Volume 22, No. 4 -- January 28, 2002

Posted
EU MAY HOLD OFF RETALIATION ON FSC AS FIX MOVES THROUGH CONGRESS

The European Union (EU) won't promise not to retaliate against U.S. Foreign Sales Corporation (FSC) tax benefits, but it will put off sanctions as long as Washington makes good faith progress toward bringing the law into conformity with World Trade Organization (WTO) subsidy rules, EU Trade Commissioner Pascal Lamy implied after meeting with U.S. Trade Representative (USTR) Robert Zoellick Jan. 25.  In the meeting, Zoellick outlined a three-part plan for revising FSC to comply with an Appellate Body decision which found it violated WTO rules.

At a joint press conference, Zoellick said the U.S. is "committed" to meeting its "WTO obligations and to seek to come into compliance with the ruling."   He said his plan includes working with business, tax and government experts to develop proposals for leveling the playing field with countries that have territorial tax systems, consulting with the EU on ideas to resolve the problems with FSC and talking to Congress about legislation to settle the dispute "fairly and to put it to rest." Zoellick said he "didn't expect a response" from Lamy to his proposal.  Hearings in the House Ways and Means Committee on FSC are expected shortly.
Zoellick's proposal shows that "the name of the game is compliance," Lamy said.  "Now what we have to do is ensure a compliance road map is set up so that the confidence we have that the U.S. will take this road is there on our side," he added.  If the U.S. says it is taking that road, "that's fine with us," Lamy said.  "It's another question to maintain our rights under the WTO to leverage on this process," he continued (see WTTL, Jan. 21, page 2).

Lamy doesn't expect Congress to act rapidly on FSC, since the tax law is involved.  "We have enough knowledge and understanding of how things happen in this country," Lamy said.  "We want to be helpful in supporting a coherent and objective goal," he added.

The two officials said they discussed the pending Section 201 decision on steel, and Lamy expressed his concern about possible restrictions on European exports.  Zoellick claimed steel and FSC are separate issues but conceded they play a role in the overall context of trade.  In the discussions, however, "there was no direct linkage" between the two, Zoellick asserted.
 

RUSSIA RESISTS OPENING AGRICULTURE AND SERVICES IN WTO TALKS

As work speeds up on Russia's accession to the WTO, Moscow insists it should be allowed to  maintain export subsidies for agriculture goods and has balked at opening up key service sectors.  These new stumbling blocks to accession were the focus of a Jan. 23-24 meeting in Geneva of the WTO working party on Russia's accession to the trade body.  Except for these areas the meeting reportedly showed that progress was being made in market access talks aimed at cutting Russian tariffs on industrial goods (see WTTL, Nov. 12, page 1).

Work on Russia's WTO accession has suddenly shifted into high gear, with negotiators shooting to complete work in time to have Russian membership approved at the next ministerial meeting, which is planned for the summer of 2003 in Mexico.  If achieved, this schedule would move up Russia's expected accession by nearly 18 months.  Moscow has been passing a steady stream of economic reform legislation to get ready to meet its WTO obligations (see story below).
"Our work over the last two days has moved this accession process into an accelerated and intensive phase," said working party chairman Kare Brin, Norway's ambassador to the WTO.  Russia has been conducting bilateral and market access negotiations with several countries.  "The Russian side expects to conclude negotiations with a significant number of members in the next months," Brin added.  He also said the working party would try to have a draft accession report ready by March 28 and will discuss the text at its next meeting, April 23-24.

Russian representatives at the meeting argued Russia needs to continue helping its struggling farmers, especially in providing subsidies to cover the high cost of transporting agriculture goods across the country's vast interior regions.  They also said Moscow could not come into immediate compliance with WTO sanitary and phytosanitary rules.  The chief U.S. negotiator at the talks, Dorothy Dwoskin, called on Russia to eliminate all farm subsidies that are prohibited by WTO rules.  "A great deal of clarification and substantive work is still required in this important area to ensure that it does not lag behind or delay the overall process," Brin said.

Russian resistance to opening such services sectors as finance, energy, maritime and telecommunications drew objections from the U.S. delegation, as well as from officials representing Norway and New Zealand.  "Regarding services, there is a commonly shared assessment that the bilateral negotiations are not as advanced as those in industrial goods," Brin reported.
 

U.S. INDUSTRIES OBJECT TO DROPPING RUSSIA'S NME STATUS

Whether or not Russia enters the WTO in 2003, key U.S. industries are objecting to Moscow's request that it no longer be considered a nonmarket economy (NME) under the antidumping and countervailing duty (CVD) laws.   Similar objections are being raised against the same request from Kazakhstan.  Comments submitted to Commerce's International Trade Administration (ITA) at the end of last year argue that Russia has not yet met the criteria set in statute to allow a change in its status.  ITA has just extended the period for rebuttal comments to Feb. 7.

The agency is also considering whether to hold a public hearing on the issue.  Although Russia has adopted many changes to its economic and tax laws, ITA sources say it is difficult to judge how those new laws are being implemented.  They also say they won't rely just on the enactment of a new law to determine if Russia should have its status altered.
"I don't think laws or bills per se count unless they are translated into something concrete," one ITA source told WTTL.  The Russians have submitted copies of many of these laws and claim they have moved the country to a market economy.  "We don't have the in-house expertise to verify their data," the source admitted.   As a result, ITA will look at the evaluations of other institutions, such as the European Bank for Reconstruction and Development and the International Monetary Fund, to see how they have judged Russia's economic transition.

Comments submitted to ITA expressed concern that Washington will drop Russia's NME status as part of a broader Bush administration plan to improve relations with Moscow and to offset Russian opposition to a U.S. national missile defense system.  "The department should not declare Russia to be a "market economy' as part of a geopolitical bargain when the country does not come close to satisfying the criteria established by the Congress and by the department itself in its prior decisions," wrote attorneys for steel firms.

"Russia is not a market economy, and simply declaring it to be one prematurely risks rendering antidumping investigations against Russian industries unworkable," wrote lawyers from Skadden, Arps and  Dewey Ballantine.  Going through each of the criterion for determining a country's NME status, they argued that Russia has failed to meet any of them.  They cited currency controls, limits on investment, state control of resources, weak trade unions, and an underdeveloped legal system.

"Most Russian industries would not even pass the market oriented industry (MOI) test, which is supposed to serve as an interim category for transitioning industries," they argued.  Russia is the subject of seven pending antidumping cases covering steel, uranium, magnesium and ammonium nitrate.  All of these cases "would require reexamination if Russia transitions from NME status," they wrote.

Writing on behalf of ferroalloy companies, lawyers with Verner, Liipfert, Bernhard noted that Russia has not made the same economic changes as countries that have had their NME status dropped, including the Czech Republic, Latvia and Slovakia.  "Russia is not remotely in the same category as the three countries the department recently granted market-economy status," they stated.  "The state still plays a large role in key sectors of the economy, including energy and transportation, and competition is nonexistent or severely lacking in the private sector because of the absence of enterprise reform and other structural reforms," they told ITA.

Privatization, they argued, has not created a market economy in Russia, because industries just shifted into the hands of former communist bosses and fair competition is still lacking.  "Privatization has not led to the creation of an effective, functioning market economy because of the weakness or absence of necessary institutions," they added.
 

U.S. LUMBER COALITION OFFERS ALTERNATIVES STEPS FOR CANADA

The U.S. lumber industry has offered a broad plan for bring the prices for government-owned timber in Canada closer prices in the U.S. and for keeping those prices from falling after Canadian provinces move to a more market-oriented systems for stumpage fees.  At a Jan. 22 meeting with Marc Racicot, the Bush administration's special envoy in the lumber talks, members of the Coalition for Fair Lumber Imports rejected as inadequate proposals from the provinces for increasing the market-based sales of timber (see WTTL, Jan. 14, page 1).

In a letter presented to Racicot, the Coalition suggested alternative steps Canadian provinces could take to move their timber sales toward what it considers a free-market system.  One key element would be the reduction or elimination of long-term leases or tenures held by Canadian lumber companies, especially in British Columbia, which give them the right to log government timber.
As long as Canadian firms have these tenures, the Coalition complained, BC's offer to auction 13% of its timber and Quebec's proposal to auction 1% would not raise prices to fair-market levels.  Lower stumpage fees paid under tenure agreements would continue to hold down prices, the Coalition argued.  With the BC offer, "major licensees would never have to harvest a single log competitively," a Coalition attorney said.  The Coalition wants a larger share of Canadian timber sold on the open market.  It also called for Canada to ease restrictions on log exports.

While bilateral negotiations remain bogged down, the legal fight over the pending antidumping and countervailing duty (CVD) cases is reaching a critical point, with ITAers verifying prices and subsidies in Canada.  A preview of the WTO challenge Canada is likely to bring against any final rulings is seen in comments filed in the ITA docket in January and December, contesting the agency's methods for comparing cross-border prices and production costs.

Lawyers for BC, Akin, Gump, Strauss, and attorneys for the BC Lumber Trade Council, Steptoe & Johnson, jointly submitted a report in December claiming the ITA's method for comparing prices was flawed and purporting to show British Columbia production costs are higher than those in Washington State.  Coalition lawyers, Dewey Ballantine, complained about BC's insistence on keeping the underlying data in the report proprietary.
 

ACTION ON FAST TRACK STILL MONTH OR MORE AWAY

Senate action on granting President Bush fast-track negotiating authority won't come until Congress returns from its Presidents' Day recess in mid-February, Senate Finance Committee Chairman Max Baucus (D-Mont.) told reporters Jan. 23.  When the measure does come up, it will "absolutely" include separate legislation to renew and expand the Trade Adjustment Assistance (TAA) program, he said.  Andean trade preferences legislation also might be attached.  "It makes sense as long as we can get agreement," Baucus stated.

As lawmakers return from their winter recess, the Senate agenda is filling quickly, pushing fast track back (see WTTL, Dec, 24, page 1).  In addition to resuming work on the deadlocked economic stimulus package, the Senate will give priority to the long-stalled farm bill and energy legislation.

BXA IMPOSES $1.12 MILLION FINE FOR ILLEGAL EXPORTS TO LIBYA

After a five-year legal battle, the Bureau of Export Administration (BXA) Jan. 24 finally reached a consent agreement with Thane-Coat of Stafford, Texas, and its president, Jerry Vernon Ford, and vice president, Preston John Engebretson.  Under the settlement, BXA imposed a $1.12 million civil fine on the firm and denied it and the two executives export licensing privileges for 25 years.  Thane-Coat, which was charged with 112 export control violations, must pay $600,000 of the fine in 90 days, but the rest of the penalty is suspended and will be waived after two years as long as it doesn't violate the law again during that time.

The consent deal came after Ford and Engebreston pled guilty Oct. 11, 2001 in the Houston U.S. district court to felony charges related to their export of polyurethane pipe coating material to Libya between June 1994 and July 1996.  Cited under the International Emergency Economic Powers Act (IEEPA), the two were sentenced to three years probation and forced to forfeit $800,000 worth of property seized by the government during the investigation.
BXA charged Thane-Coat with shipping the pipe-coating material to the United Kingdom on 37 separate occasions, knowing it was destined for Libya.  BXA generated 112 charges by making one charge of conspiracy, adding 37 charges of exporting without a license, 37 charges of acting with knowledge and 37 charges of making false statements on Shipper's Export Declarations.  Thane-Coat and the two executives have been the subject of a series of temporary export denial orders since 1997.  Two affiliated companies, Export Materials and TIC, reached consent agreements with BXA in 1999 and were denied licensing privileges for 20 years.

 * * * BRIEFS * * *

TAIWAN: Sens. Max Baucus (D-Mont.) and Charles Grassley (R-Iowa) asked ITC Jan. 17 to conduct fact-finding study on likely economic impact of U.S.-Taiwan free trade agreement.

URANIUM: ITC Jan. 22 on 4-0 vote made final affirmative ruling that U.S. industry is materially injured by imports of subsidized low enriched uranium from France, Germany, Netherlands and United Kingdom and dumped imports from France.  EU has protested ruling, which could hit $500 million in EU exports, and threatens to take case to WTO.

ANTIDUMPING: EU Jan. 18 asked WTO to set up arbitration panel to determine how much retaliation it could take against U.S. Antidumping Act of 1916, which Appellate Body had found in violation of WTO rules.  It immediately withdrew request because House Ways and Means Chairman Bill Thomas (R-Calif.) has introduced bill to delete offending provisions of law.

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. 

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