UK nerves over US retaliation

Britain wants Brussels to tread carefully in its latest dispute with Washington over illegal tax breaks since it stands to lose the most in any Trans-Atlantic trade tussle.

CBI – an organisation representing British industry – stressed that the €290 million sanctions imposed by the EU on a range of US products was “extremely bad news for UK business”, fearing retaliation as well as a weakening of US-UK trade relationship, worth €76bn annually.

“There wasn’t much business support for this case being brought in the first place,” said a CBI spokesman, “and the UK is always going to come off worse due to our particularly strong relationship with the US.”

“The phenomenon of tax and trade being put together is a worrying one,” he added referring to the illegal tax breaks – known as Foreign Sales Corporations – at the heart of the dispute.

Brussels had given Washington until March 1 to repeal the FSC legislation, but with the Congress and Senate dragging their feet in election year Brussels claimed it was “left with no other choice” than to impose the sanctions.

UK trade minister Mike O’Brien is reportedly putting pressure on Brussels to suspend the sanctions as soon as the US shows signs of pushing the necessary legislative changes through to repeal the FSCs.

"I hope the European Union won't be unnecessarily pedantic if there is legislation that's going through at a reasonable rate," O’Brien told The Independent.

UNICE – an umbrella group representing European business – asked Brussels last month to consider softening their stance over imposing sanctions amid fears of a backlash from US companies.

The Federation of German Industry also stressed that there is “a certain risk that could provoke retaliation” but sought to quell fears saying it thought this was unlikely.

John Disharoon of the American Chamber of Commerce stressed that "many of the US companies that will be hit have been investing in Europe for fifty, sixty, seventy years and have been relying on parts from Europe".

"This flies in the face of open markets," he added.

Brussels has, however, taken pains to select a list of products for sanctions so as “to minimize the negative consequences that a possible retaliation could cause”, according to EU documentation.

For example, sanctions will be imposed on powdered milk, US exports of which to the EU are negligible.

“This would not have a big effect,” said an official from the European Union of Dairy Trade, stressing that the EU sanctions were more out of “principle” than practical considerations. 

Conversely, Disharoon warned that an extra five per cent duties on top of tariffs already imposed by the EU on many US goods could be enough to push producers over the edge.

"It's the consumers and businesses who get pinched in the middle of this."

The sanctions on a select list of goods start at five per cent as of March 1 and will automatically increase by one per cent each month until the US president George W. Bush has officially signed a bill repealing the tax breaks.

If the US fails to move, the sanctions could bag €300m for the EU in 2004 and a further €600m in 2005.

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