La politique commerciale extérieure

de l’UE
Chapter 12 de B-W: EU trade policy
et chapitre 18 de Senior Nello
 The facts

The EU is the world’s biggest trader; its dominance of trade in services

is even greater. In particular:
­  2/3 of EU27 exports are to other EU27 nations; and up to 3/4 if also
considering EFTA nations and Turkey;
­  after Europe, North America and Asia are the EU27’s main markets;
­  Africa, Latin America and the Middle East are not very important as
EU export destinations.
 Table 12.1 p 329 B-W
Les 10 partenaires les plus importants de l’UE
(2010, en mds €)
 The facts: differences among Member States
structure du commerce avec les pays hors-UE
(1995-2012)
Member States have quite different trade patterns. Source of imports:
 The facts: composition of the EU’s external trade
­  Manufactured goods account for almost 90% of EU exports;
­  on import side, 2/3 of spending on manufactured goods;
­  EU27 is a big importer of fuel (about 1/5 of total).
The facts: composition of the EU’s external trade
(2009)
 The facts: EU’s Common External Tariff (CET)
The average CET rate is about 6%, with wide variation:
 The General Agreement on Trade and Tariffs
(GATT) and World Trade Organisation (WTO)

•  The GATT came into operation in 1948 to provide

a framework for international trade negotiations
and attempts to regulate world trade.

•  The WTO replaced the GATT in 1995 and differs

from the GATT in having full institutional status
and legal personality.

•  The WTO reached 153 member countries in

2008.

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 The functions of the GATT/WTO

•  Setting out regulations governing the conduct of

international trade;
•  Making provisions for the settlements of disputes
and retaliatory actions and
•  Providing the framework for multilateral
negotiations to liberalise world trade.

It was considered that much of the future reputation

of the WTO would depend on the performance of its
new Disputes Settlement Mechanism (DSM).

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The three principles of the GATT/WTO

tariff reductions

reciprocity

non-discrimination

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 GATT/WTO Rounds

Geneva 1947 tariffs.

Annecy 1949 tariffs.

Torquay 1951 tariffs.

Geneva 1956 tariffs.

Dillon Round 1960-1962 tariffs.

Kennedy Round 1964-1967 tariffs and anti-dumping.

Tokyo Round 1973-1979 tariffs, non-tariff barriers, multilateral agreements.

Uruguay Round 1986-1994 tariffs, WTO creation, extension of GATT/WTO

disciplines to new areas.

Doha 2001-?

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 EU institutions for trade policy

The customs union was the EU’s first big step towards economic
integration. A customs union requires political coordination.

The Treaty of Rome granted supranational powers to the EU’s

institutions (i.e., ‘exclusive competence’) and the various Treaties
have granted the EU more power in the area of trade.

In the twentieth century, the EU’s power on trade policy was basically
limited to tariffs. As the range of important trade barriers broadened,
the competence of the EU extended: small steps in the Maastricht
and Nice Treaties and a big step forward with the Lisbon Treaty:
­  it extended the Common Commercial Policy to explicitly include
trade in services, foreign direct investment and some aspects of
intellectual property rights (copyrights, patents, etc.).
 EU institutions for trade policy

The European Commission has the task of negotiating trade matters

with third nations on behalf of the Member States. The Commission
also takes the lead in trade policy in the sense that it has the right of
initiative on, for example, trade agreements.

Negotiations are conducted in accordance with specific mandates

defined by the Council and the Parliament (called ‘Directives for
Negotiation’).

Decisions are taken on the basis of the ‘ordinary legislative procedure’.

The Council must adopt any agreements negotiated by the
Commission after the Parliament has given its consent.

A big change from the Lisbon Treaty is that the European Parliament is
now co-legislator with the Council on all basic EU trade legislation.
 EU trade policy: broad goals and means

For most of its life, EU external trade policy meant negotiating:

-  reciprocal tariff cuts in FTAs with other Europeans;
-  reciprocal tariff cuts with non-European nations in the GATT/WTO;
-  unilateral tariff preferences for developing nations.

This started to change with a 2006 landmark communication from the

Commission known as Global Europe: it identified ASEAN, Korea,
India and Mercosur as priority partners for new FTAs.
There was also a shift towards deeper agreements that covered issues
such as investment, public procurement, competition, IPR
enforcement and regulatory convergence issues (to be dealt with
FTAs since the WTO agenda does not include them).
 Politique commerciale - suite

Les accords de commerce de l’UE sont de type Hub and Spoke

(accords bilatéraux avec de nombreux pays).
le Hub est fait de 2 cercles concentriques: l’UE et l’AELE
(EFTA)
Spoke: accord avec preque tous les pays d’Europe et de la
méditerranée.
Accord Euro-Med, accords de stabilisation et d’association avec
les Balkans, accords de coopération et de partenariat avec les
anciennes républiques soviétiques de la CEI (CIS).
Accords préférentiels avec les anciennes colonies des membres
de l’UE: ACP. Accords asymétriques: droit de douane nuls pour
l’entrée des produits de l’ACP en UE.
Accords préférentiels unilatéraux avec presque tous les PVD
 EU trade policy: existing agreements
The EU’s external trade policy is extremely complex; in the European
Mediterranean area:
 The Mediterranean Region

The Euro-Mediterranean Partnership or Barcelona Process

since 1995. Revived in 2008 as the Union for the
Mediterranean.

This provides a framework for co-operation between the EU

members, and 16 Mediterranean countries, and is
composed of regional and bilateral relations.
Euro-Mediterranean Agreements have been signed with
individual countries.

The European Neighbourhood and Partnership Instrument

provides financial support.

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 Difficulties with the Euro-Mediterranean
Partnership
The main weakness of the Euro-Mediterranean Partnership is
that the aspiration of creating an area of peace, prosperity and
progress around the Mediterranean is constantly threatened
by the ongoing unsettled international situation.
This came to the fore in early 2011 with disturbances in various
countries such as Egypt, Tunisia and Libya and a massive
surge in immigrants trying to reach the EU.
The EU response was slow and badly co-ordinated and the
newly created External Action Service was not much in
evidence.
In 2011, there were calls from some circles to set up an
equivalent of the Marshall Fund to foster stability in the
Mediterranean area.
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 EU trade policy with former colonies

Colonial ties almost always involved important trade relations. To avoid

imposing the CET on imports from former colonies, EEC6 signed
agreements with many of them: asymmetric deals where EU tariffs
were set to zero but the poor nations did not remove theirs.

These agreements have been renegotiated various times and in 2000

the EU and the ACP nations agreed to modernize the deal (also
because it was inconsistent with the WTO as it distinguished
among developing nations on the basis of colonial ties).

With the Cotonou Agreement, ACP nations commit to eventually

removing their tariffs against EU exports by negotiating bilateral
Economic Partnership Agreements (EPAs). Interim agreements
have been signed with many of the ACP nations but only one final
agreements has been implemented (with Caribbean countries).
 EU trade policy with poor nations: GSP

Poor countries receive preferential treatment in the GATT/WTO:

‘Generalized System of tariff Preferences’ (GSP).

The EU was the first to implement a GSP scheme, in 1971, and it now
grants GSP preferences to almost every developing nation in the
world:
-  general GSP for all developing nations at the EU’s discretion;
-  super GSP, which involves extra ‘generous’ EU unilateral
preferences for nations that the EU wishes to encourage for some
reason or another:
•  ‘Everything but Arms’ (EBA) for least developed nations, which grants
(on paper) zero-tariff access all goods, except arms and munitions.
 The Generalised System of
Preferences

In 1971, the Community established a

Generalised System of Preferences (GSP)
that entails the elimination or reduction of
tariffs on a non-reciprocal basis and is now
applied to 176 developing countries.

The GSP is applied in the framework of 10-year

programmes, and the current cycle covers the
2006-2015 period.

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 GSP arrangements for the 2006-2015
period
General arrangements;
The special incentive arrangement for sustainable
development and good governance (the ‘GSP
+’) provides additional benefits for countries
implementing certain international standards in
human and labour rights, environmental
protection, the fight against drugs and good
governance;
Special arrangements for the least developed
countries (LDCs), also known as ‘everything but
arms’ (EBA).
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 EU trade policy: non-regional FTAs

In recent years, a number of non-European nations have sought out

FTAs with the EU. The EU is almost always open to FTAs (as long
as they exclude agriculture).

The EU has signed a number of these deals (as of late 2011):

-  Mexico, Chile, Mercosur (Brazil, Argentina, Uruguay and Paraguay),
the Gulf Cooperation Council (Bahrain, Kuwait, Oman, Qatar, Saudi
Arabia and United Arab Emirates), India, the ASEAN nations
(Indonesia, Malaysia, Philippines, Thailand, Singapore, Vietnam,
Cambodia, Burma/Myanmar and Laos) and South Africa;
-  negotiations for an FTA between the EU and Colombia, Peru and
Ecuador have started.
Table 12.3 B-W les accords de libre-échange
entre l’UE et le reste du monde, 2010.
 EU foreign aid and external assistance

The EU and its member states provided about 56

per cent of all Overseas Development
Assistance (ODA) given to developing
countries in 2009.

EU development policy is centred on the 79

ACP, or African, Caribbean and Pacific
countries, many of which are former colonies
of EU member states.

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 Relations with the Russian Federation

Energy and mineral fuels’ products account for

over three quarters of Russian exports to the EU.
The EU dependence on Russian energy conditions
its attitude, and what has emerged since the
early 1990s is a growing gap between what
appears on paper as an extensive institutional
framework for co-operation and tensions in
practice between Russia on the one hand and
the EU and various of its member states on the
other.
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 The Russian Federation

The legal basis for EU relations with Russia is the Partnership

and Co-operation Agreement (PCA) that was signed in 1994
and came into operation in 1997.
In 2008, negotiations of a new agreement began. It should cover
political dialogue, trade, investment and energy, economic co-
operation, research, education and culture and co-operation to
combat illegal activities, drug trafficking, money laundering and
organized crime.
Since 1991, the EU has provided technical assistance to Russia
through the Technical Assistance for the Commonwealth of
Independent States Programme (TACIS). Some projects will
continue until 2013, but they are now carried out with co-
financing by Russia.
In 2002, a package of measures was agreed for Kalingrad.

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 EU Relations with Asia

ASEM was set up in 1996 to encourage dialogue and co-operation.

Action Plans have been drawn up to facilitate trade and investment.

The Trans Eurasia Information Network encourages research and

education.
There are also meetings on a regular basis of civil society and of the
private and public sectors in the Asia-Europe Business Forum and
of civil society in the Asia-Europe People’s forum.
The Asia-Europe Foundation was set up in 1997 to promote cultural
and intellectual meetings between the two regions.

Recently more emphasis on political issues.

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 EU relations with China

Trade between the EU and China has been growing rapidly

and China is the second trading partner of the EU.
The EU has a large trade deficit with China and there are
problems of market access to China, the value of the
currency and anti-dumping measures.
The EU supported China’s WTO membership (achieved in
2001) and is now concerned to ensure implementation of
China’s WTO commitments.
In 2006, the EU adopted a Partnership and Competition
Strategy, and in 2007 negotiations of a comprehensive
Partnership and Co-operation Agreement were launched.

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 EU relations with Japan

•  In the past, EU relations with Japan tended to be dominated by

trade disputes, and despite improvements the EU continues to
complain of difficulties in market access. In recent years, the EU
deficit with Japan has become smaller.
•  The 1991 Political Declaration set out common principles and
shared objectives in the political, economic, co-operation and
cultural areas and established a consultation framework.
•  In 2001, an Action Plan aimed at moving EU-Japanese relations
from consultation to joint action for the period to 2011. It
involved promotion of peace and security, strengthening
economic links and trade, coping with global and societal
change and bringing together people and cultures.

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 EU relations with India

The importance of India as a trade partner for the EU has

been increasing rapidly.
Indian tariff and non-tariff barriers (such as quantitative
restrictions, import licenses, testing and certification and
lengthy customs procedures) remain a problem.
European Union–India relations date from the 1960s and
the current Co-operation Agreement was introduced in
1994.
In 2004, it was agreed to launch a Strategic Partnership
between the EU and India.

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 EU-Latin American Relations

EU relations with Latin America are carried out

simultaneously at regional, sub-regional and bilateral
levels.

The EU is concerned that Latin American countries

maintain a balance in their links with major partners and
in particular between the EU and the USA.

The EU also has relations with individual countries such as

Mexico and Chile.

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 The evolution of EU development
Policy
•  1958: The European Development Fund (EDF) was established.

•  1963 and 1969: Yaoundé I and Yaoundé II.

•  1975, 1980, 1985 and 1990: The four Lomé Conventions.

•  (tariff preferences; preferences for agricultural products; financial
aid; and Stabex arrangements (subsequently also Sysmin for mining
sectors), which are funds to stabilise export earnings).

•  2000 Cotonou Agreement: intended to cover a 20-year period and

uses an approach based on politics, trade and development to
tackle poverty.

•  The Cotonou Agreement had to be replaced by WTO-compatible

EPAs (Economic Partnership Agreements) from 2008.

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 Economic Partnership Agreements (EPAs)

Agreements between the EU and groups of neighbouring ACP

countries.
The objective is to strengthen regional economic integration
within different ACP regions and build free trade areas
between the parties.
Due to come into operation from 2008, but in practice drawing up
such agreements proved slow and difficult. Only the
Caribbean area met the 2008 deadline. Some interim
agreements were signed and many developing countries
signed individually or as smaller groups of country than
envisaged.
Controversy about possible trade diversion; the fact that these
agreements were forced on developing countries and claims
that the EPAs were mainly to the benefit of EU exporters.

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 Les conflits commerciaux
Les mesures anti-dumping et anti-subventions
•  OMC: abaissement des barrières douanières irréversible. Seul
échappatoire= mesures anti-dumping.
•  Dumping= vendre en dessous du prix de revient (du coût) ou du prix
« normal ».
•  L’OMC autorise des mesures anti-dumping (droit de douane) si le dumping
menace une industrie.
•  L’UE et les USA ont souvent recours à ces mesures, dans le secteur de la
métallurgie, de l’électronique et de la chimie.
•  La Commission européenne est en charge d’examiner les plaintes pour
dumping. Si dumping avéré, elle peut autoriser la mise en place de tarifs
douaniers temporaires. Le conseil des ministres européen doit confirmer la
décision de la Commission avant que les tarifs ne deviennent définitifs.
 Anti-dumping - suite

•  Parfois, la Commission évite d’imposer un droit de douane en

négociant des « price undertakings » avec le pays exportateur:
promesse par ce dernier de relever ses prix en échange de la
suspension de la mesure anti-dumping.
•  Pour le consommateur, en terme de bien-être, c’est pire qu’un
droit de douane car il n’y a même pas de recettes fiscales.
•  Mais c’est politiquement plus facile, car cela revient à « acheter »
le pays exportateur de manière à ce qu’elle ne porte pas plainte
contre la politique protectionniste de l’UE.
•  Les tarifs anti-dumping sont favorable à au secteur menacé, mais
défavorable aux consommateurs européens en général et aux
activités qui utilisent les produits concernés comme input. Donc
intérêts opposés. Cela limite les procédures anti-dumping
imposées par la Commission.
•  On observe tout de même que les secteurs les plus influents
politiquement obtiennent le plus de mesures de protection anti-
dumping.
 Some EU-US trade disputes

the EU banana regime;

the UN ban on imports of beef from the US and Canada

containing growth-promoting hormones;

the US use of foreign sales corporations to reduce the taxes

of US firms exporting abroad;

the EU failure to authorise additional genetically modified

organisms and

preferential loans to Airbus and Boeing.

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 Possible explanations for EU-US
trade disputes (1)
the interdependence and the growing level of international
trade and FDI between the EU and US;
the increased willingness to refer conflicts to a multilateral
forum;
the changed international environment after 1989;
a possible decline in the hegemonic stability of the US in the
trade context;
the role of domestic pressures and interest groups;
 Trade Disputes between the EU and
the US
In recent years trade relations between the EU and US have at times been
tense, degenerating into surprisingly acrimonious disputes over issues as
varied as bananas, beef, trade legislation and subsidies to aircraft.
At the same time there have been various initiatives to construct an
institutional framework for transatlantic co-operation.
 The Beef Hormone Dispute
In February 1998 the WTO ruled against the ten-year EU ban on imports of beef
containing growth-promoting hormones from the US and Canada, maintaining that
there was not sufficient scientific evidence to support the ban.
The Community was given 15 months (until 13 May 1999) to comply with the WTO
ruling.
The EU set up 17 independent studies into the possible health risks of the six
hormones in question, and argued that keeping the ban in place during the interim
was justified on the basis of the precautionary principle.
This principle allows for preventative measures when an activity raises threats or
scares even if a direct cause-effect relationship has not been scientifically proved.
The US maintained that, while it had no objection to the EU carrying out research, in
the meantime the ban should be lifted.
On the basis of the studies reviewed in the EU by the Scientific Committee on
Veterinary Matters Relating to Public Health (SCVPH), one of the 6 hormones, 17
beta-oestradiol, was considered to cause cancer even in trace amounts. The US
and Canada maintained that there was nothing new in the studies, and that the
hormones are safe in small quantities.
 The Beef Hormone Dispute
Both the US and Canada asked the WTO permission to retaliate if the ban were not
lifted.
The National Cattlemens’ Beef Association of the US estimated its annual losses as a
result of the ban as about $250 million.
The US prepared a provisional list of retaliatory measures with tariffs or import quotas
to apply on products worth some $900 million per year, but subsequently the claim
was reduced to some $202 million.
The Canadian Government prepared a list of goods worth CND$75 million (then US
$48 million) on which to apply 100 per cent tariffs.
In July 1999 a WTO arbitration panel ruled in favour of sanctions, but at the
substantially lower level of US$117 million for the US and CDN$11.3 million (then
US$8.4 million) for Canada.
The Community informed the WTO that it was in favour of the parties settling their
differences through direct compensation paid directly by the EU to beef producers
in the US and Canada. It was argued that compensation was preferable because
it directly benefits beef farmers affected by the ban, while sanctions restrict trade
and hit exporters and importers who, in many cases, have no direct link to the
sector in question.
 The Beef Hormone Dispute
The US Government has made it known that market access with an adequate
labelling scheme would be an acceptable solution. However, the proposed label,
‘made with artificial growth hormones’, was not considered acceptable, and a
suggested alternative was ‘made in USA’.
In October 2003 a new EU hormones Directive entered into force, providing for a
permanent ban on 17 beta-oestradiol (for which carcinogenic and genotoxic
effects were said to have been demonstrated) and a provisional ban on the other
five hormones. The provisional prohibition will apply while the EU is continuing to
seek more complete scientific evidence about the hormones. The EU considered
the new 2003 legislation to be based on a full scientific risk assessment carried
out over the 1999-2002 period. The Community notified the WTO that it had
implemented the WTO ruling of 1998, and maintained that there was no longer
any legal basis for retaliatory measures by the USA and Canada so requested
immediate lifting of sanctions.
However, both the USA and Canada disagreed, arguing that the new measure lacked
any scientific basis and stating that they would keep their sanctions.
 The Beef Hormone Dispute
The Community maintained that this disagreement over compliance should be settled
in the multilateral WTO framework, and launched a WTO dispute against the USA
and Canada over the sanctions. The Community challenged the unilateral
decision of the USA that the new EU legislation was in violation of WTO
obligations.
A WTO panel report was presented in December 2007and found fault with the
method of implementing sanctions, but argued that there was a lack of adequate
scientific risk assessment for the EU import ban on hormone-treated beef. Both
the USA and Canada on the one hand and the Community on the other filed
appeals.
A WTO panel report was circulated in 2008, and found fault with the method of
implementing sanctions, but argued that there was a lack of adequate scientific
risk assessment for the EC import ban on hormone-treated beef. The United
States and Canada on one hand, and the Community on the other, filed appeals
citing procedural errors and disagreements with the panel findings.

In 2008, the WTO Appellate Body issued a mixed ruling allowing the United States
and Canada to continue with sanctions, but permitting the EC to continue its ban.
The Appellate Body maintained that the EC ban was not incompatible with WTO
rules so reversed the 2008 panel decision.
 The Beef Hormone Dispute
The Bush administration of the United States announced that it would apply carousel
legislation with a rotation of sanctions, but this was postponed on several
occasions. The EC claimed that such a measure would constitute an escalation of
the dispute.

In May 2009, the United States and EU signed a Memorandum of Understanding

containing a provisional solution that could finally end this long-standing dispute.
This entailed a further opening of EU markets to beef from animals not treated
with certain growth-promoting hormones, and a reduction in sanctions applied by
the United States on certain EU products. The agreement is to be phased in
gradually over several years.

In October 2010, a United States Court of Appeal issued a decision in a case

regarding duties paid by EU importers as a result of the dispute, which could
render them eligible for refunds.
 Genetically Modified Organisms
(GMOs)
Large commercial cultivation of genetically modified crops began in 1996 with about
1.7 million hectares at a global level rising to 102.0 in 2006. In 2006 90 per cent of
all genetically modified crops were cultivated in four countries: 55 per cent in the
US, 19 per cent in Argentina, 10 per cent in Brazil and 6 per cent in Canada. In
2006 there was also a substantial level of GMO cultivation in India, China,
Paraguay, South Africa, Uruguay and South Africa.
The cultivation of GMOs in the EU is relatively limited, but increasing. In 2007
genetically modified maize was grown on a total of nearly 110,000 hectares in
Spain, France, Portugal, the Czech Republic and Germany. In the EU genetically
modified crops are primarily grown for small-scale field trials.
In the EU GMOs can only be placed on the market after an assessment on a case-
by-case basis aimed at ensuring their safety for the environment, human health
and animal health. In 1999 the EU Council formalised a moratorium on GMO
approval, and recommended that the EU should adopt the precautionary principle
with regard to further approval of GMOs. Certain member states also banned
some of the GMOs the EU had previously approved. In 2001 a new GMO
Directive (2001/18/EC) was agreed lifting the moratorium on GMO production and
marketing, but establishing strict monitoring of GM products after their initial
release on the market. This entails mandatory labelling of GMOs and provisions to
extend traceability and liability throughout the food chain.
 Genetically Modified Organisms
The time taken for a GMO authorisation to be completed in the EU is on average two
and a half years compared with 15 months in the USA. By 2006, according to the
European Commission, more than 30 GMOs or derived food and feed products
had been approved for marketing by the EU.
In 1999 following the EU moratorium, the US Government estimated that the loss to
its producers from EU policy was in the order of $200 million a year just for lost
corn sales. In 2003 the USA, supported by Argentina and Canada launched a
WTO case against the EU over GMOs. The USA maintained that the suspension
of authorisations of GMOs by the EU ran counter to several WTO agreements
(including GATT, the Sanitary and Phytosanitary (SPS) Agreement and the
Agreement on Technical Barriers to Trade (TBT). The USA also complained about
restrictions by individual EU member states, and on a number of specific products.
In 2006 the WTO panel report concluded that:
● the EU had applied a general de facto moratorium on the approval of GMOs
between 1999 and 2003 in violation of the SPS Agreement;
● that nine national safeguard measures (introduced by Austria, Greece, France,
Germany, Italy and Luxembourg) were not based on adequate risk assessment so
were incompatible with the SPS Agreement;
● product-specific restrictions were not found to be in violation of the SPS
Agreement.
 Genetically Modified Organisms
The time taken for a GMO authorisation to be completed in the EU is on average two
and a half years compared with 15 months in the USA. By 2006, according to the
European Commission, more than 30 GMOs or derived food and feed products
had been approved for marketing by the EU.
In 1999 following the EU moratorium, the US Government estimated that the loss to
its producers from EU policy was in the order of $200 million a year just for lost
corn sales. In 2003 the USA, supported by Argentina and Canada launched a
WTO case against the EU over GMOs. The USA maintained that the suspension
of authorisations of GMOs by the EU ran counter to several WTO agreements
(including GATT, the Sanitary and Phytosanitary (SPS) Agreement and the
Agreement on Technical Barriers to Trade (TBT). The USA also complained about
restrictions by individual EU member states, and on a number of specific products.
In 2006 the WTO panel report concluded that:
● the EU had applied a general de facto moratorium on the approval of GMOs
between 1999 and 2003 in violation of the SPS Agreement;
● that nine national safeguard measures (introduced by Austria, Greece, France,
Germany, Italy and Luxembourg) were not based on adequate risk assessment so
were incompatible with the SPS Agreement;
● product-specific restrictions were not found to be in violation of the SPS
Agreement.
 Genetically Modified Organisms
The EU indicated that it would comply with the recommendations and rulings of the
panel, but required a reasonable period of time (RPT) to do so.
In January 2008 the USA made a retaliation request following the expiration of the
reasonable period of time.
In February 2008 the EU objected to the US request for sanctions. The issue is going
through the compliance procedures set out by the DSU (Understanding on Rules
and Procedures Governing the Settlement of Disputes) of the WTO.
The EU reached agreement with Argentina in 2009 and with Canada in 2010 over
GMOs. However, United States trade and agricultural officials continue to criticize
the EU for its biotech approval process.
 Foreign Sales Corporations
In 1971 the US Congress enacted the Domestic International Sales Corporation
(DISC) Act whereby US firms could shelter part of their foreign income from tax.
In 1976 the GATT ruled against the DISC system as acting like a prohibited export
subsidy, and in 1981 proposed a formula for settling the dispute.
In 1984 the US replaced the DISC system with the Foreign Sales Corporation (FSC)
Act. This permitted any US company whose exports had at least 50 per cent US
content to set up a Foreign Sales Corporation, or shell company established in a
tax haven such as Barbados or Guam. Companies with FSCs included Ford, GE,
Monsanto, Boeing, Proctor and Gamble and Microsoft. It is estimated that some
3000-7000 companies had FSCs. The FSC was generally run by a ‘letterbox’
company for as little as $2000 a year.
In theory the US company sold its exports to the FSC, which then exported them. In
practice no physical transaction took place as the FSC simply subcontracted
handling of the exports back to the parent company. Part of the FSC’s income
(often as much as 65 per cent) was exempt from tax, while tax on the remainder
was paid in the tax haven. In this way the parent company could reduce its tax bill
by as much as 15-30 per cent.
 Foreign Sales Corporations
In 1998 the WTO panel ruled that the FSCs acted as an export subsidy and violated
GATT obligations.
The US maintained that FSCs help to offset the advantage of EU firms, which are
generally exempt from VAT on their exports. In 2000 the US Congress enacted
the Extraterritorial Income Exclusion Act to replace the FSC system, and this
allowed US exporters to exclude a portion of their receipts related to foreign trade
from their gross income for tax purposes. Again in 2002 the WTO ruled against
the reformed system, and entitled the EU to impose retaliatory measures worth $4
billion by increasing the customs duties on selected products by up to 100 per
cent.
The EU waited for two years to allow the USA time to repeal the legislation, but from
March 2004 gradually began to apply countermeasures. These consisted of an
additional customs duty of 5 per cent on selected products, followed by monthly
increases of 1 per cent up to a ceiling of 17 per cent. The value of these
countermeasures was in the order of $200-$300 million, so well below the $4
billion permitted by the WTO. The sanctions were to remain in force until the US
came into compliance with the WTO ruling.
 Foreign Sales Corporations
In 2004 the USA agreed the American Jobs Creation Act aimed at phasing out the
Extraterritorial Income scheme from 2005 and replacing it with new corporate tax
breaks.
This contains special provisions to continue the tax concession on binding contracts
that entered into operation before September 2003 under a two-year transitional
clause, and in some cases on a permanent basis through the so-called
grandfathering clause in order to favour producers of goods such as aircraft and
heavy goods, which have long delivery times.
The EU suspended its sanctions in January 2005 pending a WTO decision on the
transitional and grandfathering clauses.
In 2006 the WTO ruled against these clauses.
In August 2008 the US Congress agreed a tax-cut bill, which also entailed repeal of
the corporate tax cuts (such as those to Boeing) declared illegal by the WTO.
The EU indicated that pending retaliatory trade sanctions would be suspended,
ending a long-standing trade dispute.