Punitive customs duties on selected U.S. goods, as established by European Council Regulation 171/2005, may begin on May 16, 2006. These customs duties will be at a flat rate of 14 percent. There will not be a gradual increase of these additional duties but rather, an immediate implementation of the full rate. U.S. products in transit or in customs warehouses at the date of enforcement are potentially exempt from the duties. Generally, affected products include agricultural items, textiles, industrial products, electronic products, paper products and steel (see Annex of Regulation 171/2005).
In 2003, the World Trade Organization (WTO) authorized the European Union (EU) to impose trade sanctions when it found that U.S. Foreign Sales Corporation (FSC) tax subsidies were in violation of WTO rules. (The Extraterritorial Income Exclusion (ETI) Act of 2000, which was meant to replace the FSC, was also ruled by the WTO to be in non-compliance.)
The EU started retaliating against the U.S. in March 2004 with punitive import duties on a range of products as laid out in Council Regulation 2193/2003. These duties started at a level of 5 percent with monthly increases of 1 percent to reach a ceiling of 17 percent in March 2005. Through Regulation 171/2005, the European Commission suspended these sanctions effective January 1, 2005, after President Bush signed a bill repealing the FSC/ETI export subsidies. However, this Council Regulation preserves the right to re-enforce duties in case amended U.S. law on FSC subsidies was not in WTO compliance.
The new U.S. law then went into force on January 1, 2005, and provided for a 2-year transitional period to phase out financial assistance. The EU expressed its concerns with the so-called grandfathering clause under which U.S. exporters who entered binding contracts before September 17, 2003, could still benefit from tax breaks beyond the December 2006 deadline.
On February 13, 2006, the World Trade Organization (WTO) again backed EU complaints of U.S. federal tax subsidies for exporters in the FSC dispute. Therefore, the WTO Dispute Settlement Board adopted the Appellate Body’s report on March 14, 2006, and will reinstate sanctions approximately 60 days thereafter.