Volume 22, No. 26 -- July 1, 2002

COMPUTER COMPANY CEOs OPPOSE ALTERNATIVE TO MTOPS

A group of top executives from the computer and information technology industries came away from a "very upbeat meeting" with Defense Deputy Secretary Paul Wolfowitz June 27, hoping they were successful in dissuading the Pentagon from pushing a proposal to create a new performance measure for controlling computer exports, according to one participant.  Export license reviewers at Defense have been drafting a proposal to replace the current million theoretical operations per second (MTOPS) metric with a new performance measurement based on a billion or giga floating operations per second (GFLOPS).

The executives, including CEOs from Dell, EMC, IBM, Intel, and Unisys, told Wolfowitz that "any replacement that puts us back in the same box would need to be updated every eight or ten months," one source reported.  "It would put us back on the same treadmill," he added.

The meeting with Wolfowitz was prompted by a meeting industry executives had with Vice President Cheney in January.  Cheney urged the executives to meet with Pentagon officials to work on improving communications between the department and industry.  In addition to computer controls, the executives and Wolfowitz discussed Pentagon "transformation" plans aimed at creating a more high-tech, more mobile, information-drive military structure.

Industry sources say they believe Cheney, President Bush and National Security Advisor Condoleezza Rice support their position on computer export controls but Defense is still resisting change.  Computer firms want to replace the MTOPS performance metric with controls based on end-uses and end-users.  Defense reportedly wants to have its GFLOPS proposal ready for presentation to Wassenaar Arrangement members at working-level meetings in the fall and for adoption at a high-level meeting of Wassenaar representatives in December.
 

THOMAS PROPOSAL ON INTERNATIONAL TAXES MAY SPLIT INDUSTRY

Whether exporters support or oppose legislation House Ways and Means Chairman Bill Thomas (R-Calif.) outlined June 28 to amend the Foreign Sales Corporation (FSC)/Extraterritorial Income (ETI) tax law may depend on a green-eyeshade calculation of the tax gains and loses they will face from the measure.  "The Thomas approach, unless it is done very well, may have the potential to divide the business community, because you will have big winners and big losers," one industry tax expert told WTTL.  A major factor will be the measure's transition rules for FSC/ETI tax shelters that are phased out.  "That will be a big deal," another tax specialist said.

Although Thomas revealed an outline of the plan he is calling the American Competitiveness Act of 2002, he didn't release the actual bill, which he will introduce when Congress returns from its July Fourth recess the week of July 8.  Without the specific language of the proposal, business representatives said they were reluctant to characterize the bill.

In addition to FSC/ETI, the measure will deal with the controversy over so-called tax inversions created when U.S. companies reincorporate offshore in low-tax countries (see WTTL, June 17, page 3).  Several legislative proposals have been made by both Democrats and Republicans, who are playing off public resentment of U.S. companies moving to foreign countries to avoid taxes and the general anti-big business mood in the country caused by recent accounting scandals.

"This legislation seems to be on a political fast track," one observer noted.  The measure also is being driven by a desire to avoid European Union (EU) retaliation against FSC/ETI by showing momentum toward fixing the law, which was found to be an illegal export subsidy.

The Thomas plan calls for eliminating FSC/ETI but providing offsetting benefits for inter-national firms, including simpler foreign tax credit rules, increased expensing for small business, reforming interest allocation rules and removing rules which limit the ability of firms to defer taxes on active income earned abroad.  While these changes may help firms with foreign operations, some industry representatives say they are concerned that small and medium-size FSC/ETI users will lose those benefits and not recoup them with the new rules.  The changes "could leave some people on the shore," one tax expert cautioned.

The proposed changes on tax inversions appear to follow suggestions made by Treasury, including new rules aimed at so-called "earnings stripping," requiring payments on taxes when assets are transferred overseas and imposing excise taxes on stock options and stock-based compensation of corporate officers of firms at the time of an inversion.  Thomas said his proposal "is the only bill that meaningfully addresses the problem of corporate inversions by offering a comprehensive package that removes the juice' that makes inversions so sweet."
 

UKRAINE CLAIMS IT HAS MADE TRANSITION TO MARKET ECONOMY

Since 1991, Ukraine "practically from scratch has created the attributes that, in their entirety, define the economic structure of an independent market economy," claimed Ukrainian Economy Minister Oleksandr Shlapak in comments to the International Trade Administration (ITA) supporting his country's request to have its nonmarket economy (NME) status ended.  Shlapak acknowledged the complaints of opponents to the change who say Ukraine still maintains currency and wage controls, has a weak judicial system and suffers from corruption.   But he claimed those factors are no worse than in other former communist countries, such as Russia and Kazakhstan, which ITA has already declared to be market economies.

Shlapak claimed 75% of Ukrainian goods are produced by private enterprises.  Practically all agriculture production also comes from private entities, he told ITA.  "Ukraine now has the stable convertible national currency as well as laws governing foreign economic activities," he wrote.  Shlapak noted that U.S. firms are the largest investors in Ukraine, accounting for 16.6% of all foreign direct investment.  "It is also true that about 10 U.S. companies have experienced problems in their investment activities in Ukraine," he admitted.

U.S. steel firms that have filed antidumping cases against Ukrainian steel submitted comments objecting to ending its NME status.  "Ukraine maintains a currency surrender law requiring that fifty percent of all foreign currency earned by Ukrainian exporters be converted to the national currency, the UAH [hryvnia]," wrote their attorneys, Collier Shannon Scott.  Shlapak claimed these controls are "aimed at maintaining stability on the Ukrainian currency market."

As it did in its opposition to giving Russia market-economy status, the Ad Hoc Committee of Domestic Nitrogen Producers complained that the Ukraine government "continues to exert substantial control over the natural gas sector so that prices are not market-determined."   Most of this gas, in fact, comes from Russia.  The committee said it "is particularly concerned that the Ukraine government supplies natural gas to the nitrogen fertilizer industry at prices that are not determined by the market."
 

SPEED OF FAST-TRACK CONFERENCE NOW BECOMES CRUCIAL

Bets are being taken on how long a House-Senate Conference Committee will take to iron-out the differences between House and Senate versions of fast-track legislation and a package of trade-related measures, especially Trade Adjustment Assistance (TAA).  If lawmakers can't reach a compromise before they leave for their August recess, there is concern the legislation could get sidetracked again, because members of Congress will want to avoid another controversial trade vote just before the November elections.

Fast track won another landslide victory June 26, when the House voted 216-215 to approve a rule authorizing the naming of conferees to a House-Senate Conference on the Andean Trade Preferences Act (H.R. 3009) and attaching a handful of other trade bills, including Trade Promotion Authority (see WTTL, June 24, page 3).  The start of the conference must still wait until Senate Majority Leader Tom Daschle (D-S.D.) and Minority Leader Trent Lott (R-Miss.) stop squabbling over the size and party proportions for the Senate conferees.

House Republican leaders whipped the vote on the rule at the last minute, but succeeded in winning despite the lose of three textile-state lawmakers who had voted for fast track in December, Reps. Jim DeMint (R-S.C.), Cass Ballenger (R-N.C.) and Robin Hayes (R-N.C.).  Overall, the GOP's ranks held together better than the Democrats'.  Compared to December when 23 Republicans voted against the fast-track bill, only 14 deserted the party on the rule.  Fast-track supporters were also able to hold onto 11 Democratic votes compared to the 21 they had in December.  House rules often are decided on strict party-line votes, but fast-track backers were encouraged by their ability to win even with fewer Democratic votes.

The vote on the rule and approval of a new House position of TAA, gives Ways and Means Chairman Bill Thomas (R-Calif) more to hold going into the House-Senate Conference than an avocado from his California farm-district.  While Senate Democrats have said the 70% tax credit for health insurance included in the Senate bill is the minimum they will accept, the House rule proposes a 60% credit and less funding for TAA.  The conference may come out will a TAA package less generous than the Senate's but better than current law.

Many trade observers say the closeness of the House and Senate on the basic elements of trade-negotiating authority should make that part of the conference less contentious.  A fight is expected over the controversial Dayton-Craig amendment added in the Senate, but it is likely to be dropped.
 

CANADIAN FIRMS SEEK EXPEDITED REVIEW OF LUMBER TARIFFS

Dozens of Canadian softwood lumber firms have asked the International Trade Administration (ITA) to conduct expedited reviews of the individual subsidies they may or may not have received and to issue separate countervailing duty (CVD) and antidumping determinations on their exports.  The firms hope to get a lower rate than the "all other" rate the agency issued in its final rulings on softwood lumber in March (see WTTL, March 25, page 3).  Lower rates will reduce the amount of cash deposit the companies must post on their goods now.

The majority of submissions came from small producers in British Columbia and Quebec that weren't examined during ITA's CVD and antidumping investigations into softwood lumber from Canada.  Many of them claim they buy their lumber on the open market at competitive prices and aren't party to any stumpage fee or tenure agreements with Canadian provinces.

One firm, Cando Contracting, claimed it dealt in used railroad ties that were 30-60 years old in some cases.  Domtar asked for a review of shipments from one mill on the U.S. border that buys its timber from an independent producer which harvests trees on privately owned land.  Lawyers for Canadian producers say they are confident their clients will get their deposits back when a NAFTA binational panel rules in favor of a Canadian complaint against the final rulings.

To make sure Customs doesn't liquidate the imports before then, the government of Canada's lawyers, Weil, Gotshal and Manges asked ITA to order a continued suspension of liquidation until the panel ruling is issued.  Dewey Ballantine, which represents the petitioners, the Coalition for Fair Lumber Imports, objected to that request.  "The department has no legal authority to do what Canada asks and the statute expressly prohibits it," the firm told ITA.
 

ZOELLICK SHAKES UP USTR STAFF WITH NEW APPOINTMENTS

Following the tradition of previous U.S. Trade Representatives (USTR) when they came into office, Robert Zoellick June 27 shuffled the office's career staff, creating new offices, combining others and promoting several individuals.  He said he will establish a new office of South Asian affairs, which will deal India, Pakistan, Afghanistan, Bangladesh, Nepal and Sri Lanka.  The head of the office has not yet been announced.  He also created the post of Deputy Assistant USTR (DAUSTR) for Capacity Building and named Mary Ryckman to the job.

He combined the offices of Japan and China and added Korea into an office of North Asian affairs to be led by Assistant USTR (AUSTR) Wendy Cutler.  A renamed office of Southeast Asia, Pacific and APEC affairs will be headed by Ralph Ives.  The Office of the Americas has been reshaped with John Melle becoming DAUSTR for North America and Karen Lezny named DAUSTR for FTAA.  In a shift of overseas assignments, Nancy Adams moves from USTR=s Brussels office to Geneva to become lead U.S. negotiator in WTO market access talks.  About a dozen other DAUSTRs also were named.

 * * * BRIEFS * * *

EXPORT VIOLATION: Ihsan Elashyi, also known as Sammy Elashi, of Richardson, Texas, pleaded guilty in federal court to exporting computers to Saudi Arabia after being placed on Temporary Denial Order list.  Elashyi, along with two firms he was associated with, Infocom and Tetrabel, were placed on list on Sept. 6, 2001.  He made unlicensed exports on Sept. 22, 2001, according to BIS.

TRADE PEOPLE: Keith Smith has left post as ITA director of legislative affairs to become senior manager for international trade and tax policy in United Technologies' Washington office.  He fill vacancy left by departure of Kristin Paulson, who is moving to Singapore to be president of UTIO, United's international office for Southeast Asia.  In another job change, former Clinton administration chief agriculture negotiator Greg Frazier has been named vice president for regulatory and international affairs at International Dairy Foods Association.

CUSTOMS: Customs Commissioner Robert Bonner has made several key staff changes at top of agency.  Jayson Ahern will be new assistant commissioner for field operations, succeeding Bonni Tischler who is retiring.  Michael Schmitz has been named assistant commissioner for regulations and rules.  Andrew Maner moves to chief of staff post from director of trade relations.

 WTO WATCH

TRADE LAW: WTO dispute-settlement panel has ruled that ITA's use of "fact available" in antidumping investigations is permitted under WTO rules, but found agency failed to provide sufficient legal justification for applying these facts in antidumping case against steel imports from India.

CANADA: Canadians say they will appeal second WTO dispute-settlement panel ruling that found changes it made in its milk export subsidy program still didn't comply with WTO subsidy rules.

TRIPS: EU presented WTO TRIPS Council with proposal June 25 to expand geographical indications protections that are given to wine and spirits to other products.  Change could give exclusivity to such goods as Basmati rice and Parmigiano cheese.  Separately, U.S. and EU presented similar proposals to allow developing countries that don't have pharmaceutical production capacity to issue compulsory licenses for manufacturers in other developing or least developed countries to make drugs for export to licensing country, provided safeguards are in place to prevent diversion of drugs to other countries.

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.