 percentage point for each month that lawmakers fail to bring U.S. laws in line with international trade rulings.

The tariffs penalize the United States for failing to eliminate a tax break that is worth $5 billion a year to U.S. exporters. It was declared an illegal export subsidy by the WTO and lawmakers agree they must repeal it.

Congress disagrees

But the House and Senate disagree on tax cuts to replace the old ones. American business, divided between manufacturers hoping for help and multinational companies hoping to modernize American tax laws, cannot agree on a solution.

The dollar's sharp decline in value against the euro, the European Union currency, means American goods are cheaper on European markets. That may protect U.S. manufacturers from feeling the bite for some time, said Gary Hufbauer, a trade economist at the Washington-based Institute of International Economics.

"Add all of this together, and you can see why we are going beyond the deadline," he said.

Presidential politics, combined with worries about the loss of jobs to other nations, make any congressional debate over new tax cuts a dicey proposition.

Senate leaders expect to start debating their legislative solution this week, then set it aside temporarily to work on next year's federal budget.

Democrats resisted Republican entreaties to avoid offering politically charged amendments, insisting that the tax bill is the best place this year to deal with economic issues.

Sen. Max Baucus, D-Mont., said Democrats will offer some amendments that are unlikely to pass the GOP-run Congress but would send a message to voters. Possibilities include an extension of federal unemployment insurance, an increase in the federal minimum wage and a requirement for companies that move jobs overseas to give employees three months' notice.

Democrats might also try to block an administration effort to rewrite federal overtime pay rules.

"That would be very bad and send a bad signal to the Europeans about how serious we are about getting this done," said Senate Finance Committee Chairman Charles Grassley, R-Iowa.

Senate Republicans also must work out some disagreements among themselves. Many back the bill's effort to direct new tax breaks to U.S. manufacturers.

But two senators say tax breaks aimed only at manufacturing will complicate the corporate tax system and encourage more companies to become manufacturers in name.

"If we continue to go down this road, that definition of manufacturing would grow," said Sen. Don Nickles, R-Okla. "We would regret it."

In the House, Republicans have not yet passed a bill drafted late last year.

They find little common ground with Democrats, who began a long-shot bid to force a different solution to the floor for debate and are hammering away at the administration's economic record.

"Republicans are putting manufacturing jobs at risk to reward their special interest friends with $40 billion in new tax breaks for big corporations," said House Minority Leader Nancy Pelosi, D-Calif.

Further complicating the matter, Republicans cannot agree among themselves whether to help only manufacturers or set aside some of their tax-cutting dollars to rewrite rules for multinational corporations.

Rep. Don Manzullo, R-Ill., is pushing GOP leaders to drop tax cuts that might encourage companies to move jobs overseas. He said there is good reason that such contracting out has emerged as an issue in the political campaign.

"The international tax cut makes it cheaper for American companies to move production overseas. It's just that simple. It is political," he said.

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On the Net:

EU page on U.S.-EU trade relations: http://europa.eu.int/comm/trade/issues/bilateral/countries/usa/items .htm