Volume 23 No. 15 -- April 14, 2003

IN THIS ISSUE:

* Administration Begins Plans For Lifting Iraq Sanctions
* Chile's Refusal to Support War Is Delaying Action on FTA
* FSC/ETI Bill Would Cut Taxes for U.S. Manufacturers
* New Leaders in Brazil Take Cautious Approach to FTAA Talks
* Court Won't Order Customs to Speed Harbor Tax Refunds
* Link Between Trade and Investment Grew in 2002
* Briefs: Trade Figures, Diamonds
 

ADMINISTRATION BEGINS PLANS FOR LIFTING IRAQ SANCTIONS

As the military, political and humanitarian situation in Iraq continues to get sorted out, the Bush administration is starting to plan for the lifting of trade sanctions to a post-Saddam Hussein country.  While much trade is likely to come under U.S. aid initiatives or the U.N.'s renewed Oil-for-Food program, there is also likely to be a considerable amount of private-sector business, as Iraq recuperates from the war, 12 years of U.N. sanctions and 30 years of dictatorship.

"We have had interagency discussions about the ability to move those processes forward," said U.S. Trade Representative (USTR) Robert Zoellick April 10.  "I frankly assume those issues will be taken care of as we move forward," he added.

A Bureau of Industry and Security (BIS) source said the agency has started to examine control policies to a liberated Iraq.  "There is, in fact, conversations going on about that," the source reported.  The scope of new controls is being discussed with Congress as part of the Bush administration's request for a supplemental appropriations bill to pay for the war and reconstruction.

U.S. business has faced a labyrinth of restrictions on trade with Iraq, with some controls imposed by Treasury's Office of Foreign Assets Controls (OFAC) and others by BIS.  There have also been State Munitions List controls and U.N. sanctions.  The directions for changing all these rules are likely to come in an executive order to be issued by President Bush.

Trade sources say there are loopholes in existing controls that have allowed some foreign firms and foreign subsidiaries of U.S. companies to trade with Iraq.  There are claims also of widespread circumvention. The scenes on TV of looters in Baghdad and Basra seem to support that charge, with one looter filmed carrying a large box with the Compaq computer log emblazoned on its side.

"A new government of Iraqis in Baghdad that's willing to live at peace with its neighbors, willing to get rid of its weapons of mass destruction, live in peace with its own people, will not require the same level of vigilance of the international community in terms of the sale of equipment, dual-use equipment, in particular," said State spokesman Richard Boucher April 9.  "So I would expect that something would be changed in the sanctions regime, but I can't predict when or how, exactly, it would be changed," he added.
 

CHILE'S REFUSAL TO SUPPORT WAR IS DELAYING ACTION OF FTA

The Bush administration will let Chile cool its heels for a while on the signing of the U.S.-Chile Free Trade Agreement (FTA) to express Washington's pique at Santiago's refusal to support the U.S. call for war against Saddam Hussein.  The U.S.-Singapore FTA probably will move to the head of the line for signing when Singaporean Prime Minister Goh comes to Washington May 6.

USTR Robert Zoellick April 10 came close to admitting that the Chile FTA will face delays because of the Chilean position on the war. " I wouldn't say we're stalled," he told reporters, stressing the fact that the full text of the Chile accord has been put on the USTR Website and he has held talks with Congress on the fast-tract approval of the deal.

 "Certainly, people were disappointed with Chile's position, but we're continuing to move forward with our preparations," he conceded.  "There are disappointed people on Hill.  We alerted the Chileans that this would be the case," he noted.  "Look, I've been frank as I was with the Chileans during the process.  People are disappointed.  I'm disappointed," Zoellick added.

"We work very closely with our Chilean partners.  We hoped for their support at a time that we though was very important....So there is a disappointment, but we also emphasize that this is a free trade agreement that we think is good for both countries," he said.

"We feel we have a good agreement," Zoellick continued.  "We feel it's good for both countries, and I have no doubt that it ultimately will proceed."  He would not predict when the White House would be prepared to sign the Chile deal or when Congress would act on its approval.  "We don't have [a time frame for]  action or decision on the signing of Chile," he said.

Although Zoellick portrayed the delay as the product of administration and congressional reaction to Chile's views on the war, congressional sources claim the opposition isn't coming from Congress.  "I haven't heard anyone in the Senate talk about slow-walking Chile," one congressional source told WTTL.  He said he was surprised to read Zoellick's comments.
 

FSC/ETI BILL WOULD BENEFIT U.S. MANUFACTURERS

Another congressional deadlock looms over legislation needed to repeal the Foreign Sales Corporation (FSC)/Extraterritorial Income Tax (ETI) laws which have been found to be illegal export subsidies by the World Trade Organization (WTO).  Bipartisan legislation (H.R.1769) introduced April 11 by Reps. Phil Crane (R-Ill.) and Charles Rangel (D-N.Y.) will pose a direct challenge to the approach backed by House Ways and Means Chairman Bill Thomas (R-Calif.).

Business community sources expect Senate Finance Chairman Charles Grassley (R-Iowa) and Ranking Member Max Baucus (D-Mont.) to introduce a bill similar to the Crane-Rangel measure.  But one Senate source claims Grassley has not made up his mind on what to do.  "We're still working on it," the source said.  Thomas is expected to reintroduce his old bill (H.R. 5095) with only minor variations.

As one veteran trade observer noted, the clash will come down to "who pays and who gets the benefits."  The repeal of FSC/ETI, which is part of all proposals, will cost exporters who have benefited from the tax program.  The competing bills would offset that loss with new tax benefits but would help different segments of the business community (see WTTL, Feb. 3, page 3).

In contrast to the Thomas bill, which was criticized for benefiting multinational companies with foreign income, the Crane-Rangel bill would give most of its benefits to firms that manufacture in the U.S.  It would establish a new corporate tax rate for firms with "U.S. production activities."  The measure would create a sliding scale that would cut the top tax rate for firms doing 100% of their manufacturing in the U.S. to 31.5% from 35%.  Companies with less than 100% U.S. manufacturing would get a lesser reduction on their tax rate.  There would be no exporting requirement tied to the tax rate.  That was a FSC/ETI requirement that triggered the adverse WTO ruling.

The Crane-Rangel bill and the coming Grassley-Baucus version are likely to have strong bipartisan support in both houses of Congress because they would help keep manufacturing jobs in the U.S.  Of the $4 billion in tax breaks that would be lost by repeal of FSC/ETI, most would go to domestic manufacturers under the Crane-Rangel approach.  Supporters of the bill say it would be revenue neutral for federal budget purposes, but the firms benefiting from FSC/ETI would not be assured an equal savings from the proposed legislation.  Each company's benefits would depend on its level of domestic production.

Given Thomas' usual insistence on having his versions of tax and trade legislation emerge from Ways and Means and on the House floor, Crane and Rangel will face a hard time getting their measure considered in committee. They also will have to contend with Bush administration support for the Thomas approach.  For the White House, the Thomas bill not only fixes the WTO problem, it also would change other international tax law provisions that the administration wants revised.   Many of those changes also have wide support among U.S. firms operating internationally.

Some business community sources claim Thomas lacks support for his proposal.  "Thomas doesn't have a lot of sympathy for his bill in the House," one industry source argued.  Nonetheless, he has done a masterful job in the past in getting his way on legislation.  As a result, any opposing legislation will probably have to come out of the Senate and will have to be reconciled with Thomas's bill in a House-Senate Conference Committee.

For the business community, a combination of both the Thomas version and the Crane-Rangel bill would be the best solution, fixing international tax rules while helping domestic manufacturing, another business source suggested.  The problem with that idea, he admitted, is that the total cost of the tax breaks for business would exceed the $4 billion coming from repeal of FSC/ETI.

One solution would be to wrap the international tax legislation into the tax cuts that President Bush has proposed as part of his economic stimulus package.  While the total tax cut is still being debated in Congress, it is likely to be counted in the hundreds of billions.  The relatively small amount of money in the FSC/ETI bills could be better accommodated in a big tax bill than if it were in stand-alone bill later in the year, the source argued.
 

NEW LEADERS IN BRAZIL TAKE CAUTIOUS APPROACH TO FTAA TALKS

Career trade negotiators from the U.S. and Brazil are continuing to work well together as co-chairs of talks on a Free Trade Area of the Americas (FTAA), but the new government of Brazilian President Luis Lula de Silva is taking a cautious approach to hemispheric negotiations, according to Deputy USTR Peter Allgeier.  Allgeier said he is working "very, very smoothly" with his Brazilian counterpart as the FTAA talks begin their final phase, but the direction of Brazil's position in the talks remains unclear.

"We are still seeing some degree of uncertainty on the part of the new Brazilian administration as to the relative weight they are going to attach to the different negotiations they are in," Allgeier told reporters April 11 after a meeting of the FTAA Trade Negotiations Committee (TNC) in Peubla, Mexico.

The Brazilian administration is still trying to decide how much effort to put into the FTAA compared to other trade negotiations, including the WTO and the Southern Cone trade group, Mercosur.  President Lula "has put an emphasis on strengthening Mercosur," Allgeier explained.  "What I perceive is a degree of caution on the part of the new administration," he said.  "It doesn't want to commit itself irretrievably to one course or another," Allgeier added.  This cautious approach hasn't yet slowed the FTAA talks any slower than they already were.  Trade relations between the U.S. and Brazil will be the topic of discussions April 14 between USTR Robert Zoellick and Brazilian Finance Minister Antonio Palocci.

Allgeier claimed the various working groups and committees in the negotiations are making progress, and officials hope to have a third draft of a potential agreement ready for the next FTAA ministerial meeting in Miami in November.  Participants Feb. 15 submitted their first round of market access offers for reducing trade and tariff barriers and will make requests for new offers by June 15.  "We're moving into real market access negotiations," Allgeier said.  Negotiators April 11 released the guidance they will apply to talks on government transparency and civil society.  A permanent working group on civil society issues is being established, he reported.
 

COURT WON'T ORDER CUSTOMS TO SPEED HARBOR TAX REFUNDS

Court of International Trade (CIT) Judge Jane Restani has denied (Slip Op. 03-39) a plea from U.S. exporters to issue a writ of mandamus to order Customs to hire or assign more employees to process Harbor Maintenance Tax (HMT) refund requests.  Although some refund requests have been in pending for over two years, Restani said the court "cannot conclude that Customs has refused to do its duty or violated any duty it owed to plaintiffs in this regard."

In 2000 the court expanded the scope of firms that are eligible to get HMT refunds, but Customs delayed the processing of administrative refund claims for eligible exporters awaiting Supreme Court review of the ruling and the issuance of regulations.  The Supreme Court in December 2000 refused to hear the appeal.  Since many of these claims involve trade before 1990, Customs no longer has records of the payments and the process of reviewing claims has been slow and tedious.

"Customs has no set target for the number of claims it will process per month, but it is heading towards 300 claims per month," Restani noted.  Plaintiffs wanted the court to order Customs to bolster its staff so a rate of 500 claims a month could be achieved.  Restani cited testimony by the director of Customs' National Finance Center, who said the agency has received 7,706 claims for refunds as of Feb. 23, 2003, and has processed 2, 666.  Customs has 16 contract employees assigned to work on the claims plus four "full-time equivalent" Customs employees.
 

LINK BETWEEN TRADE AND INVESTMENT GREW IN 2002

The establishment of a foreign subsidiary has increasingly become the key to import and export growth, the latest figures from the Census Bureau indicate.  In 2002, 48% of all merchandise imports went to related parties of foreign companies, while 32% of all goods exports went to related parties.  This is a slight increase from 2001, when related-party imports were 47% of all goods entering the U.S. and 31% of all exports.  The trend has been up for several years.

Not surprisingly, related-party trade is concentrated in a few industrial categories, with transportation and computers/electronic goods leading the way.  These categories accounted for the high level of related trade with such countries as Japan, Germany, Canada and Mexico.

The integration of the North American market has been driven in large measure by U.S., Canadian and Mexican firms trading with their subsidiaries or border production facilities.  Of all imports from Mexico, 66.7% were from parties related to U.S. companies.  Related parties received 43.1% of U.S. goods going to Mexico.  For Canada, related-party imports were 42.4% of trade, while related-party exports were 42.5%.  Japan recorded the largest ratio of imports from related parties with 76.5%, followed electronics-producer Singapore sending 74.3% of its goods to related U.S. partners or parents.  Related-party imports from Germany reached 67.2% in 2002.

 * * * BRIEFS * * *

TRADE FIGURES: Exports are beginning to show renewed life from December to February, latest trade figures show.  Merchandise exports in February inched up 5.2% from last February to $57.4 billion, as services exports jumped 10.5% to $25 billion.  Goods imports, however, continued to grow at faster pace, rising 11.7% from year ago to $101.6 billion.  Services imports gained 8.8% to $ 21 billion.

DIAMONDS: House and Senate week of April 7 approved bill (S. 760) to authorize U.S. participation in Kimberley Process, international program to assure diamonds don't come from illegal sources in Africa.
 

Copyright 2003 by Gilston Communications Group.  Reproduction or retransmission in any form is prohibited. Washington Tariff & Trade Letter is published weekly 50 times a year.  E-mail: Info@WTTLonline.com