Volume 22, No. 42 -- October 28, 2002

Posted Monday, October 28, 2002 12:00 am

In This Issue:

* Little Progress Made With Chinese on Post-Shipment Inspections
* Export Licensing Remains Slow For Sensitive Destinations
* Fight Likely to Delay WTO TRIPS Deal on Compulsory Licensing
* Administration Outlines Plan for Labor and Environment Disputes
* Briefs: Chapter 11, Taiwan, Thailand, Trade Facilitation

LITTLE PROGRESS MADE WITH CHINESE ON POST-SHIPMENT INSPECTIONS

License applications for exports to China are likely to continue to face slow reviews, in part, because of the inability of the Bureau of Industry and Security (BIS) to conduct post-shipment verifications (PSV) of past shipments to China. U.S. talks with the Chinese Oct. 9-10 made progress toward a new bilateral agreement on PSVs but left fundamental issues unresolved, according to one BIS source. "We're still very much in the discussing process," he reported.

While the talks held in Beijing by BIS Deputy Under Secretary Karan Bhatia covered the procedures for conducting PSVs, they also were aimed at reaching "an agreement with them on some fundamental points as well," a BIS source told WTTL (see WTTL, Oct. 14, page 3). BISers don't believe the PSV backlog is caused by a lack of Chinese personnel to accompany American inspectors.

BIS officials are careful to separate the PSV problem from the issue of lengthy license reviews. They stress that reaching a new deal with Beijing on verifications won't necessarily speed the licensing process. "There is a mutual desire on both sides to do things that will ultimately strengthen our high-tech trade relationship," one agency source said. "I don't think we can make significant progress until this issue is resolved as a first step," he added.

Earlier in 2002, BIS officials reported that there was a backlog of some 700 PSVs that were required under statute but were not being conducted. More recently, agency officials have asked the Chinese to permit several high-priority visits and some of those inspections have been conducted. As part of a new agreement, BIS may drop its requests for many long-pending PSVs for items that were considered high-performance computers (HPC) when they were exported but no longer meet that definition. "While we recognize we are still under a legal requirement to do these inspections, those are not from our perspective, or anyone's perspective, the most pressing," one BISer said.

EXPORT LICENSING REMAINS SLOW FOR SENSITIVE DESTINATIONS

U.S. foreign policy controls continue to impose long waits for the approval of export licenses for sales to countries of concern or for regional stability issues. Despite these delays, the majority of licenses are approved, while others are often returned without action (RWA) because no license was needed, according to the latest BIS statistics. License applications for sensitive destinations account for nearly one-third of the licenses BIS handles annually, but they represent the toughest cases the agency must review.

In the first six months of 2002, average reviewing times for many of these licenses have been shortened slightly, but rejection rates have edged up (see table below). Overall, review times for all licenses that BIS examines have barely moved at all, edging down to 39 days in the fiscal year that ended Sept. 30, 2002, compared to 40 days for the previous fiscal year, BIS officials reported at Update 2002.

Export licenses for China continue to be the most difficult and among the slowest in the BIS system. The average number of days to get an application approved has dipped in the first half of 2002 to 76 days from 77 in 2001. For the first nine months of this year, however, average review times declined further to 72 days. For China cases that don't get referred to other agencies for review, the processing time this year has dropped to 15 days from 26 days in 2001.

The number of applications for exports to Cuba has jumped due to legislation enacted in 2000, which aimed to ease exports of food and medical products to the country. Not only were 80% of these applications approved so far this year, but BIS reported receiving notifications for 132 shipments with a value of $864 million that were exported under License Exception AGR. BIS is examining it licensing process for Cuban cases to see if it can be improved.

Although restrictions on India and Pakistan were eased in 2001, review times for applications that are still required remain slow and the number applications rejected runs higher than for other sensitive destinations. Licensing restrictions were loosened for exports to the Pakistani military for use in support of Operation Enduring Freedom, the U.S. war in Afghanistan. A policy of denial remained in effect for exports to the military that weren't in support of the war. BIS rejected a larger number of licenses for Pakistan in the first half of the year than in 2001. It also rejected a large proportion of licenses for India and took longer to review them.

BIS Licensing For Countries of Concern 2001 vs. Six Months 2002

------------------------2001-------------------

Processed Approved (%) Rejected (%) RWA'd (%) Average Processing Days

China                 1,249         897 (72%)         39 (3%)                 313 (25%)                     77
Cuba                     252         210 (83%)          2 (1%)                    40 (16%)                    35
Hong Kong            152         104 (68%)          8 (5%)                    40 (26%)                    42
India                  1,255         849 (68%)         92 (7%)                 314 (25%)                     41
Libya                      12            3 (25%)           2 (17%)                   7 (58%)                   130
N. Korea                 15            9 (60%)           0                            6 (40%)                     55
Pakistan                  40           11 (28%)          11 (28%)                18 (45%)                     68
Syria                     150         104 (69%)          11 (7%)                  35 (23%)                     50

------------January - June 2002---------------

Processed Approved (%) Rejected (%) RWA'd (%) Average Processing Days

China                 694                 492 (71%)       25 (4%)             177 (26%)                  76
Cuba                  167                 133 (80%)         3 (2%)               31 (18%)                 37
Hong Kong           81                   66 (81%)         4 (5%)               11 (14%)                 39
India                  444                 260 (59%)        47 (10%)           137 (31%)                 47
Libya                     1                    1 (100%)        0                         0                           43
N. Korea              16                    6 (38%)          0                       10 (62%)                 44
Pakistan               42                   12 (29%)        14 (33%)             16 (38%)                 44
Syria                    85                   52 (61%)         3 (4%)               30 (35%)                 47

FIGHT LIKELY TO DELAY WTO TRIPS DEAL ON COMPULSORY LICENSING

World Trade Organization (WTO) negotiators aren't likely to reach a deal this year on new rules for the compulsory licensing of pharmaceuticals, a goal they set at the Doha Ministerial in November 2001. Recent informal talks have seen an increasingly bitter division over the interpretation of the accord ministers reached in Doha on how the agreement on Trade-Related Intellectual Property Rights (TRIPs) should be applied to least developing countries that want to issue compulsory licenses for drugs to deal with major public health problems.

The ministers agreed that TRIPS should not prevent members from taking measures to protect public health. They instructed the WTO TRIPS Council to develop recommendations by December for how countries with no drug manufacturing capability can issue compulsory licenses to producers in other countries to supply the needed medicines (see WTTL, June 10, page 1).

The U.S. pharmaceutical industry, which reluctantly accepted the Doha agreement, is complaining that countries such as Brazil, China, Egypt and India are trying to broaden the scope of the deal. Rather than limiting the liberalization of compulsory licensing rules to drugs for the treatment of such epidemics as AIDS, tuberculosis and malaria, these countries want the new policy to apply also to medicines for other conditions, including heart disease, cancer and diabetes or whatever a country determines to be a major health problem.

These countries also want to broaden the list of countries eligible to use the more liberal compulsory licensing rules to include not just the least developed but any developing country. Egypt and Singapore reportedly are among the countries that are claiming they should be entitled to the new rules for compulsory licensing.

"As we are going toward what is supposed to be the final time period [in the talks], we are quite disturbed to see a number of countries pulling away from the discussions they had on an unofficial basis and taking official positions that are far from anything anticipated at Doha," said Shannon Herzfeld, vice president of the Pharmaceutical Research and Manufacturers Association (Pharma). "What we are seeing is an Oklahoma land grab," she told WTTL. Pharma is also concerned that the proposed interpretations of the Doha text will be used by generic drug firms in developed countries to circumvent existing patent restrictions.

Consumer groups and AIDS activists are taking a contrary view, claiming the Doha agreement wasn't restricted only to epidemics. They say AIDS, TB and malaria were cited only as examples of health problems that could trigger use of the new compulsory licensing rules. Negotiators in Doha discussed the application of the proposed changes to conditions such as diabetes, cancer and asthma, contends James Love, director of the Consumer Project on Technology. The possible delay of an agreement isn't a problem, he claims, because the new rules will only affect drugs coming to market several years from now and TRIPS doesn't apply to the least developed countries now. "I'm happy nothing will happen," Love told WTTL.

U.S. Trade Representative (USTR) Robert Zoellick agreed to the accord on health as part of a strategy to gain African support for U.S. positions in the ministerial declaration that launched the Doha Round. Love said the current U.S. negotiating position, which supports Pharma's interpretation of the Doha agreement, is part of a continuing strategy "to isolate Africa from Asia and Latin America." The direction of the TRIPS talks will be on the agenda of a mini-trade ministerial meeting that will be held in Sydney, Australia, Nov. 14-15. Representatives of both Pharma and consumer groups are expected to be at the meeting to lobby for their positions. The TRIPS Council is scheduled to meet at the end of November to take up the issue.

ADMINISTRATION OUTLINES PLAN FOR LABOR AND ENVIRONMENT DISPUTES

In coming free trade area (FTA) agreement talks with Chile and Singapore, Washington intends to propose a plan for using monetary fines to enforce the labor and environment provisions of the pending accords. Bush administration officials claim their plan meets the requirements of the fast-track or trade promotion authority (FTA) provisions of the Trade Act of 2002, which made the inclusion of labor and environment language in future trade deals a principle negotiating objective for the U.S. and called for an enforcement mechanism that would be equivalent to the mechanism adopted for commercial disputes.

The plan would create two separate baskets of remedies, one for commercial disputes and one for labor and environment disputes. Both alternative options seek to meet TPA instructions which called for disputes to be resolved in a timely manner, with trade-opening compensation preferred over retaliation and in a way that limits injury to third parties.

The basket of tools for resolving commercial disputes would establish a hierarchy of remedies, starting with compensation through the reduction of tariffs or trade barriers by the losing party, the suspension of concessions or retaliation by the winning party or the paying of a fine by the losing party equal to the lost trade caused by the illegal trade action.

For disputes over the failure of a party to meet its obligation to enforce its own labor and environment laws, the "default mechanism" would be a monetary fine, which would be paid as long as the offending practice continues. As with commercial disputes, the level of the fine could be set by a panel. Only if a losing party fails to pay the fine would the winner be able to use an "alternative collection system" to force payment. That alternative could be the suspension of concessions against the losing party or the imposition of an import surcharge on its goods. The fines could go into an escrow account that the losing party could use to improve its enforcement of its labor and environment laws and to train personnel responsible for enforcing them.

How the level of fines would be determined for labor and environment disputes will be one of the most difficult issues that will face negotiators as they try to complete the FTA talks by the end of 2002. The U.S. will propose a set of criteria that panels could use in deciding the amount. These include the persistence of the offending practice, its duration, what steps have been taken to fix the problem and the value of trade affected.

U.S. officials say the fines aren't intended to be punitive, as they might be in a tort or antitrust suit, but high enough to encourage compliance. They recognize that the value of trade affected by these practices may be very low, which may make it difficult to set a fine at a level that would force compliance unless additional factors could be used to raise the amount of the levy.

Bush administration officials have briefed members of Congress and their staffs on the proposal, as well as the business community, unions and environmental groups. They say they may modify the proposal in response to comments they received before it is presented to Chile and Singapore at talks in early November.

Congressional reaction has been generally favorable among both Democrats and Republicans. Reps. Cal Dooley (D-Calif.), William Jefferson (D-La.) and John Tanner (D-Tenn.) issued a joint statement saying the proposal "will fulfill the obligations set forth in TPA and will be an effective method of enforcing trade commitments."

Congressional staffers have asked for more details on the plan, especially on how the fine mechanism would work, who would collect them, where they would go and how they would be set. They also questioned whether the system for labor and environment disputes really would be equivalent to the mechanism for settling commercial disputes, as required by TPA.

"TPA gave us a road map to do that," one administration official said. "It wasn't crystal clear, but it was clear enough for us to do that," he added. "TPA did not require us to have an identical enforcement mechanism for labor and environment as for commercial disputes. In fact, TPA's other requirement, that the enforcement mechanisms be appropriate to the subject matter and the nature of the dispute, means that they shouldn't be identical," he stated.

* * * BRIEFS * * *

CHAPTER 11: Canada said it received notice Oct. 21 that, in damage phase of review, NAFTA Tribunal has awarded $6.05 million to S.D. Myers of Tallmadge, Ohio, which sued Ottawa under NAFTA Chapter 11 rules for blocking exports of PCBs to U.S. for processing by company. Myers won ruling in 2000 that Canada violated NAFTA' national treatment and minimum standard-of-treatment requirements.

TAIWAN: U.S. exports of motor vehicles, rice, fish and other food products to Taiwan would double if the U.S. and Taiwan reached FTA deal, ITC reported Oct. 21 in report assessing impact of bilateral trade pact (ITC Pub. No. 3548). Overall, however, deal would produce "relatively small economy-wide effects" on both countries.

THAILAND: U.S. and Thailand Oct. 23 signed Trade and Investment Framework Agreement.

TRADE FACILITATION: World Bank report presented to trade ministers attending APEC Summit in Mexico Oct. 23-24 said action on trade facilitation, including investments in improving ports, regulatory systems, electronic commerce and standards, could increase trade among APEC members by more than 10% or $280 billion. This would be greater benefit than tariff cutting, report claimed.