Volume 23 No. 39 -- October 6, 2003

IN THIS ISSUE:

* Sun Working to Settle Multiple BIS Charges on Exports
* ITC Remands Lawyer for "Tip Sheet" Advice on Steel Comments
* FSC/ETI Legislation Starting to Move in House and Senate
* Miami FTAA Ministerial Could Become Another Cancun
* Administration Sees More Than Currency Problems in China
* BRIEFS: Export Enforcement, Ways and Means, Color TVs, Wheat
 

SUN WORKING TO SETTLE MULTIPLE BIS CHARGES ON EXPORTS

The Bureau of Industry and Security (BIS) wants to require Sun Microsystems to obtain license approval for the export of certain computers exported to China and Egypt even though the equipment is under the licensing threshold for high-performance computers (HPC), Sun revealed in a Sept. 29 10K filing with the Securities and Exchange Commission.  The BIS demand is part of settlement proposal BIS presented Sun during 18 months of negotiations to settle draft charges that Sun exports to China in 1997 and Egypt in 1998 violated U.S. export controls.

 "BIS approval would be required for transactions involving export, re-export or transfer of items subject to the relevant export regulations and involving the specific entities involved in the Egyptian and People's Republic of China transactions which were the subject of the original 2002 charging letters," Sun reported.  The computers exported to China operated at 2,700 million theoretical operations per second (MTOPS) and those to Egypt at 2,475 MTOPS, a Sun spokesperson told WTTL.

BIS sent Sun several draft charging letters in February 2002 about the exports to Egypt and China.  It sent another charging letter in April 2003 with 19 charges relating to recordkeeping.  In August, BIS notified the firm that it was considering two additional charges citing record-keeping for exports to Syria.  Sun said BIS has agreed to extend negotiations on a settlement until Oct. 31 to give the company time to investigate and respond to the latest complaints.

Sun claims it had received license approval for the export of E-5000 computers in 2003 to a reseller in Hong Kong, who resold them without approval to China's Changsha Institute of Science and Technology, which BIS claimed was a military end-user.  When Sun discovered the reexport, it had the computers returned to the U.S.  It also instituted new internal compliance controls.  In the second case, a reseller in Egypt sold two mid-range server-computers to the Egyptian Army without an approved licenses.  Those computers remain with the Egyptian Army, but Sun has arranged for an on-site inspection of the equipment by U.S. government repre-sentatives, the Sun spokesman explained.
 

ITC REPRIMANDS LAWYER FOR "TIP SHEET" ADVICE ON STEEL COMMENTS

The International Trade Commission (ITC) Sept. 24 issued a formal reprimand to a lawyer who advised his clients to tilt their data on the impact of Section 201 steel tariffs in their submissions to the Commission "in favor of a more compelling story" (see WTTL, June 30, page 1).  The discovery of a so-called "tip sheet" on how to respond to the ITC questionnaire in the Section 332 study of the impact of the relief on steel consumers became a minor controversy during hearings held as part of the study and a parallel mid-term review of the steel safeguard action.

The ITC reprimanded Sanford B. Ring of the DC law firm of Dykema Gossett, which represented several steel-using clients and their associations.  Except for the public embarrassment of the reprimand, the ITC's action carried no sanction.

The advice Ring gave his clients in an "ITC Questionnaire Tip Sheet" on how to respond to the ITC questions "went beyond the boundaries of appropriate guid-ance for clients and non-clients regarding their responses to Commission questionnaires," the ITC declared.  The tip sheet reminded them that in providing their responses "the overriding goal was to tell a compelling story" and urged them to make their forecasts look "more bleak than what has happened to date."

The advice "aggressively and inappropriately coaches questionnaire respondents," the ITC said.  "There is no statement in the tip sheet that reminds the respondents that their responses must be true and accurate other than to suggest that they read the ITC instruction booklet," it noted.
 

FSC/ETI LEGISLATION STARTING TO MOVE IN HOUSE AND SENATE

Both the House and Senate are poised to move legislation in the coming weeks to replace the Foreign Sales Corporation/Extraterritorial Income Tax laws (FSC/ETI) with tax cuts for U.S.-based manufacturers and new rules for taxing international income.  The drive for the legislation isn't coming from concern about complying with a World Trade Organization (WTO) ruling against the current law, but instead stems from a bipartisan desire to do something to give the ailing U.S. manufacturing sector a shot in the arm.

Progress in the Senate came Oct. 1 when the Finance Committee reported out a significantly modified and expanded version of a FSC/ETI bill (S. 1637) spon-sored by Finance Chairman Charles Grassley (R-Iowa) and Ranking Democrat Max Baucus (D-Mont.) (see WTTL, Sept. 29, page 3).

That was followed on Oct. 2 with House Ways and Means Committee Chairman Bill Thomas (R-Calif.) reaching an agreement with House Speaker Dennis Hastert (R-Ill.) to amend his tax proposal (H.R. 2896) to add an across-the-board 3% tax cut in the tax rate (to 32%) for nearly all U.S.-based manufacturers.  With that agreement, Hastert dropped his opposition to the bill and indicated he would allow the measure to get to the House floor.

The Thomas bill creates "a better tax structure for U.S. manufacturers competing against foreign companies," Hastert said in a statement after Thomas agreed to revise his bill.  "I support Chairman Thomas expeditiously moving forward with this legislation," he added.  Thomas is expected to markup of his bill the week of Oct. 6.

Although the Bush administration would prefer a tax bill that didn't increase the budget deficit, it has backed away from a call for a revenue neutral FSC/ETI bill.  It seems prepared to accept the political reality that any tax legislation will include more tax cuts than offsetting tax increases.  The Thomas bill, which it supports, is weighted heavily on the tax cutting side, and the White House continues to back Thomas' extensive revision of international tax rules.

It is concerned that tax preferences for manufacturing income will encourage firms with various sources of income to shift income into the manufacturing portion of their businesses.  "There would be significant expense allocation issues," Treasury Assistant Secretary Pam Olson told Finance.  Some of those expense allocation issues arose with FSC/ETI and 18 years after enactment of FSC "we are still litigating some of those issues in court," she noted.

"I think it would be a much more administrable set of rules to do something across the board rather than to do something specific," she said.  "My choice would be to strike a blow for simplification and to address some of the provisions in the code that disproportionately
adversely affect manufacturers,"Olson stated.  She also said the administration objects to favoring one sector of industry over another.  That triggered a sharp rebuttal from Grassley.  "What do you think FSC has have been doing for three decades and what do you think the administration did on steel, putting 30% tariffs on?" Grassley countered.

In addition to changes Grassley and Baucus made to their bill on Sept. 26, they  adopted several of the 111 amendments offered by committee members, adding $28.3 billion in tax cuts over 10 years and offsetting that with $30 billion in tax increases, including $12.5 billion from the extension of the Customs user fee.

On the tax break side was $1.3 billion in help for the timber industry and softwood lumber manufacturers; $7.2 billion for partnerships and sole proprietors in manufacturing, plus $3.8 billion for firms that repatriate income from overseas during the first 120 days after enactment of the legislation.  Such repatriated income would face only a 5.25% tax rate during the window of opportunity.  This provision has strong support from firms such as Nike with extensive overseas manufacturing operations.

A European Union (EU) spokesperson told WTTL that the EU "was not very happy" with the three-year phase-out of the current FSC/ETI law in the Grassley-Baucus bill.  Nonetheless, the measure's "substance seems okay," she said.  Finance's action showed that the congressional effort to repeal the law and come into compliance with the WTO "was going in the right direction," she added.
 

MIAMI FTAA MINISTERIAL COULD BECOME ANOTHER CANCUN

Negotiators working on a Free Trade Area of the Americas (FTAA) trade pact have failed to bridge the wide gap between Brazil and most of the countries of the Western Hemisphere on the scope and ambition of a potential trade accord.  The failure of the FTAA Trade Negotiations Committee (TNC) to make progress during its Sept. 29-Oct. 3 meeting in Port of Spain, Trinidad and Tobago, makes it very likely the FTAA Ministerial Meeting in Miami Nov. 19-20 will face the same deadlock that led to the collapse of the World Trade Organization (WTO) Ministerial in Cancun (see WTTL, Sept. 15, page 1).

At the TNC meeting, Brazil and Argentina reportedly remained silent during most of the section-by-section review of the state of current negotiations.  Without their comments it will be difficult to draft a Miami ministerial declaration that gives much support or direction to the talks.  Lacking such a statement, FTAA negotiations aren't likely to be completed by January 2005 as scheduled.

U.S. officials are trying to portray Brazil, Argentina and other members of Mercosur as being isolated in their call for a less ambitious FTAA agreement.  They point to the wide support given to a paper Costa Rica presented at the TNC meeting, pressing for a comprehensive and ambitious hemispheric accord.  The Costa Rican statement had the backing of twelve other countries, including all the Central American nations and the Dominican Republic, which are negotiating a Free Trade Agreement (FTA) with Washington, along with Bolivia, Canada, Chile, Colombia, Mexico, Panama, Peru, and Mexico.

Brazil has proposed moving some of the FTAA agenda to the WTO Doha Round negotiations and seeking a narrower accord in the hemisphere.  It wants to drop FTAA talks on rules in services, investment and government procurement.  "Brazil finds itself somewhat isolated on this," claims Chief U.S. FTAA Negotiator Ross Wilson.

Brazil has also called for moving talks on domestic agriculture subsidies and export credits to the WTO.  This is a position the U.S. agrees with, Wilson says.  On the other hand, Brazil is willing to talk about market access for agriculture and industrial goods, as well as on services and on intellectual property rights.

Meanwhile, a coalition of unions, environmentalists, consumer groups, small farmers and assorted anti-trade groups has organized a March to Miami to bring protestors to the Mimai ministerial to oppose the FTAA.  The march started in Seattle Sept. 27, with a bus, being called the Blue-Green Machine, heading across country.  The trip will culminate with what the organizers claim will be a "massive protest" in Miami.
 

ADMINISTRATION SEES MORE THAN CURRENCY PROBLEMS IN CHINA

Bush administration officials are backing away from their focus on the exchange rate for the Chinese yuan as the source of China's trade problems with the U.S. and the rest of the world.   Testifying in Congress Oct. 1, administration officials described a host of economic and financial policies that are giving China an unfair advantage in the global market place, including controls that restrict capital outflows and bank-lending policies .

"A flexible exchange rate regime would be a good policy for China," Treasury Under Secretary John Taylor said.  But "the price of Chinese goods in the United States would not change as much as the change in the exchange rate," he cautioned in his prepared testimony.  Retail prices of Chinese goods also include the cost of transportation and marketing.  "With a higher yuan, substitutes for Chinese products would likely come from countries other than China," he added.

After the hearing, Commerce Under Secretary Grant Aldonas told reporters "it is too facile a response to say we are just going to go after the currency peg.  The underlying issue is the financial markets."  There are a lot state-owned banks "that continue to fund what we used to call ‘zombie companies' in Japan that keep dumping products out on the market and that depresses prices worldwide," he said.

"I always want to be careful that we are not misleading people to think that if you simply go after the exchange rate, that you've solved the problem," he added.  The competitiveness problem "goes to the heart of how these guys are financed and whether they face the same capital market pressures our guys do and they don't," he said.

Aldonas claimed that talks Treasury has had with the Chinese on this issue have made progress because Beijing wants to move in that direction as well.  "They understand they've got a problem," he said.  "The conversations with the Chinese on both trade and finance have been enormously pragmatic."   Although there is a perception in the U.S. that jobs are going to China because of its cheap labor costs, the distorted financial markets are fostering the movement of production that doesn't involve a lot of labor, Aldonas noted.
 

 * * * BRIEFS * * *

EXPORT ENFORCEMENT: BIS Sept. 30 announced settlement agreement with Dosmatic, Inc. of Dallas, Texas. Firm agreed to pay $44,000 civil fine for illegal export of injectors to Iran through Belgium. It was also hit with suspended one-year denial of export privileges. Its former chief operating officer, Reza Pirasteh, agreed to pay $4,500 fine and was denied export privileges for seven years.  In July firm pleaded guilty to criminal charges in case and paid $50,000 criminal fine and was placed on three-years probation.  Pirasteh was sentenced to pay $2,000 fine and was placed on three-years probation.

WAYS AND MEANS: Democratic members of House Ways and Means Committee wrote to USTR Robert Zoellick Sept. 29 to complain about his meeting with only Republican members of committee week earlier to report on WTO Cancun meeting.  "Republicans and Democrats deserve to be fully briefed on this extremely important multilateral trade negotiation," they wrote.

COLOR TVs: NEC Solutions will get $13.9 million plus interest refund of antidumping duties it paid on color television imports in 2001 because Customs failed to liquidate entries in timely manner after receiving notice from Commerce of court order lifting suspension of liquidation.  CIT Judge Jane Restani ordered (Slip. Op. 03-124) refund Sept. 19 as part of enforcement of her earlier ruling (Slip Op. 03-80), which said e-mail from Commerce to Customs was adequate notice.  Since Customs didn't liquidate within six months, entries were deemed liquidated.

WHEAT: On split 2-2 vote Oct. 3, ITC made final determination that dumped and subsidized exports of hard red spring wheat from Canada are injuring U.S. industry.  By 4-0 vote, it found no injury from dumped and subsidized imports of durum wheat from Canada. Separately on Oct. 3, Canada said it was seeking NAFTA panel to challenge ITA's subsidy finding 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. 
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