The real processes of WTO dispute settlement don’t follow the simple-minded, trade-war scripts of the news headlines. The EU’s offer to cool the level of its threats over the dispute on income-tax subsidies to US corporations is a more accurate reflection of how the system works. Last year, the WTO Dispute Settlement body “authorized(link to WTO press release)”:http://www.wto.org/english/news_e/news03_e/dsb_7may03_e.htm the EU to take temporary compensation measures affecting a record $4bn of imports from the USA to offset the subsidies due to the US Foreign Sales Corporation legislation, found to be inconsistent with WTO provisions in October 1999. Of course, raising the costs of imports by introducing a tax on your own users and consumers is a completely insane way to obtain ‘compensation’ for some foreign breach of the WTO rules, so the EU did not proceed with the authorized tariff increases immediately. It demanded, nevertheless the ‘immediate’ cessation of the US payments. The US promised that it would make another attempt to fix its legislation. Now Brussels has softened its line again. bq. Brussels trade officials said they would accept a transition period allowing the US to phase out the so-called Foreign Sales Corporations provision — which grants tax breaks to exporters such as Microsoft and Boeing.(“Financial Times”:http://news.ft.com/servlet/ContentServer?pagename=FT.com/StoryFT/FullStory&c=StoryFT&cid=1075982534043&p=1012571727179) The price of this concession, says the Commission, is that the Congress take the first steps toward revising the legislation in the next few weeks. The EU looks to be the result of a calculation that the Congress is more likely to respond to soft words in an election year and an indication that the contentious legislation could be postponed until after the US election, as long as the first steps toward change are booked now. Dispute settlement is something that the major economies want to make work, because the prospect of an actual—as opposed to a threatened—trade war is very unwelcome to any of them. The economic and foreign policy costs are far too high.
Peter Gallagher is student of piano and photography. He was formerly a senior trade official of the Australian government. For some years after leaving government, he consulted to international organizations, governments and business groups on trade and public policy.
He teaches graduate classes at the University of Adelaide on trade research methods and the role of firms in trade and growth and tweets trade (and other) stuff from @pwgallagher