The review is a Bush administration attempt to address the multiplying efforts in the U.S. Congress to eliminate the perceived imbalance in bilateral trade, including a proposal to impose a 27.5% import duty on all Chinese imports. Companies involved in U.S.-China trade can expect to see more U.S. trade action, such as antidumping and import safeguard cases, as well as increased pressure on China’s enforcement of intellectual property rights. There are opportunities for companies to influence the direction of these latter efforts through involvement in Washington-based government-industry processes.
The U.S. Trade Representative Rob Portman released the long-awaited “Top-to-Bottom” review of U.S.-China trade policy in a transmission to the U.S. Congress that contained strong language but no promise to initiate formal trade disputes in the World Trade Organization (WTO). Instead of disputes, Portman tabled a program to devote more U.S. government personnel to China trade issues, cajole China into joining more international economic organizations, and initiate bilateral “dialogues” on a wide range of issues. Although the action plan is weaker than U.S. critics of China have advocated, some of its elements could be useful to private firms.
The review, which USTR Portman had promised during his Senate confirmation hearing last year, contains a surprisingly frank assessment that “… the U.S.-China trade relationship lacks balance in opportunity, as well as equity and durability.” The Bush administration called on China to become, in a phrase favored by Deputy Secretary of State Bob Zoellick, a “responsible stakeholder” in the world trade system. It outlines short-term actions the Bush administration will undertake to promote China’s acceptance of its role as a stakeholder on the same level as the U.S., EU and Japan.
These actions can be divided into three categories. First, increased U.S. government personnel assigned to China trade issues in Washington and China. Second, increased coordination on China trade issues within the U.S. government, between the U.S. and Chinese governments, and between the U.S. and third country governments. Third, stronger U.S. trade ties to other Asian countries through APEC and other means. The recent announcement of free trade agreement (FTA) talks with Korea and the expected announcement of negotiations with Malaysia, although the latter were not referenced in the review, are part of this third category.
Structurally, the review sets out six goals, from which it derives 10 short-term actions. The goals consist primarily of (1) tying China more closely to international economic institutions, (2) increasing U.S. exports and (3) limiting Chinese imports. Although U.S. government efforts to involve China more closely in technical economic institutions will not attract great political attention, the effort could be quite useful to business.
The actions are process-oriented, dealing with the structure of the federal government. Most of them consist primarily of re-assigning U.S. government personnel, holding more intra-governmental meetings, and consulting more often with China and other countries. The review does not propose any concrete enforcement actions, such as a specific WTO dispute.
One of the action items, although it sounds innocuous, merits attention. It contains a detailed and diverse array of venues for government interaction between the U.S. and China, beginning with an initiative to expand China’s participation in the Doha Round, where China has been reluctant to move forward. Other items on the list cover issues ranging from labor to information policy. As with Chinese participation in technical institutions, an ongoing series of dialogues on these topics can provide enormous opportunities for business.
The full report is available online at:
There is increasing business concern about the scope of the long-awaited Chinese antitrust law. Most recently, foreign businesses have indicated alarm over the introduction into the draft of a specific offence in relation to abuse of a dominant position through the use of intellectual property rights.
The concern is that if such a provision is included, the law could be used to target foreign companies, particularly those holding important patents, to release their valuable IP to local companies. Concern about IP rights in China is a recurring issue. Recently, the U.S. government renewed its call on China to clarify what measures it has taken to enforce IP laws and has indicated that it would be willing to make a complaint to the WTO for a failure to meet its TRIPs obligations.
The inclusion of a specific IP abuse in the law, however, is only one of a number of concerns in the draft antitrust law. While many of the basic approaches under EC and German laws have been adopted, a number of important details remain unclear. For example, the Chinese law appears to allow for “inferences” to be drawn about dominance based on market share. Although Germany also applies market share presumptions, the draft Chinese law does not indicate whether these presumptions would be rebuttable or, if so, how they can be rebutted. Unless these issues are clarified, it will be very difficult for many companies, foreign or Chinese, to have any certainty over the legality of their business practices.
There are also criticisms that the proposed merger thresholds will catch a wide range of foreign transactions simply because one of the parties has significant operations in China. Moreover, whereas EC and U.S. substantive tests are based exclusively on competition concerns, the Chinese merger law appears to take into account industrial policy goals by including an assessment of whether the transaction would “obstruct the development of a certain industry or regional economy.” This may allow local companies to challenge a transaction in order to protect their own commercial interests.
Finally, one of the most controversial chapters of the new law, control over the misuse of government authority for anti-competitive practices, appears to have been dropped. This means that central government will have less power to rein in local favouritism by local and provincial authorities.
The draft law is now with the Chinese National People’s Congress for final approval. This is expected to occur in the second half of 2006.
Many importers and manufacturers pay unnecessary duty on imported merchandise, either directly or as a cost of procured materials. Strategic importers looking for cost-saving techniques should consider various tools to reduce or eliminate tariff costs.
As the prospects for serious multilateral duty reduction or elimination through the Doha Round wane, importers face the prospect of little relief. Despite the conventional wisdom that tariffs have been reduced to a negligible level, in fact tariffs remain a significant cost of doing business in many sectors, and a driver of sourcing and logistic decisions. The proliferation of FTAs affords little relief, as they cover narrow slices of trade, and do not contain uniform benefits. As relief is unavailable multilaterally or bilaterally, importers are increasingly taking matters into their own hands.
Many importers and manufacturers pay unnecessary duty on imported merchandise, either directly or as a cost of procured materials. Due to misapplication of duty schedules, as a result of a mischaracterization of the products being imported or errors on the part of Customs, companies may be paying substantial duties in excess of what is legally required. Identification of hidden duty allows individual companies to recoup excessive costs in a way that broad-based tariff reductions cannot: individual companies benefit, rather than entire industrial sectors. Recovery efforts allow companies to save money and recover available past payments. By analyzing their import classifications and the application of preference programs, businesses can isolate hidden duty and eliminate and recover unnecessary import expenses.
These efforts require a focused management of import duties to generate significant savings. In one form or another companies have achieved significant savings in varying sectors, including chemicals ($600,000 per year), minerals ($100,000 per year), and general trading ($800,000 per year); prospective duty avoidance ($4-5 million per year); and penalty avoidance ($1-5m+). These achievements require sustained and comprehensive efforts. While this may seem unfair and part of the job of governments, for now individual action has a greater chance of affecting the bottom line.
The proposed U.S. – Korea FTA will be the most commercially significant FTA the U.S. has negotiated since NAFTA. It is expected to liberalize access to the U.S. and Korea’s markets for consumer goods, services and agriculture and also impose greater protection for U.S. foreign investments and intellectual property rights.
On February 2, 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. – Korea free trade agreement (FTA). The announcement comes after years of consideration from both sides on the feasibility of the proposed agreement. Legislation authorizing negotiations has been introduced in Congress in the past, although there has previously been insufficient political commitment by either side to forge an agreement.
The proposed U.S.-Korea 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 businesses’ costs of importing and exporting by eliminating tariffs, but it will also codify laws ensuring that investments and intellectual property receive greater protections in the future . In fact, the U.S. requests to Korea for this agreement will likely be more ambitious in key areas such as automobiles, pharmaceuticals, medical technology and regulatory transparency than have been made in previous FTAs.
According to an International Trade Commission report on the economic impacts of the proposed deal, an FTA could increase U.S. shipments to South Korea by $20 billion and would increase Korean GDP by 0.7 percent, at a minimum, without even taking into account likely increases in investment and technology flows.
But in order for these benefits to be enjoyed by your business in both the U.S. and Korea, it will be necessary to engage U.S. and Korean 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 future of this agreement remains to be seen, although the first round of negotiations is expected to begin in May. There will be heavy pressure on both sides to conclude negotiations before July 2007 when the trade promotion authority expires since any negotiations that linger past this point will not be guaranteed “fast-track” consideration by the U.S. Congress.
New proposed EU rules of origin will impact on sourcing in the global market place.
Businesses with operations in countries benefiting from tariff preferences are often unable to make the most effective use of these preferences due to unfavorable rules of origin. For example, a textile factory in Zimbabwe is currently often unable to source fabric from South Africa without loosing its preferences. Even more so, a chemical processing plant in Bolivia is prevented from cumulating origin when obtaining phosphor from China. In the interest of developing countries, recent measures by the EU and the U.S. are trying to address this issue.
In the EU, a horizontal approach has been taken to revise the rules of origins in all EU preferential tariff arrangements. The objective is to streamline these often complicated rules by introducing a simple value added rule for all products, and to provide greater flexibility in terms of origin cumulation, i.e., greater possibilities for companies present in countries with preferential access to the EU market to source intermediate products from countries with less preferential access, and, without having to meet the normal thresholds for acquiring origin, still obtain the preferential duty rate.
Currently, with regard to the large number of countries benefiting from the EU’s Generalized System of Preferences scheme, a double origin standard is applied before regional cumulation is allowed, i.e., in addition to a minimal processing requirement, businesses must show that the added value of processing in the GSP country in question is higher than in the country from where the sourced products were obtained. The European Commission is suggesting abolishing this system and replacing it with a simple added value rule, much like the minimal operations rules typically used in regional cumulation. In addition, the European Commission is also proposing to allow full cumulation of origin to a larger extent than before.
However, the true novelty in the EU’s proposal is the introduction of the possibility to cumulate origin between different areas or groups. According to the European Commission, cumulation across regions will be introduced, subject to certain important conditions, if interested countries so request. For example, countries from SAARC (South Asia) could be allowed to cumulate origin from ASEAN countries (Southeast Asia).
If put into practice, the new rules will make it more lucrative for business to process in countries benefiting from preferential arrangements, since these preferences will be less dependent on the origin of sourced materials. Consequently, operations present in beneficiary countries could profit both from cheaper materials obtained from other parts of the world and preferential duty rates when exporting to the EU.
The revision of the EU’s rules of origin in preferential arrangements is prioritized for the coming year.
New Indian investment rules allow foreign retailers to set up majority-owned stores in India – a high-growth market eyed by foreign retailers for years. India has also lifted investment limits and simplified procedures in other sectors, including transportation, energy, mining and manufacturing – facilitating greater market access and lowering market entry costs in India.
On January 24 the Government of India announced that foreign single brand retailers (such as Nike, Reebok, Nokia) will be allowed to own 51 percent of local ventures in India. In addition, India will now allow 100 percent foreign direct investment in several other sectors including: development of new airports, petroleum industry financing and investment, gas pipelines, power trading, mining of diamonds, precious stones, and coal, hazardous chemical production, and the brewing and distillation of alcohol.
Certain investment rules and procedures have also been simplified to encourage foreign direct investment. For example, in the business-to-business e-commerce sector, the requirement to sell off a 26 percent stake of a wholly-owned business within five years has been removed. Foreign investors also will no longer need approval of the Foreign Investment Promotion Board for operations in which 100 percent foreign direct investment is allowed. In addition, India has removed the requirement for prior approval of foreign direct investment in industrial projects located within 15.6 miles of 23 town urban limits.
Market access to the retail sector in particular has been of keen interest to foreign retailers. Given the growing spending power of India’s middle class which equals the total population of the United States, India’s retail sector is expected to grow 25-30 percent per year over the next four years. Simplification of investment rules will also make it easier for foreign investors to enter the Indian market, as well as lower costs through less regulatory filing requirements and compliance.
It is important to note that despite these liberalization measures for investment, certain restrictions apply for particular sectors. The new rules for the retail sector apply only for single-brand operations and therefore, multi-brand stores such as Walmart and Target still cannot open their own stores. Activities in certain sectors such as energy and manufacturing will also remain subject to other applicable regulations.
Controversial U.S. DOT proposal to attract investment in the U.S. Airlines draws fire from both sides of the pond rather than hope for Open Skies.
When the U.S. Department of Transportation ("DOT") proposed easing its interpretation of foreign ownership restrictions to encourage more non-U.S. investment in the U.S. airline industry late last year, it could not have imagined the firestorm of criticism it would unleash — not only from some U.S. airlines and labor unions but also from over 100 members of the U.S. Congress and the European airlines that many believe the proposal was designed to please. Now, despite strong opposition on both sides of the Atlantic and doubts that the proposal will bring about a long-stalled U.S.-Europe Open Skies agreement, DOT is reviewing comments and moving forward with a final rule that will likely be challenged in the court as well as Congress.
The controversial rulemaking proposal would change the way the Department interprets actual control of U.S. airlines. Current law mandates that U.S. airlines must be under the "actual control" of U.S. citizens, a requirement that was written into the applicable statute by Congress just two years ago, and which codifies longstanding DOT case law. Under DOTís proposal, non-U.S. investors from countries with Open Skies aviation agreements, including foreign governments, could, for the first time, control the economic activities (such as day-to-day operations, market entry strategy, and aircraft purchases) of U.S. airlines, as long as the investorís homeland provides reciprocal rights to U.S. citizens. The proposal also requires that U.S. citizens remain in control of areas where significant government safety or security regulation remains or involving creation and amendment of the airlineís corporate organizational documents.
The comment period on the rulemaking closed in early January 2006, with the majority of commenters raising questions about how the proposal would work or opposing it outright. Among the most vocal opponents were Continental Airlines, which opposes the proposal on multiple grounds and says DOT is usurping Congressí role, and many labor unions and individual airline employees, who say the proposal would adversely affect U.S. workers. British Airways and Virgin Atlantic both argue the proposal doesnít go far enough and raises more questions than it answers. Supporters of the proposal include bmi, the International Air Transport Association, United, Federal Express and other U.S. cargo airlines.
For U.S. airlines, the proposal could attract more foreign investment, although the likelihood of such investments in major U.S. network carriers is significantly less than the prospects for investments in new start-up airlines to feed international airlines. Even then, the financial condition of the U.S. industry rather than foreign control regulations is the inhibiting factor for airline investment. Uncertainties created by ambiguities in the rule may well discourage inward investment, as some foreign commenters have said, rather than encouraging it. For foreign investors, the proposal would bring authority to enter into deals that give them power to make decisions such as setting fares, selecting aircraft, hiring personnel and developing business plans. According to DOT Secretary Mineta, "the proposed rule would allow international investors more say in some aspects of airline operations, but retain current domestic [U.S.] ownership and labor protections in U.S. airlines."
Congress continues to oppose the proposal strongly, with over 160 cosponsors on a bill (HR 4542) to defer DOTís proposal and strong concerns being expressed in the wake of issues raised in connection with the Dubai Pports acquisition of P&O. Some aviation industry experts predict that the proposal will fail to bring about the U.S.-EU Open Skies agreement many believe the proposal was intended to achieve and has been long sought by U.S. negotiators. Nevertheless, DOT says that it is moving forward and could issue a final rule as early as next month. If it does, all indications are that the rule will be challenged in the courts and in Congress - bringing uncertainty to foreign investors, at least for the short-term.
The proposal is available on http://dms.dot.gov/search/searchformsimple.cfm (type in “15759”)
The Office of Foreign Assets Control (“OFAC”) of the U.S. Department of the Treasury has issued an interim final rule outlining a new set of enforcement procedures. Although applicable only to banking institutions, these procedures provide a first glimpse into the enforcement schematic that OFAC is likely to apply to other industries in the future.
The banking institution procedures demonstrate OFAC’s transition from transaction-based enforcement guidelines towards risk profile-based enforcement procedures. The procedures are essentially a “roadmap” for OFAC compliance that is focused on preventative and remedial actions.
OFAC’s altered approach may be rooted in its recognition that individual entities are affected by their own unique circumstances and are therefore best served by procedures that take into account their individuality. This point is underscored by the inclusion of risk matrices that provide guidelines for evaluating the adequacy of a banking institution’s compliance programs, as well as specific instructions for implementing such programs.
OFAC’s prior enforcement guidelines (issued 1/29/2003) remain in effect with regard to all non-banking institutions. However, the new roadmap is instructive to other companies as they are likely to be faced with similar enforcement procedures in the future. OFAC has expressed its intent to draft new enforcement procedures specific to a variety of industries in both the financial and non-financial sectors, and through March 13, 2006 is accepting written comments regarding how its prior enforcement procedures should be modified to suit the needs of other industries. In the interim, all institutions and sectors subject to OFAC regulations should view the banking institution procedures as an example of what is to come their way in the future and begin evaluating their own risk-management procedures accordingly.
NAFTA provisions on “regional value content” (RVC) calculation causes serious problems for related parties. In order to qualify as “originating goods” under NAFTA, products manufactured in NAFTA countries using non-NAFTA inputs frequently must satisfy a RVC requirement.
The NAFTA regulations set forth two alternative methods for calculating the RVC – a price-based method (the “transaction value” method) and a cost-based method (the “net cost method”). In general, the party generating the NAFTA origin certificate can opt to use either method.
However, there is a little-known codicil to the regulations on this point – if 85% or more of a party’s sales of a particular product (or type of product) during any six-month period are made to a related party, then only the net cost method can be used for the RVC calculation going forward. Although there are no rulings on this provision, Customs has recently stepped up its examination and enforcement of this limitation in the context of both audits and entry-specific requests for information.
Of the two RVC calculation methodologies, the net cost method is significantly more complicated, and satisfying the RVC requirements using its formulas is often more difficult than under the transaction value method. Related party sellers and importers, who in many cases have engineered their supply chain in order to satisfy the RVC requirements for NAFTA qualification, may find in certain instances that, under the net cost method, their goods no longer qualify. This opens up not only the possibility of previously qualifying entries becoming dutiable on an ongoing basis but also of retroactive penalties.
The provision has been in effect since ratification of NAFTA in 1994, but few importers are aware of it and virtually nothing has been published on the subject. As such, it presents a “snare trap” for companies claiming NAFTA eligibility on their related party sales of merchandise manufactured in the NAFTA territory using non-NAFTA inputs.
Appendix, Part III, Sec. 2, of Part 181 of the Customs regulations sets out the threshold requirement that the transaction value method shall not be used when “the good is sold by the producer to a related person and the volume, by units of quantity, of sales of identical or similar goods to related persons (as defined in article 415 of the NAFTA) during the six-month period immediately preceding the month in which the good is sold exceeds 85 percent of the producer’s total sales of such goods during that period.”
The Miscellaneous Tariff Bill (MTB) may be more relevant to your business than it sounds - at least if you are an importer of products that American factories do not produce domestically.
The last MTB, passed by the 108 th Congress in 2004, provided for duty-free imports of hundreds of products, ranging from various chemicals and pigments to certain shearing machines. Traditionally, Congress passes an MTB at the end of each session in Congress. Last Spring, the House Ways and Means Committee issued a call for duty suspension bills to be introduced by April 19, 2005. In response, about 750 duty suspension bills have been submitted for inclusion in the next MTB thus far on the House side alone. Though the April deadline has passed, companies still have a chance to seek suspension of duties on certain imports since the Senate has not yet called for bills and only a few have been introduced there. As long as a duty suspension bill is in the House or Senate version of the bill, it can still be combined into the final MTB. Thus, companies can still petition members of the Senate to submit duty suspension bills on their behalf.
Congress will generally consider a product for inclusion in a miscellaneous trade bill if it meets three criteria: (1) it must be non-controversial and non-competitive, meaning that there is no domestic producer who objects to the duty suspension, (2) the suspension or reduction of the tariff should be intended to benefit U.S. downstream producers (someone who uses the product in manufacturing), and (3) the volume of imports and corresponding revenue loss should be relatively small (should not reduce federal government revenues by more than $500,000). If you import a product that may be eligible for duty suspension, it may be well worth it to seek inclusion in the next MTB - a successful outcome generally results in duty-free treatment of the product for two years.
Crowell & Moring, in conjunction with C&M Capitolink, has secured nearly 80 duty suspension bills for its clients, potentially resulting in an estimated savings of US$20 million.
Elements of India’s new patent law which took effect in 2005 have prevented Novartis from obtaining a patent for its cancer drug “Gleevec.” As a result, generic versions of the drug can now enter the Indian market despite the fact that Novartis held an existing patent on a key chemical component of the drug.
Pharmaceutical and other chemical product-related companies need to be aware of the new procedures and technicalities of India’s patent regime before entering the market.
There have been very few rulings on pharmaceutical patent cases since last year when India introduced a new regime that protects pharmaceutical compounds. India’s new patent regime allows a pre-grant opposition process and also includes a technicality which prevents recognition of chemical product patents filed prior to 1995. In this case, Novartis filed a patent application in 1998 for a crystal modification of Gleevec. Indian generic producers contested the novelty and inventiveness under the pre-grant opposition process. India’s Patent Controller rejected the patent application on the grounds that the drug did not qualify as an invention. The Patent Controller ruled that the product was merely a modification of the key component of the drug, for which a patent had already been filed in 1993.
The 1993 date was a determining factor in denying the Novartis’ patent application because the new patent regime only recognizes patents for chemical products that have been filed in India after 1995 and so, Gleevec’s key component was not eligible for protection. As a result of the rejection, Novartis also lost its exclusive marketing right for the Indian market which it held while its patent application was pending.
With India becoming an increasingly attractive market and the strength of the domestic generic industry, IP rightholders need to be fully aware of India’s new patent regime before entering the market to determine whether they can obtain a patent for their product. In addition, companies need to be prepared for possible pre-grant opposition proceedings, which can result in extensive and costly delays.
EU to reintroduce FSC duties on US imports. The European Union announced its intention to re-introduce additional customs duties on imported products from the United States after the WTO Appellate Body’s decision that the United States failed to comply with its earlier rulings in the Foreign Sales Corporation dispute. In mid-May this year, EU importers will face additional duties of up to 14% on a wide range of products made in the United States.
In the latest development in this long-running affair, the EU will re-activate the EU Regulation imposing countermeasures on products imported from the United States as a sanction for the United States failure to comply with the early WTO rulings in the Foreign Sales Corporation Case. The proposed re-introduction of the duties has been triggered by the WTO Appellate Body’s finding that US legislation aimed at complying with the WTO’s various rulings on this issue was not sufficient. The Appellate Body found that the US revised American Jobs Creation Act ("Jobs Act") effectively continued the payment of export tax subsidies under the "transition" and "grand-fathering" provisions of that statute.
Signaling its intention to bring this issue to a head, the European Commission has announced its intention to re-introduce the additional customs duties 60 days after the adoption of the Appellate Body ruling. In practice this means the re-introduction of the additional customs duties will happen in mid-May since the possibility of the United States enacting compliance legislation within the projected time frame is slim.
At the heart of the WTO’s decision was the fact that the Jobs Act contained a "Grandfathering Clause" that says that the repeal of the Foreign Sales Corporation and Extra Territorial Income (FSC/ETI) legislation "shall not apply to any transaction in the ordinary course of a trade which occurs pursuant to a binding contract" entered into before 17 September 2003 and contains the following clarification: "a binding contract shall include a purchase option, renewal option, or replacement option which is included in such contract and which is enforceable against the seller or lessor." The aim of the grandfathering clause was to ensure that certain US exporters will continue to obtain WTO-prohibited FSC/ETI export subsidies many years into the future on products that have not yet been built or exported, even beyond the expiry of the FSC/ETI transitional period in 2006.
The additional customs duties cover a large range of EU customs classification codes. These are set out in the 2005 EU Council Regulation that suspended the sanctions pending the US appeal to the WTO Appellate Body. The full list is set in the regulation suspending sanctions as from 1 January 2005 when the EU initiated a second compliance panel following the passing of the American Jobs Creation Act. This regulation now specifies which products are covered by the re-introduction of the measures. The current level of additional duties is estimated to be approximately US$ 4 million.