This fall's legislative calendar is tight as U.S. lawmakers will soon depart the nation's capital to campaign for re-election. Among the measures they will consider, none are more important to Americans that depend on Europe's export markets than replacing the Foreign Sales Corporation/Extraterritorial Income (FSC-ETI) tax regime with lower taxes on U.S. manufacturing.
In March, the European Union imposed a five-percent tariff on more than 1,600 U.S. manufactured goods. This tariff has increased one percentage point each month since March and could increase to 17 percent early next year. Double digit tariffs render many U.S. exports non-competitive.
These tariffs are not an illegal trade practice by the EU. In 2001, the World Trade Organization (WTO) ruled that the U.S.'s FSC-ETI plan, intended to promote U.S. exports, was an illegal export subsidy. The EU gave the U.S. until March, 2004 to repeal FSI-ETI or face the escalating tariffs. The U.S. can end the tariffs any time by repealing FSC-ETI.
FSC-ETI was one in a series of measures dating back to the 1960s designed to level the playing field with countries that employ “border tax adjustments” (BTA). These BTAs remove value added taxes from the price of export products before they are shipped abroad. Such measures save European exporters as much as $100 billion per year in tax payments on export sales, according to the Institute for International Economics.
BTAs can be precisely calculated in a value added tax system because the tax is imposed on the products themselves. In a country like the U.S., which relies on direct taxes—such as corporate income taxes—BTAs cannot be determined.
This leads to a fundamental clash of direct and indirect tax systems, and has been a major topic of discussion for the past three decades among the U.S. and its European trade partners. In the 1970s, Europeans challenged the first U.S. export-related tax law, alleging that provisions violated the General Agreement on Tariffs and Trade. The dispute went unresolved until Congress passed FSC in 1984.
The EU convinced a WTO panel to strike down FSC in the late 1990s. In 2000, Congress replaced FSC with the Extraterritorial Income Exclusion Act, which legislators thought would comply with the WTO ruling. The EU challenged ETI, and a WTO panel declared ETI a prohibited export subsidy. The panel authorized more than $4 billion worth of sanctions against U.S. products—unless ETI was repealed.
Escalating tariffs are authorized sanctions and are an additional tax on products U.S. companies are attempting to sell in Europe. When tariffs are added, these U.S. products are no longer price-competitive. The problem is further exacerbated by the fact that the EU has applied the tariffs to products that can be easily replaced by domestic sources or other countries. Once U.S. companies lose market share, there's no guarantee they'll ever get it back.
Industries such as forest products, machine tool manufacturers, agriculture, apparel and footwear, and jewelry manufacturers are being hurt by EU's retaliatory tariffs. These are the same industries hard hit by the recent recession. They need every order possible to participate in the ongoing economic recovery.
This spring, both the U.S. Senate and House of Representatives overwhelmingly passed bi-partisan bills to repeal FSC-ETI. Each bill replaces current ETI provisions with lower taxes on U.S. manufacturers, each uses different methods. Both treat wood and paper manufacturing, as well as timber, favorably. Replacing ETI with lower taxes is important because the U.S. has higher effective income tax rates than its European competitors. These bills must be reconciled and approved, then sent to President Bush for signature. Unfortunately, the reconciliation process has been mired in Congressional infighting and election-year politics unrelated to FSC-ETI. Passing this legislation is vital because it would eliminate tariffs and make the U.S. tax code more competitive for manufacturers.
Time is running out. Congress will adjourn soon to campaign for their jobs. If they fail to take action before they depart, it may be too late for American jobs that rely on exports to Europe. FSC-ETI must be repealed. So long as the tariffs remain in place, U.S. companies will lose orders for exports to Europe. Losing business to marketplace competition is painful. Giving it away through Congressional inaction is far worse. A solution is already in place. All that's needed is for Congress to act.
