The United States always has been a leading proponent of free trade. However, many now believe this leadership position is at stake—especially since U.S. willingness to accept World Trade organization (WTO) rulings is questioned.

For example, both WTO and NAFTA committees have ruled that Canadian lumber subsidization evidence is insufficient. Nevertheless, the U.S. continues to impose tariffs on Canadian softwood lumber exports to the U.S. This dispute has been unresolved since 1982.

Everybody’s Doing It

The U.S. is not alone in terms of non-compliance with international trade rulings. And, if the number of global trade disputes is any indication of unfair play, the U.S., European Union (EU) and several other countries share company.

Since 1995, the year the WTO was established, the international body has accepted about 30 trade dispute cases annually. As of April 6, 2005, the U.S. alone has been charged with 86 trade disputes; the EU or member states have been charged with 54, according to the Washington, D.C.-based Progressive Policy Institute.

Convoluted Tax Codes and Subsidies

In today’s competitive world, national tax laws and subsidies have become extremely complex, resulting in numerous unintended consequences—including multiple trade disputes. For example, for decades, EU industries, such as aerospace and telecommunications, have been subsidized. This has boosted their international strength or shielded them from global competition. In addition, the EU has exempted its exporters from paying a value added tax, which, in effect, has reduced their tax burden.

Although Europe’s tax loopholes and subsidies distort trade by artificially increasing the attractiveness of its exports, its indirect tax system is technically WTO-compliant.

To counter this, the U.S. crafted the Foreign Sales Corporation (FSC) tax code in 1984. This was designed to help U.S. exporters compete more fairly with EU companies, as well as others around the world. Many U.S. companies claimed it was a success. In fact, a National Foreign Trade Council report stated that 3.5 million U.S. export-related jobs benefited from FSC tax incentives in 1999.

However, the EU challenged the FSC rule through the WTO, and won in 2000. To appease the EU and global trade body, the U.S. repealed the law. In its place, the U.S. Congress created the Extraterritorial Income Exclusion (ETI) Act of 2000. But this law still didn’t satisfy the EU. Consequently, the EU challenged it through the WTO, and won.

A Creative Solution

To remedy the situation, on October 22, 2004, President Bush signed legislation repealing ETI. The bill also reduced corporate tax rates for domestic manufacturers and simplified tax rules on overseas profits.

Without this, it was argued that approximately 6,000 U.S. exporters, who relied on ETI to compete, would have been hurt. Boeing estimated that repealing ETI without a suitable replacement would result in the loss of nearly 10,000 of its high-tech jobs, as well as 23,000 more jobs with its suppliers.

Why? In 2002, Boeing’s heavily subsidized European rival, Airbus, was estimated to have received more than $30 billion in EU financial support. Boeing claimed this gave the EU conglomerate an unfair advantage. Furthermore, analysts believed this affected the entire U.S. aerospace industry that employed nearly 800,000 highly-skilled workers in 2002.

Nevertheless, the Boeing-Airbus fight continues to rage for over a decade without a solution in sight.

Impact on U.S. Exporters

Should the number of trade disputes continue to climb resulting in retaliation, American exporters stand to suffer losses. Retaliatory actions, which typically come in the form of increased tariffs, raise the cost of American products in foreign markets. Often leading to decreased sales for U.S. companies, this can translate in fewer jobs for American workers. As a result, it is in the interests of the U.S., the EU, and others to swiftly remedy disputes and focus on more profitable long-term trade relations.

This article appeared in Impact Analysis, May-June 2005. Stephanie Frank contributed to this article.
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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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