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WTO Confirms ruling that US Export Subsidies (Foreign Sales Corporations) are Illegal
Jan 15, 2002

The World Trade Organisation confirmed that the Foreign Sales Corporation Replacement Act, brought in by the US in response to condemnation of its original FSC export subsidy system, is also incompatible with WTO rules. As the decision of the WTO Appellate Body is final, the E.U. expects this ruling to put an end to the long lasting WTO dispute on the tax breaks granted to US exporters. Both the WTO panel and Appellate Body have stated in clear terms that the US must end this WTO-incompatible practice

As part of the agreement between the EU and the US on procedures to handle the dispute, reached in September 2000, the next step in the procedure will be the automatic reactivation of the WTO arbitration procedure to decide on the amount of countermeasures the EU would be entitled to request authorisation to impose. The arbitrators' report is expected by the end of March.

The FSC scheme's predecessor, the Domestic International Sales Corporation (DISC) scheme, was declared an illegal export subsidy by a GATT panel in 1976 (the panel ruling was adopted by the GATT in 1981). The US replaced the DISC with the FSC in 1984. The EU contested the legality of the FSC when it was adopted, but did not pursue it at the time due to the opening of the Uruguay Round trade negotiations.

WTO procedures concerning FSC.

Following further complaints by EU companies, and in view of the increasing amount of FSC subsidies being granted by the US, the EU resumed bilateral contacts with the US in 1997, but no progress was made. The EU therefore took up the matter under the WTO Dispute Settlement Understanding. Consultations followed in December 1997, February 1998, and April 1998, but without resolution.

The EU then requested a WTO panel to pronounce itself on the dispute, which reported on 8 October 1999. The FSC was found to constitute an illegal export subsidy under the Subsidies Agreement, and (in relation to agricultural products) an export subsidy in violation of the Agriculture Agreement.

The US appealed to the WTO Appellate Body and on 24 February 2000 the Appellate Body confirmed the panel findings as to the illegality of the FSC scheme. The US was given until 1 October 2000 to withdraw the FSC scheme as required by the Subsidies Agreement.

WTO Procedures concerning the FSC Replacement Act

Following fruitless discussions between the parties regarding the legality of the US proposals to replace the FSC scheme, on 29 September 2000, the EU concluded an agreement on procedures with the US providing for a compliance panel to examine the WTO compatibility of the new US legislation, before countermeasures could be imposed. The agreement also enabled the US to request to the Dispute Settlement Body ("DSB") the extension of the deadline for implementing the WTO ruling until 1 November.

President Clinton signed the FSC Replacement Act into law on 15 November 2000. As the US failed to comply with the WTO recommendations within the extended deadline granted by the DSB (1 November 2000), the EU was entitled under the bilateral agreement on procedures to have direct recourse to countermeasures. In spite of this extra time delay, the EU decided nevertheless to respect the agreement on procedures in another effort to take the steam out of this dispute.

On 17 November 2000, the EU presented the request for countermeasures as required by the WTO, for an amount of $4 billion, accompanied by a broad list of products. The US requested arbitration on the amount of countermeasures requested by the EU. On that same date the EU also presented a request for consultations as the first step in the compliance panel procedure.

The compliance panel was established on 20 December 2000 and the arbitration procedure on the amount of countermeasures under Article 22 DSU was suspended the following day, with the agreement that it would automatically be reactivated upon adoption by the WTO of the Appellate Body's findings (28 Jan 2002).

On 20 August 2001, the WTO compliance panel examining the FSC Replacement Act, issued its report in full support of the EU. The panel found that the FSC Replacement Act constitutes a prohibited export subsidy because, although companies established outside the US do not need to export to obtain the tax reduction, those within the US can only obtain it by exporting. The FSC Replacement Act also violates the Agriculture Agreement as it can be used to circumvent the commitments given by the US not to grant, or to reduce, export subsidies on agriculture products. The so-called 50% US content rule has been found to violate WTO rules because by requiring the use of US products to benefit from the tax break it discriminates against non-US imported products.

The US has also been found to fail to comply with the WTO ruling and recommendations on the original FSC case as the transitional rules under the FSC Replacement Act maintain the FSC scheme for at least two years beyond the deadline granted by the WTO to the US to withdraw it (1 October 2000).

The US appealed against the panel ruling on 15 October 2001 and the WTO Appellate Body confirmed on 14 January 2002 the panel findings as to the WTO illegality of the FSC Replacement Act. Next WTO steps

In accordance with the agreement on procedures concluded by the parties on 29 September 2000, the panel and Appellate Body reports need to be adopted within 15 days from the circulation of the AB report (before 29 January 2002 at the latest). Once adopted, the arbitrators will automatically resume their work and will issue their report on the amount of countermeasures the EC would be entitled to by the end of March. A tentative calendar of the WTO steps to follow will be the following: 14 January 2002 - Appellate Body report is circulated. 28 January 2002 - (10-15 days from circulation) Panel and AB reports are adopted. Reactivation of arbitration process on countermeasures. 28 March 2002 - (60 days from adoption of reports) Circulation of Art. 22.6 arbitrators report on amount of countermeasures.

Anytime after circulation of arbitration report - authorisation of the DSB to impose countermeasures for the amount found by the arbitrator. Anytime after final DSB authorisation to impose countermeasures - countermeasures may be taken.

For further information see WTO Website http://docsonline.wto.org/imrd/ WT/DS108/24

EU DG TRADE web site: http://mkaccdb.eu.int/miti/dsu?FICHE=GO&CASE=WT/DS108 A nd see also United States - Tax Treatment for "Foreign Sales Corporations" - Recourse to article 21.5 of the DSU by the European Communities: Report of the Appellate Body

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