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Europe and the U.S. must find a way to resolve the dispute over Foreign Sales Corporations, says Stuart Eizenstat

One of the great success stories of the last 50 years has been the relationship between the U.S. and Europe. Our growing bilateral economic relationship is one of the engines of global economic growth; our growing institutional links have helped us to work together to address global political and economic crises around the world. With $350bn in two-way trade and $1,100bn in two-way investment, we have much at stake.

Yet despite our close ties, trade disputes remain the thorn in the side of the U.S.-European Union relationship. Disagreements over beef hormones, bananas and hush kits on aircraft have raised tensions on both sides of the Atlantic. And, recently, the European Commission's decision to continue to contest U.S. efforts to revise its tax legislation to comply with the World Trade Organisation's Appellate Body has clouded further the U.S.-EU relationship.

The Foreign Sales Corporation tax regime was developed in the 1980's in response to a General Agreement on Tariffs and Trade decision. It stood without objection for some 15 years. Nonetheless, the EU successfully challenged it in the WTO, which determined that the regime constitutes an illegal export subsidy.

Notwithstanding our strong disagreement, the U.S. has worked hard to respond to the WTO Appellate Body by developing bipartisan legislation that completely repeals the FSC and creates a new regime that neither entails a subsidy nor is export contingent.

As a result, we believe it complies with WTO rules. The Appellate Body acknowledged that members are at liberty to tax, or not to tax, revenue as they wish. Our proposed legislation excludes from taxation qualified foreign sales income; such an exclusion is not a subsidy.

Significantly, the proposed legislation represents the first time that the U.S. has changed a statute to comply with a WTO ruling. It is the product of an extraordinary bipartisan effort whereby both houses of Congress and the U.S. administration worked together to draft legislation that enables the country to meet its international obligation to comply with the WTO decision.

We regret that the European Commission has not accepted our proposal or even agreed to sit down and work with us to resolve this issue. While it is clear that the U.S. and the Commission have very different readings of the panel and Appellate Body decisions in this dispute, we continue to believe that negotiation rather than confrontation is the better way forward.

This dispute cuts to the very heart of the domestic policy choices made by governments. Its nature and potential scale make it essential that we resolve such a complex issue with patience and diligence before it becomes a central focus of our relationship.

Because of the high stakes involved in the FSC dispute, it is critical that we continue working together to resolve our differences in a creative and consultative manner. Passage of the new U.S. legislation by the October 1 deadline set by the WTO is the only way to meet our obligations in the WTO and avoid immediate confrontation with the EU.

As we move into the future, these sorts of disputes make it clear that we need to be more creative in how we solve the complex and difficult issues that we will encounter with our partners across the Atlantic. First, we need to be careful not to bring disputes to the WTO that might be better resolved by other means. For example, tax matters such as FSC may be suitably handled in the Organisation for Economic Co-operation and Development, which already has launched a useful effort to deal with harmful tax competition issues.

Second, we should use the U.S.-EU Summit process more effectively to resolve trade disputes that cross into other policy areas. We have already used such mechanisms to mitigate EU concerns over unilateral U.S.-EU sanctions and to try to diffuse tension regarding trade in genetically modified organisms. Moreover, we recently reached the Safe Harbor agreement at the July U.S.-EU Summit over privacy standards that safeguard consumer data.

Third, we need to involve our partners in the private sector to a greater degree in efforts to resolve trade issues. We can build consensus among American and European business leaders through the Transatlantic Business Dialogue, which brings together governments and their private sectors to reduce obstacles to trade. We should also make increased use of other groups such as the Transatlantic Environment, Consumer and Labor Dialogues.

More broadly, it is important that we do not lose sight of the overall economic and political relationship that is so important to both sides, but rather to find innovative solutions to our trade disputes. We must nurture and strengthen our overwhelmingly healthy and co-operative relationship that has provided such enormous benefits to our economies and to American and European businesses.