Economy

EU and trade partners readying WTO challenge to US border tax

Republican plan ‘definitely not compatible’ with global trade rules, allies warn

US president Donald Trump: Republicans in Congress are working to convince him to back a shake-up of the US corporate tax regime that would include a “border adjustment” system. Photograph: Mandel Ngan/AFP/Getty Images

Mon Feb 13 2017 - 20:09

Lawyers for the European Union and other trading partners have begun laying the groundwork for a legal challenge to a United States border tax proposal that could trigger the biggest case in World Trade Organisation (WTO) history.

The preliminary moves come as Republicans in Congress work to convince President Donald Trump to back a shake-up of the US corporate tax regime that would include a "border adjustment" system. It would see US imports subject to tax and export revenues exempted.

If the US were to adopt the mechanism it would represent the biggest shake-up in the global corporate tax system for almost a century, according to tax experts. Members of the WTO and trade experts warn that it would represent a significant challenge to the global trading system at a time when its most influential member is already tilting toward protectionism under Mr Trump.

Jyrki Katainen, the European Commission vice-president who oversees EU trade policy, said Europe wanted to avoid a trade war with the US as that would be "disastrous" for the world economy.

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Global rule base

But he made clear that the EU would be willing to act against the US whether in response to the border tax proposal or the erection of other arbitrary trade barriers. “If somebody is behaving against our interests or against international rules in trade then we have our own mechanisms to react,” he said. “We have all the legal arrangements within the 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.”

A defeat in a case such as the border tax could lead to some $385 billion (€363 million) a year in trade retaliation against the US, according to Chad Bown, an expert on WTO trade disputes at the Peterson Institute for International Economics.

That would be almost 100 times greater than the largest ever WTO finding. “The issue here is just orders of magnitude larger than what the WTO dispute settlement process typically is asked to manage,” Mr Bown said.

A senior trade official in Geneva said: “Our first assessment is that it is ­definitely not going to be compatible with the WTO.”

Mr Trump has yet to endorse the tax idea, pushed by House of Representatives speaker Paul Ryan and Kevin Brady, chairman of the House's tax-writing ways and means committee.

But advisers have praised it as a way of addressing what they see as the WTO’s unfair treatment of income-based tax systems, such as the US’s.

Mr Brady said he wanted to make sure that any reforms abided by global trading rules. “We are designing this to be WTO compatible,” he said. – (Copyright The Financial Times Limited 2017)

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