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Trade wars The European Union has threatened sanctions
if the United States doesnĂt end a federal
tax break for exporters. Thousands
of Illinois jobs are at stake.
And Congress is running
out of time by Dori Meinert
Two of Illinois’ largest exporters, Boeing Corp. and Caterpillar, would be particularly hard hit and have been lobbying Capitol Hill in the hope of influencing the final legislation. But Congress is running out of time. If it doesn’t repeal the export tax break by March 1, the European Union has threatened to begin imposing up to $4 billion in retaliatory sanctions that could severely affect Midwest farmers and manufacturers. The World Trade Organization approved the sanctions two years ago, agreeing with the European Union’s complaint that the break for U.S. exporters constitutes an unfair subsidy that violates international trade law. The U.S. response is being watched closely by the other 145 member-nations of the WTO as yet another test of that global trade body’s effectiveness and of the United States’ willingness to comply with its decisions. Good trade relationships are especially important to Illinois, the sixth-largest exporting state in the country. And one of the WTO’s main functions is to settle trade disputes between countries, helping disadvantaged trading partners achieve a level playing field. It also seeks to encourage the smooth flow of trade for the benefit of consumers, who enjoy a steady stream of products, as well as producers, who need a stable market to stay in business. If the United States doesn’t abide by the WTO ruling, it will be difficult to persuade other countries to do so, trade experts say. The United States already faced a barrage of international criticism from the collapse of the WTO summit in Cancun, Mexico, last September. Developing nations walked out of those talks, charging that rich, developed countries, including the United States and the EU, weren’t offering meaningful cuts in agricultural subsidies. Some countries have long perceived the United States as a bully in world trade. And the export tax break is just one of several contentious trade disputes between this country and the European Union. President George W. Bush’s administration averted one potentially expensive showdown with the European Union in December when it dropped tariffs on steel imports. While critics say the move gave the EU the upper hand in future negotiations, others said it was needed to bolster the WTO’s credibility. In other pending disputes, the United States has imposed sanctions on the European Union for its ban on imports of U.S. hormone-treated beef and has filed a complaint with the WTO over the European Union’s ban on genetically modified food. Yet the tussle over the tax break for U.S. exporters, known as the extra-territorial income exclusion, remains the longest-running and potentially the most costly trade battle. U.S. Trade Representative Robert Zoellick recently called the threatened EU sanctions the trade version of a nuclear bomb. The WTO’s appellate ruling in 2002 was one in a series of adverse rulings on this tax export break and similar tax schemes going back to 1976. The first ruling was issued by the WTO’s predecessor, the General Agreement on Tariffs and Trade, established in the wake of World War II. The current incentive allows U.S. exporters to exclude about 15 percent of their net export income from taxation. While many U.S. officials disagree with the WTO’s decision, lawmakers in both the House and the Senate agree the tax break must be repealed. “An orderly international trading system is crucial to the economic success of the United States,” House Ways and Means Chairman Bill Thomas, a California Republican, said after the WTO ruling. “It is in our interest that others follow the rules and, therefore, it is imperative that we follow the rules as well.” Yet there is little consensus in Congress on how best to ease the impact on U.S.-based exporters that are now benefiting to the tune of $5 billion a year, or whether to grant new tax cuts to multinational companies as Chairman Thomas has proposed. In October, the House Ways and Means Committee approved a corporate tax overhaul that would phase out the export break over three years and add $140 billion in new business tax cuts over 10 years, costing the federal government $60 billion in lost revenue. It would reduce the corporate tax rate from 35 percent to 32 percent for domestic manufacturers. It also would lower taxes for multinational firms. Thomas has said the measure is a long-overdue reform of the inter-national corporate tax system, which now results in double taxation of multinational firms, once in another country and again in the United States. But the plan is expected to face strong opposition when it is brought to the House floor. Heading into an election year, Democrats complain the measure is too costly when the country already is facing a deepening deficit. The liberal Center on Budget and Policy Priorities estimates the actual 10-year cost would be about $96 billion. Further, the Democrats are joined by 20 House Republicans led by Rep. Donald Manzullo of Egan, who argues that Thomas’ proposal would send more U.S. jobs overseas by giving tax cuts to multinational companies with extensive overseas operations. Just 11 Republican votes in opposition could doom the measure in the narrowly divided House. Manzullo, whose northern Illinois district is suffering from the loss of factory jobs, wants all of the money saved by the repeal of the export tax break to be returned to the U.S. firms that now benefit from it. “This is a very simple fix,” says Manzullo, who chairs the House Small Business Committee. “A lot of people are just piling stuff on to make it a Christmas tree. In doing so, they’re putting a lot of companies at risk by playing roulette with the EU.” Manzullo also contends that Thomas’ measure will harm overseas firms that have purchased companies in the United States and saved U.S. jobs, including several plants in his district. Supporters of Thomas’ plan contend Manzullo is attempting to block any congressional action to protect the interests of Caterpillar and Boeing. But Manzullo rejects the notion. “There are people so hell bent on putting through an international tax cut that has the unintended consequences of encouraging foreign companies to set up shop in China. ... They’re the ones who are causing this thing to be delayed,” Manzullo says. Some members of both parties fear it may be politically dangerous to support a corporate tax break when U.S. manufacturing jobs have, until recently, been declining. About 3.4 million jobs nationwide, including about 155,000 in Illinois, are directly or indirectly linked to companies that benefit from the export tax break, according to a study by PricewaterhouseCoopers. Chicago-based Boeing could be forced to cut 9,600 jobs nationwide and its suppliers may have to eliminate 23,000 jobs, company officials have said. Caterpillar, which is headquartered in Peoria, has been reluctant to give specific figures. But company officials told a congressional panel in 2002 that losing the tax break would hurt Caterpillar’s ability to create more U.S. jobs as its exports grow. Of that company’s $21 billion in sales in 2001, Caterpillar Vice President F. Lynn McPheeters told the Senate Finance Committee, more than $5 billion was attributed to exports, directly supporting 16,500 jobs and 33,000 U.S. suppliers’ jobs. Smaller Illinois companies would be affected as well. Exports make up 30 percent of the annual sales of Excel Foundry and Machine Inc. in Pekin. Excel President Doug Parsons estimates he would have to lay off 10 percent of his 100 employees if the current break is repealed without a new benefit. Thomas had trouble getting his original bill out of his own committee, revising it several times to include more benefits for domestic companies before winning the endorsement of House Speaker J. Dennis Hastert, a Yorkville Republican, and committee passage on a party-line vote. He eventually won over Rep. Philip Crane, a Wauconda Republican who initially had joined Manzullo in opposition, and Rep. Jerry Weller, a Morris Republican who has 5,000 Caterpillar workers in his district. Weller also received a tax cut for another constituent, Plano Molding Co., which makes fishing tackle boxes. The committee-approved bill would eliminate a 10 percent excise tax on such tackle boxes, a $32 million tax cut. Elsewhere around the country, arrow makers and Hollywood studios also receive tax cuts under the plan. Thomas says his bill will create jobs, noting that 60 percent of U.S. manufacturing jobs are provided by multinationals. “Our international competitiveness has not been meaningfully enhanced in over 40 years. This bill will make the U.S. more competitive in the 21st century,” Thomas argued in a statement issued after the committee approved the bill. Caterpillar officials, who refuse to discuss their position publicly, are said to be lobbying Congress to extend the three-year phase-out of the tax break proposed in the House and Senate bills. However, European Union Commissioner Pascal Lamy has said even three years is too long. “We have exercised considerable patience and understanding for the U.S. position as you have sought to come into compliance. But it has taken a long time. ... I hope you will understand that we cannot accept an additional three years,” Lamy wrote to Manzullo in October. House and Senate GOP leaders have said repealing the export tax break is a priority. But even if the full House and Senate can approve their respective measures by March 1, the House-Senate conference negotiations on two dramatically different bills are expected to be difficult and protracted. Senate Finance Committee Chairman Charles Grassley, an Iowa Republican, and others are insisting that any new corporate tax cuts be offset by increases in revenues in other areas. If they stand firm, House negotiators would have to give up many of the House bill’s new corporate tax cuts. The Senate bill includes several “revenue raisers,” including increases in Customs user fees and new limits on tax shelters to offset a tax rate cut for corporations. “There is going to be a battle royal within the conference and between different sectors of the business community. And that is an environment that is not a happy one, at least for Republican leadership and even for some Democrats,” says former House Ways and Means Committee Chairman Bill Archer, who now works as a senior policy adviser in the Washington, D.C., office of PricewaterhouseCoopers. Heightening the stakes for many companies is that this is expected to be the last chance for corporate tax relief for several years because of the worsening deficit. Meanwhile, the European Union plans to begin phasing in retaliatory provisions in March. It plans to impose a 5 percent tariff on imports, increasing that tariff one percentage point a month up to a maximum of 17 percent. The tariffs would hit a range of U.S. exports, from farm products to toys and jewelry, all targeted to gain the most political leverage. “Regardless of the substance [of the WTO decision], if the U.S. does not conform, it will be seen as U.S. unilateralism,” says Gary Clyde Hufbauer, a senior fellow with the Institute for International Economics. “From
a U.S. commercial standpoint, we really want countries to voluntarily
respect WTO rules. You only want to have to bring a small number
of cases. You don’t want [the world trade body] to become a
dead letter, which is always the danger with an international agreement,”
he says. “You can have all sorts of fine-sounding principles,
but if they’re not respected and observed, then it becomes
a hollow thing. That could certainly happen to the WTO if major
players don’t abide by its decisions.”
Dori Meinert covers Congress for Copley News Service. Illinois Issues, February 2004 For information about how to subcribe to Illinois Issues go to: Go to Illinois Issues blog at http://illinoisissuesblog.blogspot.com/
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