TED Case Studies

US Car Taxes

          CASE NUMBER:          76 
          CASE MNEMONIC:      USCARTAX
          CASE NAME:          US Car Pollution Controls

A.        IDENTIFICATION

1.        The Issue

     The European Community contends that three U.S. taxes
imposed on large automobiles for environmental reasons are
discriminatory against imported cars, particularly European
ones.  Although imposed as a means to reduce air-polluting
emissions, the burden of these taxes have primarily been on
imported European automobiles.  The dispute between the EC and
the United States over these taxes reflects the increasing
tensions between trade liberalization and environmental
protection and the blurring division between environmental
policies and trade protection.

2.        Description

     In February, 1993 the European Community (EC) charged that
three U.S. taxes -- the luxury tax, the CAFE (corporate average
fuel economy) standard tax, and the gas guzzler tax --
discriminated against its automobile imports.  An EC
spokesperson stated that in 1991, "the total revenue received
by the U.S. government from these three taxes amounted to $558
billion of which $494 million were levied on European cars." 
According to the EC, although European carmakers have only four
percent of the U.S. market, they paid 100 percent of CAFE taxes
and 80 percent each of luxury taxes and gas-guzzler taxes. 
They stated that the taxes violate Article III:2 of the GATT
which says that imports shall not be subject to any internal
taxes in excess of those applied to domestic products.

     The EC told the February 9-10 GATT (General Agreement on
Tariffs and Trade) Council meeting that bilateral efforts to
solve the problem had failed, and that a panel be requested to
resolve the dispute.  On May 12, the United States reluctantly
agreed to a panel.  The panel is currently reviewing the case
and a decision is at the moment pending.  The EC is the
complaining party in the dispute and Sweden, Japan, and
Australia have reserved their rights to intervene before the
panel as third parties.  Sweden, home of manufacturers such as
Volvo and Saab, stated its support of the EC position since it
is also affected by the taxes.  In addition, Japan and
Australia have claimed that they have something to say about
the dispute.

     o  The luxury excise tax applies to cars worth over
     $30,000.  This tax is imposed with the assumption
     that the more expensive the car is, the greater its
     emissions.
     o  The gas guzzler tax applies to "model types" which
     do not meet certain fuel-efficiency standards.  The
     definition of "model types" allows U.S. car makers to
     average the ratings of several cars within one model
     type.  Since the numbers of European cars for sale in
     the U.S. are much smaller, it is more difficult for
     European car makers to make such averages.
     o  The CAFE taxes are applied to automobile
     manufacturers whose entire fleet sold in the U.S.
     fail to average out to 27.5 miles per gallon.  CAFE
     taxes have in the past been opposed, not only by
     foreign automobile manufacturers, but also by
     American automobile manufacturers who have opposed
     such legislation arguing that the stringent
     regulatory requirements are detrimental to economic
     growth and compromise vehicle safety.  The European
     manufacturers argue that since its manufacturers
     (such as BMW, Mercedes, and Jaguar) do not make small
     cars, they end up paying the entire CAFE tax.

     The concern over vehicle fuel economy issues, which arose
out of the oil shock of the early 1970s, has precipitated much
debate for nearly twenty years.  

3.        Related Cases

     CLEAN case
     VENEZ case
     SULFUR case
     CHILEAIR case
     JAPANAIR case
     KORPOLL case

     Keyword Clusters         

     (1): Trade Product            = AUTOmobile
     (2): Forum                    = USA
     (3): Environmental Problem    = Pollution Air [POLA]

4.        Draft Author:  Allene Kim

B.        LEGAL Clusters

5.        Discourse and Status:  DISagreement and INPROGress

     The GATT panel sided with the United States in a ruling
issued in September, 1994.

6.        Forum and Scope:  GATT and MULTIlateral

     The dispute settlement process is laid out in GATT
articles XXII and XXIII.  Consultations between countries are
emphasized but a panel of experts may review the case on a non-
binding basis.

7.        Decision Breadth:  15 (EC, US, Sweden and Japan).

8.        Legal Standing:  TREATY


9.        Geographic Locations

     a.   Geographic Domain : North America [NAMER]
     b.   Geographic Site   : Eastern North America [ENAMER]
     c.   Geographic Impact : USA

     Part of the rationale for the tax is to reduce air
pollution and acid rain, which is heaviest in eastern Canada
and the United States.

10.       Sub-National Factors:  YES

     Although the EC complaint lies particularly with the taxes
imposed by the U.S. government, individual state programs for
cleaner air might have an indirect effect on the sales of
European cars in the United States.  Most notable is California
which has implemented programs to reduce emissions from
stationary and mobile sources.  For example, the California Low
Emission Vehicle (LEV) program, enacted a series of
progressively more stringent emission standards with the intent
of ultimately building and incorporating zero-emission
vehicles.  Several other states have also adopted the
California standards.

11.       Type of Habitat:  TEMPerate

D.        TRADE Clusters

12.       Type of Measure:  Import Tax [IMTAX]

13.       Direct vs. Indirect Impacts:  DIRect

14.       Relation of Measure to Environmental Impact

     a.  Directly Related     : NO
     b.  Indirectly Related   : NO  YES 
     c.  Not Related          : NO
     d.  Process Related      : YES  Pollution Air [POLA]

15.       Trade Product Identification:  AUTOmobile

16.  Economic Data

     World auto industry output in 1991 was 46,496,431 units. 
The EC said in a 1992 report on trade barriers, of the 1991
relevant taxes of $558 million, $498 million was levied on
European cars.  EC country tax payments account for 100 percent
of the CAFE taxes, 80 percent of the luxury tax, and 80 percent
of the gas guzzler market.  However, Europeans cars comprised
only 4 percent of the U.S. market.

17.       Impact of Measure on Trade Competitiveness: LOW

     Auto industry forecasts predict that implementation of
higher CAFE standards will lead to a potential loss of 150,000
to 300,000 jobs for passenger cars by the year 2001. 

18.       Industry Sector:  TRANS

19.       Exporter and Importer:  EURCOM and USA 

     World auto exports in 1991 equalled 19,598,600 units. 
Leading exporters were Japan (5,753,400 units), France
(2,420,600 units), and Germany (2,346,700 units).  The
leading importers in 1991 were the United States (4,452,922
units), Germany (2,741,930 units), and Italy (1,470,518
units)  The top five exporters of vehicles to the United
States are Japan, France, Germany, Canada, and Spain.

E.        ENVIRONMENT Clusters

20.       Environmental Problem Type:  Pollution Air [POLA] 

     This is an air pollution problem.  Carbon dioxide
emissions, including those from automobiles, also constitute a
percentage of greenhouse gases which contributes to global
warming.

21.       Name, Type, and Diversity of Species 

     Name:          Many
     Type:          Many
     Diversity:     2,036 higher plants per km/sq (United
                         States)

22.       Resource Impact and Effect:  MEDium and 
                                             Structure [STRCT]
23.       Urgency and Lifetime:  LONG and 100s of years

     The damage from acid rain and global warming are long term
problems.

24.       Substitutes:  Alternative Energy [ALTER]

     Substitutes include alternative forms of fuel which
pollute less, such as natural gas and electric vehicles. 
Presently, the U.S. government as well as individual states
within the United States are making efforts to phase in
alternative-fueled automobile fleets.

VI.       OTHER Factors

25.       Culture:  NO


26.       Trans-Border:  YES

     Acid rain, for example, is a classic trans-border problem
and is part of this case issue.

27.       Rights:  NO

28.       Relevant Literature

American Automobile Manufacturers Association (Formerly the
     Motor Vehicle Manufacturers Association, Inc.). 
     World Motor Vehicle Data, 1993 Edition.  Detroit:
     1993.
Association of International Automobile Manufacturers (AIAM).  
     "Motor Vehicle Fuel Conservation Options."
Daily Report for Executives.  Washington, DC: Bureau of
     National  Affairs various issues.
Federal Register.  Washington, DC: various issues.
Gakenheimer, Ralph, ed.  The Automobile and the Environment: An
     International Perspective.  OECD, 1978.
The Impact of Higher "CAFE" Standards.  Joint paper issued by
     the Coalition for Vehicle Choice, Motor Vehicle
     Manufacturers Association, Inc., Association of
     International Automobile Manufacturers, Inc., and
     National Automobile Dealers Association (February 8,
     1991).
Inside U.S. Trade  "European Community to ask for GATT Dispute
     Settlement Panel on U.S. Auto Taxes."  11/6 (BNA,
     February 12, 1993). 
International Energy Agency.  Fuel Efficiency of Passenger
     Cars.  Paris: OECD, 1991.
Journal of Commerce John Zarocostas. "EC to Ask GATT to Examine
     US Gas-Guzzler Tax."  February 12, 1993.
Motor Vehicle Manufacturers Association, Inc. (Now the American
     Automobile Manufacturers Association).  CAFE Myths
     and Facts.  Washington, DC: 1991.
U.S. Congress, Office of Technology Assessment.  Improving
     Automobile Fuel Economy: New Standards, New
     Approaches.  (October 1991).
U.S. Environmental Protection Agency, The Challenge of the
     Environment: A Primer on EPA's Statutory Authority. 
     Washington, DC, December 1972.
White, Lawrence J.  The Regulation of Air Pollutant Emissions
     from Motor Vehicles.  Washington, DC: American
     Enterprise Institute, 1982.

                          References