EU threatens tax trade war with US

The $4bn (£2.5bn) list - sanctioned by the World Trade Organisation - is being circulated for comment by EU member states and is due to take effect in November.

Observers suggest the tax war with Washington may be the worst transatlantic breach yet - just as the US is seeking maximum European co-operation in a war against Iraq.

The list includes chewing gum as well as sensitive farm products and iron and steel exports - the subject of a separate 'war' over US sanctions against EU steel exports.

The EU intention is to use the list as a major bargaining weapon in the hope it will not have to be used - President Bush has promised to work with Congress to address the tax complaints, but he is reluctant to act against popular tax rules in the run up to mid-term elections in November.

But if the trade war is declared, and the US retaliates, it could become the most serious economic conflict since the WTO was set up.

The EU claims the tax export subsidies are costing member states billions of dollars in lost trade.

The list represents a huge defeat for the US in the WTO Arbitration Panel, where the US argued the list was excessiveÿ and should be limited to $1 billion.

The tax breaks benefit companies like GE, Bopeing and Microsoft.ÿ