Sanctions Sought
Subject Trade sanctions on U.S. goods
Topic International Trade
Key Words Tariffs, Trade Restrictions, Trade Deficit, Economic Growth
News Story

The European Union has petitioned the World Trade Organization (WTO) to approve more than $4 billion in trade sanctions on U.S. goods and services. The European Union request is based upon an illegal tax break that the U.S. grants to exporters. The WTO has already sided against the U.S. in this dispute. It has agreed with the E.U. contention that the Foreign Sales Corporation, the program in question, provided illegal subsidies. The U.S. trade representative, Charlene Barshefsky stated that the U.S. would "contest the level of damages alleged by the E.U."

The Foreign Sales Corporation (FSC) was created in 1984 as a mechanism to address a ballooning trade deficit. It allowed U.S. exporters to channel overseas profits through offshore tax havens, thereby cutting their income taxes. The FSC reduced export tax bills by as much as 30 percent per year for U.S. firms. Reductions in the cost of exporting give firms a competitive advantage and thereby encourage increased exports. The EU claimed that the Foreign Sales Corporation was illegal since it only applied to exports. They challenged the program at the WTO, and in February the WTO agreed. The WTO told the U.S. to eliminate the program or face sanctions.

Hoping to avoid these sanctions and keep the U.S. out of a trade war, President Clinton signed into law legislation to replace the FSC and bring the U.S. into compliance with global trade laws. The new law offers tax relief up to $6 billion annually to companies that export or manufacture goods abroad. The new legislation does not require firms to use offshore tax havens in order to get the tax breaks. Unfortunately, the European Commission said, "The EU believes that the new law not only maintains the violations found by the WTO in the FSC case but may even aggravate them." The EU has asked the WTO to review the new legislation. No sanctions would be imposed until the WTO has ruled.

(Updated December 1, 2000)


Draw a demand and supply curve for imports. What determines the shape of the demand curve? The supply curve?

2. On this same diagram, show the consequences of providing a subsidy to exporters on the equilibrium value of imports and import prices.
3. Suppose that a tariff is now imposed upon imports of the product. What will happen to equilibrium price and quantity?
Source Paul Meller, "Europeans Seek $4 Billion in Trade Sanctions Against U.S.," The New York Times, November 18, 2000.

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