The European Union (EU) is laying the groundwork for a legal challenge against U.S. plans to impose a border tax, in what could be the biggest case in the World Trade Organization’s history.
Jyrki Katainen (pictured), the European Commission vice-president overseeing EU trade policy, told the Financial Times that the EU wants to avoid a trade war which has the potential to be “disastrous” for the world economy.
But he added: “If somebody is behaving against our interests or against international rules in trade then we have our own mechanisms to react. We have all the legal arrangements within EU, but we are also part of global arrangements like the WTO and we want to respect the global rule base when it comes to trade.”
The warning comes as Republicans in the U.S. Congress are working to convince President Donald J. Trump to back a new “border adjustment” system. If passed, it would see imports to the U.S. subject to tax and export revenues exempted, and would constitute the biggest shake-up of the global corporate tax system in nearly a century, tax experts have said.
European exporters could face an up to 20 per cent increase in import tariffs should the new system go ahead.
America’s trading partners, including the EU, are arguing that the proposals run contrary to WTO rules as they say it amounts to an unlawful subsidy on domestic goods. But the plan’s backers say it is necessary to encourage more investment within the U.S.; a key plank of Trump’s election campaign.
One of the president’s first acts following his inauguration in mid-January was to pull his country out of the Trans-Pacific Partnership. As he signed the executive action formalising the move, he told journalists in the Oval Office it was a “great thing for the American worker, what we just did”.
Trade experts have warned that a defeat in a border tax case could make the U.S. vulnerable to about $385 billion (£309 billion) a year in trade retaliation – a figure close to 100 times greater than the largest WTO finding to date.
But key advisers to the Trump administration have lauded the scheme for addressing what they claim is the WTO’s unfair treatment of business taxes. They are railing against WTO rules which allow countries with Value Added Tax (VAT) based tax systems to offer rebates on exports while preventing income-based systems such as the U.S.’s from doing the same.
“The unequal treatment of the US income tax system under biased WTO rules is a grossly unfair subsidy to foreigners exporting to the US and a backdoor tariff on American exports to the world that kills American jobs and drives American factories offshore,” Peter Navarro, the head of Mr. Trump’s National Trade Council, said in a recent interview with the FT.
Mr. Trump has yet to publicly endorse the idea which is being championed by Paul Ryan, the Speaker of the House of Representatives, and Kevin Brady, chairman of the ways and means committee.