What do you get when you continually change and manipulate tax codes? A big mess! Now, throw convoluted subsidies into the mix and you also end up with a lot of unintended consequences.

Thousands Could Lose Jobs

Today, that’s the situation in both the United States and European Union (EU). And as a result, thousands of U.S. workers stand to lose their jobs at a time when the U.S. economic recovery appears shaky.

What’s happening now is tied to actions of the past. For decades, EU industries, such as aerospace and telecommunications, have been subsidized to boost their international strength or to shield them from global competition. Additionally, the EU has exempted and continues to exempt its exporters from paying a substantial value added tax.

FSC and ETI

To counter these unfair actions, in 1984, the United States crafted the Foreign Sales Corporation (FSC) tax code so exporters could compete fairly in global markets. This proved beneficial, as evidenced by a National Foreign Trade Council report that said 3.5 million U.S. export-related jobs benefited from FSC tax incentives in 1999. Unfortunately, the EU challenged the FSC rule through the World Trade Organization, and won in 2000.

In an attempt to satisfy the global trade body, the U.S. repealed the law and in its place created the Extraterritorial Income Exclusion (ETI) Act of 2000. However, the new law still didn’t satisfy the EU, who again challenged the law, and won.

Consequently, the EU is now authorized to impose sanctions of more than $4 billion annually on U.S. exports, which include steel, beef, sugar, wood and paper products, cotton, apparel, cosmetics, and electrical machinery.

Although Europe’s tax loopholes and subsidies distort trade by artificially increasing the attractiveness of its goods and services on world markets, its indirect tax system is technically WTO-compliant. WTO language doesn’t cover indirect taxes, only direct taxes like those used in the U.S.

Small Companies Are Impacted Most

So, what can the U.S. do? If Congress terminates ETI without establishing a suitable replacement, approximately 6,000 U.S. exporters who rely on ETI to compete will be hurt. And the majority of these firms are small.

Hutchinson Technology, Inc., headquartered in Minnesota, exports 90 percent of its computer disk drive components. If ETI is repealed, President and CEO Wayne Fortun, says “The company could be forced to move production operations to the Far East, resulting in the loss of 3,000 of our 3,400 employees.”

Power Curbers, Inc., a manufacturer of concrete paving equipment, employs 130 workers at its North Carolina, Iowa and Tennessee facilities. Company President and CEO, Dwight Messinger, says “Without ETI, our exports would decrease, especially to Europe. This could result in layoffs of 5 to 10 percent of our workforce.”

Small companies, many of which are struggling just to survive the economic downturn, aren’t the only ones that stand to lose. Boeing alone estimates that repealing ETI will result in the loss of nearly 10,000 of its high-tech jobs, as well as 23,000 more jobs with its suppliers.

Airbus, Boeing’s heavily subsidized European rival, has received more than $30 billion in EU financial support. This gives Airbus an unfair advantage, and affects the entire U.S. aerospace industry that employs nearly 800,000 highly-skilled workers.

The Mess Needs To Be Cleaned Up

There is no doubt that multiple layers of loopholes and convoluted subsidies artificially create winners and losers in international trade. That’s why this mess needs to be cleaned up. The U.S. response to the ETI challenge is currently being debated in Congress. And one thing remains certain: U.S. exporters need a mechanism that counters their EU rivals’ government handouts. Small and medium-size companies, which account for about 96 percent of all U.S. exporters, and large companies, as well as farmers, all need a level playing field.

Exports Are Key to Our Economy

Exports support more than 12 million higher-paying U.S. jobs, strengthen companies and farms, and improve the tax base, while sending important revenue to local communities. Plus, one in three acres of U.S. agricultural production is exported. In short, exports are a key piece of our economy.

Congress certainly has a difficult job ahead. In order to prevent the European Union from implementing $4 billion worth of trade sanctions against U.S. exports, our Congressional Representatives must act quickly. But they must do so in a way that unshackles our exporters from a system of unfair competition, does not force them out of business or offshore, and protects U.S. jobs.

This article appeared in Trade Works, Winter 2003.
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John Manzella
About The Author John Manzella [Full Bio]
John Manzella is a world-recognized author and speaker on global business, emerging risks, and the latest economic trends. He's also founder of both the ManzellaReport.com and Manzella Trade Communications, Inc. His latest book is Global America: Understanding Global and Economic Trends and How To Ensure Competitiveness.




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