WIRE:10/31/2000 20:26:00 ET UPDATE 1-U.S. misses deadline in tax dispute with EU WASHINGTON, Oct 31 (Reuters) - The United States on Tuesday missed a key deadline in an export tax dispute with the European Union, giving Brussels a green light to begin taking steps to block billions of dollars of U.S. goods. But with White House and Republicans leaders in Congress locked in an end-of-the-year budget battle, an EU official in Brussels said Washington would be given a little more time to change its Foreign Sales Corporation (FSC) programme to keep trade retaliation from going into effect by early February.

As part of an agreement approved by the World Trade Organisation (WTO), the United States had been given until Nov. 1 to repeal the FSC programme, which doles out tax breaks to U.S. exporters through offshore subsidiaries. But Senate Majority Leader Trent Lott, Mississippi Republican, said on Tuesday the Senate would not vote on legislation containing the FSC programme repeal until later this week, effectively preventing the U.S. government from meeting the EU deadline. The missed deadline technically allows the EU to seek permission to impose sanctions on billions of dollars worth of U.S. goods, a move that U.S. officials have warned could spark an all-out trade war between the world"s biggest trading powers. However, an EU official in Brussels said the United States would have a few days leeway if the deadline was missed. "If the Americans are able to do so (enact reform legislation) in the next couple of days, the spirit of our agreement will be valid," he said. The WTO ruled in February that the FSC was an illegal export subsidy, handing the EU a major trade policy victory. The WTO initially gave the United States until Oct. 1 to repeal the system, but later agreed to extend the deadline to Nov. 1 to give lawmakers more time to complete their work. In response, Republicans wrapped the FSC bill into the party"s end-of-the-year tax package, which won House of Representatives approval last week. Under the legislation, the United States would exclude certain categories of foreign-source income from U.S. taxation.

Unlike the FSC, companies would receive the benefits directly, rather than through offshore tax havens. Despite the looming deadline, Clinton has threatened to veto the entire package, citing concerns about other tax provisions. To avert a confrontation with the EU, White House officials have urged Republicans to move the FSC bill on its own or as part of a smaller package. That could still happen, but the timing is unclear. With many lawmakers eager to hit the campaign trail, Congress may have to come back after the election to finish its work. Lott said he may try to strip out the FSC section of the tax bill and try to pass it separately. Lott said he and Senate Democratic Leader Tom Daschle of South Dakota were committed to passing the trade portion of the tax bill this year. An EU request for trade retaliation in the case is expected to run into billions of dollars. However, the United States is expected to contest whatever figure the EU requests, triggering an arbitration process that would delay a WTO decision on the matter until early February. The EU must notify the WTO dispute settlement body 10 days in advance to ask for the right to impose retaliation or seek compensation from the United States. The dispute settlement body next meets on Nov. 27, making the deadline for the EU to ask retaliation Nov. 17.

http://abcnews.go.com/wire/World/reuters20001031_3617.html

-- Martin Thompson (mthom1927@aol.com), November 02, 2000