This report discusses disputes in the World Trade Organization (WTO) between the UnitedStates and the European Union (EU). The report begins with an overview of the issues to beaddressed, and continues with a brief description of the WTO dispute settlement process, a summaryof U.S.-EU dispute settlement history, and a review of issues arising from cases of longstandingnon-compliance. The report concludes with a discussion of continuing concerns and policyconsiderations. The 108th Congress inherits several U.S.-EU disputes where the WTO has ruled that U.S. laws violate world trade obligations. In some cases, barring abolition or significant modification of thestatutes in question, the EU could decide to retaliate against U.S. exports this year or next. Thelargest threat involves a WTO ruling that a U.S. export tax benefit is an illegal subsidy. Other casesin which original WTO compliance deadlines passed without needed action by the United Statesinclude a dispute over the Antidumping Act of 1916, which provides a private right of action andcriminal penalties against dumping; a copyright dispute where the U.S. was found to have violatedroyalty rights of EU musicians; and a trademark dispute with implications for a Cuban rumtrademark. At the same time, the EU has not yet complied in a case finding its beef hormonedirective to violate WTO obligations, choosing instead to accept retaliatory tariffs originally imposedby the United States in 1999. Bills were introduced in the 107th Congress to comply with some of these WTO decisions, but, with the exception of the establishment of a Treasury Department fund for WTO settlements in theTrade Act of 2002, legislation was not acted upon. In the 108th Congress, discussions are continuingon compliance legislation in the export subsidy dispute, with bills introduced in April and May 2003. House and Senate legislation to repeal the 1916 Antidumping Act and the challenged trademarkprovision has also been introduced. In addition, funds were recently appropriated for the settlementof the music licensing dispute, and the Executive Branch has taken initial compliance action in arecent case faulting a Commerce Department countervailing duty methodology. As an international organization intended to ensure that trade between countries flows moreeasily, predictably and freely, the World Trade Organization (WTO) serves as a forum forinternational trade negotiations and the settlement of disputes. The United States and the EuropeanUnion (EU), accounting for over 40% of world trade, are arguably the two most important membersof the WTO. Cooperation and joint leadership between the two partners have historically been thekey to all previous efforts to liberalize world trade on a multilateral basis, including the creation ofthe General Agreement on Tariffs and Trade (GATT) in 1948 and the WTO in 1995. U.S.-EU efforts to provide leadership to the world economy in recent years, however, have been affected by a number of trade disputes. These disputes have absorbed a large amount of timeand energy of key policymakers, making efforts to pursue common interests and objectives, such asthe successful completion of the current WTO Doha Development Round, more difficult. Moreover, in cases involving beef hormones, bananas, export tax benefits, and other trade laws,attempts to settle disputes have met with refusal or inability by one side or the other to comply in atimely manner with the WTO panel rulings. The WTO dispute settlement system is viewed by WTO Members as "a central element in providing security and predictability to the multilateral trading system." (1) Non-compliance withWTO panel and Appellate Body rulings by a key Member arguably weakens the credibility andauthority of the WTO and serves as a poor model for the rest of the world. Why should we complywith WTO panel decisions if the United States or EU do not have to, other countries may ask. Non-compliance may also diminish the perceived value of negotiating new trade agreements, as wellas increase the attractiveness of retaliation as an enforcement mechanism. At the same time,focusing on the underlying causes of non-compliance may reveal the limitations of the WTO disputeprocess and the ultimate outcomes that can realistically be expected in certain types of cases. Settlement of trade disputes from 1948-1995 in the GATT, the predecessor organization to theWTO, was based on a blend of two different philosophies. The first was a "diplomatic" view thatfavored conciliation and problem-solving over legal precision in determining which country wasright or wrong. The second was a more judicial and "rules-oriented" approach that attempted toprovide a more binding process with sanctions as an enforcement mechanism. (2) Today's WTO Understanding on Rules and Procedures Governing the Settlement of Disputes (Dispute Settlement Understanding or DSU), one of the agreements that emerged from the GATTUruguay Round (1986-1994), tilts more towards a judicial model. U.S. negotiators had advocatedthis approach during the Round, supported by a statutory trade negotiating mandate in the OmnibusTrade and Competitiveness Act of 1988 to strengthen GATT dispute settlement procedures. The DSU, which went into effect January 1, 1995, continues past GATT dispute practice, but also contains several features aimed at making the system more rigorous and automatic. In contrastto the old GATT system, in which a member could block decisions at any step of the process, theDSU provides that panels will be established and reports by WTO panels and the Appellate Bodywill be adopted unless there is a consensus among WTO members against taking such action. Inaddition, where the losing party does not comply with its WTO obligations within a reasonable timeperiod, and the complaining party requests authorization to impose a retaliatory measure, the requestwill be granted absent the same negative consensus. Deadlines have also been established for eachstage of the four-step dispute process: consultations; panel deliberations; appellate review; andimplementation of compliance measures. (3) The DSUis administered by the WTO Dispute SettlementBody (DSB), which is composed of all WTO Members. Members are required under the DSU to first determine if invoking DSU procedures "would be fruitful" in a given case. (4) The aim of the processis "to secure a positive solution to a dispute,"the preferred outcome being "a solution mutually acceptable to the parties to the dispute andconsistent with the covered agreements"; absent such a solution, the primary objective of the processis withdrawal of an offending measure, with compensation and retaliation being avenues of lastresort. (5) Where retaliation is requested by theprevailing party, the defending party has a right to havethe amount arbitrated to determine if the level proposed is substantially equivalent to the level oftrade damage. However, compensation and retaliation are considered temporary measures under theDSU, pending full compliance. Where the defending party does take action to comply and theprevailing party questions whether the action is sufficient, a compliance panel may be establishedto determine whether the measure fulfills WTO obligations. The DSU also discourages unilateralactions in WTO-related trade disputes, requiring WTO Members to resolve such disputes using DSUprocedures, and to observe DSU provisions when determining whether a WTO violation hasoccurred or trade injury exists, determining what is a reasonable time to comply, and taking anyretaliatory measures. The steps in the WTO dispute process are as follows: Consultations (Art. 4). If a WTO Member requests consultations with another Member under a WTO agreement, the latter must generallyrespond within 10 days and enter into consultations within 30 days. If the dispute is not resolvedwithin 60 days after receipt of the request to consult, the complaining party may request a panel. Thecomplainant may request a panel earlier if the defending Member has failed to enter intoconsultations or if the disputants agree that consultations have been unsuccessful. Establishing a Dispute Panel (Arts. 6, 8). If a panel is requested, the DSB must establish it at the second DSB meeting at which the request appearsas an agenda item, unless it decides by consensus not to do so. The panel is generally composed of3 persons. The Secretariat proposes the names of panelists to the disputants, who may not opposethem except for "compelling reasons." If there is no agreement on panelists within 20 days from thedate the panel is established, the WTO Director, at the request of either disputing party, appoints thepanelists. Panel Procedures (Arts. 12, 15). After considering written and oral arguments, the panel issues the descriptive part of its report (facts andargument) to the disputing parties. After considering any comments, the panel submits this portionalong with its findings and conclusions to the disputing parties as an interim report. Absent furtherparty comments, the interim report is considered to be the final report and is circulated promptly toWTO Members. A panel must generally circulate its report to the disputants within 6 months of the date the panel is composed, but may take longer if needed. The period from panel establishment tocirculation of the report to all Members should not exceed 9 months. Adoption of Panel Reports/Appellate Review (Arts. 16, 17, 20). Within 60 days after a panel report is circulated to WTO Members, the reportis to be adopted at a DSB meeting unless a party to the dispute appeals the report or the DSB decidesby consensus not to adopt it. Within 60 days of being notified of an appeal (extendable to 90 days),the Appellate Body must issue a report that upholds, reverses, or modifies the panel report. Anappellate report is to be adopted by the DSB, and unconditionally accepted by the disputing parties,unless the DSB decides by consensus not to adopt it within 30 days after circulation to Members. The period of time from the date the panel is established to the date the DSB considers the panel report for adoption is not to exceed 9 months (12 months where the report is appealed) unlessotherwise agreed by the disputing parties. Implementation of Panel and Appellate Body Reports (Art. 21). Thirty days after the panel and any Appellate Body reports are adopted, theMember must inform the DSB how it will implement the WTO ruling. If it is "impracticable" tocomply immediately, the Member will have a "reasonable period of time" to do so. The period willbe: (1) that proposed by the Member and approved by the DSB; (2) absent approval, the periodmutually agreed by the disputing parties within 45 days after the date of adoption of the report orreports; or (3) failing agreement, the period determined by binding arbitration. Arbitration is to becompleted within 90 days after the reports are adopted. To aid in determining a compliance period,the DSU gives the arbitrator a non-binding guideline of 15 months from the date of adoption. The period of time from the date the panel is established to the date the compliance period isdetermined is not to exceed 15 months unless the disputing parties agree otherwise. If the panel orthe Appellate Body has extended its time, the additional period is to be added to these overalldeadlines. In such case, the total time is not to exceed 18 months, unless the disputing parties agreethat exceptional circumstances warrant an extension. Compliance Panels (Art. 21.5). Where there is disagreement as to whether a Member has complied in a case, a panel may be convened to resolvethe dispute. The compliance panel has 90 days to issue its report, which may then be appealed. Compensation and Suspension of Concessions (Art.22). In the event the defending party fails to comply with the WTOrecommendations and rulings within the compliance period, the party must, upon request, enter intonegotiations with the prevailing party on a compensation agreement within 20 days after theexpiration of this period; if negotiations fail, the prevailing party may request authorization from theDSB to retaliate. If requested, the DSB is to grant the authorization within 30 days after the compliance period expires unless it decides by consensus not to do so. (6) The defending Member may request arbitrationon the level of retaliation or whether the prevailing Member has followed DSU rules in formulatinga proposal for cross-retaliation; the arbitration is to be completed within 60 days after the complianceperiod expires. Once a retaliatory measure is imposed, it may remain in effect only until theoffending measure is removed or the disputing parties otherwise resolve the dispute. From 1995 through the end of 2002, the United States and the EU filed 51 complaints againsteach other under the Dispute Settlement Understanding. The cases are almost equally divided: 26have been filed by the United States against the EU or one of its Member States, and 25 have beenfiled by the EU against the United States. For the most part, the United States or the EU, as the casemay be, has been the sole complainant in the case. The 51 complaints constitute 18.3% of the totalnumber of complaints filed between January 1, 1995, the date the WTO Agreement entered intoforce, and December 31, 2002. (7) In general, the EU has brought a relatively steady number of cases each year, while the number of cases brought annually by the United States reached a peak in 1998 and has fallen to one case ineach of 2000, 2001, and 2002. The EU caseload against the United States may be viewed assomewhat heavier than the U.S. caseload against the EU because a number of the cases filed by theUnited States against the EU or its Member States involve the same or similar subject matter;moreover, the EU has pursued a greater number of cases through the full panel process. Thefollowing chart shows the variations in actual complaints filed: Source: WTO dispute settlement statistics http://www.wto.org U.S. Complaints Against the EU. Of the 26 complaints filed by the United States against the European Union or specific EU countries, 13 arecurrently listed by the WTO Secretariat as remaining in the consultative stage and thus do not appearto have a definitive solution. In all of these cases, the 60-day consultation period in the DSU haspassed. These cases allege, in reverse chronological order: Safeguards Agreement and GATTviolations stemming from the EU tariff-rate quota on U.S. corn gluten feed briefly imposed whilethe U.S. maintained its three-year safeguard on wheat gluten; the EU's failure to protect trademarksand geographic indications for agricultural products in violation of the Agreement on Trade-RelatedIntellectual Property (TRIPS); French and EU subsidies to develop a flight management systemrelated to Airbus; export subsidies resulting from income tax treatment of exports by various EUmembers; and EU export subsidies on processed cheese. In addition, there are two outstandingcomplaints related to the now settled dispute over EU's banana import regime. Seven complaints filed by the United States were settled either through consultations or before a panel had begun its work. Since settlement of a case must be mutually agreed by the disputingparties, the United States apparently achieved a satisfactory solution in these situations. Two ofthese cases dealt with customs duties on rice and grain, respectively, and five involved intellectualproperty issues. In four of these either a panel had been requested or else a panel was establishedor later suspended. Five of the cases brought by the United States were taken through the full panel process. Two were won by the United States: beef hormones and bananas. Three of the cases were lost on appeal,each of these dealing with customs classification of computer equipment. The EU eventually complied in the successful challenge to the EU's banana import regime, though two and one-half years had passed from the end of the original compliance deadline (January1, 1999) before a settlement was reached. Maintaining that the EU had not complied by thisdeadline, the United States requested authorization to impose sanctions on EU products under Article22 of the DSU. In April 1999, the WTO authorized the United States to suspend $191.4 million intrade concessions, an arbitrated amount reflecting the level of trade injury suffered by the UnitedStates. The United States imposed 100% ad valorem duties on EU products in this amount shortlythereafter and, following a compliance panel proceeding, protracted negotiations between the EU,the United States and Ecuador, and the institution of new EU measures, the EU eventually complied. The United States suspended the increased duties July 1, 2001. The case also focused attention onthe DSU itself, with the EU challenging U.S. domestic procedures and countermeasures underSection 301 of the Trade Act of 1974 as violative of DSU requirements. In contrast, the EU chose to accept retaliation in the beef hormone case, in which the United States had obtained panel and appellate reports finding that the EU's ban on imports of meat fromanimals to which certain growth hormones were administered violated the WTO Agreement onSanitary and Phytosanitary Measures. When the EU had not complied by May 13, 1999, the end ofthe arbitrated compliance period, the United States again sought authorization to impose sanctionson EU products. In July 1999, the United States was authorized to suspend concessions in thearbitrated amount of $116.8 million, and shortly thereafter imposed 100% ad valorem duties oncertain EU items. Absent compliance by the EU, these duties still remain in place. Currently pending is a U.S. complaint regarding the EU's provisional steel safeguards instituted after the Bush Administration imposed safeguards on steel imports in March 2002. A panel wasestablished in September 2002, but panelists have not yet been named. EU Complaints Against the United States. Of the 25 cases brought by the EU against the United States, seven cases are listed by the WTOSecretariat as remaining in consultations; in each of these the 60-day DSU consultation period hasended without a panel being requested. The most recent of these are disputes over sunset reviewsof antidumping and countervailing duties on steel products from France and Germany, and a sunsetreview of antidumping duties on seamless pipe from Italy. The older disputes involve the Section301 carousel retaliation provision, which generally requires the United States Trade Representative(USTR) to revise lists of products against which trade sanctions are imposed; Section 337 of theTariff Act, which authorizes border measures against infringing imports and was amended in 1994after a successful GATT challenge by the European Communities; the U.S. harbor maintenance tax;an import ban on poultry products; and antidumping measures on solid urea from the former GermanDemocratic Republic. In five cases, the dispute was either settled through consultations or an established panel was allowed to lapse. Two of these involved U.S. rules of origin for textiles, and a third involvedpre-WTO retaliatory measures taken by the United States against the EC beef hormone directive. When the U.S. removed its tariff increases in July 1996, the EU decided not to pursue its earlierpanel request in this third case. The two remaining cases challenged U.S. measures imposed forforeign policy purposes and were controversial for this reason. The challenged statutes were theCuban Liberty and Democratic Solidarity Act (Helms-Burton Act), which imposed additionalsanctions on Cuba and on individuals dealing in property confiscated by Cuba, and theMassachusetts state law that imposed procurement sanctions on firms doing business in Burma. After a panel was established in the Helms-Burton Act case and the United States suggested that itmight invoke WTO national security exceptions in its defense, the dispute was resolved by bilateralagreement between the United States and the EU. The Burma panel was allowed to lapse inFebruary 2000 as lower federal courts in the United States ruled the state law unconstitutional. TheSupreme Court eventually held that the statute was preempted by a federal statute imposing sanctionson Burma. (8) Thirteen of the 25 cases have been pursued by the EU through the full panel process or are currently before a panel. Two of these, each involving challenges to Section 301 and instituted inresponse to U.S. actions in the banana case, had mixed results for the EU; the United States did notneed to take action in these cases. (9) The EU prevailedin nine others. To date the United States hascomplied in two of these cases (wheat gluten safeguards and a countervailing duty order on U.K.steel products), and has taken action aimed at compliance in several others. Two cases are currently at the panel stage, both dealing with safeguards. In the first case, a challenge to the steel safeguards imposed in March 2002, a final panel report adverse to the UnitedStates was issued May 2, 2003; the United States has stated that it will appeal the report, which isexpected to be circulated to WTO Members as a whole in July 2003. (10) In the second, a challengeto U.S. safeguards on line pipe and wire rod, panelists have not been named; the panel may havebecome moot, however, since the safeguards in question expired in early March 2003. Of the seven cases in which the United States has not yet fully complied, one involves a tax statute (the Extraterritorial Income Exclusion (ETI) Act); two involve intellectual property issues(music licensing and protection for trademarks belonging to businesses whose property wasconfiscated by the Cuban government); and four deal with trade remedies. The ETI Act was passedto comply with an earlier WTO ruling finding that the U.S. Foreign Sales Corporation statute wasa prohibited export subsidy. The trade remedy challenges involve the Antidumping Act of 1916,which provides a private right of action and criminal penalties for dumping; a countervailing duty(CVD) order on German steel products; a set of 12 CVD orders on EU steel products; and theContinued Dumping Subsidy Offset Act of 2002 (CDSOA) or Byrd Amendment, which providesfor the disbursement of antidumping and countervailing duties to producers and interested partiesin the underlying antidumping and CVD proceedings. In three of the seven cases (ETI, music licensing, and the Antidumping Act of 1916), U.S. compliance deadlines have passed; in one (trademark protection), the compliance deadline willexpire at the end of June 2003. The Administration, in its FY2004 budget proposal, has called forrepeal of the ETI statute and stated an intent to work with Congress for statutory reform ofinternational tax rules. As discussed below, other legislative proposals and options are also beingconsidered, with bills recently introduced in the House and Senate. Legislation has also beenintroduced in the current Congress to repeal the 1916 Antidumping Act ( H.R. 1073 (Sensenbrenner); S. 1080 (Hatch/Leahy); and S. 1155 (Grassley)). Threebills that would repeal the challenged trademark provision in connection with removal of the U.S.trade embargo with Cuba have also been introduced ( H.R. 188 (Serrano); S. 403 (Baucus); and H.R. 1698 (Paul)). In the music licensing case, the disputing parties agreed to have the level of trade injury determined in an arbitration under Article 25 of the DSU, which provides for binding arbitration asan alternative means of dispute settlement. This option, which resulted in an arbitral award of $1.1million annually, was agreed to after the United States had not implemented the earlier WTO rulingby the end of the arbitrated compliance period (July 2001). Congress established a judgment fundfor the payment of such WTO awards in the Trade Act of 2002, but has yet to appropriate funds forit. In P.L. 108-11 , the emergency wartime supplemental appropriations act, however, Congressappropriated $3.3 million for "a one-time only, lump-sum payment" to the European Communitiesto cover three years of trade injury in the case. (11) The compliance process is in its early stages in some of the more recent cases. The United States has begun to comply with rulings in the challenge to the multiple CVD orders on EU steelproducts with the issuance of a Commerce Department notice March 21, 2003, announcing aproposed revision of the privatization methodology at issue in the case. (12) The United States and theEU have negotiated a compliance deadline of November 8, 2003, in the proceeding. (13) Thecompliance period in the CDSOA dispute is currently being arbitrated. (14) While the majority of U.S.-EU disputes do get resolved satisfactorily, a number of cases arecurrently testing the implementation articles of the DSU. Two of the more difficult of these cases-- beef hormones and the ETI Act export subsidy -- do not involve routine commercial disputesover trade or customs regulations, but rather tax policy and internal national regulation, particularlyof social and health matters. These kinds of disputes, involving what are normally considereddomestic policy issues, appear to be the most difficult to resolve and may raise broader questionssuch as whether the WTO is the proper forum for resolving these kinds of disputes. The beef hormone dispute dates to 1989, when the EU instituted a ban on the sale, distribution and importation of hormone-treated beef. (15) Inchallenging the ban under the new DSU in 1996, theUnited States argued that it violated the Uruguay Round Agreement on the Application of Sanitaryand Phytosanitary Measures (SPS Agreement). While the provisions of the SPS Agreementrecognize the right of WTO members to adopt measures to protect human, animal, or plant life orhealth, they also require that these measures be founded on scientific evidence and applied only tothe extent to achieve public health goals. The United States argued that the EU ban was institutedwithout sufficient scientific evidence, and that it constituted a disguised trade barrier. WTO panels agreed with the U.S. argument and gave the EU time to bring its hormone measure into compliance with SPS rules. The EU, however, argued that none of the scientific reportsestablished beyond reasonable doubt that the consumption of beef treated with hormones was safefor human health. The EU also claimed that a judgment about the level of protection was a valuejudgment that only it could make. Occurrences of "mad cow disease" in several EU countries andthe outbreak of foot-and-mouth disease in the United Kingdom also contributed to making manyEuropeans more risk averse on this issue. As noted earlier, the US in 1999 imposed 100% advalorem tariffs on $116.8 million in EU exports, an amount of retaliation that is still in effect. Food safety concerns are not limited to the beef hormone case, however, with the United States having recently filed a complaint in the WTO requesting consultations with the EU regarding itsrestrictions on products containing genetically-modified organisms (GMOs). The EU has imposeda moratorium on approval of GMO products while it implements regulations requiring traceabilityand labeling. Some EU countries have also adopted a policy of banning such products, though theEU has indicated that it would seek to prohibit individual countries from maintaining their bans onceEU regulations are in place. The United States views the moratorium and import bans, whichsignificantly affect exports of U.S. agricultural products to Europe and, it is alleged, to developingcountries as well, as not being scientifically-based as is required under the SPS Agreement and hasexpressed doubts as to the feasibility of the proposed regulatory scheme. Members of Congress havebeen calling for the initiation of a dispute settlement proceeding, with the EU strongly defending itspractices and urging the United States to allow the EU regulatory regime to be fully implemented. (16) The United States filed its WTO complaint May 13, 2003, with Canada and Argentina initiatingseparate actions. A complaining country may request a panel if its dispute with the EU is notresolved within 60 days of its consultations request. In Europe, GMOs are an issue of great public sensitivity. Several food safety crises in the late 1990s heightened public fears about biotechnology and reduced public confidence in the ability ofgovernment agencies to police such activities. Nor have such technologies found much favor withinthe European agricultural sector that still places major emphasis on maintaining family farms. Giventhese sensitivities and preferences, it is uncertain whether the EU would comply with a WTOdecision that lifted the moratorium directly or indirectly. The issue has been further complicated byboth U.S. and European efforts to persuade other countries to adopt their approaches towardsbiotechnology in foods and agriculture. (17) How the United States taxes export earnings has been the focus of a dispute with Europe since the 1970s. The current dispute is a product of multiple factors: technical GATT and WTO rulings,EU efforts to gain diplomatic leverage over the United States on trade issues, and complexdistributional issues making it hard for Congress to craft a WTO compatible solution. The FSC/ETI controversy involves EU charges that these provisions are an export subsidy that contravene various WTO agreements, particularly the Agreement on Subsidies and CountervailingMeasures (SCM Agreement) and the Agreement on Agriculture. WTO panels have agreed with theEU complaint, rejecting the U.S. argument that it had negotiated exemptions to its taxation ofexports in the late 1970s and early 1980s. After the FSC replacement statute was rulednon-compliant with world trade obligations, a WTO arbitrator, in an award circulated in August2002, determined that the EU could impose 100% punitive tariffs on $4.04 billion of U.S. exportsto Europe. On May 7, 2003, the EU formally requested and received authorization from the WTOto impose the retaliatory measures. (18) EU TradeCommissioner Lamy stated the same day that he was"encouraged" by U.S. efforts to "ensure repeal" of the statute during the current fiscal year and thatthe European Commission "will review the situation in the autumn, and if there is no sign thatcompliance is on the way at that time, it would then start the legislative procedure for the adoptionof countermeasures by 1 January 2004." (19) Although the FSC was enacted in 1984, the EU did not challenge the provision until 1997. Many on the U.S. side maintain the EU challenge was motivated by a desire to create negotiatingleverage on trade issues, not by complaints from European companies that they were beingdisadvantaged by the subsidy. Perhaps the EU thought that winning a case that involved a very largeamount of trade could forestall U.S. challenges against a variety of EU practices, as well as helpsettle other trade disputes. U.S. policymakers remain divided over how best to comply with the WTO ruling, which has raised complex issues involving the U.S. tax code. Some in the Senate would like to see a negotiatedsolution, perhaps by amending the SCM Agreement in a way that would permit some exemption ofexport earnings from corporate tax. Legislation proposed in the House to repeal the ETI and provideother tax benefits was introduced by House Ways and Means Committee Chairman Thomas in the107th Congress ( H.R. 5095 ), but was opposed by a number of large exportingcompanies, and was not acted upon. In 2003, the President called for repeal of the ETI statute alongwith revision to the U.S. international tax rules in his FY 2004 budget proposal and discussions havecontinued to take place in Congress on replacement legislation. On April 11, 2003, CongressmenRangel and Crane introduced legislation ( H.R. 1769 ) that would repeal the currentstatute, provide transition relief, and create a new tax deduction for income attributable to U.S.production activities. A companion Senate bill ( S. 970 (Hollings)) was introduced May1, 2003. Chairman Thomas is also expected to introduce replacement legislation in the currentsession. (20) The credibility of the WTO depends on a prompt, effective, and fair dispute settlementmechanism. Non-compliance by either the U.S. or EU of a WTO ruling arguably thwarts thisobjective. To deal with the problem of non-compliance, both Washington and Brussels may haveto give greater attention to a number of concerns and policy considerations, including choice of casesinitiated, limitations of panel decisions, the role of mediation and conciliation, and the adoption ofremedies that are trade liberalizing. Both the U.S. and EU have brought complaints to the WTO that may have been motivated more by a desire to score points with domestic political interests or to bolster negotiating leverage on othertrade disputes than to redress serious trade problems. Some cases have been initiated even when itis probable that the defendant would be unable to implement a losing panel decision due tooverwhelming domestic political opposition. Greater sensitivity on the part of policy makers on theselection of cases to initiate in the future could prevent the WTO dispute process from being usedand arguably weakened in this manner. In the area of some of the most bitter U.S.-EU disagreements, the WTO may be asked to rule on very complex issues that touch sensitive domestic social and environmental concerns directly. If the applicable WTO agreements are vague or ambiguous, it is legitimate to question whether WTOpanels should be in the business of clarifying rules where scant U.S.-EU substantive consensusexists. Moreover, Bush Administration trade officials have expressed concerns that some panelrulings "legislate new obligations" that were not agreed to in multilateral negotiations. Under thesecircumstances, some type of politically agreed upon compromise may be viewed as preferable to aquasi-judicial WTO ruling pending efforts to clarify the rules in subsequent multilateral negotiations. Assuming that some disputes with a highly charged political content are not well suited for the panel and appellate body process, greater efforts could be made to get the contending parties to settletheir differences through bilateral negotiations, through mediation, or by agreeing to arbitration froman outside ( i.e. , non-WTO) party. (21) While the DSU does afford opportunities for mediation andconciliation, some observers argue that these provisions can be greatly strengthened and mademandatory in highly divisive cases. Similarly, Washington and Brussels could try to strengthen therole of the "early warning system" that was established in 1999 as means of identifying andpreventing future disputes stemming from legislative and regulatory proposals which threaten tocreate problems for the other side. The fact that the EU elected to accept retaliation rather than comply with the WTO beef hormone ruling raises other concerns about WTO remedies. While accepting retaliatory measuresmay be an option for managing a dispute with domestic implementation difficulties, the remedy(trade sanctions) fundamentally conflicts with the goal of trade liberalization. Moreover, tradesanctions raise political tensions and impose economic costs not only on foreign producers, but alsoon domestic importers, consumers, and firms dependent on those imports subject to punitive tariffs.Retaliation often hardens the resolve of the offending party to maintain its WTO-illegal policy or lawthan to change it. Thus, when retaliation is accepted for an extended period, the utility of the remedyas a means of exerting pressure on the losing party to comply fully may diminish. (22) Some critics of retaliation have suggested making compensation the only WTO remedy for non-compliance. Compensation, in turn, could be implemented through a monetary fine on theoffending country or the offending country could agree to reduce its own trade barriers by an amountequivalent to its trade barrier. (23) WTO Members are currently negotiating possible revisions to the WTO Dispute Settlement Understanding in the Doha Development Round, facing a deadline of May 2003. The United Stateshas recently proposed revisions that would give disputing parties greater control over the process,with additional avenues for settlement. It is unclear at this point how successful the disputesettlement negotiations will be and whether any revisions that are adopted will serve to defuse thetypes of US-EU disputes that have stalled at the compliance phase. Moreover, regardless ofrevisions to the DSU, rulings that require statutory changes may as a rule prove more difficult toimplement than those involving the exercise of authorities already granted. As long as the DSUallows Members to resort to the full WTO dispute process for disputes of their choosing, Memberswill have the option of following this route when they believe that pursuing a WTO case best fulfillstheir various policy goals. It remains unclear whether past experience as to the types of WTO casesthat may realistically be expected to result in compliance will serve as a significant factor indecisions as to which cases Members will initiate in the future.

Summary: U.S.-EU relations have been affected by a number of trade disputes in recent years. While the majority of trade disputes do get resolved, attempts to settle some of the disputes have been met withrefusal or inability by one or another of the parties to comply in a timely manner with the WorldTrade Organization (WTO) panel rulings. The 108th Congress inherits several of these disputeswhere the WTO has ruled that U.S. laws violate trade obligations. Absent U.S. compliance throughlegislative action, the EU could in some cases decide to retaliate against U.S. exports this year ornext. In the meantime, the EU remains in non-compliance with its WTO obligations to allowimports of beef treated with hormones. Beyond raising U.S.-EU trade tensions, non-compliance bya key WTO member arguably weakens the credibility and authority of the WTO and its disputesettlement process. The initiation and resolution of disputes under WTO agreements is carried out under the Uruguay Round Dispute Settlement Understanding (DSU), considered a cornerstone of the WTOsystem. The WTO dispute settlement process has a more quasi-judicial orientation than thequasi-diplomatic orientation of the prior GATT system, in which negotiation and conciliationgenerally prevailed over multilateral enforcement of rules. The DSU provides for virtually automaticestablishment of panels, adoption of panel and appellate reports and, where requested, authorizationto impose retaliatory measures; deadlines are set out for various stages of the process. These featuresensure that complaints are heard and promote implementation of WTO rulings, thus makingavailable to all WTO Members the means to clarify trade rules and redress trade injury. At the sametime, the process continues to retain certain diplomatic elements in that its primary aim is to "securea positive solution to a dispute," with the preferred outcome being a "solution mutually acceptableto the parties to the dispute and consistent with the covered agreements." Opportunities forsettlement are provided at a number of points in a procedure. U.S. and EU instances of longstanding non-compliance have for the most part not involved routine commercial disputes over trade or customs regulations, but rather tax policy and internalnational regulation, particularly of social and health matters. While ambiguity in WTO agreementsmay give rise to disputes in these difficult areas, the automatic features of the DSU also allow partiesto pursue such cases through the full dispute process, even though it may be evident from the outsetthat implementation of an adverse WTO ruling may be subject to overwhelming domestic oppositionin the defending country. To deal with the problem of non-compliance in difficult cases, bothWashington and Brussels may need to give greater attention to a number of concerns and policyconsiderations, including choice of cases initiated, limitations on panel decisions, role of mediationand conciliation, and adoption of remedies that are trade liberalizing. Assuming that some disputesare not well-suited for the DSU process, greater efforts may be needed to settle differences throughbilateral negotiations and political compromises, through mediation, or by agreeing to arbitrationfrom an outside ( i.e. , non-WTO) party. This report will be updated periodically. For more on theWTO dispute settlement process and U.S.-EU Trade Relations, see CRS Report RS20088 and CRS Issue Brief IB10087.