02 March 2004	Tuesday	10 Muharram 1425

BRUSSELS, March 1: The EU imposed millions of dollars' worth of sanctions on US goods ranging from jewellery to textiles on Monday, carrying out a threat aimed at getting Washington to change a disputed system of export tax breaks.

The EU move could cost US companies $315 million this year and $666 million in 2005 if the sanctions remain in place. The lower tax rates on exports by firms including Boeing and Microsoft were judged an illegal subsidy by the World Trade Organization (WTO) in 2002. It said the EU could respond by imposing up to $4 billion in sanctions a year on US goods.

"Despite waiting for more than two years, the US has not brought its legislation in line with WTO rules. We are therefore left with no choice but to impose countermeasures," European Trade Commissioner Pascal Lamy said in a statement.

"The name of the game is not retaliation but compliance: countermeasures will be lifted the day the FSC is repealed. We now need to turn our attention to the post-March 1 period."

Lamy, not wanting to hobble transatlantic trade, decided to apply gradual pressure against the US tax breaks system, known as the Foreign Sales Corporation (FSC), by phasing in sanctions.

They start at $16 million as an extra five per cent duty on selected US goods in March. The duties are due to rise one percentage point a month with sanctions totalling an estimated $315 million in 2004 and $666 million if they run throughout 2005.

The Commission tried to soften the blow for EU importers, whose costs will rise, by targeting items that are less than 20 per cent of imports for a particular item.

The sanctions are intended to prod the US Congress quickly to replace the tax breaks with measures in line with WTO rules. Based on the full $4 billion, the main sector to be hit would be US jewellery at an estimated $1.43 billion.

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 US 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.

But EU firms have expressed worries over the escalation of a dispute that could increase costs just as the economy revives. Lamy has said the fight should be seen in the light of daily transatlantic trade of $1 billion, and the EU has coped since 1999 with more than $100 million of imposed US sanctions a year in a fight over beef.

The dollar's weakness is likely to lessen the pain for US 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 US Trade Representative Robert Zoellick said in a letter to Congress last week.

The US 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 legislation 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. -Reuters