Trade tensions escalated this month as the European Union adopted a plan for retaliatory tariffs on U.S. imports because of a corporate tax break. That tax exemption is important to U.S. exporters, including chemical companies.
The EU trade sanctions, approved by the World Trade Organization and worth $4 billion, would start in March 2004 if Congress has not repealed the corporate tax break by then. WTO says the tax break amounts to an unfair subsidy for U.S. exporters.
According to the American Chemistry Council, chemical manufacturers collectively benefited by about $415 million from this tax exemption in 2001, with life sciences firms getting some $750 million.
The tax break initially applied to income from foreign sales corporationssubsidiaries established by U.S. companies outside of U.S. territory. Later, it allowed firms to exclude part of foreign sales income from federal taxes. WTO ruled against both versions and said the EU could impose up to $4 billion in retaliatory sanctions on U.S. imports.
EU officials have been waiting for Congress to repeal the tax break for nearly two years, and the retaliation plan shows their patience is wearing thin. A phaseout of the exemption is part of corporate tax-cut legislation pending in Congress that is unlikely to get passed before the end of 2003. Whether the EU would be satisfied with a phaseoutand not immediate repealof the tax break remains to be seen.
Inflaming this situation is a Nov. 10 WTO ruling against U.S. steel safeguards which impose tariffs on many types of imported steel.