EU Sanctions Would Hurt U.S. Businesses

Posted September 3, 2003 at 9:01am

The United States has long provided export-related benefits under its tax laws. For most of the past two decades, these benefits were provided under the Foreign Sales Corporation regime. In 2000, the European Union succeeded in having the FSC regime declared a prohibited export subsidy by the World Trade Organization.

In response to this ruling, the United States repealed the FSC rules and enacted the Extraterritorial Income regime. On Jan. 14, 2002, a WTO appellate body held that the ETI regime constituted a prohibited export subsidy under the relevant trade agreements. Further, a WTO arbitration panel determined in August 2002 that the EU was entitled to more than $4 billion of annual countermeasures against the United States for failure to repeal its ETI rules.

The EU has not yet imposed trade sanctions against U.S. exports, but it has released its final list of U.S. products it is targeting. The list includes steel, beef, sugar, wood and paper products, cotton, apparel, cosmetics and electrical machinery. If these announced sanctions are put in place, it will devastate U.S. businesses and consumers.

FSC/ETI benefits companies manufacturing and producing goods in the United States, and it supports more than 1 million direct jobs and nearly 2.5 million indirect jobs at home. However, the WTO rulings and the threat of potential trade sanctions require an immediate Congressional response. There is a strong consensus that this should include repeal of FSC/ETI. There is a dispute, however, over how best to replace it.

Since the repeal of FSC/ETI will result in a tax increase of more than $50 billion on our nation’s manufacturing base, including not only large companies but also many small and medium-sized manufacturers, it is crucial that any legislative solution return this money to the U.S. manufacturing sector. This is particularly important since that sector is currently hemorrhaging jobs. Any legislative solution must take into account that were FSC/ETI to be repealed without a suitable replacement, many U.S. businesses would have very little reason to maintain facilities, and therefore jobs, here.

Merely repealing FSC/ETI without returning the revenues to companies producing goods in the United States will result in an artificial transfer of U.S. manufacturing jobs to Europe. This is unacceptable, especially since we have lost more than 2.5 million U.S. manufacturing jobs in the past two years. Therefore, any solution must include significant transition relief to account for the needs of current FSC/ETI beneficiaries, and any permanent solution must be structured in such a manner as to support U.S. jobs.

H.R. 1769, Crane-Rangel-Manzullo-Levin Bill

In April of this year, I, along with my good friends Reps. Charlie Rangel (D-N.Y.), Don Manzullo (R-Ill.) and Sander Levin (D-Mich.), introduced legislation, H.R. 1769, the Job Protection Act of 2003. This legislation repeals the current FSC/ETI provisions and returns the corresponding $51 billion in new revenue to companies that produce goods here. All manufacturing companies that pay corporate taxes are eligible to receive a permanent new deduction for manufacturing activities in the United States. The legislation is nearly revenue neutral, costing the government only $126 million over 10 years. The new deduction is not export-related and is therefore consistent with our trade agreements.

To date, 137 Members of Congress, including more than 70 Republicans and seven committee chairmen, have co-sponsored Crane-Rangel-Manzullo-Levin, which does three things:

• Repeals FSC/ETI, effective immediately.

• Provides transition relief for current FSC/ETI beneficiaries.

• Provides a permanent new deduction for manufacturing activities in the United States, which reduces the effective corporate tax rate for U.S. manufacturers. For companies with 100 percent domestic production, the effective rate reduction would be 3 1/2 points (meaning the 35 percent corporate tax rate would effectively be reduced to 31 1/2 percent). Other companies would receive a sliding-scale effective rate reduction based on the value of their U.S. production of eligible products compared to the value of their worldwide production.

The lower effective rate provided for domestic production and manufacturing income in H.R. 1769 is in no way export-contingent, and is therefore WTO-compliant. Taxpayers are eligible to receive the lower effective rate regardless of whether they export a single product.

Some have asserted that the transition relief in H.R. 1769 is not WTO-compliant. These opponents support an alternative approach that would use some of the revenue from repeal of FSC/ETI to lower taxes on the offshore operations of U.S. firms, rather than for U.S.-based manufacturing. Interestingly enough, the approach they support also provides transition relief to current FSC/ETI beneficiaries. And unlike H.R. 1769, the transition relief they champion is based upon export performance. The general transition relief in our bill, although based upon prior benefits, does not continue the FSC/ETI program. It is therefore difficult to oppose H.R. 1769 on this basis.

While I expect that various details regarding the structure of H.R. 1769 will need to be worked out throughout the legislative process, Congress must be steadfast in its commitment to returning all $51 billion raised to the government upon repeal of FSC/ETI to the manufacturing sector of our economy. H.R. 1769 is the only legislation introduced to date that does that.

Looking Forward

We have had similar challenges to our export-related tax benefits in the past. We have always responded in a bipartisan, bicameral manner. Such a response is appropriate because this type of challenge is not a partisan issue. It is a legal dispute between our country and our foreign competitors. In that dispute we all represent the same client, the United States.

In addition to the strong bipartisan support H.R. 1769 has received in the House, 44 Senators — 23 Republicans and 21 Democrats — recently sent a letter to Senate Finance Committee Chairman Chuck Grassley (R-Iowa) and ranking member Max Baucus (D-Mont.) urging that a legislative response to the WTO protect U.S. manufacturers. Our approach does not divert FSC/ETI revenues, which help manufacturers stay competitive in global markets, to other sectors of the economy.

The Crane-Rangel-Manzullo-Levin bill is about protecting and creating jobs and allowing U.S. manufacturers to remain competitive in the global marketplace. H.R. 1769 will preserve, not threaten, American jobs. Surely, that is a goal we should all support.

Rep. Phil Crane (R-Ill.) is chairman of the Ways and Means subcommittee on trade.