Agence France Presse

Washington, February 28,

European trade chief Pascal Lamy said time has finally run out and Europe will launch sanctions on Monday to pressure the United States to scrap illegal export tax breaks.

But for the first time, Lamy said he would consider allowing a transition period for removing the subsidies, ruled illegal by the World Trade Organisation.

'We have been very patient but there is no way now that we can avoid this action, which hopefully will concentrate a few minds on the urgency of this legislation,' the European trade commissioner said.

The European sanctions, to be ratcheted up each month to increase pressure on the United States to overturn the law, would be lifted when Congress passes legislation to repeal the subsidies, he said.

Tariffs, already approved by the WTO, begin at five percent on a range of goods from American meat to nuclear reactor parts. The duties will rise by one percentage point a month. In 2004, the extra duties would be worth a total 315 million dollars, according to the Europeans. The WTO has ruled that the so-called foreign sales corporation (FSC) law flouts global trade rules by allowing US firms, operating through subsidiaries in offshore tax havens, to benefit from reduced export taxes.

WTO arbitrators have agreed with the EU that just over four billion dollars would constitute 'appropriate countermeasures' based on the trade impact of the US policy. Lamy said he only wanted to check the final proposal before it becomes law.

The House of Representative and Senate are drawing up rival proposals for legislation, which would need to be hammered out in a compromise text before signature by president George W Bush. Two of the main proposals contain a three-year transition period to phase out the tax break, however.

'The WTO ruling says that the only WTO-compliant transition period is zero. That is what the WTO ruling says,' Lamy said. 'This being said, we have a margin of appreciation and if my judgment at that time is that I can use a bit or part of this margin of appreciation, I will do it (while) keeping my goal ... which is getting this thing repealed.'