The European Union is threatening the United States with as much as $4 billion a year in tariffs to offset what it says is an unfair tax deduction the U.S. government has given to American companies doing business in Europe.
This sets the stage for a high-stakes stand off between the United States and Europe. The United States is going to have to be firm.
The World Trade Organization ruled that a U.S. law granting $4 billion annually in tax breaks to more than 6,000 American companies constituted an illegal export subsidy. General Electric Corp., Microsoft and Boeing Corp. are three of the biggest beneficiaries of the tax break.
Fairness questioned: On the face of it, the ruling seems unfair, since the U.S. tax break was designed to offset the fact that some European countries tax only domestic profits of their companies while others don't charge foreign buyers the same value- added tax that domestic buyers pay.
One option for the United States might be to specifically pursue those accusations against the European Union in a complaint to the WTO.
But for now, the United States is in a difficult position. If the WTO contention is correct -- if the tax breaks provided by the United States are a violation of trade law -- then the most honest response would be for Congress to repeal the exemption.
That would mean that several thousand U.S. companies, including some of its biggest and most influential, would end up paying about $4 billion a year more in federal income taxes. That doesn't sound like a bad idea, at a time when the federal treasury is going back into the red. On the other hand, raising taxes isn't the best fiscal policy at a time when the nation is trying to work its way out of a recession.
As we said, this puts the nation in a difficult position, and when nations are in a difficult position, they sometimes make mistakes.
What could happen: One mistake the United States could make at a time like this would be to trade away the trade sanctions it recently won against European nations for dumping steel on the U.S. market in order to lesson the impact of the WTO finding on the tax issue.
There's already been some talk of doing just that, although both U.S. and European spokesman say they're not inclined to make that deal. We're not convinced that minds couldn't be changed if some of the most powerful companies in the nation started lobbying to save themselves $4 billion a year.
Trading away the sanctions won against European steel makers would be wrong in two ways, morally and practically.
On the moral level, it would be wrong for U.S. steel companies and their thousands employees to lose their profits and jobs in order to protect tax breaks for electronic, high tech and airline companies.
On a practical level, it would be a mistake for the United States to do any more than it already has to cripple the domestic steel industry. Especially now, in a time of war, the nation must realize that it cannot afford to sacrifice the steel industry on the altar of free trade.