Volume 22, No. 3 -- January 21, 2002

U.S. WON'T LOOK FOR TEST CASE TO CHALLENGE CHINA'S WTO COMPLIANCE

U.S. trade officials won't go out of their way to find out if China is failing to live up to the commitments it made when it became a member of the World Trade Organization (WTO) in December.  While U.S. trade agencies will address complaints brought to their attention about Beijing's compliance, they will set a "neutral standard" that will treat them the same way they deal with complaints against any trading partner, one source said.

The central clearinghouse for reviewing complaints will be the interagency Trade Policy Staff Committee (TPSC), which is chaired by the U.S. Trade Representative's (USTR) office.  The TPSC meets monthly to review trade complaints.  It will judge China complaints on a case-by-case basis to decide whether to deal with the issues bilaterally, multilaterally or to take them to the WTO.

The initial challenge facing the TPSC is to review a flood of trade regulations Beijing has begun to propose to meet its WTO obligations to provide transparency in its rules.  These regulations have to be translated, studied and then commented on.  The examination of the first of these regulations on insurance and biotechnology is finding that their vagueness is a bigger problem than any specific deviation from WTO requirements.  USTR staffers will be going to Beijing shortly for talks aimed at clarifying the proposed insurance regulation.

U.S. officials expect the main complaints from U.S. business in China will deal with practices that are not covered by WTO rules.  Some of these complaints may deal with the interpretation of contracts, which has been a problem area before.  Distribution, one of the sectors covered by the U.S.-China bilateral trade agreement on accession, also could present trouble because there is no central government control over distribution, which is often regulated locally.

 
COMMISSION REPORT COULD PUT MORE PRESSURE ON EXPORTS TO CHINA

A report due this June from a commission examining U.S. trade and national security concerns with China could reignited public and congressional concerns about export controls imposed on sales to China and to Chinese firms in the U.S.  Two days of hearings by the U.S.-China Security Review Commission Jan. 17-18 focused on export licensing policies and the expected impact of China's accession to the WTO.

The ideologically diverse makeup of the 12-member commission foreshadows a report that will be thin on consensus but far-ranging in warnings about the need for tighter controls on exports to China.  Questions raised by commission members hint at the issues they will want to address in that report.

For example, Roger Robinson, who chairs the conservative William Casey Institute, pressed witnesses on his pet effort to require Chinese and U.S. companies that are seeking listing or financing on Wall Street to disclose their ties to the People's Liberation Army.  Former Reagan administration Defense official Stephen Bryen questioned the military impact of easing controls on high-performance computers (HPC).  Counterbalancing the hawkish slant of the commission is former Bureau of Export Administration (BXA) Under Secretary William Reinsch, who is now president of the National Foreign Trade Council.

Robinson's questions drew mixed responses from Lisa Bronson, Defense deputy under secretary for technology security policy and counterproliferation, and BXA Assistant Secretary James Jochum.  Bronson said she has thought about restricting Chinese access to U.S. financial markets as a way to assert leverage on Chinese companies seeking to do business with the U.S.  "It is certainly fair game to consider what levers to use," she said.  Jochum, however, pointed out that the Bush administration has opposed similar suggestions in legislation that would have included reporting requirements on companies doing business in Sudan.

Commission members also raised concerns about "leakage" of U.S. technology through Chinese "front companies" in the U.S. which may be acquiring U.S. goods and technology and shipping them back to China illegally.  Commission member George Becker, president emeritus of the United Steelworkers, questioned reports that there may be thousands of Chinese fronts operating in the U.S.  "We don't know what we don't know," conceded Vann Van Dienpen, acting deputy assistant secretary of State for nonproliferation controls.

Bush administration officials who testified at the Jan. 17 hearing on U.S. export controls indicated that export licensing decisions will be driven increasingly by Washington's concerns about industries that China has identified as "pockets of excellence."  The Chinese are putting resources into these sectors as part of a broad effort to modernize their industries and military.  "In particular, our view of microelectronics dual-use licenses is colored by our evolving understanding of what China wants," Bronson testified.

BXA Assistant Secretary for Export Enforcement Michael Garcia complained about a backlog of 700 post-shipment verification (PSV) inspections in China caused by PSV requirements for old computer sales and Beijing's resistance to doing some inspections.  Although statutory requirements for PSVs for HPCs have been dropped, BXA believes it is still obligated to conduct visits for computers shipped under the old rules, including many operating at less than 10,000 Million Theoretical Operations Per Second (MTOPS).  BXA conducted 42 PSVs of HPCs in 2001 under a bilateral agreement with Beijing, but it can't get China to move PSVs for larger computers and noncomputers to the head of the line, Garcia told the commission.
 

U.S. LIKELY TO ASK EU FOR EXTENSION OF CEASE FIRE ON FSC

When European Union (EU) Trade Commissioner Pascal Lamy comes to Washington Jan. 24-25 for talks with USTR Robert Zoellick, one top item on their agenda will be an American request for more time to comply with the WTO Appellate Body ruling against the Extraterritorial Tax Income Exclusion (ETI) Act.  The U.S. will seek an extension of the September 2000 agreement, under which the EU agreed not to retaliate against the old Foreign Sales Corporation (FSC) tax rules until the WTO process ran its course, because Congress won't be able to change the tax code before March 28, when a WTO arbitration panel is expected to decide how much compensation or retaliation the EU is entitle to.

While there is support among some Republicans in the House to amend the tax code to fix the FSC problem by totally eliminating federal taxes on foreign source corporate income, such a measure is unlikely to pass the Democrat-controlled Senate.  "Our current tax system must undergo fundamental change," said Ways and Means Chairman Bill Thomas (R-Calif.).  "It is now clear that we have to reform the U.S. tax code not out of desire but out of necessity to maintain international competitiveness," he added.  Some lawmakers would like to see the long-term fix for FSC to be part of negotiations in the new WTO Doha Development Round.  Pending fast-track legislation would make talks on taxation of foreign income one of the objectives for U.S. negotiators.  The U.S. would enter such talks at a disadvantage, since it would clearly be seeking a concession to avoid retaliation.

The WTO is expected to adopt the Appellate ruling by Jan. 28.  Then a WTO arbitration panel will have until March 28 to decide the level of countermeasures that can be taken against the U.S. tax rules.  The Appellate ruling Jan. 14 upheld an earlier dispute-settlement panel decision that the ETI didn't satisfactorily fix the problems with FSC and still provides an export subsidy.  The body agreed with the panel that the law continues to forego taxes that are "otherwise due," provides benefits that are contingent on exporting, doesn't serve to prevent "double taxation," violates WTO agriculture rules on subsidies, and violates national treatment requirements because it requires U.S.-origin content.

Although $4 billion is cited as the potential retaliation the U.S. might face for failing to comply with the WTO ruling, that figure is misleading.  That number is based on Internal Revenue Service (IRS) data on the estimated tax revenue lost due to FSC/ETI.  The EU claims that is the amount of subsidy that should be offset by retaliation.  But that number covers all U.S. exports to all destinations.  The EU accounted for just under 22% of U.S. goods exports in 2001 and less in previous years.  Even if all U.S. exports to the EU benefited from FSC/ETI, which they don't, its share would only be $880 million.

The four other countries that participated as third parties in the case, Australia, Canada, Japan and India, accounted for an additional 32.4% of U.S. merchandise exports.  It is not clear whether they or other WTO members would exercise their rights to get compensation or threaten retaliation.  Those countries and the EU face restraints in retaliating against U.S. exports because a large share of U.S. exports are made by their own multinational corporations located in the U.S.  In addition, a significant chuck of U.S. exports go to related-parties, either parent corporations or subsidiaries, in those countries.  For example, according to a Census report, 30.5% of U.S. exports to the EU in 2000 went to related parties.  For exports to Canada the figure was 41.2% and for Japan, 37.4%.
 

MIXED ITC FINDINGS ON WHEAT STYMIES USTR SEARCH FOR REMEDY

USTR Robert Zoellick has been forced to extend his Section 301 investigation into the practices of the Canadian Wheat Board (CWB) because an International Trade Commission (ITC) report on Canadian practices didn't support many of the complaints raised by the North Dakota Wheat Commission (NDWC).  Zoellick has put off a decision in the case until Feb. 15.

In comments to the USTR's office on the ITC report, NDWC said the commission and USTR staff couldn't verify its charges because the CWB had refused to cooperate and provide needed data on its sales and costs.  "If the Section 301 Committee has been unable to collect more data from the CWB, the USTR must draw an adverse inference," wrote NDWC attorney Charles Hunnicutt of Robins, Kaplan, Miller and Ciresi.

The NDWC asked Zoellick to impose a tariff rate quota (TRQ) on imports of Canadian durum wheat and other wheat.  It proposed an extra $50 per ton tariff on durum imports of 300, 000 tons or more and $50 per ton on imports of 500,000 tons and more of other wheat varieties.

CWB comments noted that the ITC didn't find it under-pricing in the U.S. or over-delivering on quality, two of NDWC's main charges.  The ITC said U.S. and Canadian prices are about the same and over-delivery a common practice on both sides of the border.  CWB complained that the ITC was too selective in choosing foreign markets for comparing U.S. and CWB prices.  Caught in the battle between U.S. and Canadian wheat growers, the North American Millers Association (NAMA) submitted comments objecting to a TRQ on imports to the U.S. because the ITC didn't find price cutting of Canadian wheat.

"If the USTR believes the CWB has engaged in predatory pricing in overseas markets, the proposed remedy is even more inappropriate," NAMA contended.  In addition to hurting U.S. millers, "the wheat it prevents from entering the U.S. would simply be diverted to overseas sales, displacing U.S. wheat sales to markets about which the petitioners care so much," NAMA argued.
 

TEXTILE INDUSTRY ROLE IN WASHINGTON SEEN DIMINISHING

A 25% reduction in the staff of the American Textile Manufacturers Institute (ATMI) portends a major change in the role of textiles in U.S. trade policy.  The association Jan. 15 said its executive vice president Carlos Moore is leaving and four other top staffers, including its chief lobbyist, Doug Bulcao, were having their jobs eliminated.  Moore will remain on half-time duty for a year after a successor is found and will focus his attention on trade matters.

The cuts at ATMI come after the association lost half its income over the last three years due to the loss of members from industry consolidation and the bankruptcy of several leading textile manufacturers.  In addition, some companies have quit the group over policy differences.

The industry has been slowly losing its clout in Washington over the last 20 years as it has shrunk and its major ally, the apparel industry, shifted to reliance on imports.  Its inability to hold on to key votes against fast-track legislation in the House in December reflected that weakened position (see WTTL, Dec. 10, page 4).  There is speculation that ATMI may eventually cease to exist.  But as one source said: "I would never count them down and out."

Sources expect ATMI to come increasingly under the sway of Roger Milliken, the outspoke head of Milliken & Co.  The industry's smaller role is likely to be felt in the soon-to-begin Doha Development Round, where textile tariffs will be a major issue.  The changes also leave questions about how the industry will address the end of the current textile quota system in 2005.  It is widely expected the end of quotas will spark a barrage of antidumping and countervailing duty litigation.  Litigation instead of legislation may be the industry's last trump card.

 * * * BRIEFS * * *

CENTRAL AMERICA: After years of rebuffing Central American requests for free trade agreement, President Bush Jan. 16 said he is prepared to start such talks, although he gave no date for beginning negotiations.  He said administration would consult with Congress.  Costa Rica, El Salvador, Guatemala, Honduras and Nicaragua, have been seeking FTA with U.S. since Clinton administration.

TRADE FIGURES: U.S. merchandise exports in November dropped to $56.2 billion, down 15% from November 2000, Commerce reported Jan. 18.  Services exports were off 11% to $22 billion.  Import of goods in November sank 14% from year ago to $90 billion, as services imports declined 15% to $16 billion.

FINAL IRONY: In Jan. 17 Federal Register, Customs announced availability of dumping and CVD funds for distribution to injured U.S. firms under Byrd Amendment.  Most firms identified as eligible to share $24 million in duties on TVs from Japan are foreign.  List includes Hitachi, Matsushita, Philips, Toshiba and JVC.  Notice identifies 24 antidumping and CVD cases that have produced funds for distribution.

PNEUMATIC CONTROL: The Pneumatics Group filed antidumping petitions with ITA and ITC Jan. 14 against imports of pneumatic directional control valves from Japan.

SEDs: Missed in Dec. 28 Federal Register was Census call for public comments on adding several reporting requirements for ITAR Munitions List items on automated AES submissions.

CUSTOMS: Customs Commissioner Robert Bonner Jan. 17 announced plans for new Container Security Initiative, which will seek agreements with 10 "megaports" around world to provide pre-screening of shipping containers headed for U.S.  Shippers that participate would be eligible for expedited treatment at U.S. ports, he promised.  Those top 10 ports account for almost half of containers entering U.S.

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.