$300m trade war to erupt next month

The European Union is gearing up to slap sanctions worth nearly $300m (£160m) over 12 months on imports from the US from next month. The penalties, which could rise to nearly $1bn by next year, would affect a vast number of US exports, ranging from food to nuclear reactor parts.

The sanctions will be imposed unless Washington abolishes a system of tax breaks used by US firms such as Boeing and Microsoft to cut their tax bills. The World Trade Organisation ruled in 2000 that the scheme, known as Foreign Sales Corporations (FSCs), broke international trade rules by offering an illegal subsidy to US firms exporting goods.

The US Congress has been working to repeal the legislation and replace it with a system in line with WTO rules. But the new Bills have been ensnared in attempts to offer incentives to US firms to create more jobs. Congress is now expected to miss the WTO's 1 March deadline.

European businesses, concerned about the effect of the sanctions on international trade, have asked the EU Trade Commissioner, Pascal Lamy, to show flexibility towards the US. A letter to Mr Lamy on Friday from Juergen Strube, a former chairman of German chemicals group BASF and current president of Unice, a European business lobby group, said he should consider giving the US more time to scrap the FSCs legislation by accepting a short phase-out period for the tax breaks beyond 1 March.

The European Commission has already rebuffed US requests for a longer period to phase in the changes. But a spokeswoman for Mr Lamy said that he would look at Unice's request, while stressing that it was up to the Americans to make the necessary changes. "It's not up to us to pass legislation. It's up to them."

The move comes amid reports that the Commission plans to take action against US drinks giant Coca-Cola for anti-competitive practices. The Commission has been investigating allegations that the firm has struck sweetheart deals with retailers in the UK and other European countries. It is also due to rule soon on whether Microsoft has unfairly crowded out competitors.