Volume 23 No. 37 -- September 22, 2003

IN THIS ISSUE:

* Baucus, Grassley Introduce Their Own FSC Bill
* BIS Proposes Penalty Guidance for Export Enforcement
* Evans Joins Adminstration's Criticism of China
* Agriculture Talks in Cancun Raise Questions for U.S. Farmers
* BRIEFS:  Missile Technology, CAFTA, Standards, Uranium
 

BAUCUS, GRASSLEY INTRODUCE THEIR OWN FSC BILL

The long-anticipated Senate version of legislation to replace the current Foreign Sales Corporation/Extraterritorial Income Tax (FSC/ETI) was introduced Sept. 18 by Senate Finance Committee Chairman Charles Grassley (R-Iowa) and Ranking Member Max Baucus (D-Mont.).  As expected, the bill (S. 1637) combines many of the tax proposals already included in competing legislation in the House, including a tax reduction for manufacturers, improvements in the rules for foreign tax credits and better tax treatment for personal holding companies.

Following the popular congressional penchant for giving catchy names to legislation, the Grassley-Baucus bill is being called the Jumpstart our Business Strength (JOBS Act).  "Even in our selection of international tax reforms, we have focused on those reforms that enhance the U.S. companies' ability to manufacture here at home," said Baucus.

To bring the U.S. into compliance with a World Trade Organizaton (WTO), which found the FSC/ETI law to be an illegal export subsidy, the measure would phase out the law over three years.  Meeting a key criterion that the White House has placed on a replacement law, Grassley and Baucus claim their measure is revenue neutral.

The main benefit for domestic manufacturers would be a cut in their income tax rate to 32% from 35%. "The tax reduction is effected through a deduction equal to 9% of a company's manufacturing income," a Finance Committee statement explained. This deduction would be phased in over five years, beginning in 2004.  To avoid another international trade dispute, the legislation would grant the deduction to any manufacturing entity in the U.S., including foreign-owned operations in the U.S.

Less ambitious and calling for fewer changes in the tax code than Ways and Means Committee Chairman Bill Thomas' (R-Calif.) FSC bill (H.R. 2896), the Grassley-Baucus measure includes an extension of the foreign tax credit carryforward period to 20 years from five years, revises the rules for interest allocation for foreign tax credit limitations, and recharacterizes overall domestic losses for purpose of calculating foreign tax credits.
 

BIS PROPOSES PENALTY GUIDANCE FOR EXPORT ENFORCEMENT

The Bureau of Industry and Security (BIS) Sept. 17 asked for public comment on proposed penalty guidance it will use to determine when to take legal action against violators of export control rules and what type of penalty to impose.  While not intended to be binding on the agency, the proposal, which was published in the Federal Register, offers insights into how BIS weighs violations to determine what level of punishment they deserve.  It also will give exporters and their legal counsels ammunition to use when pleading for lesser penalties.

The guidance explains how BIS will decided when to just send a warning letter for a violation of the Export Administration Regulation (EAR), when to seek civil penalties and when to refer a case to Justice for criminal prosecution.  "Because many administrative enforcement cases are resolved through settlement, the process of settling such cases is integral to the enforcement program," the agency said.

Much of what is presented in the proposed guidance has long been BIS policy.  While the rationale for the punishment the agency has imposed in the past isn't always clear, its actions usually match the considerations it explains in its proposal.  The proposed guidance will only apply to export control violations and no to antiboycott violations, BIS stresses.

In general, BIS will consider the destination of an illegal export, the degree of willfulness involved in the violation and several mitigating and aggravating factors in determining what action to take against any exporter.  The agency's Office of Export Enforcement (OEE) will often issue only a warning letter "to first-time offenders for apparent violations based on technicalities; where good faith efforts to comply with the law and cooperate with the investigation are present; where the investigation commenced as a result of a voluntary self-disclosure satisfying the requirements of Section 764.5; and where no aggravating factors exist," the proposal explains.

The more specific criteria BIS considers include:

Degree of Willfulness:  Where simply negligence or carelessness has caused a violation, BIS may seek only a civil fine as part of a settlement agreement.  When gross negligence or willful self-blinding is found, it is likely to also see a denial of export licensing privileges and larger fines.  A "knowing violation" may be found if firms have ignored the presence of "red flags" with a transaction or took inadequate steps to inquire.  In addition, even carelessness might draw tougher action if national security has been placed at risk.

Destination of Export:  Tougher sanctions are likely to imposed for a violation involving the export to a terrorist country or entity or to an entity of concern for specific reasons, such a nuclear or missile facility, BIS explained.

Related Violations:  BIS will look to see if the export has violated several parts of the EAR or other export requirements, such as false statements on Shipper's Export Declarations (SEDs).

Multiple Un-Related Violations:  An export who is found making repeated illegal exports could face harsher enforcement action.  "Multiple violations may indicated serious compliance problems," BIS said.  Such a pattern of behavior also suggests that future violations are likely to occur, it argued.

Timing of Settlement:  Early settlement of charges through a settlement could reduce the penalties a company faces, BIS conceded.  The agency wants to preserve its limited resources and a quick settlement of a case helps it do that.  Cases that drag out or involve a hearing before an administrative law judge are not likely to get the better deals in the end when a settlement is reached, it suggested.

Related Criminal or Civil Violations:  When an export control violation also involves other federal statutes or investigations by other federal agencies, BIS probably will seek stiffer penalties.  A criminal conviction or civil penalty by another agency could be a sign of serious or willful violations, the agency noted.  Cases involving multiple laws and agencies also may require a "global settlement" that settles all charges.

Numerous mitigating and aggravating factors also will be weighted.  Among the mitigating factors are: voluntary self-disclosure, having an effective compliance program, an isolated violation, an export that probably would have been approved if a license were filed, no previous record of violations, not under a previous settlement agreement in the last five years, cooperating with the investigation and helping BIS investigate other violators involved in the case.  It also will help if no harm to national security were involved and the exporter was inexperienced.

On the aggravating side of the ledger, BIS said it will give great weight to deliberate efforts to hide a violation or a serious disregard for export compliance.  Other aggravating factors include: the export of sensitive items, harm to national security or foreign policy, concurrent violations of other federal laws, a criminal record, a violation within five years of a previous settlement or three years since a warning letter and lack of a compliance program.
 

EVANS JOINS ADMINISTRATION'S CRITCISM OF CHINA

Commerce Secretary Don Evans Sept. 15 joined Treasury Secretary John Snow's open call for China to allow its currency to float in accordance with market forces (see WTTL, Sept. 8, page 3).  In a speech to the Detroit Economic Club, Evans said the Bush administration "believes that currency values should be set by free-market forces."

This was the same message Snow delivered during his trip to Beijing earlier in September.  Evans said that trade with China was the greatest concern raised by U.S. business executives during a series of roundtable discussions that Commerce officials held during the summer.

"No country raised more attention as source of concern as China," he reported.  "Concerns ranged from inadequate access to China's markets to the lack of a level playing field in many areas," he noted.  Other concerns raised by U.S. industry included piracy of intellectual property rights, forced technology transfer as part of joint ventures, trade barriers and capital markets that are largely insulated from free-market pressure.

In particular, Evans noted Beijing's failure to comply with a provision in its WTO accession agreement that was supposed to allow non-bank entities to establish financing arms to fund car purchases.  "We're still waiting," he declared.  Evans also complained about China not keeping its promise to allow the establishment of distribution systems for American goods.  "We're still waiting," he said again.  "But we won't wait idly," he warned.  "We will work to ensure that China honors the commitments it makes," he added.

Evans tried to offer some balance to the relationship between the U.S. and China, noting Beijing's help in dealings with North Korea and the fight against terrorism.  He also acknowledged that China, along with the U.S., has accounted for a large measure of the growth of the world economy.

The administration's new pressure on China reflects its understanding of the political risk the trade deficit with China posses for President Bush as the U.S. manufacturing sector continues to lose jobs.  It also wants to deflect efforts by Congress to take legislative action against China.  Rep. Phil English (R-Pa.), for example, introduced a bill Sept. 10 to require the Treasury to conduct a study to determine if China is manipulating its currency to gain an unfair trade advantage.  If Treasury finds such manipulation, the bill would require it to impose a levy on imports from China equal to the percentage of manipulation found.

The business community, led by the National Association of Manufacturers, is also keeping pressure on the White House on China's currency.  NAM President Jerry Jasinowski applauded Snow's statements in China.  "But we are not satisfied with China's response to these appeals, which suggest continued delays in correcting the problem," he said.  "China needs to take this issue seriously," he warned.
 

AGRICULTURE TALKS IN CANCUN RAISE QUESTIONS FOR U.S. FARMERS

If the World Trade Organization (WTO) Ministerial Meeting in Cancun had not broken down early over the so-called Singapore Issues on Sept. 14, it was likely to collapse over conflicting demands for reform of the world's agriculture support systems.  Although officials from several countries kept saying progress was being made in the farm talks, negotiators never got pressed to make the toughest final concessions that were needed for a deal.

In the "be-careful-for-what-you-wish-for" category of trade demands, the potential deal in Cancun would have presented a tough choice for U.S. farmers.  The direction of the negotiations appeared headed toward greater commitments from the U.S. and European Union (EU) on the reduction of domestic supports and export subsidies, with uncertain commitments from middle-income nations to open their markets.

With the deal that was taking shape in Cancun, American farmers would eventually have to face the choice of giving up farm subsidies that they already have in exchange for a promise of better access to world markets.  They also would have to give greater access to the U.S. market for import-sensitive products.  Despite the bravado of Agriculture Department officials who claim American farmers can compete on a level playing field against any other farmers in the world, there is no guarantee U.S. farmers would win that bargain.  That is why they may balk at accepting any deal that comes out of the Doha Round when it eventually is completed.

"Farmers have become more pragmatic about trade as opposed to philosophical," American Farm Bureau Federation President Bob Stallman told WTTL.  "That's why they want to see the details," he added.   "We are going to have to make an assessment when we see what the formulas and numbers are as to what that means in terms of market access for us, to see if its equivalent to whatever we have to give up in domestic support."

Most important, he noted, U.S. farmers don't expect domestic support to be totally eliminated.  "We're talking about the reduction of trade-distorting domestic supports, we're not talking about elimination.  There's a big distinction there," Stallman said.  U.S. farmers also will be watching to make sure the market access promised by other countries is real.  "That's why we focused on economically meaningful market access," Stallman said.

Led by Brazil, India, Argentina and Egypt, a group of 21 middle-income developing countries pushed a position paper they had presented to negotiators in Geneva in August.  The G-21 demanded greater cuts in domestic subsidies in developed countries and the total elimination of export subsidies.  At the same time, the insisted that they and lesser-developed countries should be allowed to maintain protection for their farmers.

The draft ministerial declaration released Sept. 13 by the chairman of the meeting, Mexican Commerce Secretary Luis Ernesto Derbez, proposed reductions on all trade-distorting or so-call amber box subsidies with caps on help for specific products.  It would limit domestic support to 5% of the total value of production and, for the first time, it called for a review of all green box subsidies that are generally considered non-trade distorting.

The text opened the door for discussions that could lead to the elimination of all export subsidies, including some food aid programs by a date certain.  But it would have allowed Japan to keep high tariffs on rice, while giving developing countries special and differential treatment that demanded far fewer changes in their farm programs.
 
 

* * * BRIEFS * * *

MISSILE TECHNOLOGY:  BIS in Sept. 18 Federal Register issued final rules amending EAR to implement control changes adopted in September 2002 by Missile Technology Control Regime.

WATERWORK FITTINGS:  McWane, Inc. and several of its subsidiaries filed Section 421 petition with ITC Sept. 5, asking for investigation into surge of imports from China of ductile iron waterworks fittings and for recommendation that special safeguard measures should be imposed on these imports.

CAFTA:  Sen.Max Baucus (D-Mont.) made floor statement in Senate warning that labor and environment provisions of proposed FTA with Central America aren't strong enough and promising to make his own proposal on how to deal with issue.  He also complained about Central American countries that were part of G-21 group at Cancun ministerial that contributed to collapse of meeting.

STANDARDS:  ITAUnder Secretary Grant Aldonas has named Heidi Hikikata to be agency's standards liaison as part of initiative launched earlier in 2003 to focus on role of standards as trade barrier.

MANGANESE DIOXIDE:  ITC Sept. 12 made preliminary determination on 5-0 vote that allegedly dumped imports of electrolytic manganese dioxide from Australia, Greece, Ireland, Japan and South Africa may be injuring U.S. industry.  It found imports from China to be negligible, terminating that investigation.

POLYVINYL ALCOHOL:  In 4-0 final determination, ITC Sept. 12 ruled that dumped imports of polyvinyl alcohol from China and Korea are injuring U.S. industry.

RECTANGULAR TUBES:  ITC opened investigation requested by group of steel firms seeking antidumping action against imports of light-walled rectangular pipe and tube from Mexico and Turkey.

SAUDI ARABIA:  During visit to Saudi Arabia Sept. 17 Treasury Secretary John Snow gave boost to kingdom's bid for WTO accession.  "I believe that Saudi Arabia's plan for accession to the World Trade Organization sets achievable targets for attaining an important milestone," he told press conference.

URANIUM:   Three-judge CIT panel partially upheld ITA's remand determination on low enriched uranium but reversed agency on its decision to cover worked uranium in case.

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