Oct. 28, 2004--The European Union indicated this week that it would rescind trade tariffs that have been hurting U.S. exporters since March.

E.U. trade commissioner Pascal Lamy said Monday that he would recommend that retaliatory tariffs aimed at U.S. exporters be phased out after President Bush last week signed a bill designed to eliminate tax loopholes deemed illegal by the World Trade Organization. Earlier this month the Senate and the House both approved the American Jobs Creation Act of 2004, a $140 billion corporate tax-cut bill aimed at defusing the ongoing trade dispute with the E.U.

The new law is set to take effect in the U.S. in January 2005, but certain provisions could allow vestiges of the old code to remain in effect for an additional two years. The E.U., concerned about the possibility that this issue could linger beyond the new year, did not set specific dates for rolling back the tariffs and left open the possibility that they could be reinstated if the U.S. did not quickly implement its new code.

The dispute centered on specific U.S. tax provisions involving foreign sales corporations and extraterritorial income, which created tax breaks for U.S. exporters. In March, the World Trade Organization judged that the provision constituted an illegal export subsidy for American businesses, thereby allowing the E.U. to impose import duties of up to 100% on a host of U.S. goods under WTO rules. The E.U. decided to retaliate with tariffs that started at 5% and increased at a rate of one percentage point per month, reaching 12% in October, significantly raising costs for American companies selling to Europe, the largest market abroad for American products.

The inclusive new legislation, which represented a compromise between the two houses of Congress, eliminated the disputed tax breaks that had run afoul of WTO regulators. To counterbalance the elimination of the export tax break and other loopholes, the wide-ranging bill introduced numerous new tax breaks, including a reduction in the tax rate for domestic manufacturers from 35 to 32%.