Volume 22, No. 11 -- March 18, 2002

REVISED ENCRYPTION RULES WILL CLARIFY MASS-MARKET EXCEPTION

Bureau of Export Administration (BXA) reviews of  "mass-market" eligibility requests for encryption-containing software exports would be completed within 30 days under a planned change in the Export Administration Regulation (EAR), agency officials report.  After a year of debate, interagency agreement has been reached on key technical changes to the October 2000 encryption rules, and a draft revision to the regulation is heading to interagency review.

The proposal would update EAR policies and procedures for making mass-market determinations and implement the Wassenaar Arrangement's December 2000 agreement to revise multilateral rules on encryption.  The European Union (EU) implemented those changes in March 2001, giving European software firms an advantage over American companies, BXA officials admit.

The proposed rules would clarify what type of information exporters would need to submit to demonstrate that their product qualifies for the mass-market exception.  Interagency review of the submissions would have to be completed in 30 days.  If a product is determined to be eligible for mass-market treatment, it would still be subject to anti-terrorism (AT) controls, but would not have to submit semiannual reports and won't need to seek de minimis rulings.  The proposed EAR change also would make it clear the one-time technical review of encryption software for licensing exceptions is neither a commodity classification review nor a license application; thus avoiding restrictions that apply to such reviews.

Additional changes will clarify control policies that have confused exporters since the encryption regulation was published.  These modifications would address the control of software test equipment, key length exceptions and short-range wireless products.  If a mass-market eligibility request doesn't meet the criteria in the coming rules, it will be returned without action or converted to a license exception request which won't be subject to the 30-day deadline.
 

ENCRYPTION EXCEPTION REVIEW TIMES DROPPED IN 2001

Better interagency agreement, especially from Defense, on which encryption products should be exempt from licensing requirements helped cut the time for review of one-time technical exception requests.   License exception review time dropped to an average of 53 days last year from 67 days, according to BXA encryption staff chief Norman LaCroix.  During the year, BXA reviewed 1,364 exceptions, of which 81% were found eligible for retail product classification.  When BXA's review of exports eligible for no-license required (NLR) status are included, the number of products examined by the agency goes up to 1,900.

Only 200 individual license applications were review in 2001.  The agency approved 157, RWA'd 36 and denied only one, LaCroix told the Regulations and Procedures Technical Advisory Committee (RAPTAC).  BXA also handled 191 requests for de minimis determinations.  Of these, 54% were granted such treatment.  This compares to 2000 when BXA reviewed 123 de minimis requests and okayed 48%.  The backlog of de minimis requests has been cleared up, LaCroix claimed.

BXA's trend analysis of the exception requests found that encryption products used for e-commerce, network security, management and administration comprise about 25% of these submissions.  Another 14% cover products for individual users, personal data systems and browsers; 13% are for items used by corpora-tions in virtual private networking or routing systems; and 12% are for encryption products in business collaboration, e-mail and messaging systems.
 

COMMENTS WARN OF DISRUPTIONS FROM ENDING CANADA'S MTCR STATUS

The potential elimination of Canada's exemption from licensing requirements for Missile Technology Control Regime (MTCR) items would disrupt more than $10 billion in two-way defense trade and require scores of new export applications, according to comments on BXA's advance notice of proposed rulemaking (see WTTL, Dec. 24, page 3).   BXA issued the notice in response to a General Accounting Office (GAO) report which said it wasn't enforcing MTCR licensing requirements imposed by the National Defense Authorization Act (NDAA).

As detailed in the comments on the notice, the extent of integration between U.S. and Canadian defense industries is likely to build pressure for a legislative fix to the NDAA requirements on dual-use exports.  Most of the cost and burden of a change in rules will fall on U.S. companies, since six of Canada's top 10 defense firms are subsidiaries of American firms.  Among U.S. defense contractors operating in Canada are Boeing, General Dynamics, General Motors, Litton Systems, Lockheed Martin, Pratt & Whitney, and Raytheon.

"Since the Hyde Park agreement of 1941, Canada and the United States have strived for increased cooperation between their defense and security industries," noted the Canadian Defense Industries Association.  Since then, there have been some 2,500 bilateral agreements aimed at enhancing defense cooperation, it pointed out.  Bilateral defense trade was already damaged by State's dropping of Canada's exemption from licensing requirements for items covered by the International Traffic in Arms Regulation (ITAR) in 1999, despite the exemption's reinstatement in February 2001.  "We have noted an alarming degradation in the ability of Canadian and U.S. defense contractors to quickly enter into mutually supportive contractual relationships," CDIA wrote.

Honeywell told BXA it might have to submit dozens of additional licenses yearly for its exports to Canada.  Licenses would not only be required for aerospace products but also for technology and people.  It also would affect service and repair agreements with Canadians, because each shipment of MTCR items for repair would require a license.  Several firms told BXA they now send inertial navigation equipment to Litton Systems Canada for repair.

Ending Canada's exemption would "result in disruption of the free flow of engineers between our facilities in Canada and the United States as licenses under deemed export' rules will have to be obtained," Honeywell told the agency.  Honeywell also depends on several Canadian firms to write technical publications.  The data given to those companies now is eligible for License Exception TSU or NLR.  "One such company in Canada has produced 20 different technical manuals for Honeywell," the firm stated.

The Canadian government pointed out that EU rules allow license-free exports of MTCR items to Canada.  "Imposing further U.S. licensing on many of the goods that this [defense and aerospace] industry purchases from the U.S. will push Canada's industry to procure equipment from Europe," it warned.  "This would only further hurt the competitiveness of American industry," Canada added.

Boeing told BXA it had identified 18 items on the Commerce Control List (CCL) that are or could be exported to Canada without licenses now but would face licensing if the proposal were adopted.  "Clearly, the imposition of a new licensing requirement would make it significantly more difficult and costly to do business with our Canadian subsidiaries and other Canadian suppliers, including employment of Canadian citizens," Boeing argued.  "In short, the existing exemption is critical to our operations," it declared.
 

COMMISSION OPTION FOR LUMBER DISPUTE HITS SNAGS

A proposal for the creation of a binational commission to determine when Canada has moved sufficiently to an open-market approach to lumber sales has floundered over what criteria such a commission would use for making its ruling.  The commission idea was raised as part of a proposed plan to bridge the transition between Canada's imposition of an export tax on softwood lumber to settle the pending countervailing duty case and the full implementation of promised reforms in the Canadian system (see WTTL, March 11, page 3).  With a commission, rather than Commerce or the U.S. industry, weighing Canada's reforms, some proponents argue the judgment would be less political and more impartial.

The commission proposal "is a nonstarter," John Ragosta, attorney for the Coalition for Fair Lumber Imports, told WTTL.  The problem with the idea is the disagreement over what criteria a commission would use to judge the progress Canada was making toward open-market sales.  The shift to an open-market system supposedly would allow Canada to reduce its export tax.

The Coalition contends the criteria for judging reform must be spelled out in advance and in detail.  It wants benchmarks on the amount of government-owned timber that is sold through competitive bidding, on the easing of log export restrictions and on ending long-term tenures that lock up a significant share of Canadian timber.  Depending on how strict these criteria are, Canada may have trouble ever meeting them, and an export tax might become permanent.

Meanwhile, Canadian Prime Minister Chretian's visit to Washington March 14 helped push negotiations forward, but failed to produce a breakthrough.  Chretian and President Bush discussed the issue in their meeting and encouraged negotiators from both sides to reach an agreement before the March 21 deadline for the International Trade Administration (ITA) to issue its final dumping and subsidy margins in the cases.  "We've agreed to keep working hard to achieve an agreement that is satisfactory to both parties," Bush said after the meeting.

March 21, however, is no longer the deadline for a deal, because any agreement would require the Coalition to withdraw its complaints, which could be done at anytime.  In addition to the export tax and transition plan, the Coalition wants a trigger-price mechanism to control prices of imported lumber as a condition for withdrawing its antidumping complaint.

The International Trade Commission's (ITC) May 8 deadline for announcing its final injury ruling is more crucial, since after that date, if the decision is affirmative, importers would have to start posting cash deposits on penalty duties rather than just bonds.  In this game of high-stakes poker, both sides have to decide whether to risk waiting for the ITA and ITC decisions or to reach a certain but less than perfect deal.
 

EU WILL INSIST ON COMPENSATION FOR SECTION 201 STEEL ACTION

Consultations between the U.S. and EU March 19 on European demands for compensation for President Bush's imposition of Section 201 safeguard measures on steel won't go anywhere, but they will set the stage for Brussels to invoke its World Trade Organization (WTO) rights for retaliation.  Article 8 of the WTO Safeguard Agreement requires countries imposing such relief to "endeavor" to maintain a substantially equivalent level of concessions for the countries hit with restrictions.

If compensation consultations fail, the complaining country can suspend concessions granted to the 201-imposing country.  That suspension of concessions can only be imposed after three years or when a WTO panel finds the safeguard action in violation of WTO rules.  The EU is confident the U.S. action will be declared WTO-illegal.

A preview of the talks was provided in letters between Deputy U.S. Trade Representative Linnet Deily and EU Ambassador to the WTO Carlo Trojan. "We believe that immediate compensation backed by threats of unilateral trade retaliation are deeply mistaken," Deily wrote in her March 11 letter.  She discounted EU claims that the 201 action will drive a surge of steel exports to the EU from other countries hit by the tariffs Bush imposed.

"We believe those fears are exaggerated and, indeed, may not be borne out," she wrote.  Deily said the U.S. imports more than a trillion dollars in goods and steel accounts for roughly just one percent of that.  "Moreover, with the U.S. economy now expanding and the dollar at a high rate, demand in the United States for steel imports should remain strong," she declared.

Trojan argued that the problem with American steel isn't imports but the high legacy costs for retired worker health and pension benefits.  "Until the U.S. is willing to tackle these issues, no amount of protection will enable its older plants to become internationally competitive," Trojan wrote in his March 15 reply.  "The absence of any domestic restructuring proposals or requirements on the U.S. industry, therefore, remains a major disappointment," he added.

Trojan objected to the suggestion that the request for compensation is a unilateral threat.  The EU wants the U.S. to honor its safeguard obligations, he said.  "We continue to hope, against experience and not withstanding the reported comments of some senior administration officials, that the U.S. will be prepared to honor its responsibilities in this area," he wrote.

 * * * BRIEFS * * *

TEXTILES: Seeing success of steel industry in getting import relief, some textile firms are starting to organize new push for help from Bush administration.

VICTORY LAP: Having won political raves from steel industry and unions for Section 201 steel ruling, Bush administration is sending Commerce Secretary Evans to Steubenville, Ohio, March 18 and Dravosburg, Pa., March 19 to visit steel plants and talk to workers.

LINE PIPE: WTO Dispute-Settlement Body March 8 adopted Appellate Body ruling which basically upheld dispute-settlement panel's earlier ruling that U.S. acted inconsistent with WTO rules in 2000 when it imposed Section 201 restrictions on circular welded carbon quality line pipe.  Decision, based on complaint by South Korea, represents fourth 201 action struck down by WTO and adds new legal precedents for expected challenges of 201 relief for U.S. steel industry (see story page 3).  Appellate Body agreed that U.S. had not adequately shown that industry's injury wasn't caused by nonimport factors.  It also found Washington had not provided adequate compensation consultations.

EXPORT ENFORCEMENT: BXA in March 11 Federal Register extended temporary denial order on Infocom and Tetrabel of Richardson, Texas, several employees and related respondents. It also added two more individuals and one company, Mynet.Net to TDO.  Since original TDO on Sept. 6, 2001, those named have continued to export computer equipment to Syria and Libya without licenses, BXA said.

SILICON METAL: At request of Globe Metallurgical and several unions, ITA and ITC have launched antidumping investigations into imports of silicon metal from Russia.

EAA: Executives from 20 trade associations and groups wrote March 11 to National Security Advisor Condoleezza Rice asking to meet to discuss steps administration plans to take "to bring export control legislation back on track toward an acceptable version."   Letter noted industry's "deep concern" about amendments House Armed Services Committee added to Export Administration Act (EAA) bill (H.R. 2581) (see WTTL, March 11, page 2).  "Without a clear and workable plan to rescue this legislation, we will have no choice but to actively oppose any further congressional action on these bills," they wrote.

RUSSIA: ITA will hold public hearing March 27 on proposals to end Russia's legal status as nonmarket economy under antidumping and countervailing duty rules (see WTTL, Feb. 25, page 1).

Copyright 2002 by Gilston Communications Group. Reproduction or retransmission in any form is prohibited. Washington Tariff & Trade Letter is published weekly 50 times a year.