Case Study

Is a Tax Break an Export

Subsidy?
Is a Tax Break an Export Subsidy?

 Why do you think the U.S.

Congress was apparently so

reluctant to scrap the FSC?

 What do you think might

occur if the U.S. Government
fails to amend its tax law?
Would the EU impose sanctions?
What would the U.S. response
Why U.S. Congress was apparently so
reluctant to scrap the FSC?
 Pressurized by Surging Trade Deficit

 Foreign Sales Corporate (FSC) is a

kind of
export subsidy

 FSC Produces Large Tax Saving for

U.S. Export (e.g. $3.5 bill income tax saved in
1998)

 FSC Encourage U.S. Exporter to export

more
to balance the trade deficit

 To compensate US companies for EU

What do you think might occur if the U.S. Government fails to
amend its tax law?
Would the EU impose sanctions?
What
 would the U.S. response be?
If U.S. Government fails to amend its tax law,
EU will
impose an punitive tariffs worth $4.04 billion
on U.S
exports to the EU. However, EU will not
immediately
exercise it’s right to impose sanctions against
U.S or
and will almost not impose it but by giving
U.S more
time to make adjustment.

 In response, U.S will find ways to change the

internal
What do you think might occur if the U.S. Government fails to
amend its tax law?
Would the EU impose sanctions?
What wouldthe U.S.
Most response view
observers be? it as unlikely that the
European Union will implement the sanctions, since
the disruption that would cause transatlantic trade
to rebound on European companies; it is likely
rather than the EU will seek to use the threat of
sanctions as a bargaining chip to obtain
concessions from the US in other areas.

 A trade war refers to two or more nations raising

or creating tariffs or other trade barriers on each
other in retaliation for other trade barriers. It is the
opposite of free trade.

 Economists generally believe trade wars are very

non-productive and decrease the economic welfare
and total social surplus of all nations involved.
However, political scientists may see the threat of a
trade war as helpful in winning a concession of