May 10, 2004

May 10, 2004 | Commentary on

Trade Sanctions Pile Up While Congress Fiddles

If private companies worked the way Congress does, we'd probably never be able to compete in the global marketplace. Efficiency, productivity, responsiveness to changing conditions -- all seem lacking under the Capitol Dome.

Consider how long it's taking lawmakers to fix a costly problem with our tax laws.

Several years ago, the World Trade Organization ruled that certain tax breaks given by the federal government for export subsidiaries of American companies (know as "Foreign Sales Corporations," or FSCs) were illegal. That decision gave European nations the power to impose tariffs against many popular American exports, including paper, cotton and a variety of agricultural products.

Congress tried to fix the problem by passing the Extraterritorial Income Exclusion Act (ETI). The EU sued again -- and won another victory at the WTO.

More than four years later, nothing has changed. The federal government is still giving "illegal" tax breaks to American companies. So on March 1, the European Union began imposing tariffs of 5 percent on our exports. It plans to increase them by one percentage point per month up to 17 percent. The WTO has authorized sanctions that could increase the cost of American exports by up to $4 billion a year, creating a tremendous competitive disadvantage for U.S. producers.

Now, we can argue about whether the WTO should impose sanctions. It's running a big risk, since sanctions might trigger a trade war between Europe and the United States. After all, we need more free trade, not less. If sanctions put that at risk, everybody gets hurt.

Still, the United States voluntarily agreed to join the WTO, and to abide by its rulings. We should live up to our commitment, and as an added bonus, improve our domestic tax system at the same time.

Lawmakers should act immediately to repeal the FSC and ETI. They should then help American businesses by trimming corporate income tax rates. Doing so would lower tax rates and reduce the double taxation of capital income. It also would make our companies more competitive at home and abroad.

The U.S. has the world's second-highest corporate tax rate -- higher than the rates in socialist welfare states like France and Sweden. Lowering the rate is always a good idea; lowering it to settle a complaint by the EU would be even better. After all, the EU seems to be attempting to use the World Trade Organization against us, but if we lower corporate tax rates in response, we'll actually end up stronger and generate more jobs.

Unfortunately, many politicians are using this issue as an excuse to push for more special-interest tax breaks. A Senate bill, for instance, replaces the special tax break for export-oriented income with a special tax break for certain manufacturers.

Amazingly, some lawmakers want to make the bill worse. Sen. Tom Harkin, D-Iowa, for example, has succeeded in tacking on a measure that would block the Bush administration's recent effort to ease government-imposed overtime regulations.

In the business world, this amendment process would be like a company insisting that if you want to buy a DVD, you must also buy some other unpopular titles that company sells, whether you liked them or not. That company wouldn't sell many discs or would quickly go out of business. In the nation's capital, this process simply rolls on, day after day.

The answer seems pretty simple. Just as companies allow you to buy only the DVDs you want, lawmakers should bring the tax reform measure up, without all the unrelated amendments, and vote on it. And the Senate tried that with what's known as a cloture vote, on March 24.

Unfortunately, parliamentary rules allowed a minority to block the will of the majority. It takes 60 votes to bring a bill to the floor, and "only" 51 senators supported the motion to invoke cloture. This is the same process, by the way, that's kept so many well-qualified judges who enjoy majority support in the Senate from being confirmed.

So far, the Senate has managed to whittle down the number of amendments from about 150 to about 80. That's still far too many. Until the world's self-proclaimed "greatest deliberative body" can agree to get rid of dozens more amendments, the bill will remain in limbo.

Sadly, in Washington, this is just business as usual. The lawmakers fiddle while sanctions pile up. And we'll all end up paying higher prices for goods and services while U.S. firms lose markets because of increased tariffs on our exports. There ought to be a law against such shenanigans. Unfortunately, we already know it would never pass.


Ed Feulner is the president of The Heritage Foundation (heritage.org), a Washington-based public policy research institute.

About the Author

Edwin J. Feulner, Ph.D. Founder, Chairman of the Asian Studies Center, and Chung Ju-yung Fellow
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