FSC's - Explain briefly the history of the dispute and what is it about.

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FSC’s

Explain briefly the history if the dispute and what is it about.

The disagreement is in tax relief provided by the US to its major exporting companies. It is between EU and US, and has existed since the 60’s. In 1971, with a growing trade deficit, the US formed the Domestic International Sales Corporation (DISC); a partial tax deferral for the earnings of American companies, exporting outside the US. DISC was declared an illegal export subsidy in 1976 by GATT. As a result, the US set up the Foreign Sales Corporation (FSC) in 1984. FSC’s are shell companies in offshore tax havens through which US companies channel foreign income to avoid tax. (Economist 2000).

The dispute has arisen again in 1999 when, Sir Leon Brittan former EU commissioner, challenged the FSC, stating that it violated the Code on Subsidies & Countervailing Measures (SCM) agreed at the Uruguay Round. The WTO body did not rule the EC claim that FSC’s violate SCM. However the WTO panel in Oct 1999, did decide FSC is an illegal export subsidy because revenue is forgone and exports are taxed more favourably than production abroad. () The US was then given until  1st November 2000 to withdraw the FSC scheme.

As a result on 15th November 2000, in an effort to comply with the WTO demands, President Clinton, signed the FSC replacement; the Extraterritorial Income Exclusion Act (ETI). However the ETI did not meet the demands of the WTO who in Jan 2002, deemed this also as an illegal export subsidy. ().  The ETI act seemed like a desperate attempt to show progress had been made as it was signed in the midst of the presidential elections.

A Diagram showing how the

FSC legislation helps the US

Companies to export

(See Appendix A)

A diagram showing the effect of EU sanctions on US Goods.

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(See Appendix B)

Are there any other reasons why the US gives these Breaks

In 1981 GATT gave the US the backing of FSC’s which the US claims make the subsidy legal.

Exports have been a major contributor to the US’ exceptional economic growth since 1990. From 1992-1997 the US economy grew from $7200bn to $8100bn with exports accounting for a third of the growth. Dole (2000).

FSC’s encourage exports, ...

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