Volume 22, No. 40 -- October 14, 2002

Posted Monday, October 14, 2002 12:00 am

In This Issue:

* White House Takes Risky Approach to EAA Legislation
* BIS Fighting Defense Over License Exception Restrictions
* U.S. Industry Opposes Formula Approach to WTO Tariff Talks
* Mandatory AES Filing For Controlled Items Moves Closer
* BIS Seeks New Deal With China to Conduct Verifications
* McDermott Warns Administration to Comply with Trade Legislation
* Briefs: USTR, Export Privileges, Andes

WHITE HOUSE TAKES RISKY APPROACH TO EAA LEGISLATION

Before Congress adjourns for the year, the Bush administration is making a last-ditch effort with House Republican leaders to get a new Export Administration Act (EAA) passed. In attempting to circumvent the House Armed Services Committee, however, it is taking a high-risk gamble, business community sources warn. A bipartisan coalition of Armed Services members, led by Rep. Duncan Hunter (R-Calif.), is trying to scuttle the White House effort.

The White House is working with House Speaker Dennis Hastert (R-Ill.), Rules Chairman David Drier (R-Calif.) and House International Relations Chairman Henry Hyde (R-Ill.) to find compromise language to tone down amendments added to the House version of EAA (H.R. 2581). "The administration is in discussions and negotiations with the House leadership, and we feel we are very close to concluding that process in a way that will be satisfactory," said Bureau of Industry and Security (BIS) Under Secretary Kenneth Juster.

Hunter and other Armed Services members have been angered by the White House effort to cut them out of negotiating on a final bill. He recently wrote to Hastert to complain about the process and has circulated "Dear Colleague" letters to other lawmakers to stir up opposition to any compromise that doesn't include the committee. Meanwhile, a coalition of exporting companies and trade associations wrote to Hastert Oct. 8 to remind him of the business community's concerns with amendments that have been added to H.R. 2581.

The White House goal apparently is a compromise measure that could pass the House over the objections of Armed Services members and still be acceptable to backers of the Senate's EAA bill (S. 149). It has been talking to Senate Republicans about potential changes, but has not provided any specific written proposals, one source reported.

In this dream scenario, the Senate would accept the House version without demanding a time-consuming House-Senate Conference Committee. The fly in the ointment for that game plan may be the five conservative Senators who opposed S. 149 when it passed the Senate in 2001. They could try to block the legislation again. While there are likely enough votes to force cloture to get the bill to the floor, the number of days left for legislative maneuvering is dwindling rapidly.

BIS FIGHTING DEFENSE OVER EXPORT LICENSE EXCEPTION RESTRICTIONS

Bureau of Industry & Security (BIS) staffers are in the midst of a case-by-case struggle with the Defense Technology Security Administration (DTSA) over Pentagon efforts to impose limitations on the use of license exceptions as a condition for the approval of "deemed export" licenses. One BIS official called the issue "a big problem" that is being escalated to the political levels of Commerce and Defense for resolution. Another BISer said DTSA's position is part of a broader Pentagon effort to restrict the use of license exceptions in general.

Most of the battle over the conditions is being fought in the interagency Operating Committee (OC), which attempts to settle differences over licensing decisions. In many cases, when exporters have been contacted about the conditions DTSA wants to impose, they have acquiesced to the lose of license exception eligibility just to get their licenses approved, one BISer explained.

There have been interagency discussions for almost a year on revising the standard conditions attached to deemed export licenses. The last time this policy was defined was in 1997. Most of the talk until recently centered on raising the technical levels of the conditions to match changes in export policies and regulations. Lately, BIS has tried to shift the focus to a broader examination of the use of conditions. The dispute over the expansion of conditions to deny license exception eligibility has just begun to get raised.

In the license review process, DTSA has proposed the addition of conditions on deemed export licenses for technology that is peripheral to the technology that is the subject of the application even when that adjacent technology is eligible for license exception TSR. Sometimes that technology is not so close, BISers contend. The conditions have mainly been applied on nationals from such countries as India and South Korea, which are eligible for license exceptions. Restrictions on use of TSR were imposed in recently published rules for space qualified items (see WTTL, Sept. 30, page 1).

"There is a great debate over whether it is legally appropriate to write a condition that would in essence void a license exception," admits William Kane, director of DTSA's licensing division. "The fact of the matter is that we've been doing it since 1997 with license conditions," he adds. The issue usually comes up when a license application covers multiple Export Control Classiciation Numbers (ECCNs).

For example, an application may seek approval to give a foreign national access to electronics technology in ECCN 3E001, but DTSA will want to add 4E001 for microprocessors. "We think we should condition the license for 4E001 as well, because the nature of the work is that they are not only going to do electronics work, but they are also doing it with regard to microprocessors," Kane says. "So we think the license should include 4E001," he adds. One option DTSA may seek is to have licenses specify technology down to the subparagraph level rather than covering all the technology in a general category, he notes.

U.S. INDUSTRY OPPOSES FORMULA' APPROACH IN WTO TARIFF TALKS

The Bush administration hasn't decided how to approach non-agriculture market access negotiations in the Doha Round, but it will reach a decision by the end of November when it plans to present a paper to the World Trade Organization (WTO) in Geneva, according to one U.S. trade official. As the U.S. Trade Representative's (USTR) office prepares that paper, it is hearing strong opposition from U.S. industry to using the traditional "formula" approach to cutting tariffs. In previous trade rounds, tariffs were cut by a fixed percentage by most participants.

WTO non-agriculture market access talks are about two years behind talks in agriculture and services. Only in July did negotiators agree on a schedule for submitting proposals for the "modalities" for conducting negotiations. Negotiators now hope to catch up with the other groups, and plan to agree on the modality for negotiation by May 2003.

"For our part, we are continuing to explore a number of modalities," the trade official said, speaking on the condition of anonymity. While many countries are again pushing for a formula approach, there have also been proposals for using a "cocktail" approach that would cover nontariff barriers (NTBs), as well as low and peak tariffs. Least developed countries have called for a plan that would allow them to offer less than full reciprocity in tariff cutting. These nations want to continue to receive the "special and differential" treatment they have traditionally been granted in past trade rounds. "We want to be responsive to the S&D provisions in the Doha Declaration," the trade official said.

U.S. industry opposes the old formula approach and is advocating a "sectorial" approach that would focus on the most significant products and markets. Reducing tariffs by a fixed percentage, unless based on applied rates, won't work because developed countries already have low rates, while many developing countries have high ones. A formula approach would still leave those high rates too high, Frank Vargo, vice president of the National Association of Manufactures, (NAM), told the TradeProExpo Conference in Washington, Oct. 9.

Some 25 industrial sectors support this approach, as well as trade groups in Germany, Canada and the United Kingdom, Vargo noted. The sectorial plan aims to reach zero tariffs in identified sectors, but not for all countries. The goal would be to get "a critical mass of countries that account for a significant percentage of trade in that commodity" to participate, he said. While least developed countries could be left out of the deal, "you've got to get the developing countries of South America and Southeast Asia to play," Vargo stressed..

"This round is not going to be a success unless it includes very substantial reductions in non-agricultural trade barriers," Vargo said. "Anyone who thinks the round can be brought to a successful conclusion just in agriculture is mistaken," he added. "It can't pass Congress, if manufacturers stay home and say there is nothing there for us," Vargo argued.

MANDATORY AES FILING FOR CONTROLLED ITEMS MOVES CLOSER

With the first robins of spring, exporters can also expect final implementation of new rules requiring the electronic filing of Shipper's Export Declarations (SED) and manifests for items on the Commerce Control List (CCL) and Munitions List (ML) through the Customs Automated Export System (AES). After months of delay, Census Oct. 9 finally published a notice of proposed rulemaking and request for comments on the statutorily mandated requirement for exporters of controlled goods to file export documentation via AES.

Acting under 1999 legislation requiring use of AES, Census officials say they will move quickly after reviewing the comments to issue a final order and have the new rule take effect by April or May. Census said it does not expect the new requirement to be a burden on small exporters, since 90% of the 128,000 exporters who are considered small firms use forwarding agents to handle their shipments. In addition, about 86% of all SEDs are now filed on AES.

The major changes will be the addition on extra fields of information that will have to be provided on the electronic filing, particularly for ML items. These include one new data record and eight new data elements required by State. State also is expected to issue a separate revision of the International Traffic in Arms Regulation (ITAR) to impose advance filing requirements on ML shippers. As expected, the Census notice also includes a proposal to eliminate the availability of Option 3 filing of SED data five days after export (see WTTL, Sept. 23, page 1). Only 53 filers are using Option 3 and only seven use it exclusively.

BIS SEEKS NEW DEAL WITH CHINA TO CONDUCT VERIFICATIONS

BIS's publication in June of a list of "unverified end users," which included nine Chinese entities, has gotten Beijing's attention and may lead to the revision of the 1998 bilateral accord on the conducting of post-shipment verifications (PSV), according to BIS Under Secretary Kenneth Juster. "We are negotiating with them now to put in place a new arrangement that would allow end-use visits that are at a similar level as those for other countries," he said.

A delegation of Chinese officials came to Washington in September to discuss problems with the PSV process, and BIS Deputy Under Secretary Karan Bhatia was in China the week of Oct. 7 for consultations on the issue. "When we came into office, there was a lack of cooperation by the Chinese on this issue," Juster told reporters Oct. 10. That appears to be changing.

Early in 2001, the backlog of PSVs in China had reached about 700. Most were for high-performance computers (HPC) over 2,000 million theoretical operations per second (MTOPS) and are still pending. Since then, HPC controls have been raised to 190,000 MTOPS, and many of those old PSVs have become low priority. BIS is now focusing on getting inspections for the most sensitive technologies exported to China. "We had given the Chinese a list of 20 high-priority items earlier this year, and we have completed about half of them," Juster said.

BIS placed 11 foreign entities on the unverified end-user list based on its inability to conduct PSVs on previous exports to them. Although exporters have raised concerns about the list, Juster said he was unaware of any of the entities trying to get delisted. "I'm not going to prejudge a case before I've heard it, but I'm unaware of any case being filed or requested," he said. "I would suggest the most compelling way to get removed from the list would be to permit the end-use visit to be conducted," he added.

McDERMOTT WARNS ADMINISTRATION TO COMPLY WITH TRADE LEGISLATION

Any attempt by the Bush administration to avoid compliance with the negotiating goals in fast-track legislation, could worsen the existing split over trade policy and make approval of future trade deals more difficult, warned Rep. Jim McDermott (D-Wash.). Unless there is a change in the substance and process for trade negotiations, the atmosphere of polarization created during the fast-track debate "isn't going to go away by itself," he told the TradeProExpo Conference in Washington Oct. 9. "In fact, it will continue to fester, creating the conditions that will make the debates on each of the agreements brought back under fast track just as cantankerous and just as partisan as the debate on fast track itself," he continued.

McDermott, who serves on the Ways and Means Committee, called on the White House to provide closer and real consultations with Congress during trade talks. A key test of the administration's effort to work with Congress will come in how it treats labor and environment provisions in future trade deals, he said. In particular, he is waiting to see how the White House treats labor and environment enforcement in the Singapore and Chile free trade area (FTA) agreements.

"The only sense of the administration's direction we have on this enforcement issue comes from Ambassador Zoellick's alarming focus on the word equivalent,' suggesting that he intends to create a separate enforcement approach for labor and environment provisions. Big mistake," McDermott said. "If the administration wants to exacerbate the polarization, it can try to create a new formula and hang it on the word equivalent," he declared..

* * * BRIEFS * * *

USTR: USTR Robert Zoellick Oct. 9 named Christopher Padilla to be assistant USTR for intergovernmental affairs and public liaison. Padilla was director of international relations for Eastman Kodak.

EXPORT PRIVILEGES: BXA in Oct. 12 Federal Register notice denied export licensing privileges until 2010 for All Ports of Norfolk, Va. and Patte Sun until 2008 and Bing Sun until 2010 based on their 2000 conviction for violating Arms Export Control Act by exporting Munitions List items to China without licenses. Patte Sun is now in Alderson Federal Prison in West Virginia. Bing Sun is in Seymour Johnson Federal Prison Camp in North Carolina.

ANDES: U.S. imports from countries benefiting from Andean Trade Preferences Act in 2001 came to only $9.6 billion and had a "negligible" effect on U.S. economy, ITC reported Oct. 8 (Pub. No. 3538).