Auto protectionism?

"It is our hope that any car scrappage legislation ultimately enacted will remedy these concerns, and that the EU will be able to support this important initiative to promote fuel-efficiency, reduce pollution, and provide a needed boost to the automobile industry," John Bruton, the EU's ambassador to the United States, said in a letter sent to the US Congress on Wednesday.

President Barack Obama supports passage of a "cash-for-clunkers" bill to pay people to turn in their gas guzzlers and replace them with more fuel-efficient vehicles.

But Bruton said Europe is worried that a leading version of the legislation, "as currently drafted, provides benefits only for replacement vehicles assembled in the U.S. or North America, a distinction that would harm car manufacturers from other parts of the world, including Europe."

Such a provision, he added, would be "a clear violation" of World Trade Organization (WTO) rules requiring a country's laws to treat foreign and domestic products equally.

Possible compromise on North American provision

Europe's fears and the concerns that the EU and US may bring their differences before the WTO were partially allayed on Thursday when got a boost after a leading proponent of the "cash-for-clunkers" bill, Ohio Congresswoman Betty Sutton, signaled she may drop a provision limiting the subsidies to purchases of North American made vehicles.

The provision has been a major sticking point in Congressional efforts to merge competing proposals for the program, and Sutton's move brings those who are opposed to the North America requirement closer to a compromise with those who support it.

"It's not so important to me that it has to be done" exactly according to her bill, but rather that a program is passed, Sutton told reporters on Capitol Hill.

Germany, France, and Slovakia - as well as China - have already enacted such trade-in programs but a central feature of the European programs is that they apply to all vehicles, whether assembled in Europe or abroad.

The US may now follow suit as Congressional aides redouble their efforts to find common ground on compromise legislation that could clear Congress within months.

But even if a compromise is reached, lawmakers must find funding for the program. Some have suggested that the money would come from the economic stimulus package passed earlier this year.

Proponents say the program - to provide new-car discounts of $1,500 to $7,500 (1,150 euros – 5,700 euros), depending on the proposal - is desperately needed to lift slumping car sales.