Volume 23 No. 2 -- January 13, 2003

Posted Monday, January 13, 2003 12:00 am

In This Issue:

* EU Offers Own Approach to Making Patented Drugs Available
* Silicon Graphics Agrees to Give License Exception Rights
* Central America Rushes to Get Ahead of China, Cuba
* Commerce Plan for Lumber Won't Resolve Dispute With Canada
* Briefs: Customs, Farm Equipment, Aluminum Oxide, Senate

EU OFFERS OWN APPROACH TO MAKING PATENTED DRUGS AVAILABLE

In what it claims is an effort to break the deadlock in World Trade Organization (WTO) talks on the compulsory licensing of patented drugs, the European Union (EU) Jan. 8 offered a proposal that would give the World Health Organization (WHO) a key role in deciding when such licenses are warranted. With the U.S. insisting that the list of diseases and epidemics covered by any WTO agreement should be limited, the EU has suggested the WHO could provide advice on broadening the application of the accord.

When the WTO talks collapsed in December, the U.S. announced that it had made the unilateral decision to refrain from challenging any qualified developing country's effort to issue a compulsory license to import drugs from third countries for a selected list of well recognized health crises, including HIV/AIDs, tuberculosis, malaria and several tropical diseases (see WTTL, Jan. 6, page 3). Except for five additional diseases, the U.S. didn't define what other conditions should qualify under a WTO agreement to amend the accord on Trade-Related Intellectual Property Rights (TRIPs) as it applies to patented drugs.

The EU calls for adopting a list of additional diseases included in a WTO draft accord in December. That list names yellow fever, plague, cholera, meningoccal disease, African trypan-osomiasis, dengue, influenza, leishmaniasis, hepatitis, leptospirosis, pertussis, poliomyelitis, schistosomiasis, typhoid fever, typhus, measles, shigellosis, hemorrhagic fevers and arbor-viruses. For conditions not listed, the EU proposes that countries ask the WHO for advice.

"The EU suggests that members wishing to import medicines to meet any public health concern not explicitly covered in an initial list be encouraged to seek WHO advice," it said in statement explaining its plan. "The WHO, with its global health expertise in assessing developing countries' public health concerns, would be entrusted with assessing the occurrence of such situations and making recommendations," it continued. Meanwhile, the EU said it would follow the U.S. lead in unilaterally forswearing any WTO challenge of a developing country's use of a compulsory license for a drug for a condition on the proposed list.

SILICON GRAPHICS AGREES TO GIVE UP LICENSE EXCEPTION RIGHTS

In a precedent-setting concession to settle charges that it illegally exported high-performance computer workstations to Russia, China, Israel, Qatar, and the United Arab Emirates, Silicon Graphics, Inc. (SGI) has waived its right to use License Exception CTP for future exports to Russia for three years. In a settlement agreement with the Bureau of Industry and Security (BIS) Jan. 7, SGI agreed to pay $182,000 in civil fines and not to exercise its eligibility to use CTP for any sales to Russia without the prior written approval of BIS's Office of Export Enforcement.

It also pledged not to sell to any military or nuclear end-user in Russia without such approval or to perform any repair or maintenance services for such users without advance BIS consent. The agreement included a three-year ban on exports to Russia, but BIS suspended the sanction on the condition that SGI complies with export control rules in the future.

The agreement with BIS came on the same day the U.S. district court in San Jose, Calif., approved an agreement SGI reached with Justice in December to settle criminal charges against the firm for the unlicensed exports to Russia in 1996. In that deal, SGI pled guilty to two felony charges for violating Export Administration Regulation (EAR) requirements for the sales of computer workstations and agreed to pay $1 million in criminal fines.

"The 1996 exports came at a time when the U.S. government in the spirit of post-Cold War cooperation was encouraging the technology industry to assist Russia in developing commercially beneficial scientific research," an SGI statement said. The firm claimed its customer had represented that computers the firm shipped to Russia were to be used for civilian research. "However, because the export was made to a government-operated facility involved in both civil and non-civil activities in Russia, SGI has agreed in this settlement [with Justice] that it should have applied for an export license," it added.

When reports of the sales to Russia first surfaced in 1997, SGI initially admitted it made a mistake and promised to cooperate with the government in investigating the allegations. Then, just before a House hearing on the case, it switched its position and claimed it was innocent of any wrongdoing (see WTTL, April 21, 1997, page 1). Over the next five years, the additional questionable exports, dating from 1996 to 2000, were uncovered. The BIS charging letters to SGI indicated the firm exported its workstations under the CTP exception when it knew or should have known the equipment needed an export license or were the subject of notification requirements for high-performance computers.

CENTRAL AMERICA RUSHES TO GET AHEAD OF TWO BIG Cs

The decision of the U.S. and five Central American nations to set an ambitious one-year dead-line for completing talks on a free trade area (FTA) is being driven in part by the need to assure the region's preferential treatment in the North American market in the face of competition from China and looming competition from Cuba. The negotiating schedule announced Jan. 8 with the launch of talks is aimed at completing a deal on a Central American Free Trade Area (CAFTA) by the end of 2003 and having Congress approve it in 2004, well before Dec. 31, 2004, when the current global system of textile and apparel quotas will end.

The eventual reopening of U.S. trade with Cuba also poses an economic challenge to the region. Although an International Trade Commission (ITC) study in 2001 estimated that U.S. exports to Cuba, which has a population of 11 million, would be only $658 million to $1 billion without the current embargo and imports only $69 million to $146 million, those numbers seem low.

In the first half of 2002, Commerce received notice of $864 million in agriculture exports to Cuba under License Exception AGR. The normalization of U.S.-Cuban trade could see a surge in foreign investment into Cuba in such key areas as agriculture, tourism, manufacturing and infrastructure. These are all areas where Central America is also seeking financing.

The advantages Central America already enjoys in the U.S. market under the Caribbean Basin Initiative (CBI) for apparel and manufacturing assembly still don't offset the lower cost and greater efficiency of production in China and Asia. Textile industry sources estimate there is 100% overcapacity in textile and apparel manufacturing globally due mainly to current quota restrictions.

For Central America to maintain its edge, the CAFTA is needed to attract foreign investment that would make its apparel industry more competitive. Even with CBI benefits, Central America isn't competitive with Asia's apparel production, said James Jacobsen, vice chairman of Kellwood, a major apparel manufacturer, who also serves as co-chairman of the newly created Business Coalition for U.S.-Central American Trade.

"Asian labor costs are lower than in Central America," Jacobsen told WTTL. "China and a lot of Asian countries have become very good at becoming full-service apparel producers," he said, noting the ability of these sources to provide design, marketing, fabrics, components, cutting, assembly and finishing operations. Central America, however, has remained limited mainly to sewing operations in part because of CBI rules-of-origin restrictions.

"Only those countries that learn to compete without quota protection will survive as far as apparel is concerned," Jacobsen said. Whether his firm, which operates in all five Central American FTA countries, increases investment in the region will depend on the outcome of CAFTA talks. "How we come out in the next 12 to 18 months will determine that," he said. "If we get a really liberal trade regime that opens the ability to do full service business there, then we'd do more business in Central America; otherwise we will not."

El Salvador's Trade Minister, Miquel Lacayo, concedes that China is the region's main competitor in U.S. apparel market and one of the reasons a CAFTA is needed before the textile quota system ends. "China is putting a lot of pressure on in some sectors," he told WTTL. "In order to be competitive after China's quotas come off, the whole value chain has to be set," he said. Lacayo claims he is less concerned about Cuba. "Let's worry about that when it becomes time," he said. "Castro has a lot of oxygen left in his lungs," Lacayo added.

Nicaragua's Trade Minister, Mario Arana, also played down the coming competition from Cuba. "We haven't dwelled that much in the region or in the U.S. on those developments," he told WTTL. Nevertheless, if U.S.- Cuba trade opens, he said Nicaragua, which has commercial and political relations with Havana, "will be willing to help the U.S. strengthen its ties with Cuba."

With a combined population of about 33 million, Costa Rica, El Salvador. Guatemala, Honduras and Nicaragua have a few more people than Canada, which has 31 million. Nonetheless, two-way trade between the U.S. and Central America of $20 billion annually is less than three weeks of U.S. trade with Canada. Despite production-sharing operations with U.S. firms, Central America remains dependent on agriculture exports, including coffee, bananas and sugar.

To help Central America build an economic base to take advantage of a CAFTA, U.S. Trade Representative (USTR) Robert Zoellick has brought nearly a dozen U.S. and international trade development and lending organizations into the talks with Central America. The Overseas Private Investment Corp. (OPIC) already backs some $426 million in investments in the region and expects to offer more guarantees. The U.S. Trade and Development Agency, AID and World Bank are also being asked to help the region.

COMMERCE PLAN FOR LUMBER WON'T RESOLVE DISPUTE WITH CANADA

Someone should have yelled "Timber" before a Commerce proposal for resolving the softwood lumber dispute with Canada hit the ground with a thud Jan. 7. The draft policy bulletin released by the International Trade Administration (ITA) is intended to offer guidance on the criteria the agency would apply to a changed-circumstances request to revoke the current countervailing duty (CVD) order on Canadian lumber. Although the draft plan won a quick endorsement from the U.S. Coalition for Fair Lumber Imports, which represents the petitioners in the case, U.S. officials were expected to face a chorus of objections from their Canadian federal and provincial counterparts at a meeting scheduled for Jan. 10.

As forecast (see WTTL, Dec. 23, page 1), the draft says ITA would be prepared to revoke the CVD order, if a province showed that it had adopted a competitive system for selling its timber. For ITA, a competitive market-based system would be one in which "a province sells at least a significant portion of its timber at public auction," the draft states.

While British Colombia reportedly is prepared to move toward such an auction system for setting timber prices, sources say other provinces, as well as Canadian federal officials, would object to ITA's proposal when they met with Commerce Under Secretary Grant Aldonas in Toronto. AI don't think this paper is the basis for anybody to do anything," one attorney argued. Another source claimed the proposal has drawn an angry response in Canada from industry and government officials. Despite these protests, ITA plans to publish the bulletin in final form with few changes sometime in February.

After meeting with Aldonas, the Coalition issued a statement welcoming the bulletin as being consistent with its objectives for an open and competitive lumber market in Canada. "We hope the policy bulletin assures Canadian governments that addressing the market-distorting policies will end the dispute with our largest trading partner," said Coalition Chairman Rusty Wood.

In addition to requiring an auction system for selling government-owned timber, the ITA draft says the agency will consider steps the provinces take to end the ban on log exports, minimum processing requirements and appurtenancy requirements which dictate where lumber is milled. While the document says the U.S. doesn't want to interfere with Canadian environmental or conservation requirements that are tied to current timber sales, it offers no explanation of how those requirements would fit with an auction system. Moreover, ITA indicates that it will monitor Canadian practices after any order revocation to assure that the changes are working as intended.

These additional provisions in the draft bulletin have particularly angered Canadians who reportedly see them as an intrusion into Canada's sovereignty. "The overall thrust of the paper seems to be that, under pain of continuing the current CVD order, provinces must act like the U.S. Forest Service and completely alter how they manage their forests," one source asserted. Canadian sources also contend an auction system might not produce the higher Canadian lumber prices the U.S. ultimately wants, because there may be little bidding competition in some timber areas where only one or a few firms operate.

One attorney said the procedures spelled out in the bulletin for revoking the CVD order could take up to four years to complete. That much time is needed, because it will take time for provinces to enact changes to their laws, implement the new system, produce economic data for review and for ITA to conduct its investigation. During that time, the Coalition and some elements in Canada still hope an interim measure, in the form of a Canadian export tax, could be put in place.

But Canadians are still divided over whether to seek a deal or wait for the results of WTO and NAFTA dispute-settlement panels that are examining complaints against the U.S. trade action. "I don't think there is consensus in Canada on an export tax agreement," one attorney noted. There is a strong expectation in Canada that it will win these challenges and force Washington to revoke the order. If that happens, "the paper becomes irrelevant," the attorney said.

* * * BRIEFS * * *

CUSTOMS: In Jan. 9 Federal Register, Customs proposed procedures for importers to request confidentiality of cargo manifest information submitted as part of 24-hour-in-advance rules.

FARM EQUIPMENT: Deere & Co. and New Holland North America, have filed separate petitions at ITC seeking Section 337 investigations of allegedly unfair imports of agriculture tractors and vehicles from China, Europe and Canada.

ALUMINUM OXIDE: ITC Jan. 6 voted 5-0 in preliminary ruling that allegedly dumped imports of refined brown aluminum oxide from China may be injuring U.S. industry.

SENATE: Finance Committee has tapped four Republicans to fill vacancies left by departure of members from last Congress and one new GOP seat. New members are Majority Leader Bill Frist (Tenn.), Rick Santorum (Pa.), Gordon Smith (Ore.) and Jim Bunning (Ky.).