The World Trade Organisation ruled on Monday the United States violated key trade agreements with a law that channels anti-dumping duties on imports to US firms making similar products.
US officials in Washington said they would appeal the decision, which is the latest in a series of WTO rulings against duties imposed by the United States to protect domestic producers against "unfairly" priced or subsidised imports.
The law, widely known as the Byrd Amendment, requires the US Customs Service to distribute the proceeds of anti-dumping and countervailing duties to US companies that complain the cheap imports have undermined their business.
Customs distributed almost $207 million in payments to US steel companies, ball-bearing producers and various other firms in the first year of the programme in 2001. A second tranche of payments is scheduled this fall.
A WTO panel - created at the request of the 15-nation European Union and 10 other members of the trade body - ruled the Byrd Amendment should be brought into line with WTO rules.
The three-member panel said the best way to do that would be to repeal the law, which is credited to Democratic Sen. Robert Byrd of West Virginia.
European Union Trade Commissioner Pascal Lamy also called on the United States to drop the offending provision.
"I strongly hope that, in view of the clear condemnation of the legislation itself and the very broad interests affected, the US will promptly repeal the Byrd amendment as recommended by the panel," Lamy said in a statement.
Richard Mills, a spokesman for the US Trade Representative's office, said the United States had no current plans to repeal the provision.
"We believe that Congress's ability to direct the use of AD/CVD proceeds is consistent with WTO rules. We vigorously defended the Byrd amendment. We disagree with the panel's conclusion and we intend to appeal," Mills said.
A Senate Finance Committee aide said he did not expect Congress to repeal the provision, even if the United States lost the case on appeal.
"I think the Byrd amendment could turn into a major US showdown with the WTO," the aide said.
The ruling appeared to be the latest example of a bias at the WTO against US trade remedy laws, he said.
Congress passed the law in 2000 against the advice of then-President Bill Clinton's administration. Charlene Barshefsky, trade representative at the time, warned that the Byrd Amendment contradicted WTO rules".
But the law quickly won the support of new President (George W.) Bush".
The law caused an uproar in the WTO, where dozens of countries said it undermined principles of the global trading system by encouraging US firms facing cheap foreign competition to claim they were being hurt by dumped imports.
The panel effectively supported that argument, saying the law encouraged US companies to apply for compensation "irrespective of their need for relief..." and that this was "inconsistent with the principle of good faith".
Bush administration officials argued that WTO accords do not state what countries can, or cannot do, with the proceeds of anti-dumping levies.
The panel rejected that argument, saying the Byrd Amendment's provisions were not a "permissible remedy".
But the panel rejected a Mexican complaint that the law amounted to a subsidy to US firms producing goods that compete specifically with imports from Mexico. The panel ruled Mexico had failed to show it had been specially targeted.
The United States' decision to appeal is expected to delay a final decision in the case for at least three to six months.