SPOTLIGHT ON:

European Union Swats U.S. Corporation Subsidies

BRUSSELS, 20 August—After reviewing the multi-billion-dollar tax breaks the U.S. grants to hundreds of exporting companies, including such giants as Microsoft and Boeing, a World Trade Organization WTO panel concluded that such subsidies are illegal because such benefits put rival companies from other countries at a competitive disadvantage.

In response to the WTO’s finding, the European Union (EU) has announced it will seek $4–$5 billion in trade sanctions against the U.S.—unless the U.S. changes its offending tax-credit program. The ruling said the U.S. is free “to choose any kind of tax system it wishes—so long as that system is consistent with WTO obligations.”

William Drozdiak, Washington Post foreign correspondent, reported on August 21 that U.S. Special Trade Representative Robert B. Zoellick equated the $4 billion sanction, if implemented, to “dropping a nuclear bomb” on international trade.

The U.S. has generally gone along with WTO trade dispute decisions, but the sanctions involved, until now, have been relatively small. Now the U.S. has warned that if the EU pursues these sanctions, Congress may retaliate by passing laws that could disrupt global trade, possibly bringing on a world-wide economic crisis.

The Bush administration has 60 days to file an appeal of the WTO ruling. One EU trade representative, Stephen Gospage, said the EU would hold off on applying sanctions as long as the U.S. made serious efforts to change its offending laws that favor U.S. exporting companies. If the U.S. decides to appeal the WTO decision, he warned, the EU would go forward with requesting WTO permission to impose the sanctions.

Overall, the federal government spends about $65 billion annually on over 125 programs that provide direct taxpayer assistance to American businesses operating overseas, according to the General Accounting Office and other research organizations, such as the Progressive Policy Institute and the Cato Institute. Examples of U.S. international trade subsidies include:

General corporate subsidies: $billions and $billions

° The International Trade Administration (ITA), which conducts export promotion programs directed toward specific industry sectors through its Trade Development Program. ITA's U.S. and Foreign Commercial Service counsels U.S. businesses on exporting and facilitates participation of U.S. firms in trade shows. It also provides marketing services, develops regional and multilateral trade strategies, and conducts investigations of trade policies. The ITA’s budget in 1997 (the last figures available) was $270 million.

° Foreign Sales Corporations (FSC) allows U.S. exporters to exempt from taxes up to 15% of export earnings. This costs the U.S. taxpayer an estimated $1.8 billion annually. Boeing Co., the biggest beneficiary of the FSC tax break, saved $130 million in U.S. income taxes in 1998.

° U.S. aid for international investors, exporters, and importers exceeds $32 billion annually and benefits such “needy” recipients as General Motors, Citibank, Archer Daniels Midland, and Boeing. The Market Access Program (MAP), for example, uses taxpayer money to reimburse corporate foreign advertising costs.

° The Overseas Private Investment Corporation (OPIC) supplies loans and insurance to companies investing abroad.

° The Sugar Program limits U.S. sugar imports, thereby keeping supplies lower and prices higher.

The Military Connection: $500 million total

Military export sales subsidies cost U.S. taxpayers $500 million. Prices assessed foreign purchasers of U.S. weapons don't cover government research and development costs. The U.S. also arranges foreign military financing, to the tune of $3.3 billion. It also provides grants and subsidized loans to foreign countries for purchase of military goods and materials.

The U.S. sometimes sells excess defense items on the foreign market at steep discounts; it offers arms purchasers no-cost leases; provides the defense industry with U.S. government equipment free for foreign trade shows; forgives bad loans for arms exports; involves the departments of State and Commerce and U.S. military to promote arms sales; subsidizes foreign purchasers of U.S. agricultural and dairy products; and subsidizes the shipping industry.

Agricultural Subsidies: $790 Million total

°Export Enhancement Program—Subsidizes foreign purchasers of U.S. agricultural products by paying bonuses to U.S. exporters, which allows them to decrease foreign prices.

°Dairy Export Incentive Program—Subsidizes exporters of U.S. dairy products.

° Market Access Program—Subsidizes overseas advertising by U.S. agricultural companies and trade associations.

°U.S. Department of Agriculture Export Guarantees—Provides loan guarantees for foreign purchasers of U.S. agricultural commodities.

°Public Law 480 Program—Provides subsidized loans to purchasers of U.S. agricultural products.

Fishing Subsidies: $14.4 Million

°International Fisheries Commission—Promotes fishery trade and exports.

°Access Payments for South Pacific Fisheries—Annual payment to several Pacific Island states to guarantee fishing access to about 45 U.S. tuna boats.

Other Subsidies for Exporters, Importers, and International Investors: $1,113 Million

In addition to the ITA and OPIC, this category includes:

° Export-Import Bank Loan Subsidies—Subsidizes loans to foreign purchasers of U.S. products.

°Small Business Administration Export Assistance Centers—Provides export assistance to small businesses.

°Trade and Development Agency—Provides grants to U.S. companies for feasibility studies and planning services for foreign economic development projects.

°U.S. Travel and Tourism Office—Promotes U.S. travel and tourism overseas.

°International Monetary Fund—Protects risky investments of large U.S. banks and corporations by providing loans to countries experiencing currency problems.

°Support for Multilateral Development Banks—Makes payments to multilateral development banks that fund projects to develop infrastructure in developing countries, which supports investment by multinational corporations.

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This story was published on September 5, 2001.