A Quarrel That Endangers Trade

A year ago, in the happy afterglow of the Kennedy Round of tariff reductions, a trade war between the U.S.

and Europe would have seemed like a wholly improbable nightmare. Not any more. A tax scheme, originated by France and rapidly spreading throughout the Common Market and Scandinavia, has started an increasingly bitter skirmish between the U.S. and its Euro pean trading partners. Officials have ex changed threats of reprisals and counterreprisals, and no solution is anywhere in sight.

At issue are Europe's so-called value-added taxes, or VAT, a complex substitute for sales and excise taxes. Washington contends that VAT penalizes American exports and gives a substantial price advantage to many European goods shipped into the U.S. Concern has heightened since the U.S. foreign trade surplus shrank from almost $8 bil lion in 1964 to $726 million in 1968.

America's Burden. Under the VAT sys tem, companies at each stage of manufacture add a standard percentage of tax -- 11% in West Germany, 12.5% in Denmark -- to the difference between what they paid for the materials and the price at which their products are sold. Consumers ultimately pay the en tire levy as part of the price of almost everything they buy. In Paris, used car dealers drove through town last week in protest against the new 25% VAT "luxury" rate on their cars. In Amsterdam, a restaurant owner, cooks and waiters recently staged a mock funeral procession to "bury Amsterdam's entertainment," hurt by an extra 12% on restaurant bills.

What worries Washington is that value-added taxes are refunded on exports and imposed as special border taxes on U.S. products entering European countries. That tends to add 6% to 23% to the prices of U.S. goods above and beyond import duties. VAT is sanctioned by the 21-year-old General Agreement on Tariffs and Trade, to which the U.S. subscribes. Under GATT rules, the U.S. can neither match such export subsidies nor raise similar import barriers because it relies chiefly on other forms of taxation. Except for excise taxes on a few items--autos, alcohol and tobacco --the U.S. has no value-added taxes.

Although France adopted the value-added tax in 1954, the U.S. grew seriously concerned only after the entire Common Market decided to copy it. When Germany made the switch to VAT last year, one immediate effect was a 2% drop in the export price of steel, machinery and other goods. The Netherlands introduced VAT Jan. 1 with similar results. Denmark and Sweden have joined the rush; Norway, Belgium and Italy will do so next Jan. 1, and Britain is considering VAT.

Europe's Advantage. The U.S.'s Committee for Economic Development, a group of top executives, argues that VAT should be considered as a partial replacement for corporate income taxes. Congress so far shows no inclination to consider such fundamental changes. In Geneva, American negotiators have been pushing for a sensible change in GATT rules to allow U.S. companies to receive export rebates based on corporate income taxes and other "direct" taxes. In his final economic message, President Johnson asked for Europe's help in revising the rules "so that they no longer give a special advantage" to Europe.

Unless European countries agree to bend the GATT regulations, the chances are growing that Congress will turn to protectionist measures of its own, even at the risk of violating the GATT treaty or causing retaliation abroad. Last week President Nixon said he took "a dim view of this tendency to move toward quotas," but added that there was a "special problem" in textiles. Recently, the U.S. pressured Japan and European countries to impose "voluntary" limits on their steel shipments to the U.S., and Chairman Wilbur Mills of the tax-writing House Ways and Means Committee called for similar barriers to textile imports. Speaking of textiles, Mills warned: "Before our Government will allow this industry to be destroyed, it will consider whatever limitations are required to preserve it."

The stage has been set for a still more dangerous quarrel between the Atlantic partners. Plainly, it will require restraint on both sides to avoid a flare-up that could undo much of the world's great postwar advance toward freer trade.

This file is automatically generated by a robot program, so reader's discretion is required.