Trade sanctions could cost US aerospace companies hundreds of millions of dollars, and may trigger a US-EU (European Union) trade war, after the World Trade Organisation (WTO) confirmed that a tax break legal under US law qualifies as an illegal export subsidy under world-trade rules.

Foreign sales corporations (FSCs), normally shell companies based in Barbados or the US Virgin Islands, allow US companies to keep up to 30% of export earnings out of reach of the US tax authorities. Boeing is the largest US exporter, and, according to its last annual report, saved $235 million in taxes from FSCs in 2000.

The US law permitting them was revised in late 2000 after protests from the EU, but the revision failed to satisfy the European Commission (EC), which lodged another complaint with the WTO. This was upheld in September, and on 14 January the WTO rejected a US appeal, opening the way for $4billion in sanctions against US companies, the highest penalty in WTO history.

The US Government now has 60 days to comply, and must either remove the loophole, which would cost US companies "more than $4 billion" in increased taxes, according to the US National Association of Manufacturers, or face sanctions, in the form of quotas, higher tariffs or outright bans.

The WTO will determine the amount on 27 March, which will probably be lower than the $4 billion the EC claims FSCs have cost European business. The EC says it could give the USA a year to adjust its laws, with EU exports gaining improved access to US markets.

The situation is complicated by another transatlantic trade dispute, over proposed US protective tariffs on foreign steel. And with US/EU aviation negotiations on Open Skies proposals on the horizon, a WTO dispute and possible trade war would come at a bad time.

Source: Flight International