The US could face billions of dollars' worth of sanctions after the World Trade Organisation ruled last month that US corporate tax policy is anti-competitive and incompatible with WTO rules.
US tax breaks worth $4bn to US exporters have long been disputed by the European Union, which has threatened to retaliate with up to $4bn of sanctions on US goods. Playing for time, the US appealed against the WTO's decision last August that its corporate tax legislation was illegal - but, predictably, has lost again.
Now under intense pressure to amend its legislation, the US waits to see how the EU will strike. A WTO arbitration panel's ruling on the level of countermeasures the Union may take is expected by the end of March.
US trade representative Robert Zoellick said he would be consulting closely with Congress and affected US interests over next steps. 'We are disappointed with the outcome,' he said. 'Given prior decisions, we knew this would be an uphill struggle, but we believed it was important to make our case for a level playing field on tax rules. The US respects its WTO obligations, which serve America's interests, and we intend to continue to seek to cooperate with the EU in order to manage and resolve this dispute.'
Welcoming the decision, EU trade commissioner Pascal Lamy said: 'We have made a point of handling this dispute in a reasonable manner. Now it is up to the US to comply with the WTO's findings to settle this matter once and for all. As to how, we look forward to rapid US proposals.'
The US originally amended its corporate tax legislation in November 2000 in response to EU complaints, and a subsequent WTO ruling that tax credits benefiting 6,000 US exporters were an illegal subsidy and violated regulations. The EU dubbed the new law 'even worse', and in August last year, the WTO concluded that US companies in overseas markets were still unfairly subsidised.