Volume 23 No. 50 -- December 22, 2003

IN THIS ISSUE:

* WASSENAAR ADOPTS MODIFIED "CATCH-ALL" STATEMENT
* THIN ENTHUSIASM WILL MAKE IT HARD TO COLLECT VOTES FOR CAFTA
* CAFTA AGREEMENT GIVES REGION SHOT AT COMPETING WITH CHINA
* DUE DILIGENCE HELPED AGILENT AVOID PAYMENT OF FINE TO STATE
* STATE LETS FIRM KEEP MOST OF $2 MILLION FINE TO PAY FOR COMPLIANCE
* BRIEFS:  SUN, SYRIA, SOFTWOOD LUMBER, DOHA ROUND, ITC
 

WASSENAAR ADOPTS MODIFIED "CATCH-ALL" STATEMENT

After years of failing to get the Wassenaar Arrangement to adopt "catch-all" controls, the U.S. succeeded in getting the regime to agree to a modified version that will be tied to international or regional arms embargoes.  At its annual plenary meeting in Vienna Dec. 11-12, the group agreed on a "Statement of Understanding on Control of Non-Listed Dual-Use Items."

The statement said: "Participating states will take appropriate measures to ensure that their regulations require authorization for the transfer of non-listed dual-use items to destinations subject to a binding United Nations Security Council arms embargo, any relevant regional arms embargo either binding on a participating state or to which a participating state has voluntarily consented to adhere, when the authorities of the exporting country inform the exporter that the items in question are or may be intended, entirely or in part, for a military end-use."

The understanding advises that "if an exporter is aware that items in question are intended, entirely or in part, for a military end-use, the exporter must notify the authorities referred to above, which will decide whether or not it is expedient to make the export concerned subject to authorization."  Each member may determine its own definition of "military end-use."  Members also will be able to restrict exports for "public policy" reasons.

In the past, according to one State source, opposition to the adoption of a catch-all requirement from countries such as Russia was due to concerns that previous proposals were too broad and ill-defined.  For that reason, the new agreement doesn't use the phrase "catch-all" and specifically limits application of the understanding to destinations subject to arms embargoes.

Wassenaar also adopted tighter controls on man-portable air defense systems (MANPADS), arms brokers and small arms and light weapons.  The changes in the control list included stronger controls on certain microwave electronic devices, semiconductor lasers and  navigation equipment.  The regime also amended the Initial Elements of it core agreement to add language encouraging members to share information on regions where "risks are judged greatest."
 

THIN ENTHUSIASM WILL MAKE IT HARD TO COLLECT VOTES FOR CAFTA

The free trade agreement the U.S. reached with four Central American countries (CAFTA) Dec.17 has drawn broad support from the business and agriculture communities, but observers are already questioning whether that backing will be vigorous enough to get the implementing legislation through Congress.  Because of the small size of the Central American market, business enthusiasm for the deal may not be as strong as it was for fast-track negotiating authority or China's normal-trade-relations status, one source suggested.  Countering this potentially mild support will be fierce opposition from unions and environmental groups, some parts of the textile industry, sugar growers and most Democrats.

While business groups rolled out the customary pre-drafted press releases ap-plauding the deal reached with El Salvador, Guatemala, Honduras and Nicaragua, many statements included cautionary notes.  Some groups also said they wanted to withhold judgment until they saw the complete final text of the deal, which still has blanks in some sections.  Division within the farm community kept the Amer-ican Farm Bureau Federation from taking any formal position on the deal.

The biggest concern, of course, was Costa Rica's decision to delay its signature of the pact because of continuing resistance to U.S. demands in the services and agriculture sector.  Costa Rica accounts for more than one-third of the CAFTA market for U.S. exports.  U.S. Trade Representative (USTR) Robert Zoellick said he would continue talks with Costa Rica's trade minister in the coming weeks to resolve its remaining objections.

Although U.S. negotiators fought hard to maintain restrictions on sugar imports, textiles and apparel because of the sensitivity of these sectors, the domestic sugar industry and several major textile producers immediately rejected the deal.  While some textile firms with production in Mexico and Central America support the accord, as well as apparel makers, this opposition will make it more difficult for the administration to arm-twist votes from Republican House members from North Carolina and Florida as it did with fast-track.

The sugar industry opposes provisions in the accord that would increase the sugar quota for the four CAFTA participants to 196,000 tons in the first year from the current quota of 111,000 tons.  The quota would grow 2% annually and reach 236,000 tons in 15 years.  The out-of-quota tariff would remain at 100%, which is about 15-17 cents a pound.  Beyond this increase, the industry is concerned that the addition of Costa Rica and the Dominican Republic to CAFTA plus future FTAs with sugar-exporting countries such as Panama, Australia, South Africa and Colombia will mean even greater increases in imports and lower prices.

Most sources agreed the deal will face a tougher fight in the House than the Senate.  Speculation has already arisen that the White House might delay bringing the pact to Congress for approval before the elections and would put it off until 2005.  Statutory requirements for the president to notify Congress 90 days before signing a trade deal, the need for an International Trade Commission (ITC) report on the economic impact of the agreement, plus any extra time needed to complete talks with Costa Rica and the Dominican Republic could mean the deal won't get to Congress until July.  That would put it before lawmakers just as national nominating conventions are about to be held and the election season gets into full force.
 

CAFTA AGREEMENT GIVES REGION SHOT AT COMPETING WITH CHINA

The four Central American countries that reached a free trade agreement with the U.S. Dec. 17 think the deal's textile and apparel provisions will allow them to compete with China after 2004 when the global Multifiber Arrangement (MFA) comes to an end.  Some industry sources are not as confident.  Political, economic and infrastructure developments may be more impor-tant than CAFTA to the region's ability to compete with China and Asia, they say.

The draft accord won't give Central America complete free trade access to the U.S. market for  textiles and apparel.  The key yarn-forward rule of origin remains the essential criteria for trade.

Apparel and retail industry sources, however, say the yarn-forward rule is losing some of its value for U.S. textile makers because the low-cost of Asian fabrics combined with low wages in Central America make it economical to produce non-qualifying garments there even if a tariff must be paid on non-regional content.  The deal includes about a dozen sweeteners to help regional production of such goods as bras, boxer shorts, pajamas, luggage, cotton trousers and wool suits.

Nicaragua alone will get a special trade preference level that will give it greater access to non-CAFTA fabrics.  An increase in the de minimus level for non-CAFTA content to 10% also will help the region use non-CAFTA materials and components.

"We are convinced that this agreement is going to be a most instrumental element in our fight against that very intense competition we are all facing," said El Salvadoran Economic Minister Miguel Lacayo.  The cumulation provision offers the region flexibility, he said.  "We worked out within the political reality that is present in the United States what is the best use of that flexibility so that the region can prosper," he stated.  Honduran Economic Minister Norman Garcia noted:  "Obviously, CAFTA will be a two-way street, in which Central American as well as U.S. companies will have to join together to develop strategic alliances for investment in order to face the great challenge from China."

The accord's cumulation provision would allow CAFTA members to import up to 100 million square meter equivalent of wool, denim and cotton trousers from Canada and Mexico.  That covers just over half of their current imports of these fabrics.  Retail industry sources say they are concerned about how this exception will be administered.  They also claim the cumulation language won't give Central America the full duty-free access it wanted to Mexico and Canada.  Mexico will have to amend its FTA with the region to give duty-free access to items using cumulated fabric, and Canada will have to revise its proposed FTA with these countries.

The cumulation provision was based on actual trade, including one Canadian company's investment in a yarn factory in Georgia, Commerce Under Secretary Grant Aldonas said.  Aldonas, who led U.S. negotiators in the textile talks, said he looked at Mexican and Canadian exports to the region.  The U.S. considered "what are the sorts of things that we have to address, rather than coming at it from the idea that we would allow cumulation for everything," he said.

Outside of textiles, U.S. agriculture exporters, who are essential to getting CAFTA approved by  Congress, have mostly accepted a market-opening agreement that will require extreme patience.  While half of U.S. farm exports to the region will gain immediate duty-free access to the four countries, tariffs and quotas on such products as beef and pork will phase-out over five to 15 years, for poultry over 18 years and other products over 20 years.  More than 80% of non-farm U.S. consumer and industrial goods will have immediate tariff-free access to CAFTA partners, with all duties ended in 10 years.
 

DUE DILIGENCE HELPED AGILENT AVOID PAYMENT OF FINE TO STATE

Careful due diligence of a prospective acquisition's export compliance program may have saved Agilent Technologies a $225,000 fine.  Before it acquired SAFCO Technologies from Salient Communications in 2000, Agilent's due diligence research found that the company was negotiating a settlement agreement with State for alleged violations of the International Traffic In Arms Regulations (ITAR).  As a result, Agilent included in the acquisition contract an agreement for Salient to pay whatever fine was finally negotiated with the department.  A final settlement imposing the fine wasn't reached until this August.

SAFCO had submitted self-disclosures to State concerning unlicensed exports of its propagation measurement and analysis systems (PROMAS) to Motorola Israel in 1996 and Folec Communications in Singapore in 1997.  The items need licenses because they included ML-controlled receiver/scanners as components.

STATE LETS FIRM KEEP MOST OF $2 MILLION FINE TO PAY FOR COMPLIANCE

State's Directorate of Defense Trade Controls (DDTC) imposed a $2 million civil fine on Multigen-Paradigm, Inc. (MPI) of San Jose, Calif., in September for violations of International Traffic in Arms (ITAR) controls but let the company keep $1,750,000 of the penalty to apply toward past and future programs to correct its export compliance program.  Only $250,000 will actually be paid to the government, with half already paid and the rest due next September.

After being acquired by Computer Associates in 2000, MPI undertook an extensive program to correct what it admitted to State was an "informal" export compliance program.  As part of that effort it filed a Commodity Jurisdiction (CJ) request to determine the licensing status of its line of Vega simulation software products.  At the same time, it discovered and voluntarily disclosed to State the unlicensed exports of over 200 units to distributors in 20 countries.

As part of its settlement agreement with State, MPI will get credit for having already spent $1.5 million to upgrade its compliance system and for spending another $250,000 over the next three years to continue its remedial efforts.  The company agreed to strengthen its employee training program on export controls, obtain outside legal support and to create an electronic record system that would be accessible to State.  Its CEO also will have to provide written certification that corrective actions have been implemented.
 

 * * * BRIEFS * * *

SUN: Sun Microsystems will pay $269,000 fine to settle BIS charges related to diversion of its servers to military end-users in China and Egypt (see WTTL, Oct. 6, page 1).  Two subsidiaries in Hong Kong, Sun Microsystems China, Ltd., and Sun Microsystems California, will each pay $11,000 fines.  Fourth partic-pant in export, Automated Systems, Ltd., of Hong Kong will pay $22,000 fine.  In three separate charging letters to Sun, BIS claimed 25 violations of export controls, false SED statements and failing to comply with license conditions.  "As today's settlements demonstrate, companies that do no adhere to license conditions will be held accountable," said BIS Assistant Secretary for Export Enforcement Julie Myers.

SYRIA: President Bush Dec. 12 signed bill (H.R. 1828) requiring ban on Commerce Control List (CCL) and Munitions List (ML) exports to Syria, but statement he issued with signing suggests that he will ignore new law (see WTTL, Nov. 17, page 3).  "The executive branch will construe and implement Section 5 [trade sanctions] in a manner consistent with the president's constitutional authority to conduct the nation's foreign affairs and as commander in chief," Bush said.  Ironically, as bill was being signed, EU announced it was close to reaching agreement with Syria that will provide for free trade and closer diplomatic ties.

SOFTWOOD LUMBER: Canada's new Trade Minister Jim Peterson was quick to criticize ITC's Dec. 16 ruling reconfirming its previous injury finding in softwood lumber cases.  "We regret that the ITC has come back with a determination that maintains its threat of injury finding," Peterson said.  ITC acted on remand from NAFTA panel which declared its initial ruling to be inadequate.  Going back over its first determination, ITC's 114-page ruling gave more detailed explanation for its decision and why it rejected alternative causes of injury to U.S. industry.  Evidence showed "overproduction remains a problem in Canada and that the likely market for this excess production is the U.S. market," it stated.

DOHA ROUND: After two days of lengthy and extensive statements from member but no vote, WTO General Council Chairman Carlos Perez del Castillo said he took discussion to mean members accepted his proposal to restart Doha Round negotiating groups (see WTTL, Dec. 15, page 3).  But he conceded resumption of talks is mostly procedural rather than substantive.  "While the round is not back on track and we may not be there yet, we have made considerable progress in that direction," he asserted.

EXPORT ENFORCEMENT: ABO (USA) has agreed to pay $20,000 civil fine, which BIS has suspended, and to have its export privileges denied for two years to all destinations except Canada for its part in export of Bushnell night vision products to Japan without licenses (see WTTL, Aug. 11, page 4).

ITC: Commission published public reprimand in Dec. 15 Federal Register of Bruce Aitkin of Aitkin, Irvin, Berlin & Vrooman for breaching administrative protective order in cases involving rolled steel products from several countries. Notice cited him for "failing to provide adequate supervision over another attorney who had little experience" dealing with APO material and released proprietary information.  ITC said this is fourth breach by Aitkin in just over three years.  He will be denied access to APO information for six months and his firm must have two lawyers review all APO documents for compliance for next five years.

EDITOR'S NOTE: In keeping with our regular schedule, there will be no issue of Washington Tariff & Trade Letter on Dec. 29, 2003.  Our next issue will be Jan. 5, 2004.  Until then, we wish all our subscribers a HAPPY HOLIDAY and a HEALTHY and PROSPEROUS NEW YEAR.

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