It’s no secret that both the United States and European Union (EU) manipulate their tax structures to achieve specific results. In most cases, these practices don’t adversely affect bilateral trade relations. However, the growing crisis over the United States’ Extraterritorial Income Exclusion (ETI) Act of 2000 could change this, and cause big problems for both transatlantic trade and thousands of U.S. exporters.

Actions of the Past Are Haunting Us Today

The problems today are the result of a multitude of actions taken in the past. For example, the EU has exempted and continues to exempt its exporters from paying a substantial value added tax. Plus, for decades EU industries, such as aerospace and telecommunications, have been subsidized to boost their international strength or to shield them from global competition.

To counter these actions, in 1984, the United States created the Foreign Sales Corporation (FSC) tax code so exporters could compete fairly in global markets. This proved advantageous, as evidenced by a National Foreign Trade Council report that said 3.5 million U.S. export-related jobs benefited from FSC tax incentives in 1999. Unfortunately, the EU challenged the FSC rule through the World Trade Organization, and won in 2000. In an attempt to satisfy the global trade body, the U.S. repealed the law and in its place created the Extraterritorial Income Exclusion (ETI) Act of 2000. However, the new law still didn’t satisfy the EU, who again challenged the law, and won.

Consequently, the EU is authorized to impose sanctions of more than $4 billion annually on U.S. exports, which include steel, beef, sugar, wood and paper products, cotton, apparel, cosmetics, and electrical machinery.

Eliminating ETI Will Hurt Exporters

Europe’s tax loopholes and subsidies distort trade by falsely increasing the attractiveness of its goods and services on world markets. However, its indirect tax system is technically WTO-compliant, since WTO language doesn’t cover indirect taxes, only direct taxes like those used in the U.S. As a result, Congress needs to act. If it terminates ETI without establishing a suitable replacement, approximately 6,000 U.S. exporters who rely on ETI to compete will be hurt. And the majority of these firms, which are small, are already struggling just to survive the economic downturn. But small companies aren’t the only ones that stand to lose.

Aerospace giant Boeing estimates that repealing ETI will result in the loss of nearly 10,000 of its high-tech jobs, as well as 23,000 more jobs with its suppliers. Boeing’s heavily subsidized European rival, Airbus, has received more than $30 billion in EU financial support. This gives Airbus an unfair advantage, and affects the entire U.S. aerospace industry.

Pay Attention to the Congressional Response

The U.S. response to the ETI challenge, which is currently being debated in Congress, will affect many companies, industries and jobs. Most policymakers understand this and recognize that U.S. exporters need a level playing field. Consequently, it’s important that they craft new legislation that doesn’t hurt U.S. exporters. But Congress must act soon. If not, the EU may implement $4 billion worth of trade sanctions against U.S. exports.

Exporters who currently rely on ETI to boost exports need to reassess how their sales abroad could be impacted if ETI is eliminated, or if a substitute doesn’t offset the artificial advantages many EU exporters have.

This article appeared in October 2002. (CB)

John Manzella
About The Author John Manzella [Full Bio]
John Manzella, founder of the Manzella Report, is a world-recognized speaker, author of several books, and an international columnist on global business, trade policy, labor, and the latest economic trends. His valuable insight, analysis and strategic direction have been vital to many of the world's largest corporations, associations and universities preparing for the business, economic and political challenges ahead.

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