V ol. 2 8 , No. 1 7
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Big Def ense Firms Face Sharply Higher Regist rat ion Fees
Major U.S. defense exporters could see a significant increase in the registration fee they pay to
State’s Directorate of Defense Trade Controls (DDTC) under a plan the agency has submitted to
State Department management. The plan, which will go to the Office of Management and
Budget (OMB) for approval in the next couple of weeks, would raise the registration fee on a
proportionate basis so heavy users of the defense export licensing system would pay more than
smaller users. The goal would be to raise enough money to cover 75% of DDTC’s annual
budget, State Acting Assistant Secretary Stephen Mull told a Senate committee April 24.
“We are looking at restructuring our registration fee structure,” Mull told Senate
Homeland Security Committee’s oversight subcommittee. He said 60% of
registered firms export less than $100,000 annually through DDTC yet they pay
the same as firms that export billions.
Some 5,500 defense firms are registered with DDTC and pay the same annual $1,750 fee. This
is estimated to generate just over $9.6 million annually, which goes into the government’s general fund. With DDTC’s current budget of about $22 million, the higher fees would need to
bring in $16.5 million to cover 75%. DDTC, however, wants to increase its budget to implement President Bush’s national security directive from January, so more income will be needed.
U. S. , EU t o Negot iat e M ut ual Recognit ion of C-TPAT and AEO
The U.S. and European Union (EU) have agreed to work on developing a mutual recognition
agreement (MRA) that would give American firms that participate in the Customs-Trade
Partnership Against Terrorism (C-TPAT) and European firms that qualify under the EU’s
Authorized Economic Operator (AEO) program common treatment. An agreement in March
created a “roadmap” that is intended to lead to an MRA by January 2009, according to Lilan
Bertin, the EU counselor for transportation in Washington. The goal would be to implement
the MRA in mid-2009, he told a business conference.
The EU’s AEO program formally began in January and so far 1,500 firms have applied for
authorization, he reported. Of those applying, 70% are small or medium size companies, he
noted. Most of the applications are still pending. Industry executives say applications for AEO
have been slow to come in because companies cannot see the benefits of the program. In
addition, unlike C-TPAT, which was created after 9/11, AEO doesn’t seem to have the same
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national security imperative. AEO requirements are nearly identical to those for C-TPAT. EU
firms, however, complain that they need to apply in each separate country where they have an
operation that might use the program and there is not mutual recognition among EU members so
an AEO granted in one country will be recognized in another. In particular, countries in
Northern Europe are reluctant to accept AEOs granted by countries in Southern Europe.
Supreme Court Grant s Cert iorari t o Eurodif Case
When the Supreme Court reviews the ruling of the Court of Appeals for the Federal Circuit
(CAFC) in the Eurodif case, the debate may be over what it is being asked to review as much as
what the appellate court decided. The High Court April 21 said it has granted the writ of
certiorari requested by the U.S. Solicitor General and U.S. Enrichment Corporation and will
allow one hour for oral arguments when the consolidated cases are heard during the court’s next
session, which starts the first Monday in October (see WTTL April 14, page 4).
“Contrary to respondents’ characterizations, the question in this case is not
whether the Federal Circuit correctly recited the rule of Chevron U.S.A. Inc. v.
NRDC,” said the last reply brief filed by the Solicitor General. “Nor is the
question whether Section 1673 applies only to ‘sales’ of ‘foreign merchandise.’
Nor, finally, is the question whether separative work unit (SWU) contracts are
contracts for the sale of enrichment services,” the government argued.
“The question in this case, rather, is whether SWU contracts, and other similar contracts
between foreign producers and domestic consumers for the ‘service’ of manufacturing goods,
result in ‘foreign merchandise *** being *** sold in the United States’ within the meaning of
Section 1673,” it stated. Commerce “reasonably answered that question in the affirmative. The
Federal Circuit erred in overriding that expert judgment. Because the Federal Circuit has
exclusive jurisdiction over appeals in antidumping-duty cases, its error is a matter of national
importance and warrants this Court’s review,” the Solicitor General declared.
“As DOC explained in its final determination, uranium enrichment is ‘a major manufacturing
operation for the production of LEU’ that ‘results in the substantial transformation of the input
product into an entirely different manufactured product’,” the brief recounted. “When such
operations result in the introduction of the manufactured good into the commerce of the United
States, that good qualifies as merchandise subject to the antidumping-duty statute,” it said.
“Respondents assert that goods entering the United States pursuant to contracts for manufacturing services are categorically exempt from antidumping duties because the domestic customer
has purchased the manufacturing of a product, not the product itself,” the brief continued. “But
regardless of whether the contractual price is meant to cover the value of the raw materials, the
value of the manufacturing process, or both, the fact remains that such a contract results in the
transfer of the newly manufactured good to the customer in exchange for consideration. It surely
was reasonable for DOC to conclude that a customer that pays for the manufacture of a product
generally expects to receive the product itself in return,” it contended.
Proposed CFIUS Rules St ay Close t o Legislat ion
Proposed rules for the operation of the Committee on Foreign Investment in the U.S. (CFIUS),
which Treasury published in the Federal Register April 23, try to stay close to the language of
2007 legislation that mandated new procedures for reviewing foreign investment in the U.S. but
also to give the committee flexibility to review cases that might not fit neatly into any category. In particular, the proposal avoids drawing a “bright line” on what level of ownership by a
foreign party would trigger the need for a notification to the committee. “We’ve tried to
basically say that this bright line test that people think there is, there isn’t,” Treasury Assistant
Secretary for International Affairs Clay Lowery told reporters. “That has been the case...and
how we try to look at it,” he added. “That does mean it is very important to look at each case
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specifically on a case-by-case basis,” Lowery said. “What we’ve tried to do is to clarify for the
community and make it much more predictable what it is we are trying to look at in terms of
control issues, while at the same time making sure there is flexibility,” he noted.
Lowery also addressed the hot topic of sovereign wealth funds that are buying U.S.
companies or infusing cash into investment banks. “Sovereign wealth funds have
been looked at by CFIUS for 19 years, of which 17 years were previous to
anybody having coined the term sovereign wealth funds,” Lowery said. “So
sovereign wealth funds are not new to CFIUS. Sovereign wealth funds are treated
as a state-owned enterprise,” he continued. Every year, 10% to 20% of CFIUS
transactions involve foreign-government controlled entities, he noted.
“The statute basically tells CFIUS that we need to have higher scrutiny over foreign government-controlled entities,” Lowery explained. “Sovereign wealth funds fall under that basket.
So, in that respect, they would, from a national security aspect, be treated with higher scrutiny
per the statute and that is how we have been treating them. That doesn’t mean there is any bias
towards or against sovereign wealth funds, instead it means we will treat at a higher scrutiny
level state-owned enterprises,” he stated.
Legal community reaction to the proposal, which is likely to draw extensive public comments
before it becomes final, has been generally positive. “There are four things they did well and
one thing that is still missing,” said Joshua Holzer with the law firm of Wilson, Sonsini,
Goodrich and Rosati. The proposal did well formalizing the process for conducting pre-filing
discussions, providing guidance on useful information to submit with a notification, offering
advice on what CFIUS expects to see in a notice, and clarifying what may constitute controlling
interest in a U.S. firm. By clarifying the pre-filing discussion process, some of the mystery is
taken out of the process. “It’s not a matter of who you know,” Holzer told WTTL.
What the proposal is still missing, Holzer suggested, is better coordination between CFIUS
requirements and those in the Defense Security Service’s National Individual Security Program
Operating Manual (NISPOM) for facilities that have U.S. government security clearances.
NISPOM requires firms with clearances to report activities that might affect their clearance, and
DSS may report such information to CFIUS. The proposed rules don’t address what might
happen if CFIUS receives a notice that might affect a clearance holder unknowingly, Holzer
pointed out. Because the government has all the information on the proposed transaction and
the firm’s security clearance, it should coordinate any mitigation agreement that comes out of
CFIUS with the firm’s security clearance from DSS, Holzer argued.
U. S. Imposes Token Saf eguard on Socks f rom Honduras
Because it had made a commitment to restrict imports of socks from Honduras to win enough
votes to pass the Central American Free Trade Agreement (CAFTA), the Bush administration
was compelled to impose a 5% tariff on Honduran cotton socks April 23. But to avoid retaliation by Honduras and injury to U.S. firms that rely on Honduran socks, the administration
limited the safeguard action to six months, starting July 1. The Committee for Implementation
of Textile Agreements (CITA) announced plans to impose sanctions on Jan. 18 and U.S. Trade
Representative officials have been negotiating a deal with the Hondurans since then to allow the
sanctions to be imposed without retaliation and without paying Honduras compensation.
With the delay between January and the July 1 start of the duty, importers may have had time to
stock up on socks they need. The six-month “snap-back” period is designed to end on Dec. 31
when the current restrictions on imports of cotton socks from China are also scheduled to end.
Commerce Deputy Assistant Secretary Matt Priest said the Dec. 31 date was chosen so Honduras would not be at a disadvantage to China. Priest said 45% of the socks coming from
Honduras are actually made in the U.S. but sent to Honduras to have the toes sewn together and
to be packaged. About 99% of the cotton in Honduran socks comes from the U.S. while
Chinese socks have no U.S. cotton. The 5% tariff compares to the 4.4% tariff that was on
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these products before CAFTA. U.S. firms that wanted restrictions on Honduran socks had asked
for the tariff to be set at 13.5% for three years. “Honduran sock makers aren’t threatening the
U.S.,”said Laura Jones, executive director of the U.S. Association of Importers of Textiles and
Apparel, which represents importers. “Pakistan, the number one source, and China, the number
three source of cotton socks, are the only real winners here,” she said in a statement.
BIS M at ching Export Licensing Dat a w it h AES Report s
Under an agreement with the Census Bureau, the Bureau of Industry and Security (BIS) now has
access to information provided by exporters in their Automated Export System (AES) filings and
is using that data to evaluate the impact U.S. export controls is having on U.S. trade, licensing
and economic competitiveness. One of the first discoveries the new arrange-ment has found is
that only 57% of export licenses actually end up being shipped against, BIS analyst Gerry
Horner told the agency’s Information Systems Technical Advisory Committee April 23. BIS
plans to investigate this finding to determine why exporters are not using their licenses and
whether it is due to the slowness of the U.S. licensing system or other export control factors
that might cause them to lose a sale, he reported.
BIS also is using the AES data for enforcement purposes to check if items that
need licenses had them before being exported. It has developed a system to “cross
walk” Harmonized Tariff Schedule (HTS) numbers with Export Control
Classification Numbers (ECCNs) to match exports with Export Administration
Regulations (EAR) requirements, Horner told the TAC. This has helped BIS
identify items exported as NLR (no license required) or under a license exception.
The review is determining the states from which exports originate to help the BIS Office of
Export Enforcement (OEE) allocate resources to its regional offices. A particular focus of the
reviews is on items that Census has designated as Advanced Technology Products (ATPs). The
10 product categories designated as ATP account for almost 24% of all U.S. exports and many
of these items are subject to export controls. The data are also being used to monitor exports
that are going to Chinese entities that have been granted Validated End User (VEU) authorizations, Horner reported. BIS has a contract with an independent vendor which is providing the
agency with foreign census data as well.
* * * Brief s * * *
IN T R A - C O M P A N Y T R A N S F E R S : B IS h a s re c e ive d c o m m e n ts fro m D e fe n s e o n its p ro p o s e d ru le t o c r e a t e
n e w l ic e n se e x c e p tio n a n d p la n s to re v is e p ro p o s a l fo r fina l c le a ra n c e . B IS o ffic ia ls s a y the y a re a i m i ng t o
p u b l is h p r o p o s a l in F e d e ra l R e g is te r b y e n d o f M a y ( s e e W T T L , M a r c h 1 7 , p a g e 2 ) .
S P E C I A L 3 0 1 : U S T R A p ril 2 3 re le a s e d a n n u a l re p o rt o n c o u n trie s tha t a r e no t d o ing a d e q u a te jo b p r o t e c t in g in te lle c tu a l p r o p e r ty r ig h ts ( I P R ) . I t a d d e d P a k is ta n to lis t o f n a tio n s d e s ig n a te d a s P r io r ity W a tc h
C o u n tr ie s . S till o n lis t a r e C h in a , R u s s ia , A r g e n tin a , C h ile , In d ia , I s r a e l, T h a ila n d a n d V e n e z u e la . U S T R
s a id it w o u ld c o n d u c t o u t-o f-c yc le r e v ie w o f I s r a e l b e c a u s e o f p r o g r e ss c o u n tr y is m a k in g . B e c a u s e o f
p ro g r e ss t h e y a r e m a k in g , B e lize a n d L ith u a n ia ha v e b e e n ta k e n o ff W a tc h L is t. U S T R a ls o m o v e d E g yp t ,
L e b a n o n , T u r k e y a n d U k ra in e fro m P rio rity W a tc h L is t to W a tc h L is t.
E X P O R T P R O M O T I O N : R e p s. D o n M a n z u llo ( R -I ll.) a n d J o h n M ic a ( R -F la .) in tr o d u c e d b ill ( H .R . 5 8 8 3 )
A p r il 2 4 to r e str u c tu r e T r a d e P r o m o tio n C o o r d in a tin g C o m m i tte e , w h ic h is s u p p o s e d to c o o r d in a te tr a d e
p r o m o tio n e ffo r ts o f 2 1 d e p a r tm e n ts a n d a g e n c ie s . B ill w o u ld m o v e m a n a g e m e n t fr o m C o m m e r c e to n e w
O f fi c e o f T r a d e P ro m o tio n w ith in E x e c u tiv e O ffic e o f th e p re s id e n t.
E X -I M B A N K : D a n ie l C u rr a n o f B o yn to n B e a c h , F la ., w h o p le a d e d g u ilty o n J u n e 8 , 2 0 0 7 , to o n e c o u n t o f
c o n sp i r a c y t o d e fra u d E x -Im B a n k in $ 3 0 m illio n s c h e m e a n d o n e c o u n t o f m a il fra u d , w a s s e n te n c e d A p r i l
2 3 to 4 1 m o n th s in p r iso n in D .C . U .S . D is tr ic t C o u r t. H e w a s p la c e d o n th r e e ye a rs o f s u p e r v is e d r e le a se ,
o r d e r e d to fo r fe it $ 1 4 0 , 0 0 0 a n d p a y r e s titu tio n o f $ 2 3 ,1 5 6 , 8 2 8 to E x -I m . “T h e s u b s ta n tia l a ss is ta n c e
C u r r a n p r o v i d e d to th e g o v e r n m e n t in its in v e s tig a tio n a n d p r o s e c u tio n o f o th e r s w a s ta k e n in to c o n s id e r a tio n a t s e n te n c in g ,” J u s tic e s ta te m e n t s a id ( se e W T T L , O c t. 1 5 , p a g e 3 ) .