"We have delivered on our commitment to suspend sanctions from 1 Janurary, as announced and in recognition of the US move to repeal its FSC (Foreign Sales Corporation) law," European Commission Trade spokeswoman Claude Veron-Reville said.

But Veron-Reville added that the EU could re-impose tariffs on as much as 60% of US products if the World Trade Organisation backed its complaint about residual US export tax breaks.

"We will be in a position to reinstate those sanctions if the WTO finds the American law is not in compliance," she added.

US still upset

US trade officials said they were disappointed the EU did not lift the sanctions once and for all. They warned continuation of the dispute could hurt trans-Atlantic trade relations which recently have appeared to be on the mend.

"We will be in a position to reinstate those sanctions if the WTO finds the American law is not in compliance"

Claude Veron-Reville,
European Commission Trade spokeswoman

"After years of hard work and close consultation with the European Commission, Congress fully addressed the EU's major concerns in repealing the FSC," Richard Mills, a spokesman for the US Trade Representative's office, said in a statement.

"It is harmful for the EU to needlessly prolong this matter in the face of Congress' good faith action," Mills said.

The US FSC legislation, ruled illegal by the WTO, was the trigger for the biggest trans-Atlantic trade dispute in 50 years.

Financial row

The European Union slapped an initial duty of 5% on a broad range of goods from steel to textiles and paper last March, ratcheting it up to 14% by the end of the year.

The bloc announced it would lift its sanctions in 2005 after the law was repealed, but complained at the same time to the WTO about remaining subsidies under the regime.

European leaders raised tariffs up
to 14% on goods from the US

These include three years of transitional aid for companies that have benefited from the FSC and - under a so-called grandfathering clause - continued benefits for all exporters that entered binding contracts before 17 September 2003.

Officials say the WTO is expected to rule on the legitimacy of remaining FSC subsidies in September.

Tariffs could return

If the WTO rules against the provisions and efforts to negotiate with the United States fail, the EU could reimpose a 14% tariff on 60% of the goods originally hit with the duties, Anthony Gooch, a spokesman for the European Commission's Washington office, said.

But the EU would first give itself 60 days "to broker an amicable agreement that negates the need for sanctions," Gooch said. "We don't believe the sanctions instrument is necessarily the one that is going to advance our case and our interests best."

Diplomats said a minority of EU states, including Britain and the Netherlands, objected to an earlier proposal that would have automatically re-imposed sanctions if the WTO ruled against the United States in the latest phase of the FSC dispute, which goes back to the late 1990s.

The legislation approved on Friday by top EU trade officials - and due to be finalised by the end of January - leaves Brussels with a large degree of flexibility about how to proceed with sanctions if that need arises, Gooch said.