[Congressional Record (Bound Edition), Volume 146 (2000), Part 2]
[Senate]
[Pages 1490-1491]
[From the U.S. Government Publishing Office, www.gpo.gov]



                        DECISION IN THE FSC CASE

  Mr. GRASSLEY. Mr. President, as chairman of the International Trade 
Subcommittee, I rise to express extreme disappointment about a very 
adverse decision to the United States handed down in Geneva today by 
the World Trade Organization appellate body in the Foreign Sales 
Corporation case, sometimes called the FSC case.
  I suppose I should not be standing here on the floor crying about the 
United States losing a case before the World Trade Organization because 
we win most of these cases. The reason I am so disappointed in this one 
is that I think there is a fundamental misunderstanding of the purpose 
of our Foreign Sales Corporation tax law. From that standpoint, when we 
rely so much on income taxes and the European Community relies so much 
on value-added taxes, this sales corporation tax law is to equalize the 
playing field between Europe and the United States on a lot of key 
manufactured products.
  The appellate body decision essentially means the Foreign Sales 
Corporation rules in our Tax Code violate the WTO rules. As I 
indicated, the appellate body fundamentally misunderstood the nature 
and the intent of the Foreign Sales Corporation plan. The FSC plan was 
designed to address the competitive disadvantage faced by United States 
businesses that compete with foreign firms in European countries that 
have value-added tax regimes. When products from countries with a 
value-added tax regime are exported, they typically get rebates. 
However, in the United States, because we rely upon the corporate 
income tax and not on a value-added tax, our exporting firms don't 
enjoy this type of tax benefit. This obviously makes our exports less 
competitive in world markets. The FSC rules were designed, then, to 
create a level playing field with these European tax systems.
  The appellate body decision is a very serious development because it 
comes at a time when the World Trade Organization itself is under 
attack. In my view, these attacks are unwarranted and unjustified, but 
politically we have to deal with them. It will probably be the case, in 
one or the other body of this Congress, that we will even be voting 
this year on the issue of whether or not the United States ought to 
stay as a member of the World Trade Organization. I think they should, 
but this case could impact that decision.
  Of course, we must not allow this setback to undermine either the 
World Trade Organization or our support for this vital institution. I 
will do everything I can to make sure this does not happen. In the 
meantime, I strongly urge President Clinton to attempt to negotiate a 
settlement with the European Union that modifies or overturns this 
appellate body's decision. This should be President Clinton's No. 1 
priority at the G-8 summit in Okinawa later this year.
  I also call upon the European Union not to take any retaliatory 
action against the United States until we, through our President, have 
the opportunity to personally discuss this case in Okinawa at the 
summit there.
  We must make sure we observe the rule of law in this case and in 
every case involving international trade disputes. We expect no less 
from our trading partners, and we must do the same. And since we win 
the vast majority of these cases, we find ourselves not in a bad 
position by taking this moral stand.
  But I hope when we address this case, we bear in mind that while the 
outcome of the case itself is very important, there is something else 
at stake; that is, the integrity of our international trading system. 
We must remember that the WTO benefits every farmer and every business 
that sells its goods and services in foreign markets. If we did not 
have a WTO and, more importantly, the discipline in the rule of law in 
international trade that goes with it, we would have only the rule of 
the jungle. Those who would suffer the most would be the small 
exporters.
  In the United States, two-thirds of all businesses that export have 
20 or fewer employees. It is, then, the WTO that prevents these small 
firms from being dominated by their larger competitors in the 
international marketplace.
  Let's make sure we get an appropriate and fair resolution of this 
case, and let's make sure we maintain our strong support for the World 
Trade Organization.
  Mr. ROTH. Mr. President, I am extremely disappointed by the WTO 
appellate body's decision on the FSC. The panelists completely ignored 
economic reality. The FSC is not an export subsidy. It is a remedy for 
the competitive disadvantage our firms face in the marketplace due to 
the tax practices of other WTO members, particularly the members of the 
European Union.
  That said, the real problem here is not the appellate body's 
decision, but the underlying WTO rules. That, and the perverse decision 
by the European Commission, over the objection of many of its own firms 
and member countries, to reopen this trade dispute 20 years after we 
had reached a satisfactory settlement of these issues.
  Other WTO members, particularly in the European Union, employ a 
territorial-based tax system that does not tax foreign source income, 
including income from exports. That system affords a competitive 
advantage to firms operating in those jurisdictions that the U.S. tax 
system, based on worldwide reporting of income, does not. The WTO rules 
currently permit the use of territorial based tax systems, despite the 
competitive benefits they confer on products exported from those 
countries. That is what the FSC and the DISC before it were designed to 
offset.
  I want to be absolutely clear about my view on this. While I fully 
expect we will live up to our obligations, no resolution of this issue 
can leave our firms, our farmers, and the American worker at a 
permanent competitive disadvantage in the marketplace.
  Indeed, I thought we had put this issue to rest with our European 
counterparts 20 years ago. But, they saw fit to abrogate the agreement 
we had reached to resolve our prior dispute over the trade effects of 
their tax system and our attempts to redress those effects. That 
agreement included the understanding that, in the future, we would take 
our differences over tax policy to fora that were specifically designed 
for that purpose, and not the GATT or the WTO.
  The reason for that understanding was simple. The GATT and the WTO 
are essentially agreements to reduce trade barriers and avoid other 
discriminatory trade practices. Nothing in those rules was intended to 
force a member country to choose between competing tax systems. Yet, 
that is the net effect of the current ruling.
  The Europeans' action raises a far broader point about the conduct of 
their trade policy. The decision to abrogate our 20-year-old agreement 
and bring the FSC case, by all accounts, was not made at the behest of 
the EU member countries. Nor was it made at the insistence of EU firms 
complaining that the FSC somehow put them at a commercial disadvantage. 
That is because European firms understand that they already benefit 
from the territorial-based tax systems and the FSC was simply a way of 
providing equivalent treatment under our system of taxation. In fact, a 
number of those European-based firms have U.S. subsidiaries that take 
advantage of the FSC as well.
  The decision to bring the FSC case was made at the European 
Commission without consideration either for its political impact here 
or for its impact on the trading system. In that sense, the decision to 
bring the FSC case fits with

[[Page 1491]]

the Commission's attitude on our disputes on bananas and beef and on 
other WTO disputes. The Commission seems to have forgotten that the 
European Union member countries are, along with the United States, 
among the principal beneficiaries of the WTO system and that the 
Commission bears the responsibility to shore the system up, rather than 
engaging in tactics designed to weaken it.
  Both the Commission's decision to flout the WTO rules in the beef and 
bananas disputes and the reckless decision to bring the FSC case are 
deeply inconsistent with that responsibility. This case was brought, 
not for any European constituency, but for the Commission's own petty 
political interest in balancing its losses before the WTO with a few 
wins, regardless of the larger consequences for the trading system.
  This issue must be made a top priority in discussions at the upcoming 
G-8 summit. President Clinton must make the political point to his 
European counterparts that they, not the Commission, are responsible 
for setting the course of the European Union's trade policy and that 
this issue needs to be resolved in terms that ensure a level-playing 
field for American workers, farmers, and firms. As chairman of the 
Finance Committee, I am committed to making that happen.

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