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Retaliatory E.U. Tariffs Squeeze U.S. Exporters

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Sept. 21, 2004--A standoff between the two houses of Congress over how to restructure corporate tax legislation is forcing U.S. companies to pay growing European Union import duties.

At issue is a U.S. tax provision involving foreign sales corporations and extraterritorial income, which results in tax breaks for U.S. companies. In March, the World Trade Organization ruled that the provision constituted an illegal export subsidy for American businesses, causing the E.U. to initiate import tariffs that started at 5% and increase at a rate of one percentage point per month for one year.

The tariffs now stand at 11%, and U.S. exporters across a range of industries are feeling the squeeze. Increasingly, U.S.-based companies that have foreign facilities are thinking about shifting their operations abroad to circumvent the tariffs, according to Darren McKinney, a spokesman for the National Association of Manufacturers. While this is an option for larger multinational companies, most small businesses are not so lucky.

"Considering that a small business is far less likely to have a foreign production facility than a larger U.S. manufacturer, that business is likely to feel the pain of these tariffs much more acutely, as will its employees," McKinney said.

Last week, a group of over four hundred American companies sent a letter to Congress and the White House, stressing the immediate need for legislation that would "bring the United States into compliance with the World Trade Organization's obligations and bring a halt to the continuing assessment of tariffs by the E.U. on many U.S. exports."

But the two chambers of Congress hold different ideas about how to amend the tax code. Efforts toward consensus have been bogged down by election-year politics, particularly surrounding the hot-button issue of tax breaks for companies that outsource U.S. jobs overseas, as well as a host of riders that have been added to bills in both houses.

The impasse on Capitol Hill is forcing American companies to shoulder the rising cost of selling to Europe, the largest market abroad for American products. Without new tax legislation, the tariffs will continue to grow through next March, when they are due to cap out at 17%.





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