Volume 22, No. 29 -- July 22, 2002

DEEMED EXPORT BACKLOG EASES, BUT CONDITIONS REMAIN PROBLEM

A combination of better interagency cooperation and the slowdown of the high-tech economy has helped ease the backlog of "deemed export" license cases pending at the Bureau of Industry and Security (BIS).  But just as the backlog issue is being resolved, industry is complaining that the conditions being placed on license approvals are becoming more burdensome.

The backlog problem, which seemed to be fixed at the end of the Clinton administration, resurfaced again after the Sept. 11 attacks and the closer scrutiny given to foreign nationals coming into the U.S.  Industry sources give credit to BIS Under Secretary Kenneth Juster and Assistant Secretary Jim Jochum for gaining agreement from State and Defense on a plan for speeding the review of deemed export licenses.  As part of the arrangement, BIS is doing a larger share of the background checking on individuals who are the subject of these applications.

While cases are moving at a more reasonable pace, exporters say approval conditions are barring foreign employees from projects they have been hired for.  This has particularly been a problem in the semiconductor manufacturing sector where conditions have blocked some foreigners from having access to design information for certain micro-width technology.  In other cases, the conditions require foreign workers to be insulated from restricted areas.

"Companies are going through the licensing process and then finding the very thing they want the person to work on, he can't work on," one industry source complained.  Firms say some conditions reflect the personal views and restrictive attitudes of staffers at the Defense Security Technology Administration and not real technology issues.  BIS is trying to revise the standard set of conditions attached to deemed export license approvals to make them more usable.
 

CHINA REPORT FORESHADOWS TOUGHER LICENSING AND LEGISLATION

Exporting community representatives are warning that a new report on Chinese efforts to acquire U.S. technology could further slow BIS licensing decisions on exports to China and trigger legislation to restrict trade and investment with Chinese entities.  The U.S.-China Security Review Commission's report, released July 15, seeks to expand pre-license and post-shipment verification requirements beyond high-performance computers to cover sensitive dual-use exports, as well as a mandatory program that would require all U.S. companies to report any trade and investment relationships with China involving technology transfer (see WTTL, July 15, page 1).

The report, which portrays China as a growing military and economic threat to the U.S., includes 21 recommendations aimed at tightening controls on the flow of economic resources and technology to China.  "This report fits into several things I've seen recently that indicate the U.S. government is shifting its attitude toward China," one industry representative told WTTL.  The report of the congressionally mandated and funded commission could spur legislation that would implement some of its recommendations, the source cautioned.

While chances for enactment of the Export Administration Act (EAA) this year have grown faint, restrictive amendments could be added to other legislation, he warned.  The annual Defense authorization or appropriations bills could serve as a vehicle.  Even if tougher legislation isn't enacted, the report may kill chances for repealing restrictions on computer and satellite sales to China.

The report calls for legislation to require Defense and the FBI to conduct annual assessments of Chinese targeting of sensitive U.S. weapons-related technology.  It also recommends changes in U.S. investment laws and Security and Exchange Commission (SEC) statutes to require foreign firms seeking to raise capital in the U.S. to report business activities in countries subject to U.S. sanctions.  Language implementing such a policy is in pending legislation aimed at Sudan.  There are also recommendations seeking tougher enforcement of China's WTO obligations.

Former BXA Under Secretary William Reinsch, who is now president of the National Foreign Trade Council, was the sole dissenter on the commission's 12-member board.  In a separate dissenting statement, he said the portion of the report on computer controls "reflects a Cold War mentality that ignores both the spread of these technologies over the past decade and their importance in bringing freer communications and information to the Chinese people."
 

BAUCUS FAVORS WAYS & MEANS APPROACH TO CUSTOMS MOVE

It is increasingly likely that Customs will retain its identify and trade-related functions in the proposed Department of Homeland Security (DHS), although the agency will be significantly reduced from its current size.  Following a July 16 Senate Finance Committee hearing on the agency's future in a new department, Chairman Max Baucus (D-Mont.) said he favors revising the Bush administration's proposal for establishing DHS (H.R. 5005) in ways similar to the amendment the House Ways and Means Committee adopted (see WTTL, July 15, page 1).

"There will be some changes [in the proposal] along the lines of Ways and Means," Baucus said.  "I think that makes sense," he added.  Baucus said his approach would "keep Customs separate with a commissioner."  But he also admitted the process is "very early and very fluid."

The Ways and Means proposal also has gotten the support of House leaders, who originally were planning to keep all of Customs intact in the new department.  In a proposed "chairman's mark" presented to the House Select Committee on Homeland Security July 19, House Majority Leader Dick Armey (R-Texas) adopted the approach reported out by Ways and Means.

At the Finance hearing, Treasury Deputy Secretary Kenneth Dam argued for keeping Customs undivided in DHS.  Without referring to the changes Ways and Means made, he said, "We face the substantial danger of undermining current synergies, if some Customs functions are split off from the others."  Dam said "walling off Customs might not be optimum."

Dam also was concerned about changes in the legislation that would limit the DHS secretary's ability to restructure Customs to fit the needs of the department.  In an attempt to protect Customs' trade functions, Ways and Means amended H.R. 5005 to restrict the secretary's ability to change the agency's organization.  "Such an approach would unduly limit the latitude and accountability of the new secretary's ability to manage the new department," he argued.

The effort of Ways and Means to construct a new, smaller Customs Service within DHS by moving specific job titles into the new agency and preventing those jobs from being eliminated also was a concern of former-Customs Deputy Commissioner Samuel Banks, who is now with Travis & Sanders Trade Advisory Services.  "The trouble with putting that into statute is that it roots Customs into the past," he cautioned.  "Customs is trying to change the way it does business, moving from a transaction process to an account processing path.  You don't need to handcuff the new management," Banks told the committee.

Colleen Kelley, president of the National Treasury Employees Union, voiced the concerns of Customs employees about their benefits in a proposed DHS and their right to union representation.  "Despite of the comments that were read into the record or what Governor Ridge said about employee rights, that is not the language that is in the proposed legislation," she said.

James Clawson, of JBC International, which represents the Joint Industry Group, urged Finance to keep its oversight of Customs.  He stressed the importance of providing adequate funding for Customs in DHS and for implementing the Automated Commercial Environment (ACE).  It has taken seven years to get money to implement the 1994 Customs Modernization Act, he noted.
 

TALK OF LAME-DUCK SESSION RAISES CONCERN ABOUT TRADE AND FSC BILLS

There is more and more talk in Congress about lawmakers coming back after the November elections for a lame-duck session to complete action on still-stalled appropriations bills.  Tied to that speculation is the possibility that fast-track legislation and a measure to eliminate the Foreign Sales Corporation/Extraterritorial Income (ETI) tax law also may get pushed over to a post-election session (see story below).  Congressional staffers say they have mixed views on the possibility of that happening and whether delay will help get those measures enacted.  If action on those bills awaits a lamb-duck session, there is a risk that neither will pass this year.

Those favoring delay say post-election action will ease the pressure on members who are afraid of casting votes on a pro-trade bill or on easing taxes for U.S. firms operating abroad.  They point to the passage of Uruguay Round Agreement Act, which cleared Congress in a lame-duck session in 1994.

Other congressional sources caution, however, that such a scenario only works if control of the two house of Congress remains split between Democrats and Republicans.  If one party wins both houses in November, there is a probability the leaders of the winning party will throw out the measures passed by the House and Senate and the compromised they had to make and come back next year with legislation that contains mostly the views of their party.

Ways and Means Committee Chairman Bill Thomas (R-Calif.) called talk of a lame-duck session a "red herring."  Suggesting there is always a reason not to deal with trade legislation, he said, "everything is better to deal with when it is just after an election."  The impetus to vote on repealing FSC/ETI remains the threat of retaliation by the EU, Thomas argued.
 

FOREIGN FIRMS IN U.S. GET LITTLE SYMPATHY FOR LOST TAX BENEFITS

Congressional tax law drafters are showing no sympathy for foreign firms that complain about the tax increase they face under proposals to restrict the use of "earnings stripping" in legislation (H.R. 5095) that would repeal the Foreign Sales Corporation (FSC)/Extraterritorial Income (ETI) tax rules and amend tax code provisions on inversions (see WTTL, July 15, page 3).  Foreign firms are now getting a special benefit under U.S. tax rules and the proposed legislation merely reduces that benefit, congressional sources argue.   "Obviously, they are getting less, but should they have gotten [the benefit] in the first place? No," one source said.

Ways and Means Chairman Bill Thomas' (R-Calif.) bill would limit the ability of subsidiaries in the U.S. to borrow from their foreign parents and deduct the interest payments on those loans from their U.S. tax bill.  The cost of changing the rules on earnings stripping and eliminating expatriation benefits will be an estimated extra $62 million in taxes in 2002, $235 million in 2003 and $821 million by 2012 when the changes are fully implemented, according to preliminary tax staff figures.  The total bite will be $2.6 billion over five years and more than $6.3 billion over 10 years.

The committee estimated that the repeal of ETI will produce $2.255 billion in extra taxes in 2003, plus $67 million from repeal of FSC transition rules.  Those figures jump to $4.642 billion and $56 million, respectively, in 2004.  By 2012, ETI repeal will cost exporters $6.359 billion in additional taxes, the budget estimate projects.  Over five years, the total will be $21.957 billion and over 10 years, $51.233 billion.  The bill's tax-cutting provisions are supposed to offset much of that added tax burden, although not necessarily for the same firms.  Over five years, the committee projects a total of $6.4 billion in increased taxes, but over 10 years, the extra tax becomes only $1.1 billion.

The proposal has drawn opposition from such firms as Daimler-Chrysler, Sony and Nestle, which have major U.S. operations but are foreign owned.  Industry groups note that one in seven U.S. manufacturing jobs are at plants owned by a foreign company.  Business community sources say these concerns are shared by some Ways and Means Committee members who may try to slowdown committee action on the measure.  The bill also will be slowed because the chances of its passage in the Senate are "slim, fat and none," one industry representative said.

The bill is also being criticized by U.S. firms, especially in the aerospace, defense and intellectual property communities, which don't have operations abroad and benefit now from FSC/ETI rules.  There are also complaints, particularly from Democrats, that the bill favors firms that move manufacturing overseas.  Counterbalancing that opposition, is support coming from banking, insurance and services firms that get better treatment under the proposal.

Bill provisions on long-term leases may get changed, Thomas indicated.  "Leasing, especially long-term leases, may be treated as sales," he said.  "Those are the kinds of adjustments we are thinking of making in the bill," he told reporters July 17.  He wouldn't predict when the committee will begin marking up the bill.  "We're currently in an information and education stage," he said.  "When that stage ends, we'll move forward," Thomas said.

 * * * BRIEFS * * *

STEEL: European Commission July 19 said it would recommend delaying retaliation against U.S. Section 201 steel tariffs until Sept. 30.  Recommendation came after EC criticized U.S. steel exclusion decisions as inadequate.  "We're pleased to see that the Europeans have stepped back from unilateral trade retaliation, which would not have helped Europe, the United States, or the world trading system," said Associate USTR Josette Shiner.  Meanwhile, U.S. granted 14 more exclusion requests July 19.

FAST TRACK: Senate Finance Committee Chairman Max Baucus (D-Mont.) and House Ways and Means Committee Chairman Bill Thomas (R-Calif.) settled dispute July 18 over who would chair Conference Committee on fast-track legislation.  Thomas will hold ceremonial gavel.  But no meeting of conference had been announced and formal meetings may be delayed until September.  House and Senate staffers, however, are likely to use August recess to iron out technical proposals to offer their bosses.

SOFTWOOD LUMBER: ITA in July 17 Federal Register spelled out procedures it intends to use to consider requests for expedited review of countervailing duty orders on softwood lumber from Canada (see WTTL, July 1, Page 3).  Agency initiated 73 of 100 requests that were filed, saying others were deficient or incomplete.  Firms whose requests weren't accepted will have chance to fix them.

WTO: Trade Negotiations Committee July 19 broke impasse over start of talks on non-agriculture market access issues (See WTTL, July 15, page 3).  Compromise calls for "outline" of agreement on modalities of negotiations to be completed by March 31, 2003 and final agreement by May 31, 2003.

TRADE FIGURES: Although U.S. exports are still down from year ago, tide may have turned upward, latest trade figures show.  U.S. goods exports in May were $57.3 billion, down 8% from May 2001.  Services exports were off 1.5% to $23.4 billion.  But goods imports are on rise again, growing 2% from last May to $98.8 billion, as services imports rose 1% to $19.5 billion.

BYRD AMENDMENT: Canada said WTO dispute-settlement panel has ruled in its favor, declaring Byrd Amendment payments to antidumping and countervailing duty petitioners to violate WTO rules.

TEXTILES: Amendment requiring CBI-eligible apparel to have dying and finishing done in U.S. was attached to House-Senate Conference Committee report on supplemental spending bill July 18.

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.