Congress Must Act Now to Stop Trade War, Says MJSA

Manufacturing Jewelers and Suppliers of America (MJSA) is urging Congress to quickly repeal tax breaks for U.S. companies that have been deemed illegal subsidies by the World Trade Organization (WTO). The European Union (EU) has said it will impose stiff sanctions on U.S. jewelry if such subsidies are not eliminated.

According to MJSA president and chief executive officer James F. Marquart, the sanctions—which went into effect March 1—will cause serious competitive disadvantages to the U.S. jewelry industry and cost it "hundreds of millions of dollars." MJSA officials issued their plea at a March 1 press conference held during the MJSA Expo New York.

The EU's retaliatory tariffs cover several U.S. industries (including toys, textiles, and paper), but jewelry would be the hardest hit. Though jewelry represents only 2.1% of all U.S. exports to Europe, it's targeted with 30% of the tariffs and could pay up to $1.43 billion of the annual $4 billion the EU can ultimately impose, estimates the CNN news service.

EU Trade Commissioner Pascal Lamy is phasing in the sanctions gradually. They start at 5% (on top of any current import duties), and unless and until Congress acts, they'll increase 1% a month until they reach 13%.

The sanctions are intended to spur Congress to replace the disputed tax breaks with measures in line with WTO rules, a Lamy spokesman told CNN. "The name of the game is not 'retaliation,' it is 'compliance,' " she said. "The day the new measures are passed by Congress, we will stop the sanctions."

This is the first time the EU has imposed retaliatory tariffs on the United States. It caps an ongoing dispute between the two over tax breaks that U.S. companies doing business abroad get from the government.

At issue are the U.S. "Foreign Sales Corporations" (FSC) and "Extraterritorial Income" (ETI) programs. The FSC program, which let the U.S. government provide tax relief to U.S. companies to offset foreign taxation, was challenged by the EU a few years ago as a violation of WTO rules against illegal subsidies. The WTO agreed in 1999. In 2000, Congress passed the ETI program to do the same thing without violating WTO rules. The EU challenged that, too. The WTO agreed this also was an illegal subsidy and authorized the EU to impose up to $4 billion annually in trade sanctions on the United States until the programs are repealed. The EU gave the Untied States until the end of 2003 to act.

Some Washington officials downplayed the situation, saying this wasn't the start of a trade war but part of an ongoing process. The weak dollar might also lessen the impact of the sanctions.

However, the Bush administration has pushed Congress to change the questionable provisions. In a February letter to Congress, Treasury Secretary John Snow, Commerce Secretary Don Evans, and U.S. Trade Representative Robert Zoellick warned that the retaliatory tariffs on U.S. exports "pose a threat to ... growth and may retard the creation of jobs in certain sectors of the economy."

The Senate was expected to begin debate this month on a bill to repeal the subsidies, but quick action in the Houses of Representatives was "less certain" reported CNN. Election-year campaigning may help, suggested some industry and government sources: With the spotlight this year on the loss (or "outsourcing") of American jobs to other countries, Congress and the administration may want to avoid measures that could hurt U.S. businesses and promote even more job losses.

MJSA faxed its 16,000 members in mid-February with an "Urgent Alert" asking members to contact their representatives in Congress to urge repeal of the programs.

For more information, contact MJSA at (800) 444-6572, ext. 3022.