A Grand Deal for the Trade Dispute

Relations between the U.S. and Europe could improve overnight with a little finesse and a lot of compromise on both sides. Here's how

By Paul Magnusson

Congressional Republicans are scrambling to find a way to pay for President George W. Bush's tax-cut package. Meanwhile, the U.S. and Europe are on the brink of a trade war. And diplomatic cooperation across the Atlantic, so necessary for economic revival, has been moribund since France and Germany split with the U.S. over the Iraq war.

So what do all these things mean to a corn and soybean farmer from Cedar Falls, Iowa? Plenty, if the farmer's name is Charles Grassley, U.S. Senator. The Hawkeye State Republican chairs the Senate Finance Committee, which writes tax legislation and oversees trade policy. And right now, he's at center stage in a trifecta of tax and trade disputes.

Grassley is on the hunt for business-tax loopholes that can be closed so that Congress can offset the cost of a broader corporate dividend tax cut. It was Grassley who pushed the Administration to sue the European Union on May 13 in an effort to overturn its ban on imports of genetically modified crops -- many produced by Grassley's constituents. Plus, the senator's committee faces a yearend deadline to end a $5 billion-a-year tax subsidy for U.S. exporters or get hit with severe trade retaliation from Europe.


  Grassley is staring at a plateful of challenges. But with a little finesse and plenty of compromise, he can find a way out of this tax and trade morass. The elements are in place for a grand deal that could put each of these problems to rest.

The first element: U.S. exporters need to face facts. The World Trade Organization has ruled that a 30-year-old U.S. export subsidy, known as the Foreign Sales Corporation, is illegal because profits from exports are taxed at a 15% lower rate than taxes on domestic profits. The FSC must be ended unless the U.S. is willing to pay the penalty -- $4 billion a year in higher tariffs on U.S. exports.

Europe won its case against the subsidy in the WTO back in 2000. Washington has run out its appeals. On May 7, the WTO authorized Europe to place 100% retaliatory tariffs against $4 billion-a-year worth of U.S. exports -- many of them farm goods, including corn and soybeans. Yet, some of America's biggest exporters still balk. Boeing (BA ), FSC's biggest beneficiary, saved more than $1 billion in income taxes over the past five years.


  Given nearly three years to come up with an alternative, business still can't agree on a way to comply with the ruling. That has sapped their influence on Capitol Hill and given Congress little alternative but to comply. Five years is a reasonable time to give U.S. exporters to readjust -- it's the same period the U.S. gave Europeans to phase out their illegal quota on banana imports.

So, Grassley should use the opportunity to push for a repeal of the export tax dodge. Over 10 years, that would add $60 billion or so in revenues to the Treasury -- a tidy sum that would go a long way to helping the Senate's search for the revenues needed to offset lost revenues from the President's tax cuts. And Grassley should dangle the prospect of lower business-tax rates overall as an incentive to U.S. exporters to compromise.

Europe needs to do its part as well. The EU should hold off on imposing the tariff penalty long enough to give Grassley and Congress time to revoke the FSC tax break. Like a hangman's noose, the threat of $4 billion in annual tariffs on U.S. exports should focus Congress' mind.


  Compromise always works both ways. Just as it will be difficult for U.S. politicians to end the export subsidy in the face of pressure from corporate lobbyists and employees of the beneficiaries, EU officials will find it tough to give in to U.S. demands to end the ban on new imports of genetically modified food products.

No matter that top scientists from Europe, the U.S., and the developing world agree that no evidence shows harm from GM crops. After all, people in the U.S. and Europe have been eating older varieties of genetically modified foods for years without ill effects. But the politically powerful European farm community has played on consumer fears of "Frankenfood" to win limits on such imports from rivals.

That's why EU leaders, too, must step up and take an unpopular move: In return for the U.S. resolution of the FSC dispute, Europe should back down on its objection to GM foods. The point: Strike one deal that solves all these problems at the same time.


  So far, European politicians have shown no interest in compromising. The EU denounced Washington's May 13 suit as "legally unwarranted, economically unfounded, and politically unhelpful."

The U.S. isn't alone, however. Thirteen countries, including Egypt, Argentina, and Mexico, have joined the suit to end the European ban on GM foods. Grassley, who vows to keep the Administration on the case, is incensed because American corn farmers are losing $300 million in sales a year to Europe. But poor farmers in Honduras and South Africa are also getting hit. They face a terrible choice: Give up the benefits of biotech -- higher yields, fewer pesticides, and drought resistance -- or plant inferior crops to export to Europe.

Bucking big corporate interests or grassroots pressure is never easy for any politician or policymaker. In the interests of easing trade tensions, however, both Europe and the U.S. need to take a deep breath and do the right thing. That would create winners all around -- consumers worldwide, exporters, taxpayers, and farmers -- in striking a grand deal.

With Stanley Holmes in Seattle

Magnusson covers trade issues for BusinessWeek in Washington

Edited by Douglas Harbrecht

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