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CALIFORNIA IN THE SPOTLIGHT

WINE INDUSTRY

The United States and the European Union have signed a bilateral wine trade agreement that will facilitate trade but also increase competition in the two wine markets. Both the United States and the EU view the accord as a “win-win,” agreement, which specifically addresses wine-making practices and labeling of wines in ways that will have a direct impact on the California wine industry, as well as on other U.S. and EU winemakers. More…

The U.S. - EU Wine Trade Agreement, signed on March 10, is effective immediately and provides for:

  1. mutual recognition of existing wine-making practices;

  2. a consultative process for accepting new wine-making practices;

  3. the United States limiting the use of certain "semi-generic" terms in the U.S. market;

  4. the EU allowing under specified conditions for the use of certain regulated terms on U.S. wine exported to the EU;

  5. recognizing certain names of origin in each other's market;

  6. simplifying certification requirements; and

  7. defining parameters for optional labeling elements of U.S. wines sold in the EU market.

The overall benefit to U.S. and EU winemakers is the establishment of stable market conditions in each other's markets. For example, prior to the agreement, U.S. winemakers were required before shipping wine to Europe to renew short-term approvals for wine-making practices - such as cold filtering and wood chip aging which were not recognized by the EU. This short-term re-approval process created market uncertainty for U.S. winemakers. Under this Agreement, U.S. winemakers will now be able to export wines made by non-recognized EU practices on a long-term basis.

Another element of the Agreement that will have an impact on both EU and U.S. winemakers in the U.S. market is that the U.S. will limit future use of EU wine names such as Burgundy, Champagne, Chablis, Chianti, Madeira, Malaga, Port, Sherry, and Tokay on labels in the United States. These terms had been considered "semi-generic" names, which allowed non-EU winemakers to use these terms on labels in the U.S. market.

Some of the benefits in the Agreement will not take effect until certain other obligations are implemented. In addition, the Agreement does not address the controversial issue of the use of “geographical indications,” which protects winemaker place names and appellations as a form of intellectual property. The Agreement provides for a second phase of negotiations to begin by mid-June to address the geographical indication and other outstanding U.S.-EU wine trade issues.

For further information on and analysis of how the U.S.-EU Wine Agreement may impact your business, please contact Brian Peck in our California office at bpeck@crowell.com.

BILATERAL TRADE

On March 8, the Bush Administration announced its latest plan to help U.S. exporters and importers do business in the Asia-Pacific market — a proposed U.S. — Malaysia Free Trade Agreement (FTA). The agreement is expected to liberalize access to the U.S. and Malaysia 's markets for consumer goods, services and agriculture and also impose greater protection for U.S. foreign investments and intellectual property rights. More…

The March 8 announcement of the FTA was made at a ceremony held on Capitol Hill featuring U.S. Trade Representative Rob Portman and Malaysian Trade Minister Rafidah Aziz. The announcement came after a more than one-year series of meetings between US and Malaysian officials, some within the formal Trade and Investment Framework Agreement (TIFA) process.

Both sides indicated their desire to complete the talks within a short time frame — preferably by the end of 2006, despite the fact that negotiations of past U.S. agreements have frequently lasted longer than one year. But these negotiations are predicted to progress more rapidly than in the past because Malaysia has indicated that it will not seek to increase access to the heavily protected U.S. agricultural market, and will not resist efforts by the U.S. to gain access to the Malaysian agricultural market. Negotiators will also be spurred on by the July 2007 expiration of U.S. trade promotion authority — the law that allows the U.S. Congress to expedite passage of these agreements.

The proposed U.S. - Malaysia FTA provides a myriad of opportunities for the business community to lower its costs of doing business in both countries. Not only will the agreement reduce the costs of importing and exporting by eliminating tariffs, but it is also expected to codify laws ensuring that investments and intellectual property receive greater protections, restrictions on banking and insurance are reduced, and transparency in government procurement is improved. Malaysia 's linkages with other key economies in the region will also offer the potential for additional growth for businesses through access to even larger markets.

Even without the benefits of an FTA, U.S. - Malaysia bilateral trade in such goods as electronics, machinery, chemicals, transportation equipment, and agricultural products already approaches $45 billion. Malaysia is now the U.S. ' tenth largest trading partner and this relationship is expected to expand as a result of these new negotiations. According to the National Association of Manufacturers (NAM), U.S. exports are predicted to double by 2010 if the FTA is ratified.

But in order for these benefits to be enjoyed by your business in both the U.S. and Malaysia , it will be necessary to engage U.S. and Malaysian government officials and lawmakers soon to ensure that your interests are included and that negotiators maintain a sense of momentum throughout the negotiations which will propel them toward a successful conclusion. There is no better time than at the beginning of negotiations to advocate for your business' interests.

The first round of negotiations is expected to begin after a 90 day consultation period with the U.S. Congress which will expire in June. Both sides have indicated that they wish to conclude negotiations by the end of 2006. The negotiations must be finalized 90 days before the July 2007 expiration of trade promotion authority. Any agreements that linger past this point will not be guaranteed “fast-track” consideration by the U.S. Congress.

If the Malaysian market is an important market or source for your business, it will be important to engage negotiators sooner rather than later to ensure that your business' interests are included in this important deal.

For more information please contact John Pacheco, C&M International at jpacheco@crowell.com.

EUROPE IN THE SPOTLIGHT

CHEMICALS

New EU rules on the Registration, Evaluation and Authorization of Chemicals (REACH) will greatly affect the business reality for a large number of chemical companies as well as downstream users doing business in Europe and elsewhere. REACH might however affect EU companies and third country companies differently. More…

The aim of REACH is to improve the protection of human health and the environment through the better and earlier identification of the properties of chemical substances. Indeed, it is not questioned whether REACH will, in fact, bring advantages to health and the environment for the benefit of EU customers and citizens. However, as all industry regulation, REACH does not come without cost to businesses, in this case significant costs. The problem is that REACH might impose different costs on EU companies and companies in third countries. This might, in turn, cause uneven competitive conditions and impact on trade to and from the EU.

In general terms, REACH obliges manufacturers and importers to gather information on the properties of their chemical substances or preparations, which will help them manage them safely, and to register the information in a central database. Substances of very high concern will be subject to authorization. The REACH legislation also applies to downstream users of chemicals, if the chemicals in question are intentionally or unintentionally released from the manufactured product. Downstream users are, however, not required to register substances that have already been registered for their specific use.

These rules have some unanticipated effects on trade. For example, with regard to downstream users, products produced in the EU can only contain registered substances while foreign products may contain non-registered substances (unless the chemicals are intentionally or unintentionally released from the product). In this respect, EU producers consequently have a greater burden to fulfill under REACH than foreign producers. On the other hand, EU importers will have a strong incentive to source substances from within the EU where they can rely on the substances already being registered than from foreign manufacturers that might not have a REACH compliance scheme in place. Foreign manufacturers are consequently greatly disadvantaged in this respect under REACH.

The current REACH proposal was approved by both the European Parliament and the EU Council in the end of 2005. The Proposal must now go through a second reading in the Parliament before it can be finally adopted by the Council. This process is set to take about another year (with adoption and implementation in 2007), but since no major obstacles for final adoption of the proposal are foreseen, business is already preparing for implementation.

For more information, please contact Margareta Djordjevic in our Brussels office at mdjordjevic@crowell.com.

MARKET ACCESS

The EU and the U.S. are each other's main trading partners, accounting for the largest bilateral trade relationship in the world. All is not well, however, in this important relationship. The EU has, as only good friends can do, pointed out many problems with U.S. behavior. Some of these issues are subject to protracted dispute settlements, but others are less well-known but nonetheless have significant impact on business. More…

Unsurprisingly, the EU Report stresses the difficulties in the ongoing dispute on large civil aircraft; offensive U.S. extraterritorial measures affecting environment, taxes and export controls; as well as the controversies over trade defense measures and intellectual property rights. The report also draws attention to increasing difficulties with U.S. technical regulations and standards. These rules in particular create significant non-tariff barriers for EU exporters, specifically exporters of electrical and electronic equipment, including telecommunications equipment.

The EU is however not the only one reporting problems in trade relations with the U.S. In December last year, Japan also pointed towards similar measures as the EU, including regulatory issues in the telecommunication sector. Furthermore, during the recent trade policy review of the U.S. in the WTO, China expressed concerns with a number of issues, including measures based on national security interests, anti-dumping measures and “American content” requirements.

Absent multilateral channels, dwindling in the face of the increasingly flagging Doha negotiations, and the very unlikely prospects of Free Trade Agreements, affected parties must instead resort to self-help in order to tackle these barriers and increase market access.

In the EU, companies may seek help fighting these U.S. measures. For example, companies can request that the European Commission take action, either informally within the framework of the EU Market Access Strategy or through formal complaint procedure under the so-called EU Trade Barriers Regulation (TBR).  Any company formed under the laws of one of the EU Member States may lodge a complaint under the TBR as long as the company is directly concerned in the production of goods or the provision of services affected by the obstacle to trade in question. Apart from affected EU companies, the TBR option is consequently also available for a large number of U.S. companies with subsidiaries incorporated in the EU. Interestingly, the TBR therefore also creates a backdoor option for U.S. companies to tackle market access problems in their home market.

The EU Report is available on the website of the European Commission at http://europa.eu.int/comm/trade/issues/bilateral/countries/usa/pr010306_en.htm.

For more information concerning the EU TBR or other market access opportunities, please contact Robert MacLean or Margareta Djordjevic in our Brussels office at rmaclean@crowell.com or mdjordjevic@crowell.com .

European Union Introduces "Flexible" Features into Its Anti-Dumping Measures. In an effort to introduce a new element of "flexibility" into the EU's anti-dumping policy, the European Commission will for the first time introduce phased-in and downsized anti-dumping measures against imports of leather shoes from China and Vietnam. The new approach is an effort to strike a balance between the competing commercial interests that almost invariably emerge in EU anti-dumping cases. More…

The anti-dumping measures in question, which will be applied on a provisional six-month basis, will contain accommodations designed to address concerns raised mainly by EU importers, retails and consumers. The striking features of these measures will be:

  • The European Commission will reduce the size of the anti-dumping duties being imposed — from the levels of dumping discovered for Chinese and Vietnamese exporters — to far lower rates by applying the EU's so-called "lesser duty rule" which sets the dumping duty rates not on the basis of the actual dumping margins but instead at the levels of price undercutting for comparable EU-made products.

  • The duties will be phased in over six months — in equal increments — starting from around 4% and reaching 19% for China and 17% for Vietnam by October 2006.

  • Children's shoes will be excluded from the application of the duties — despite being included in the product scope of the investigation — because of concerns raised by consumer organizations that the measures will penalize poorer families.

  • Special Technology Athletic Footwear will also be excluded because these products are no longer made in "significant volumes" inside the European Union.

The European Commission intends to make the measures definitive in October 2005 but requires the agreement of a majority of the EU Member States to do so. Already, opposition to the attempt to strike a "reasonable balance of interests" has emerged. On the one side, the EU industry is claiming that the measures are too low and should be set at the levels in excess of 40% found in the investigation. It also sees the exclusion for children's footwear as an enormous loophole which will be exploited by importers.

EU importers and retailers are arguing that the measures themselves are an illegal and unjustified reaction to the termination of the EU's quota regime last year which allowed Chinese and Vietnamese imports to enter the EU market without quantitative limits. Questions have been raised whether these imports actually have caused sufficient injury to EU manufacturers in such a short space of time.

Whether or not this policy of flexibility has widespread support among the 25 EU Member States will emerge when it comes to the final vote later this year on whether or not the measures should be made definitive and applied for five years.

For further information please contact Robert MacLean in our Brussels office at rmaclean@crowell.com.

The US and the EU have come together to request WTO consultations with China on its tariffs on automotive parts signaling an important change in the relationship among the three trading partners. Since China joined the WTO in 2001, an informal policy of restraint has been exercised by the three sides and China has rarely been involved in WTO dispute settlement proceedings. That situation appears to be about to dramatically alter. More…

The actual dispute itself seems unremarkable – indeed the WTO Dispute Settlement Body has ruled on many cases involving similar issues of the vehicle-making sector. Chinese rules apply high tariff rates for "whole vehicles" to the import of spare parts making up 60% or more of the value of a finished vehicle. To avoid the "whole vehicle" tariff rates, a non-Chinese vehicle-manufacturer has to source 40% or more of the spare parts by value in China. The U.S. and the EU believe this may constitute an internal tax on imported goods — because the tariff is levied on a finished product constructed with imported parts and the same rates are not applied to vehicles produced with local spare parts. On the other hand, China claims that the measures are designed to prevent circumvention (i.e., the prevention of the importing whole vehicles as spare parts to avoid the higher tariff rates for whole vehicles).

The United States has brought the only previous WTO case against China, involving a Chinese tax rebate on semiconductors which was resolved during the consultation phase. The European Union has never taken such a step. More significant is the background context. The U.S. has created a task force on trade with China and has engaged in a "top-to-bottom" review of U.S.-China trade policy which explicitly refers to the use of legal options when negotiations are not productive. From the European perspective, the European Commission has been aggressively pursuing an unfettered policy of taking protective measures and anti-dumping action against Chinese products entering the market — from textiles, through leather shoes, to DVD-Rs.

For private companies, it seems that both countries will now be more willing to take aggressive action against China in the WTO where market access is blocked by Chinese laws and regulations that are WTO-incompatible. In the past, use of the EU's market access instruments — such as the Trade Barrier Regulation — was unofficially discouraged against China.

The three sides have the opportunity to prevent a full escalation of the dispute by reaching a mutually satisfactory solution through the consultation process — which is effectively a pre-litigation stage before actual formal dispute settlement by the WTO Dispute Settlement Body. However, the interests of the EU and the U.S. are not completely aligned which renders this prospect remote. Regardless of which side prevails in the dispute, it now seems that 2006 will be the year that the genie has been let out of the bottle in the escalation of WTO dispute settlement cases between the three sides.

For further information please contact Robert MacLean in our Brussels office at rmaclean@crowell.com.

Investors clearly have begun to realize the significance of the rights guaranteed to them under NAFTA and other investment treaties, as well as their ability to enforce them. This is evident by the recent increase in investor-state disputes. More…

As the international business world moves closer and closer together, the need for a secure and stable investment regime rises to the forefront. Recognizing that foreign investment will continue to flow where there are effective protection and dispute resolution mechanisms in place, countries have increasingly engaged in bilateral investment treaty (BIT) negotiations. Where there were about 300 BITs in 1990, there are now over 2200 BITs involving 176 countries.

Although the specific protections provided in each BIT may vary from one to the next, there are certain fundamental protections that are commonly included in all such treaties, including regional ones such as NAFTA. These protections include the "national treatment" obligation (foreign investors and investments must not be treated less favorably than the host state's own investors and investments), the "most-favored nation treatment" obligation (foreign investors and investments must not be treated less favorably than other foreign investors in the host state), and protections against “direct and indirect expropriation” (defining the circumstances under which property may be taken and the corresponding compensation that must be paid).

Investors clearly have begun to realize the significance of the rights guaranteed to them under NAFTA and other investment treaties, as well as their ability to enforce them. This is evident by the recent increase in investor-state disputes. In 1998, ICSID, an international dispute resolution forum, registered only eight new cases and had 19 pending. Today, it is involved in more than 100 disputes valued at more than $30 billion. The ease with which such claims can be brought may be the cause of this increase. Foreign investors can enforce their rights by submitting claims against foreign governments without any involvement of their own government. Although there are varying requirements to exhaust local remedies prior to bringing such a claim, once met, investors' claims are resolved by binding arbitration rather than through domestic judicial systems (in which foreign investors often would not even stand a chance). This is not to say that arbitration does not come with its own concerns (such as efficiency and transparency), but it certainly provides a valuable alternative approach to investor-state disputes, generally with greater enforceability than litigation.

For more information please contact Sobia Haque in our Washington office at shaque@crowell.com.

Two initiatives currently underway in the U.S. government may make the prospects of bringing antidumping actions less attractive to U.S. petitioners. More…

First, in a recent Federal Register notice, the U.S. Department of Commerce solicited comments on how to implement the WTO's finding that the practice of "zeroing" in antidumping investigations is inconsistent with the U.S.'s WTO obligations. Using the "zeroing" methodology, the U.S. calculates antidumping duty margins based on U.S. sales below "fair value," but excludes sales at above fair value. This past October, a WTO panel ruled that this practice is unlawful in antidumping investigations — accordingly, the Commerce Department now is seeking comments "on the alternative approach(s) that may be appropriate in future investigations."

The elimination of zeroing may make investigations more difficult for U.S. petitioners, but just as importantly, the potential rewards for such investigations also may be shrinking. Under the so-called "Byrd Amendment" in the current U.S. antidumping law, all collected antidumping duties are redistributed pro rata to the petitioners and the industry members who expressed support for the petition during the investigation. Although the Byrd Amendment, like zeroing, was determined by a WTO panel to be unlawful, there has been little Congressional interest in repealing the provision… Until now. The Byrd Amendment, also known as the "Continued Dumping and Subsidy Offset Act" was repealed, albeit with a two-year delay, as a part of the Deficit Reduction Act of 2005.  The Act was signed by President Bush last month, and allows the continued distribution of all duties on entries of goods made and filed before October 1, 2007. Duties on entries made after that date, however, would be retained by the U.S. Treasury. Because investigations frequently take more than a year before the imposition of duties, it is unlikely that petitioners filing cases from now forward will receive significant Byrd disbursements.

These changes may embolden respondents participating in antidumping investigations. Traditionally, the perception has been that although participating in the "Commerce side" of a/d investigations (which includes the margin calculation process) is important, the cases are won or lost in the injury determinations made by the U.S. International Trade Commission. With zeroing eliminated, it will be much more difficult for petitioners to demonstrate dumping. As a result, the focus may shift away from the largely theoretical and subjective injury evaluation and back to the dumping calculation. In addition, because non-petitioner domestic firms will no longer have the incentive of Byrd distributions to justify supporting a petition, there may be more opportunities to question standing by attacking the industry support of petitions filed in less-concentrated industries.

The devil one knows is better than the devil one doesn't — there is always the possibility that both the Byrd Amendment and the zeroing practice will be followed by equally or more unlawful replacements, though no-one can identify any such possibilities at this time.

The Federal Register notice: Antidumping Proceedings: Calculation of the Weighted Average Dumping Margin During an Antidumping Duty Investigation, 71 Fed. Reg. 11,189 (March 6, 2006) is available at http://frwebgate6.access.gpo.gov/cgi-bin/waisgate.cgi?WAISdocID=658586401398+0+0+0&WAISaction=retrieve.

For more information please contact Alexander H. Schaefer in our Washington office at aschaefer@crowell.com.

U.S. extraterritorial sanctions continue to wreak havoc with sourcing for companies worldwide. The recent renewal of the U.S. emergency with respect to Iran and the ongoing tightening of the embargo on Cuba are just two pieces of the puzzle that multinationals must try to solve. More…

Doing business in today's global markets requires that companies rationalize production location and sourcing of products and services. Managing the impact of and compliance with the Iran and Cuba embargoes, as well as the export regulations which contain additional headaches, requires sustained effort. Companies that have done so are able to compete both in the U.S. and in international markets while minimizing the risk that they will be subjected to U.S. sanctions.

To add to the inherent difficulty of informed compliance with sanctions programs, the Director of the U.S. Treasury's Office of Foreign Assets Control (OFAC) (the agency that administers the U.S. sanctions programs) recently accepted a new post and has not yet been replaced. With this agency's leadership in limbo, and future U.S. and international policy regarding Iran in question, many companies find themselves unsure where to turn for guidance on best business practices.

Of particular importance in today's international business climate are the U.S. sanctions on Iran and evolving international policy regarding Iran. The UN Security Council is currently considering possible multilateral sanctions against Iran , and on March 13, 2006, President Bush renewed the National Emergency with Respect to Iran. While the President continues this emergency annually and the renewal does not come as a surprise, it is an important reminder to companies to remain vigilant in their compliance with sanctions laws.

For more information please contact Carrie Fletcher in our Washington office at cfletcher@crowell.com.

China "catch all" export control delayed but not dead; major review of China export policy underway. Many exporters were heartened by the recent retreat by the U.S. Department of Commerce's Bureau of Industry and Security ("BIS") on proposed changes to the deemed export rule. But BIS has not abandoned another troubling change that is causing many exporters to review their export profile and consider possible limits on China and other markets.

The so-called military "catch all" is intended to capture commercial items that are used by or for the military. In practice, a catch all type control applies to an otherwise "No License Required" item, when the exporter has knowledge. So far so good. The problems arise because so few details of the possible rules have been worked out.

What does knowledge mean? If this rule is consistent with other catch all rules, knowledge means not only actual knowledge, but also implied knowledge, based on what a reasonable exporter would have known or inquired about in the circumstances. As in most things, knowledge will be examined in hindsight, and hindsight is always 20/20.

One report includes speculation by an official that there will be a presumption that controlled items exported to China will have a military end use or user. Absent a showing to the contrary, such exports would be denied.

Will there be a difference in treatment among target countries? One reported aspect of the rule would impose new restrictions on exports and re-exports to at least 20 countries currently under a U.N. embargo; other reports suggest even tougher restrictions on exports and re-exports to China, which is not under a U.N. embargo.

Which products will be targeted? Some indications are that anything subject to the EAR will be covered, others indicate only those controlled in specific ECCNs, such as those controlled for AT (anti-terrorism) reasons. BIS officials say that the proposed China catch all would control "relatively low-level" items such as personal computers and certain microprocessors and avionics that have previously been decontrolled.

Who is a military end-user, and what it a military end use? Knowing your customer is difficult enough in most cases, but in China the issue is much more difficult. With the pervasive role of the military in commercial activity, exporters run the risk of misjudging certain end users, or having to delay commercial transactions to be certain. Also troublesome is the concept of military end use, which creates obstacles for sales to commercial customers who may, at least so far as the exporter knows, be a contractor to the military.

Will the playing field be level? Will U.S. trading partners implement a similar rule in a similar way? While officials have indicated that the new rule is not designed to create a higher standard than US allies will implement, it is a fact that the US is more often seeking for other nations to raise rather than lower their limits. This will mean increased competition from non-U.S. suppliers to China. These and many other questions remain.

All of this occurs during a time in which overall export control policy on China undergoes a major review. The Administration is managing a debate within the U.S. government between those in the defense agencies seeking greater controls on China, and others who argue that exports are needed to keep the economy healthy and to drive innovation. This debate reared its head recently on the deemed export issue. Whether the defense community will defer again on China will be the big question for exporters in 2006.

What you can do now — review your export profile to identify business flows that may be affected by these new rules. Consider options and contingencies. Submit detailed comments when the proposed rules are published. Have a plan to manage the impact of these rules before they go into place.

For more information please contact Lorry Halloway in our Washington office at lhalloway@crowell.com.

April 8, 2006 - Kim Nobles will be the luncheon keynote speaker on the topic of Patents & Intellectual Property for Science Technology Companies during the 2006 Annual Convention of the Chinese Association of Science and Technology, Los Angeles Chapter, in Alhambra, CA.

March 29 and 30, 2006 - Brian Peck gave presentations on "Protecting IP Assets" as part of two seminars hosted by the U.S. Commercial Service in Orange County and Los Angeles on Licensing and Managing Brands in China for U.S. apparel and clothing companies

March 23, 2006 - Crowell & Moring's Brian Peck and C&M International's Doral Cooper participated in The California Council for International Trade (CCIT) 8th Annual Trade Policy Forum – a day-long event. Brian was part of a panel discussion entitled, Hot Topics: Labor Standards and Intellectual Property Rights. Doral was a panelist onBilateral and Regional Free Trade Agreements: The New Wave or Dead in the Water?

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