The European Union threatened to reimpose sanctions on as much as $4 billion a year in U.S. goods after the World Trade Organization (WTO...

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The European Union threatened to reimpose sanctions on as much as $4 billion a year in U.S. goods after the World Trade Organization (WTO) ruled that the United States fell short in its attempt to repeal a contested tax rebate for exporters.

WTO arbitrators yesterday backed an EU complaint against a U.S. law created last year to end a 10-year, $50 billion tax break that benefited businesses such as Caterpillar and Boeing.

The EU objected to provisions that phased out the tax break over three years and “grandfathered” benefits for some companies. Yesterday’s WTO report confirms a confidential decision that was leaked to the public July 23.

“The EU welcomes the WTO’s clear language and conclusions,” EU Trade Commissioner Peter Mandelson said. The EU will apply new duties on U.S. goods as early as Jan. 1, he said.

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The dispute is linked to a separate spat over development subsidies to rival aircraft makers Boeing and Airbus that is also before the WTO.

Boeing, the biggest recipient of the export tax breaks, pocketed $150 million this year and stands to gain $750 million over the next decade, according to the EU.

Boeing got a $168 million break last year because of the law, one of several rebates that allowed the company to reduce its tax burden to $140 million from $686 million, its annual report shows. Its rebate was $115 million in 2003 and $195 million in 2002.

Boeing spokeswoman Amanda Landers said the company doesn’t know how the EU calculated its expected future benefits. She declined to comment on what Boeing forecasts its future tax break to be.

The tax breaks were first ruled illegal by the WTO in January 2002. Lawmakers in the U.S. criticized the EU for continuing to drag out a dispute that Congress toiled for two years to resolve.

“I’m extremely disappointed that the European Commission has insisted on perpetuating this dispute,” said Senate Finance Committee Chairman Charles Grassley, R-Iowa.

“The fact is, the U.S. Congress worked for years to come into compliance with our obligations under the WTO.”

WTO arbitrators said the U.S. is failing to comply with their January 2002 ruling that deemed the tax breaks to exporters illegal.

The U.S. rewrote corporate-tax legislation to comply with the WTO rules, but phased out the export credits through 2006 rather than ending them immediately. The WTO arbitrators said that phase-out violates global trade rules.

The U.S. “maintains prohibited subsidies,” the arbitrators wrote in a 34-page decision published on the WTO’s Web site.

The “grandfathering” provision allows exporters to keep receiving the tax benefit beyond 2006 if a binding contract was entered into a year ago that includes a future purchase option, or renewal option.