The European Union has started imposing trade sanctions amounting to more than $4 billion on the USA. The sanctions are in retaliation against subsidies granted by the American government to its exporting enterprises.
The sanctions, which will be imposed phase wise in the form of enhanced duties on a variety of US export products, follow a ruling of the Dispute Settlement Body (DSB) of the WTO.
The DSB had ruled in 2002 that certain provisions - called FSC/ETI provisions-in the US Internal Revenue Code giving tax concessions to the country's exporting firms constituted a prohibited export subsidy.
Since the WTO ruling was made under the agreement on subsidies and countervailing measures (SCM), it seems appropriate to look at the relevant provisions of the agreement.
The SCM agreement comprehensively defines the term "subsidy", regulate the provision of various types of subsidies as well as provides measures to offset the harmful effects of subsidized imports. A subsidy is defined as a financial contribution made by a government body, which confers a benefit on one or more enterprise or industry.
A financial contribution may be in the form of direct transfer of funds such as grants or loans or potential direct transfer of funds or liabilities including loan guarantee.
In case the government revenue that otherwise is due is foregone - as in case of tax concessions to US firms - it also constitutes a financial contribution. Secondly, the financial contribution must come from the government, national, state or local, if it is to constitute a subsidy within the meaning of the SCM Agreement.
In case the financial contribution is provided by a non-governmental organization, it will not be regarded as a subsidy. Thirdly, the financial contribution must confer a benefit on the recipient firm or industry. For instance, if government credit is provided on terms and conditions similar to those on which a private institution makes loans, the credit provided by the government will not be considered a subsidy.
The government, however, will be deemed to subsidise a firm if it, charges a lower interest rate than that charged by private lenders. It is important to note that only specific subsidies are subject to the SCM agreement disciplines. A specific subsidy is one which distorts the resource allocation in an economy. If, however, a subsidy is widely provided in an economy, it is not regarded as specific.
Of the four types of specific subsidies recognized by the SCM Agreement, one is prohibited subsidy. Such subsidies exist where a government targets exports goods for subsidization - called export subsidies - or where subsidy is provided to goods using local inputs as against imported inputs. The latter is termed import substitution subsidy.
Thus it was the grant of export subsidies by the US government that prompted the EU to retaliate. Export subsidies are believed to have such an enormous potential for distorting trade that the complaining country does not have to show their adverse trade effects to challenge them in the WTO.
The EU-USA row over export subsidies dates back to 1970s when the US government's domestic international sales corporation (DISC) law allowed its exporting firms to defer taxes on a percentage of their earnings.
The European Commission considered that DISC constituted an export subsidy and challenged the same in the general agreement on tariffs and trade (GATT). The American government retaliated by challenging a number of European tax laws. The DISC, however was repealed, following a GATT judgment and replaced with FSC provisions.
The FSC provisions were also questioned by the EU in the WTO in 1997. The WTO ruled two years later that the provisions were violative of the SCM Agreement. In compliance, the US scrapped the FSC law but enacted the ETI Act.
The purpose of the new law was to remove any disadvantage faced by US firms owing to difference between American and foreign tax regimes. The EU again took the law to the WTO, which ruled that the ETI law was also at variance with the SCM Agreement. Later trade sanctions amounting to $4.403 were also authorized by the WTO.
Instead of clamping the sanctions at one go, the EU has decided to impose them in phases. Initially the EU has imposed an additional duty of five per cent on US exports, which will increase by one percentage point each month till March 2005.
Hence, after one year the American exports will be subject to an additional duty of 17 per cent in the EU region. In case, the USA fails to comply with the WTO ruling and does not repeal the controversial legislation, the EU will decide on the subsequent course of action.
The USA and the EU are two of the strongest economies and the largest trading nations in the world. The total global exports of the USA are $967 billion, while imports exceed $1400 billion. The exports and imports of the 15-member EU are more than $3 trillion each. They are also each other's principal trading and investment partners.
The daily US-EU trade, also called transatlantic trade, is in excess of $1 billion. US exports to the EU are $244 billion or 25 per cent of its global exports, while US imports form the EU are $293 billion or 21 per cent of its total imports.
The US market accounts for 20 per cent of total EU exports, while imports from the USA constitute 24 per cent of total EU imports. As for two-way investment between the EU and USA, it is well over $1 trillion. With such an enormous EU-USA trade and investment level, their commercial relations are crucial to the international economy.
The $4 billion trade sanctions appear a small amount considering the huge volume of transatlantic trade, and thus may not significantly impact upon EU-USA commercial relations.
However, the decision does have its significance: One, ever since the birth of the WTO, it is the first occasion that the EU has clamped sanctions on the export of merchandise from the USA; although the EU has faced American sanctions on beef export, which went into force in 1999. And in case the US Congress does not repeal the controversial law in one year, the EU may retaliate more strongly. Two, it is evident that the USA is yet to fully comply with the WTO regime.
Sometime back the USA had decided to increase tariffs on the import of steel evoking a tough response from the EU, which made Washington withdraw the enhanced duties. If the world's most robust economy shies away from meeting its international trade obligations, there is little point in her asking less prosperous or developed economies to do so.
Three, if as advanced an economy as the USA feels it necessary to give some measure of support or protection to its firms or industry, what about the economies which lag behind on the road to economic development? Do not they have a case for domestic support or protectionism?
Four, the sanctions and the antecedent DSB ruling show that the WTO is a rule based system or regime. If a country has or makes laws inconsistent with the regime's principles or agreements, the same will have to be amended or repealed.
