Trade Dispute Puts U.S. Defense Jobs at Risk
9
2,002
by Lawrence P. Farrell, Jr.
As the legislative season heads into the home stretch on Capitol
Hill, many companies in the defense and aerospace industries will
be wondering whether Congress and Bush administration officials
can successfully solve an ongoing international trade dispute that
could threaten the viability and competitiveness of key U.S. manufacturers.
The dispute—between the United States and the World Trade
Organization (WTO)—has to do with the Extraterritorial Income
Exclusion/Foreign Sales Corporation (ETI/FSC) provisions of the
U.S. tax code. These provisions were designed to help U.S. companies
compete more effectively against European exporters that are heavily
subsidized by their governments and enjoy tax rebates on their exports.
In a challenge brought against the United States by the European
Union, the WTO found the ETI/FSC to be an impermissible export subsidy.
Unless the United States repeals the ETI/FSC, the European Union
intends to impose trade sanctions that could cost U.S. exporters
approximately $4 billion.
The United States, as a founding member of the WTO, wants to ensure
it complies with the organization’s rules. But repealing the
ETI/FSC without replacing it with a viable alternative would devastate
major U.S companies that employ thousands of skilled workers. Many
of these skills are vital to maintaining a healthy defense industrial
base.
Essentially, a repeal of the ETI/FSC would act as an instant tax
on U.S. exporters. Pierre A. Chao, a prominent defense industry
analyst at Credit Suisse First Boston, estimated that key exporters
like Boeing and United Technologies could lose $3 billion of market
capitalization; Caterpillar, Deere and Walt Disney could lose around
$1 billion of market capitalization. The impact on General Electric’s
and Intel’s market capitalization could be as high as $15
billion to $20 billion.
Without the ETI/FSC, U.S. companies would be left with unpalatable
options. They would have to raise prices to offset the impact of
the increased tax (making them less competitive internationally),
accept lower margins and earnings (thereby impacting their ability
to attract capital) or lower their costs to offset the increased
tax rate.
As Chao noted during a hearing of the Senate Finance Committee
in late July, lowering costs often means massive layoffs and moving
work to lower cost areas.
“The fact that the ETI/FSC repeal disproportionately hits
key, good-wage, high value-added U.S. exporting industries like
aerospace, manufacturing and high technology is particularly disturbing,”
he said.
NDIA is particularly concerned about the future of 800,000 workers
in the defense and aerospace industry whose jobs would be in jeopardy
if the ETI/FSC is repealed.
Thankfully, key members of Congress, the U.S. Trade Representative,
the Treasury Department and industry organizations are making a
concerted effort to come up with alternative ways of enhancing U.S.
competitiveness other than through the FSC-type tax regime.
A legislative solution is necessary to ensure that the United States
complies with its international obligations, so as to avoid economically
damaging trade retaliation, U.S. Trade Representative Robert Zoellick
told lawmakers at the Senate hearing.
Two NDIA member companies—Boeing and Caterpillar—testified
to the Senate Finance Committee about the consequences that the
ETI repeal would have on their business. Without the ETI, Boeing
potentially would have to relocate or eliminate 9,600 jobs, in addition
to 23,000 supplier jobs, said James H. Zrust, a Boeing vice president.
F. Lynn McPheeters, the chief financial officer at Caterpillar
Inc., said that the repeal of the ETI provisions would immediately
impose a more than $5 billion tax increase on the nation’s
exporters—making it difficult for U.S. based exporters to
remain competitive
NDIA urges Congress, the administration, and U.S. industry to work
together to develop an alternative to the ETI regime that provides
comparable benefits. In crafting an alternative, it is critical
to avoid incentives for companies to move abroad. Companies that
have chosen to stay in the United States and produce jobs here at
home should not be penalized if and when ETI is repealed.
Zrust pointed out that, in 2001, the aerospace industry was the
largest positive net contributor to the U.S. trade balance, producing
an industry trade surplus of almost $27 billion. Without tax benefits
similar to those under ETI available to the U.S. industry—our
balance of trade will suffer.
Obviously, the ideal outcome would be to achieve a WTO compliant
solution that keeps U.S. exporters competitive.
A member of the Finance Committee, Sen. Charles Grassley, D-Iowa,
noted that the present dispute over how to tax the foreign earnings
of U.S. corporations is not new. We have been wrestling with this
question in one form or another at least since the late 1960s.
At a time when critical U.S. defense and aerospace industry skills
and manufacturing capabilities are at stake, it is important to
find a solution to the tax code that satisfies our international
trade obligations but also protects our national interest.
I should point out that the topic of ETI/FSC was included in NDIA’s
Top Issues for 2002. Our recommendation, which was published early
this year, called for engaging in immediate, high-level negotiations
with the European Union, aimed at averting the imposition of undesirable
duties on U.S. exports.