Volume 22, No. 28 -- July 15, 2002

DEFENSE PROPOSAL SEEKS TO CONTROL COMPUTER NETWORKS

Initial Defense proposals for a new yardstick to control computer exports would set the bar at a point that would control only 50 to 60 of the fastest computer systems now in operation in the world.  Nonetheless, computer industry executives are concerned that number would jump to 120 in the next six months and keep expanding after that, as computing power follows its historic progression.  More than the exact level of control, the proposal "creates uncertainty," one source said.  "Industry doesn't know how people will enforce it or expand it," he noted.

Industry sources are also worried the computer control plan being developed by staff at the Defense Technology Security Administration (DTSA) is getting support from top Pentagon officials, including Deputy Secretary Paul Wolfowitz.  A group of industry executives met with Wolfowitz in June in an effort to convince him that the DTSA proposals won't work (see WTTL, July 1, page 1).

DTSA is drafting a computer control metric to replace the current measure, which is expressed in million theoretical operations per second (MTOPS).  Its alternative is a formula using a billion or giga floating operations per second (GFLOPS).  The agency wants set the new control level at 400 Adjusted GFLOPS, industry sources say.  In addition, since no machine on the market operates at that speed, DTSA's plan would control the whole computer system.  Industry sources say they are unsure how these controls would be applied in practice or how network or system components would be controlled.

Whatever plan comes out of Defense will need the approval of the White House National Security Council (NSC).  Industry executives say they hope the NSC will block the Pentagon proposal.  They caution, however, that a new report from the U.S.-China Security Review Commission, which warns about economic and strategic threats from China, may create a new congressional clamor for tightening export controls on China.  If Congress decides to impose new restrictions on high-tech trade with China, it may act through the National Defense Authorization Act (NDAA) which it used in 1998 to impose computer controls based on MTOPS.  Rather than MTOPS, such legislation could adopt the GFLOPS metric, one source warned.
 

FUTURE STRUCTURE OF CUSTOMS SERVICE REMAINS UNCERTAIN

The attempt by the House Ways and Means Committee to create a mini-Customs Service within the proposed Department of Homeland Security (DHS) may have short-lived prospects.  Even before the committee July 10 marked up its portions of the DHS legislation (H.R. 5005), House Majority Leader Dick Armey (R-Texas) reportedly had already drafted a broader plan for the bill, including provisions that would keep Customs together in its current form in the new department.

Armey chairs the Select Committee on Homeland Security, which has the task of melding all the marked-up pieces of DHS legislation coming from the various House commit-tees that have jurisdiction over the parts that might go into the new department.  Armey's challenge is to keep H.R. 5005 as close as possible to what the White House proposed, while also appeasing committees that are afraid of losing their current jurisdiction over functions that might be moved to DHS (see WTTL, June 24, page 2).

Just as Ways and Means is trying to maintain its oversight of Customs, other committees also have amended the legislation to strip out parts they don't want to see in the new department.  For example, the Judiciary Committee's markup moved the Secret Service to Justice from Treasury and not to DHS as the White House wanted.  The Transportation Committee decided to keep the Coast Guard in Transportation rather than move it to DHS.

Jurisdiction concerns were clearly among the factors behind the en bloc amendment to H.R. 5005 that Ways and Means Chairman Bill Thomas (R-Calif.) proposed.  "We can try to hang on to all of it and fail or hang on to the part we have jurisdiction over," he told the committee.  If Ways and Means can keep that jurisdiction, it would calm some concerns the trade community has about coming under a department whose main responsibility is security (see story below).

By a 34-3 vote, the committee adopted the Thomas amendment, which would establish a new Customs Service headed by a commissioner within DHS under an under secretary for Border and Transportation Security.  The amendment would require DHS to submit a separate annual budget for the agency and to apply all Customs user fees to Customs functions.  It would transfer to the new Customs all trade and revenue functions of the current service.

Rather than attempting to identify which functions will be moved to this new Customs, the proposal calls for transferring individuals by their title.  Thus, it would transfer to the new agency all import specialists, entry specialists, drawback specialists, national import specialists, fines and penalties specialists, attorneys of the office of regulation and rulings, Customs auditors, international trade specialists and financial service specialists.

About 4,800 Customs employees -- 25% of the agency -- would move to the new entity, committee staff estimated.  The measure would preserve current pay and benefits for personnel who are moved but doesn't assure their right to be union representation.  "I understand that the proposal is not intended to interfere with union or collective bargaining status.  That status would transfer over," Treasury Under Secretary Jimmy Gurule told the committee.

While trade and revenue-related Customs staff will move to the mini-Customs in DHS, the legal authority for their functions will remain with the secretary of the Treasury, who is authorized to delegate that authority to DHS.  This would, in effect, create a dotted line connecting Treasury to Customs on a government organization chart.

By keeping revenue authority with the government's chief financial officer, the amendment avoids having to amend all the existing legislation that identifies the Treasury secretary by name.  The amendment specifically cites 15 statutes whose implementation remains Treasury's responsibility, including the Trade Acts of 1930, 1974 and 1979, NAFTA, the Uruguay Round Agreements Act, the Foreign Trade Zone Act and the Caribbean Basin Economic Recovery Act.
 

TRADE COMMUNITY WARY OF PROPOSED SHIFT OF CUSTOMS

While the ultimate fate of Customs is still undecided, the trade community and U.S. trading partners continue to raise concerns about how trade operations at U.S. ports will be affected by the agency's move to a proposed Department of Homeland Security (DHS).  The Ways and Means Committee's proposal to create a mini-Customs within DHS with jurisdiction over Customs Service trade and revenue functions has drawn questions about how this new agency
would work in practice.

Industry is worried that no matter what changes are enacted, there will be a period of confusion and disruption at U.S. ports.  There is already speculation that Congress will have to come back in the next few years to examine the impact of any reorganization and may have to enact new legislation to correct decisions it made in haste.

I'm not sure how this will work," one industry representative told WTTL.  "This is not what we wanted," she added.  "We have been pushing for a single-window concept" to reduce the number of agencies importers have to deal with at the ports, she said.  Splitting Customs with trade and revenue on one side and border security on the other may create more windows, this source suggested.

"The logic to it escape me," said Lee Sandler of Sandler, Travis and Rosenberg.  "My continuing fear is that everyone is saying the right thing about keeping ports operating efficiently, but once you set this up, you need procedures in place so it works," he added.

Sandler also voiced concern about the impact the proposed changes will have on the morale of Customs agents. "I would not like to lose the identity of the Customs Service, its sense of history and the way officials rally around it," he noted.
 

DOHA ROUND TALKS ON MARKET ACCESS BLOCKED AGAIN

Vincent Duke's old standard, "I Can't Get Started" may become the theme song for the World Trade Organization (WTO) working group on market access issues in the Doha Development Round.  A planned July 11-12 meeting of the group was canceled after the European Union (EU) refused to agree to a proposed schedule of negotiations for the coming year.  The dispute over the group's negotiating plan has been kicked up to the Doha Round's Trade Negotiations Committee, which will address it at a July 18 meeting.

The EU's opposition to the schedule for talks followed previous moves by developing countries, particularly India and Egypt, to block agreement on a schedule (see WTTL, April 22, page 2).  In an effort to get the talks moving, Swiss Ambassador Pierre-Louis Girard, who chairs the market-access talks, proposed May 31, 2003 as the deadline for reaching an agreement on the "modalities" or structure for future negotiations on tariff cutting and market opening.

Girard presented his plan for talks at an informal meeting of WTO delegates July 5.  The EU rejected the proposal because it wants an earlier deadline that would coincide with those set for talks in services and agriculture.  Developing countries want a later target.  An effort by the U.S., Canada and Japan to mediate the split -- by suggesting that talks start and the deadline be agreed to later -- failed.  If the TNC can resolve the dispute, Girard may attempt to hold a meeting of the market access group either July 31 or Aug. 1, one source in Geneva said.
 

THOMAS TAX PROPOSAL FACES OPPOSITION FROM MANY SIDES

Legislation House Ways and Means Committee Chairman Bill Thomas (R-Calif.) introduced July 11 to repeal the Foreign Sales Corporation/Extraterritorial Income (FSC/ETI) tax law may solve one transatlantic dispute, but ignite another one (see WTTL, July 1, page 1).  While eliminating tax rules that the WTO has determined to be illegal export subsidies, the bill (H.R. 5095) includes provisions that would limit the ability of foreign-owned subsidiaries in the U.S. to deduct fully interest on loans from their parent companies abroad.

Not by coincidence, the main targets of this provision are multinational companies in the EU and Japan, the two U.S. trading partners that are threatening to retaliate against American exports unless FSC/ETI are repealed.  As expected, the proposed change in the so-called "earnings stripping" tax rules has triggered complaints from representatives of foreign firms in the U.S., but it also has raised concerns of U.S. multinationals who are afraid other countries might enact mirror legislation hitting their tax deductions abroad.

The FSC/ETI part of the bill aims to show the EU that the U.S. is moving toward compliance with the WTO ruling and Europe should therefore continue to defer retaliation against U.S. goods.  "Introduction of legislation that would bring the United States into compliance with the WTO findings in the FSC dispute is a very important step," said U.S. Trade Representative (USTR) Robert Zoellick.

In addition to foreign objections, the proposal will be opposed by firms on the losing side of the winners-and-losers line the bill draws.  Thomas said his bill is "revenue neutral" to the Treasury, because it raises some $75 billion to $80 billion over ten years in new taxes from the repeal of FSC/ETI and earning stripping rules, but provides the same amount of new tax savings to business.  But firms getting tax increases aren't necessarily those that are getting tax decreases.  The major losers are exporters without foreign income to offset lost FSC/ETI benefits.

Tax experts also note the lack of an adequate transition period for companies that face a big tax hit on protected income once FSC/ETI is repealed.  With some $5 billion in taxes shielded by current FSC/ETI rules annually, that amount of tax will have to be paid by someone.
 

FAST-TRACK CONFERENCE FINALLY LEAPS KEY SENATE HURDLE

The Senate July 12 finally overcame a numbers game over how many conferees should be named to the House-Senate Conference Committee that will iron out differences between the two bodies on fast-track legislation.  Senate Majority Leader Thomas Daschle (D-S.C.) used his prerogative to name three Democrats, Sens. Max Baucus (Mont.), Jay Rockefeller (W.Va.) and John Breaux (La.), and two Republicans, Charles Grassley (Iowa) and Orrin Hatch (Utah).

The smaller Senate team will increase the likelihood that the conference will lean toward the Senate-passed version of fast track.  Earlier in the week, Daschle said he wanted the 3-2 split to reflect the sentiments of the Democratic Caucus.  "Support for TPA, support for wage insurance.  These are issues that are very important to the Caucus," he said.  "I want to make sure that we don't put senators in a difficult position in having to uphold the position of the Caucus, if they have not been in support of them in times past," he said.

A larger contingent likely would have included in Sen. Kent Conrad (D-N.D.), who voted against the final Senate fast-track bill (H.R. 3009).  It also might have added Sens. Don Nickles (R-Okla.) or Phil Gramm (R-Texas), who opposed the expanded benefits added to Trade Adjustment Assistance and the Dayton-Craig Amendment (see WTTL, July 1, page 3).

 * * * BRIEFS * * *

MEXICO: USTR Robert Zoellick July 12 said he was disappointed with Mexican Supreme Court ruling, which will "restore a protectionist and discriminatory tax on beverages sweetened with high fructose corn syrup" (HFCS).  "Today's court action makes it more imperative for the Mexican government to end its unjustified discrimination against HFCS," he said.

CENTRAL AMERICA: Assistant USTR Regina Vargo held fifth round of preliminary talks July 10-11 with delegation of representatives from five Central American countries that want to negotiate free trade agreement with U.S.  Even though there is no formal initiation of FTA talks, advance work will save time once those talks begin, Vargo said.

STEEL: Commerce and USTR July 11 announced exclusion of 23 more products from Section 201 tariffs.

SACCHARIN: PMC Specialties Group July 11 filed antidumping complaints at ITC and ITA against import of saccharin from China.

CLEMENTINES: USDA July 11 moved to defuse another U.S.-EU dispute, lifting import ban on Spanish clementines that meet conditions to prevent introduction of Mediterranean fruit fly.

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.