Volume 22, No. 46 -- November 25, 2002


In This Issue:

* White House Launches Review of Defense Trade Controls
* U.S. to Call for Major Cut in Global Tariffs in Doha Round
* Customs Investigating $500 Million In-Bond Fraud Case
* Singapore Accepts U.S. Plan for Fines in Labor and Environment Case
* Commission Recommends Fundamental Shift in Export Licensing
* State Wants to Review Control List for Screening Visas
* Major Disruptions Could Come with End of Textile Quotas
* Brief: Unverified List change


The Bush administration Nov. 22 said it is beginning "a comprehensive assessment of the effectiveness of U.S. defense trade policies," including export licensing and Pentagon procurement of commercial items.  While the announcement focused primarily on defense trade and State implementation of the International Traffic in Arms Regulation (ITAR), industry sources say they expect the review also to cover Bureau of Industry and Security (BIS) licensing policies and the Export Administration Act (EAA).  The multi-agency review of export controls may lead to a change in the administration's approach to EAA, one source suggested.

One goal of the review will be to "identify possible specific modifications, and assess the potential risks to U.S. national security and foreign policy interests posed by such modifications, to current U.S. defense trade licensing policies and practices," the White House said.  It also will look at changes in technology transfer policies that might help the U.S. military benefit from commercial developments and international cooperation.
Another goal will be an assessment of the two-year old Defense Technology Security Initiative (DTSI) (see WTTL, May 29, 2000, page 1).  Among DTSI's aims were the improvement of the Munitions List (ML) licensing process and the negotiation of agreements with U.S. allies to ease the export of military items.  The new review will examine the success of DTSI and will "develop recommendations for either continuing, changing or discontinuing the initiative."   The White House plans were made public just days after a federal commission on the future of the aerospace industry issued a report that included sharp criticism of current licensing policies and the whole approach to export controls (see story page 3).


The U.S. plans to offer a major tariff-cutting proposal to the Doha Round negotiating group on non-agriculture market access in December, including a call for the elimination of all tariffs that are five percent or less and the placing of an 8% cap on all other tariffs.  The U.S. proposal will endorse a formula approach to tariff cutting that will bypass the traditional "request-and-offer" modality used in previous rounds of trade talks.

U.S. trade officials, who have started to brief industry advisory committees and Congress on the plan, emphasize that the proposal matches the tariff-cutting objectives in the fast-tract provisions of the 2002 Trade Act.  Sources who have already been briefed on the plan have called it "radical" and "very forward leaning."  Once source said U.S. apparel importers should be especially pleased with the proposal.
The U.S. proposal goes beyond the zero-for-zero approach to tariff reductions that members of the business community have advocated.  Rather than being limited to selected product categories or based on reciprocity, it will seek the elimination of all low-value tariffs, which often are considered nuisance taxes by importers rather than revenue sources or trade barriers.  No product categories are excluded from the proposal's coverage.  The new trade law reestablished the president's authority to negotiate the elimination of tariffs that are five percent or less without further congressional approval.

The cutting of so-called "tariff peaks" is a goal business groups have pushed.  It is also an aim of less developed countries which have complained that high tariffs block them from moving from commodity exporting into manufacturing.  The U.S. will back a formula proposed by the Swiss for calculating tariff peaks and cuts.  Washington also will try to get negotiators to base future tariff cuts on "applied rates", the actual duties paid on imports, rather than "bound rates", which are the official tariffs countries fixed as their maximum duties in past trade rounds.


In what one Customs official called "a major, major circumvention of our in-bond system," the agency has launched an investigation into the illegal import of some $500 million in apparel that was supposed to transit the U.S. in-bond to Mexico and Central America.  The goods, carried in some 5,000 containers, were reportedly shipped from Hong Kong through Los Angeles and would have been subject to quotas and about $63 million in tariffs if they were to enter the U.S. legitimately, one Customs source said.

Customs has obtained warrants to search the facilities and records of parties that were involved in the shipments in Hong Kong and the U.S.  Customs usually relies on Mexican import certificates to verify that in-bond shipments actually were exported as required.  In this case, "we uncovered that the documents had been tampered with," one source said.


In a tentative free trade area (FTA) deal reached Nov. 18 with the U.S., Singapore accepted a Bush administration proposal to use monetary fines to enforce the labor and environment provisions of the accord.  It also agreed to adopt a NAFTA-based "yarn-forward" rule of origin for textiles and apparel that will be granted tariff-free treatment under the pact.  The deal also reportedly includes provisions that would provide special tariff treatment for information technology products that include both Singapore and Indonesian materials and production.

In October, USTR officials floated a plan to allow participants in future FTAs to seek the payment of a fine, if the other party to the accord failed to enforce existing labor and environment laws (see WTTL, Oct. 28, page 3).  Although the proposal drew support from some Democrats in Congress, it was criticized by labor and environmental groups.  The use of fines "means they don't want to enforce these provisions," one union representative told WTTL.
The U.S. and Singapore reached the "substance of an agreement" after all-night talks in Singapore where U.S. Trade Representative (USTR) Robert Zoellick participated in the final round of meetings.  The last major unresolved issue is a U.S. demand that Singapore waive its rights under World Trade Organization (WTO) rules to impose controls on capital flows and currency if it faces a balance of payments crisis.

After this issue is settled, negotiators must still draft a formal legal text for initialing.  Then, under the fast-track provisions of the 2002 Trade Act, Zoellick will have to give Congress 90 days advance notice of his intention to sign the final agreement.  Within 60 days after signing the accord, he will have to send Congress a description of any changes in U.S. law that would be required under the pact.  Congressional sources say Congress could begin consideration of implementing legislation next spring.

The U.S. and Singapore also agreed on a tariff-preference level (TPL) that will allow tariff-free treatment in the first year of the FTA for 25 million square meter equivalents (SMEs) of cotton and man-made-fabric (MMF) apparel containing third-country components.  The TPL would be reduced annually and phased out over eight years.  "The theory is that this is a transition mechanism to allow for the development of relationships with U.S. suppliers," one U.S. official explained.  Singapore shipped some 68 million SMEs of textiles and apparel in 2001 to the U.S.  Of that, 65 million SMEs were cotton and MMF apparel.


A statutorily created federal commission looking at the future of the U.S. aerospace industry issued a final report Nov. 18 calling for a "fundamental shift away from the existing transaction-based licensing system to process licensing."  While the report focused primarily on State's Munition List (ML) licensing process, commission members said their findings also applied to BIS procedures for licensing dual-use goods.  The commission's findings and recommendations, which were shared with administration officials in advance, may have prompted a new White House review of defense trade controls (see story page 1).

Export controls were only part of the broad scope of the commission's report, which also raised concerns about the competition U.S. firms face from Europe's Airbus and the fight over Foreign Sales Corporation (FSC) tax rules.  The report also warned about serious problems facing the industry with reduced research and development, an aging workforce and an economically depressed airline sector.
A primary obstacle to the "health and competitiveness of the U.S. aerospace industry is our own export control regime," the commission declared.  "We believe current export controls are increasingly counterproductive to our national security interests in their current form and under current practices of implementation," it said; adding: "Export control reform is crucial."

A major problem with the licensing system is the case-by-case review of each export.   Instead of this approach "we should establish a process that approves a company for basic operations under predefined conditions," the commission recommended.  It pointed to Federal Aviation Administration (FAA) procedures for certifying new aircraft as a model to follow.  The FAA certifies the design of a new aircraft based on extensive information filed by its manufacturer and then monitors the ongoing production to assure conformance to the approved design.

"The export control system would be much more efficient if it were similarly reconfigured," the commission argued.  "Companies that wish to export would undergo a rigorous certification process to ensure they possess the internal controls that safeguard against the sale of weapons or dual-use items to unacceptable parties," it explained.  "Once approved, the company would be free to sell and ship goods consistent with U.S. government policy.  The government would monitor and audit those operations for compliance," the commission explained.  Case-by-case approval could still be required for some advance technology or a country of concern.


The State Department plans to undertake a "baseline study" of the current technology alert list it uses to screen visa applications from foreign business people, academics and scientists who want to come to the U.S.  The proposal has drawn mixed reactions from the business community.

Some sources say the list, first developed in 1994, is outdated and needs to be revised, while others contend State should not even have a separate list and should use the existing Commerce Control List (CCL) as its guide.  On both sides of the issue, however, people are skeptical about the chances of getting interagency agreement on a new technology list and fear the effort will just delay progress in correcting the problems that have arisen in getting business visas approved (see WTTL, Oct. 21, page 1).

Business participants at a Nov. 19 meeting of State's International Economic Policy Advisory Committee complained about the continuing problems plaguing State's Mantis Program, which uses the visa screening process to prevent the illegal acquisition of dual-use technology by foreign visitors to the U.S.  Despite several meetings with department and White House officials, "we don't seem to be making any progress on a dialogue," one representative protested.  "A baseline study is just going to delay resolution of this matter," he added.

An official from State's visa office said she recognized the concerns about the use of a separate list, but said the current system has problems because the agencies that now review visas have different reasons for objecting to their approval.  Any agency can object to a visa and is not compelled to explain why.  "Right now in too many cases we don't get the information from the other agency.  They file an objection and don't produce their actual info, so we can have an actual dialogue," the state official said.

"The Administration is committed to doing a baseline study, but there is a broad range of opinion as to where the issues of concern are," she told the committee.  "It's true that it will be very hard to get consensus among the various federal agencies as to where the fault lines lie and what are technologies of concern," she admitted.


U.S. apparel manufacturers and retailers, as well as foreign suppliers, are entering a period of great uncertainty as they prepare for the end of the global system of textile and apparel quotas on Dec. 31, 2004, as mandated by the WTO Uruguay Round agreement, according to speakers at an apparel industry conference Nov. 20.  While the end of quotas should herald a new era of flexibility and freedom in sourcing imports, several speakers warned the industry to be prepared for new restrictions in the form of antidumping, countervailing duty and Section 201 safeguard actions initiated at the request of the domestic textile industry.

A greater impact may be felt by countries that are only in the textile and apparel business because they have a share of the quota for certain items.  Some U.S. importers now obtain goods from 40 to 50 countries, but many buyers say only 12-15 major producers will survive after 2005.  "There will be a lot of losers in this equation," said Robert Boynton, senior textile coordinator at State.
Ron Shulman, VP of strategic sourcing for the Limited, raised the specter of serious problems for apparel importers during the holiday season in 2004.  Some importers will run out of quota early in the year.  Since there will be no quota available to borrow forward on from 2005 and some of the quota for 2004 may have been borrowed in 2003, the "bank will be dry," he told the U.S. Association of Importers of Textiles and Apparel.

With China already looming as the 800-pound gorilla in textile and apparel trade, the U.S. textile industry has filed five petitions with the USTR's office seeking to invoke the anti-surge mechanism for textiles that was included in China's accession agreement to the WTO.  The Bush administration is still debating the procedures for handling such petitions, said David Spooner, chief U.S. textile negotiator.  The administration will probably propose procedures for these petitions before it decides what to do with the pending requests, he said.

 * * * BRIEF * * *

UNVERIFIED LIST: BIS Nov. 21 removed China's S.B. Submarine Systems from list.

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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