Europe threatens US with record breaking sanctions

The EU today gave Washington until the end of the year to stop illegal tax breaks for exporters or face the biggest sanction bill ever in a trade dispute: up to €3.5bn.

EU trade chief Pascal Lamy said he was counting on the US administration and congressional leaders to make swift progress on the issue by autumn.

“If there is no sign that compliance is on the way at that time, the EU would then start the legislative procedure for the adoption of countermeasures by January 1 2004,” he said in Brussels.

The EU was to receive the formal go-ahead from the World Trade Organisation later today for the right to impose sanctions on US imports in retaliation for Washington’s failure to change the tax law, which the WTO ruled illegal four years ago.

Potential sanctions were expected to include a wide variety of US exports, including anything from oranges to nuclear reactors. If implemented in full, the sanctions would be the biggest ever.

Sanctions hurt US producers by making it harder for them to sell their products in Europe. But they can also backfire by pushing up prices in Europe or disrupting production if other suppliers can’t be found.

In the past, the United States has imposed sanctions against the Europeans, including over rules on banana imports and following an EU ban on hormone-treated beef. However the tax breaks dispute is many times larger and would have a much bigger effect on transatlantic trade.

Lamy said he was optimistic, though, that the Bush administration would move decisively on the issue.

“I also trust that any solution found by the US will be fully compatible with WTO rules,” he said.