Topic Category: Politics

When it comes to trade policy, Senator John Kerry and President George W. Bush share many similarities. But differences do exist. If elected president of the United States, what trade policies is Kerry likely to push? What trade deals is a Bush second term likely to generate? And how is either candidate likely to impact international business?

John Kerry’s Senate Trade Record

As a four-term Democratic senator from Massachusetts, Kerry has compiled an impressive record of support for free trade. He voted in favor of every major trade bill to come before Congress: the Uruguay Round Agreements Act, the North American Free Trade Agreement, normal trade relations (NTR) with China and then permanent NTR in 2000, more generous market access for imports from Africa and the Caribbean, and trade promotion authority for Presidents Clinton and Bush. He was one of a minority of his party in the Senate to reject steel quotas in 1999.

Yet, Kerry’s record on trade has its blemishes. He voted for the huge farm subsidy bill in 2002 that President Bush signed. He voted for more restrictive language on labor, environmental and human rights standards in trade agreements. He voted to make it more difficult to reform America’s much abused antidumping laws in World Trade Organization negotiations. But those deviations aside, Kerry’s record in Congress has been pro-trade, especially for a Democrat.

Election Rhetoric?

As a presidential candidate, however, John Kerry has staked out a more skeptical line on trade. While paying lip service to the need to trade, he has ratcheted up his call for “enforceable labor and environmental standards at the core of every trade agreement,” skipping over the fact that most developing countries in the WTO have made it perfectly clear they will not sign agreements that contain such language.

In his July speech, Kerry said, “We will trade and compete in the world. But our plan calls for a fair playing field”—whatever that would mean in practice—“because if you give the American worker a fair playing field, there’s nobody in the world the American worker can’t compete against.” To deliver that “fair” playing field, Kerry has proposed reviewing and even re-opening existing agreements and aggressive use of the Super 301 trade law that threatens other countries with unilateral U.S. sanctions. To slow “outsourcing,” he wants to impose new regulations on U.S. companies and restrict government contracts to companies that promise to do all the work in the United States.

Equally disturbing has been Kerry’s attacks on the patriotism of his fellow Americans. He’s described executives who have tried to control costs by moving some operations overseas as “Benedict Arnold CEOs”—as if trying to stay competitive in global markets is somehow un-American. He’s promised to “appoint a U.S. Trade Representative who is an American patriot and who will put American jobs first”—as if past and present USTRs have not been good, decent Americans committed to the same bi-partisan, post-war trade expansion that has brought so much peace and prosperity to the United States and its trading partners.

His choice of Sen. John Edwards of North Carolina as a running mate only reinforces this retreat from free trade. In contrast to Kerry, Edwards voted in favor of steel quotas and against opening the U.S. market to apparel imports from Africa and against final passage of trade promotion authority. Edwards ran against NAFTA during his 1998 campaign and even voted against free trade agreements with Chile and Singapore last summer. (Kerry missed those votes.) The one bright spot on the Edwards record has been his support in the past for normal trade relations with China.

What Would President Kerry Do?

What would all this mean for trade policy in a Kerry administration? Probably not as much as the campaign sound bites indicate. The anti-trade noise generated in U.S. elections is always worse than any legislation the politicians finally enact. John Kerry’s swipes at trade are popular with the Democratic Party’s core constituencies of organized labor and environmental activists, but trade has simply not been a decisive issue in recent presidential or congressional campaigns.

Nonetheless, trade policy would change under a Kerry presidency. If he wins what everyone expects will be a close race, his anti-trade constituencies will want to collect on their victory. The price may be fewer bilateral and regional trade agreements, and probably none with less developed countries where labor and environmental standards would be an issue. The first casualty would likely be the Central American Free Trade Agreement, which Kerry has vowed to either renegotiate or veto.

Fortunately for the global trading system, economic and foreign-policy realities, as well as what is likely to be another Republican Congress, will probably block any sharp turns toward protectionism by a Democratic administration.

President Bush on Trade

As U.S. president, George W. Bush speaks often of the benefits of trade for the U.S. economy and its broader foreign policy interests. But his administration has also retreated from free trade principles in the face of political pressure, casting a cloud of uncertainty over the trade policy of a second Bush term.

Nowhere has this tension between principle and politics been more evident than in U.S. trade with China. The Bush administration strongly supported China’s entry into the World Trade Organization, and has worked constructively with China on a range of trade issues. It rejected a string of Section 421 requests by U.S. industries to restrict imports of Chinese-made wire hangers, pedestal actuators and brake parts.

The Bush administration also dismissed two Section 301 petitions that would have imposed tariffs on Chinese imports in retaliation for alleged labor abuses and currency manipulation. The president’s able trade representative, Robert Zoellick, negotiated settlement of a WTO dispute over China’s tax treatment of imported semiconductors. During the administration’s tenure, two-way trade between the United States and China has continued its spectacular growth, from $116 billion in 2000 to $181 billion in 2003.

And yet President Bush has not been immune to protectionist pressures. He imposed special safeguard duties on Chinese-made brassieres, dressing gowns and knit fabrics. His Commerce Department has rejected arguments to designate China a “market economy” for purposes of antidumping calculations. And a steady parade of administration officials have pressured China to revalue or float its currency to supposedly boost U.S. exports to China, which have already grown by 75 percent since 2000.

The president overlooked his own lapses from free trade in a recent campaign speech in New Mexico, declaring, “Good public policy and good trade policy say to places like China and elsewhere, open up your markets. Ours are open. You open up yours. We can compete with anybody, anytime, anyplace, so long as the rules are fair.”

Like his policy toward China, President Bush’s overall record on trade is one of unsteady progress. On the plus side, the administration and USTR Zoellick were instrumental in launching the Doha Development Round and in keeping it alive with serious proposals to liberalize trade in industrial products, services and farm commodities. The administration persuaded Congress to pass trade promotion authority after an eight-year lapse, allowing the president to negotiate market-opening agreements with Singapore, Chile, Australia, Morocco, the Dominican Republic, and five nations in Central America.

On the minus side, President Bush in 2002 imposed temporary tariffs as high as 30 percent on imported steel through the Section 201 safeguards provision. He also signed the trade-distorting farm bill that year that locked in subsidies at a level 80 percent higher than under the previous farm bill. Besides being costly to taxpayers and consumers alike, the farm bill undercuts the U.S. government’s moral authority to argue for free trade in other countries. So the Bush record on trade can be described as one of good intentions and genuine progress compromised by tactical retreats in the face of political pressure.

Fortunately, President Bush seems to have rediscovered his free trade principles on the campaign trail. He speaks openly of the blessings of free trade and the dangers of protectionism and isolationism. He has been eager to sharpen the differences between the two parties on trade rather than blur them.

Business in the Next Four Years

A huge piece of unfinished business for the next president will be the ongoing Doha Development Round. A comprehensive agreement could be hammered out as soon as December 2005 at the planned ministerial meeting in Hong Kong. Whoever is president would then need to shepherd any final agreement through Congress before trade promotion authority expires in 2007.

Either a Bush or Kerry administration could bring the round to a successful conclusion, but Bush would probably have more flexibility to negotiate real limits on antidumping abuses.

Where Bush differs most from Kerry on trade would be in more aggressively seeking bilateral and regional agreements. Nowhere will the contrast be sharper than on the Central American Free Trade Agreement. The Bush administration negotiated the agreement and strongly supports it in its current form, while Kerry has pronounced it unacceptable because it supposedly lacks adequate labor and environmental protections.

A re-elected President Bush would also pursue a U.S.-Thailand Free Trade Agreement, while a President Kerry would be more likely to heed the objections of the United Auto Workers union, which fears competition from the Thai light-truck industry.

No matter who wins in November, it is unlikely that the United States will deviate much from its post-war commitment to a more open global trading system. But judging by both his rhetoric and his record, George W. Bush would be more likely to build and expand upon that legacy than his opponent.

This article appeared in Impact Analysis, September-October 2004.
Topic: Politics
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On December 6, 2001, the Trade Promotion Authority bill (TPA) passed in the House of Representatives by a vote of 215 to 214.

Although the bill’s passage was reason to celebrate, the one vote margin is cause for concern. The narrow win indicates that Members of the House of Representatives are deeply divided over the benefits of international trade and don't fully understand its impact.

Soon, TPA will be voted on in the Senate — where its fate is uncertain. But due to the positive impact this legislation will have on the Hudson Valley region, it's very important that Senators Schumer and Clinton support it.

TPA requires Congress to pass or reject trade agreements without making any changes. Since 1994, when legislation expired, foreign governments have been reluctant to make new agreements and concessions that could be changed later by Congress. Without TPA, the United States has been handicapped in its ability to negotiate new trade accords.

Why is this important?

In order to generate new, higher-paying jobs, local companies need to export more goods and services worldwide. But in order to do so, the United States needs to forge new trade agreements that knock down foreign tariff barriers which make our goods and services less competitive internationally.

What's more, while we sit on the sidelines, our foreign competitors are establishing bilateral accords at record pace — giving their exporters preferential access to the most lucrative markets in the world.

How far have we fallen behind?

Consider this: of the estimated 130 free trade agreements in force around the world today, only three include the U.S. This has put our companies, workers and farmers at a severe disadvantage, and has resulted in lost export deals.

For example, the absence of the U.S. from the Canada-Chile free trade agreement alone has cost U.S. companies $800 million a year, according to the National Association of Manufacturers. Since 1997, Canadian goods have entered Chile duty-free, while ours have been assessed duties that make them more expensive. As a result, Chileans are buying goods from Ontario at the expense of New York.

TPA served Presidents Ford, Carter, Reagan, Bush, and Clinton. It's time that President Bush is given TPA. Thousands of New York State companies, workers and farmers need it.

But New York is not the only beneficiary. Exports now account for almost one-third of real U.S. economic growth. As a result, the income of workers and farmers, as well as the growth prospects of an increasing number of U.S. businesses are pegged to international trade.

In 2000, the United States exported $786 billion in goods and $317 billion in services. Based on calculations provided by the U.S. Trade Representative, these exports support over 13 million U.S. jobs. And these jobs pay more than the average U.S. wage.

Plus, communities where exporters reside also benefit through a more stable workforce and a strong tax base. Furthermore, the revenue generated from exports flows to local communities through restaurants, retail stores, movie theaters, etc., and spreads risk should the domestic market enter a period of slow growth or recession.

International trade has some drawbacks, but they are small in comparison to the gains. For example, according to The CATO Institute, less than 2% of total U.S. non-farm workers are at risk from imports.

Our farmers and workers can compete and win in world markets, but only if Congress gets us back on a level playing field. This is why I encourage Senators Schumer and Clinton to support TPA when it soon comes to a vote.

This article appeared in the Hudson Valley Business Journal, February 2004.
Topic: Politics
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Tariffs levied on imports increase their cost and discourage their demand. As a result, each country places higher import barriers on goods determined to be import sensitive. But tariffs are only one way to restrict imports. New and innovative methods, including non-tariff barriers, subsidies, confusing tax codes and red tape, are difficult to measure and are increasingly being used. How does this affect your business?

Industrial and Developing Country Interests Differ

According to the World Bank, industrial countries are less sensitive to manufactured imports. As a result, they maintain low tariff levels on manufactured goods. However, due to their high sensitivity to agricultural imports, they maintain high tariff levels on agricultural products. In fact, the average tariff protection on agricultural goods is nine times higher than on manufacturing goods. And this does not include the impact of agricultural subsidies.

On average, developing countries’ applied tariffs on industrial products are three to four times as high as those of industrial countries. And, their tariff levels on agricultural products are even higher. What would happen if all tariffs were eliminated? According to the IMF and World Bank, potential welfare gains are estimated at $250 - $650 billion annually. About one-third to one-half of this would accrue to developing countries. And removal of agricultural supports would raise global economic welfare by an additional $128 billion annually, with some $30 billion going to developing countries.

Studies Show Protectionist Measures Inflict Severe Damage

Although in some instances protectionism may help fledgling industries for limited periods of time, current and decades-old studies indicate that trade barriers have severe negative consequences. Reducing the number of imports through the use of trade barriers only raises the costs of goods and services to consumers and results in net job losses.

According to the 2002 U.S. International Trade Commission report, The Economic Effects of Significant U.S. Import Restraints, if all U.S. trade barriers had been simultaneously eliminated in 1999, 175,000 full-time workers would have been displaced, with the textile and apparel sector incurring nearly 90 percent of that loss. This would have represented only one one-hundreth of 1 percent of the 1999 labor force of 122.1 million. However, the report indicates, 192,400 full-time jobs would have been created, resulting in a net gain of nearly 17,400 jobs. In addition, total output would have increased by $58.8 billion.

The World Trade Organization (WTO) determined in 1988 that $3 billion was added annually to grocery bills of U.S. consumers to support sugar import restrictions. In the late 1980s, U.S. trade barriers on textile and clothing imports raised the cost of these goods to consumers by 58 percent.

And when the U.S. limited Japanese car imports in the early 1980s, car prices rose by 41 percent between 1981 and 1984. The objective was to save American jobs. However, in the end, it cost more jobs due to a reduction in the sale of U.S.-made automobiles, according to the WTO.

Additionally, Trade, Jobs and Manufacturing, a report by Dan Griswold published by the Cato Institute, a Washington, D.C. think tank, contends that if import barriers on sugar products were eliminated, imports would surge by almost 50 percent and domestic production would fall by 7.2 percent. The resulting job losses in sugar-related industries would total 2,290 out of 16,400 full-time industry jobs — a small number compared to an average of 235,000 net new jobs the U.S. economy created each month leading up to 1999, the year the report was released.

The Rising Use of Non-Tariff Barriers

Unlike tariffs, non-tariff barriers are often hidden. Sometimes referred to as “red tape,” they typically include quotas, boycotts, licenses, standards and regulations, local content requirements, restrictions on foreign investment, domestic government purchasing policies, exchange controls and subsidies. Although some are used to legitimately protect consumers, many are not. In fact, in some countries environmental, labor, competitive policy and investment issues are increasingly also used in an abusive manner to discourage imports.

Controversy over Subsidies and Tax Codes

Several countries have continually changed and manipulated their tax codes to obtain a trade advantage. In addition, many have thrown convoluted subsidies into the mix and ended up with a lot of unintended consequences. Today, that’s the situation in both the United States and European Union.

What’s happening now is tied to actions of the past. For decades, European industries, such as aerospace and telecommunications, have been subsidized to boost their international strength or to shield them from global competition. Additionally, the European Union has exempted and continues to exempt its exporters from paying a substantial value added tax.

The Foreign Sales Corporation and Extraterritorial Income Exclusion Act

To counter these unfair actions, in 1984, the United States crafted the Foreign Sales Corporation (FSC) tax code so exporters could compete fairly in global markets. This proved beneficial, as evidenced by a National Foreign Trade Council report that said 3.5 million U.S. export-related jobs benefited from FSC tax incentives in 1999. Unfortunately, the European Union challenged the FSC rule through the World Trade Organization, and won in 2000.

In attempt to satisfy the global trade body, the United States repealed the law and in its place created the Extraterritorial Income Exclusion (ETI) Act of 2000. However, the new law still didn’t satisfy Europe, who again challenged the law, and won.

Consequently, the European Union is now authorized to impose sanctions of more than $4 billion annually on U.S. exports, which include steel, beef, sugar, wood and paper products, cotton, apparel, cosmetics, and electrical machinery. Although Europe’s tax loopholes and subsidies distort trade by artificially increasing the attractiveness of its goods and services on world markets, its indirect tax system is technically WTO-compliant. WTO language doesn’t cover indirect taxes, only direct taxes like those used in the U.S.

The U.S.-EU Challenge

How can the United States respond to this challenge? If Congress terminates ETI without establishing a suitable replacement, approximately 6,000 U.S. exporters who rely on ETI to compete will be hurt. And the majority of these firms are small. But they’re not the only ones that stand to lose. Boeing alone estimates that repealing ETI will result in the loss of nearly 10,000 of its high-tech jobs, as well as 23,000 more jobs with its suppliers.

Airbus, Boeing’s heavily subsidized European rival, has received more than $30 billion in European financial support. This gives Airbus an unfair advantage, and affects the entire U.S. aerospace industry that employs nearly 800,000 highly-skilled workers.

The U.S. response to the ETI challenge is currently being debated in Congress. And one thing remains certain: U.S. exporters need a mechanism that counters their European rivals’ government handouts. Small and medium-size companies, which account for about 96 percent of all U.S. exporters, and large companies, as well as farmers, all need a level playing field.

Sound Research Is Needed to Identify All the Barriers to Trade

Regardless of how the U.S. and EU work out their disagreements, one thing is certain: tax codes, subsidies, tariffs and multiple layers of non-tariff barriers can artificially create winners and losers in international trade. As a result, it is essential that U.S. exporters in pursuit of new markets conduct sound research to determine what barriers exist and what impact they are likely to have on your level of competitiveness. In today’s era of hidden obstacles, in-depth research and analysis can mean the difference between international success or failure.

This article appeared in Impact Analysis, January-February 2004.
Topic: Politics
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Prospects for a short-term home-land investment package from Congress, allowing the repatriation of certain foreign earnings at a lowered tax rate, remain bright given interest on both sides of the aisle. But the provision and its exact form will have to wait until lawmakers take up international tax legislation following the winter recess.

In the meantime, U.S. firms affected by the proposal should prepare now for the repatriation window (estimated to be between six and 12 months) and consider effects the provision may have on foreign exchange and credit markets, according to Bank of America officials.

Freeing “Stranded” Money

Under current law, U.S. firms that repatriate earnings from foreign subsidiaries pay tax based on the difference between tax paid overseas and the 35 percent U.S. rate. Companies can avoid U.S. taxes on such earnings by keeping the money overseas, where many nations exclude foreign dividends from domestic taxation—further encouraging the overseas investment of earnings made abroad.

As a result, hundreds of billions of dollars in earnings remain in foreign markets, according to economists’ estimates.

Congress introduced legislation last February designed to release certain overseas earnings and provide a one-time economic stimulus back home. The Homeland Investment Act, sponsored by Rep. Phil English, R-Pa., and its sister bill, the Invest in the U.S.A. Act, sponsored by Sen. John Ensign, R-Nev., sought to reduce the tax rate on repatriated foreign earnings to 5.25 percent for one year. The break would apply to distributions in excess of a company’s normal amount, also called the base amount, calculated as the average of dividends received over five years excluding the low and high years.

The Joint Committee on Taxation first estimated that the proposal would bring an additional $135 billion of foreign earnings into the United States during a one-year period. A more recent Bank of America study places the figure as high as $400 billion.

Furthermore, a recent analysis by research economist Alan Sinai indicated that repatriation of $300 billion would increase real GDP by 0.2 percent in 2004 and up to 0.9 percent in 2005. Capital spending also would increase, Sinai concluded, and the repatriated funds would add up to 666,000 new jobs to the U.S. economy.

According to the Homeland Investment Act’s sponsors, the repatriated earnings would allow businesses to increase domestic investment in plants and equipment, as well as research and development; increase funding for pension plans; reduce domestic debt; increase dividends to shareholders; increase funds available for stock repurchases; and, ultimately, create jobs.

“As we work to get our economy moving again, we need to do all we can to encourage investment in our capital markets,” said Rep. David Dreier, R-Calif., one of the bill’s cosponsors. “Just as consumers need an incentive to invest, so do businesses.”

Despite bipartisan support, however, the House bill remained tabled in committee. The Ensign bill, having achieved a favorable 75-25 floor vote in the Senate, was attached to the jobs and growth bill being rushed to the president’s desk before Memorial Day. Prospects looked good for homeland investment at the time, although for reasons of political expediency lawmakers removed the provision at the last minute.

A New Beginning

Homeland investment was down, but not out. In late July the chairman of the House Ways and Means Committee, Rep. William Thomas, R-Calif., inserted a homeland investment provision in his international tax bill, the American Jobs Creation Act of 2003. Insiders report that this had been Thomas’s intent all along, and that his strong support for homeland investment was one reason lawmakers dropped the provision from the growth bill earlier in the year. In other words, they knew its chances of passage at a later date, under Thomas’s guidance, were strong.

The Thomas provision differed in many ways from the original English and Ensign bills, including an increase of the tax rate to 7 percent. It also placed greater restrictions on companies that might benefit from the rule change. And the maneuvering continued. Thomas dropped homeland investment from his bill during the committee’s markup period in mid-October, but only after it had been added to the Senate’s international tax bill, the Jumpstart Our Business Strength (JOBS) Act, sponsored by Sens. Charles Grassley, R-Iowa, and Max Baucus, D-Mont.

The homeland investment provision in the Senate version more closely resembles the original bills, setting a one-year window for repatriation at a one-time rate of 5.25 percent. As before, the rate would apply to dividends in excess of a three-year average.

The JOBS Act also requires that dividends be part of a “domestic reinvestment plan” approved by a company’s senior management and board of directors. Uses could include “the funding of worker hiring and training; infrastructure; research and development; capital investments; or the financial stabilization of the corporation for the purposes of job retention or creation,” according to the bill.

Passage of the overall package is more complicated now, however, because the international tax bills also contain other, more controversial provisions. Most notable among them is the WTO-mandated and much-debated repeal of the extraterritorial income (ETI) exclusion.

Is Passage on the Horizon?

Industry support and lobbying for homeland investment have flourished in recent months, particularly among high-tech and healthcare companies and their trade associations. Supporters in Congress clearly want some form of the provision, which they believe could have a dramatic economic impact, in place well before the 2004 elections. Will it happen in conjunction with the international tax bill?

Although the Thomas bill recently passed through the House Ways and Means Committee without a homeland investment provision, the Senate has delayed a vote on its sister bill, the JOBS Act, until after the winter recess. This is despite the fact that retaliatory tariffs from the EU are slated to begin January 1, 2004 if the ETI exclusion is not repealed.

Given passage of the JOBS Act in its current form following the recess, it is very likely that homeland investment will be part of the delicate Senate-House reconciliation process expected to take place next spring, according to Arnold Miyamoto, managing director and global head of Bank of America’s Risk Management Advisory Group for Global Foreign Exchange.

Because Thomas remains a strong supporter of homeland investment in the House, Miyamoto believes the provision will still have a good chance of passage at that time. The resulting one-year repatriation window would apply to a company’s first taxable year ending 120 days or more after the provision’s enactment, according to the Senate bill.

Getting Prepared

So where does that leave companies now? The delay in Congress actually gives firms more time to prepare and maximize their tax benefit during a one-year window, Miyamoto said. He recommends that companies engage in the legislative process and initiate planning.

For most firms that means considering borrowing offshore as a way of increasing the size of repatriated dividends. Yet companies should keep in mind that the large influx of foreign earnings will have significant impacts on the dollar and credit markets, Miyamoto noted.

Foreign Exchange Implications

U.S. firms would likely increase the size of their repatriated dividends by issuing debt in non-dollar currencies. This would have a positive impact on the dollar because firms would have to sell those currencies and buy U.S. dollars for repatriation.

Repatriated funds would be invested in short-term, high-quality U.S. securities before later being redeployed into other uses, Miyamoto said. Because these steps would occur in a short period, a move in the currency market could easily diminish a company’s tax break resulting from the homeland investment provision.

“From the currency side, homeland investment has very bullish implications for U.S. assets, the economy and the dollar,” Miyamoto said. “When it’s more certain about whether the legislation will pass, companies should very strongly consider hedging, because they don’t want to erode a lot of the projected tax benefits due to a foreign exchange loss.”

Credit Issues To Consider

On the credit side, passage of homeland investment would create a “massive wave” of new bond issues—mostly high-grade but some high-yield as well—both in the United States and Europe, according to Miyamoto. With the figure reaching into the hundreds of billions, he expects that euro credit market spreads will be volatile and likely to widen, with the opposite happening to credit spreads in the United States.

“For companies looking to issue debt, they need to be mindful of that, particularly if they’re looking to globally diversify their debt structure,” Miyamoto said. “They need to be mindful of the fact that the market can only absorb so much. Secondly, if they’re holders of U.S. debt, as well as non-U.S. debt, they also need to be aware of what the short-term ramifications will be.”

Looking for Help?

For assistance with these and other repatriation issues, company officials should contact their primary banker, Miyamoto said, noting that Bank of America has a large homeland investment team in place across multiple product areas. “As we get greater clarity in terms of where the legislation is headed, customers will be guided down the appropriate path,” he said.

Overall, Miyamoto remains very optimistic regarding the economic effects of homeland investment and companies’ eagerness to take advantage of its passage. “Over the past decade this is the third time that a proposal like this has come up,” he said. “This is without question the farthest it’s ever advanced. If this is passed and enacted, companies will act quickly on it.”

This article appeared in December 2003. (BA)
Topic: Politics
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Are higher costs and supply chain disruptions an inevitable result?

The gap between bipartisan teams in Congress and the Bush administration over port security widened in late October, coinciding with the first-ever homeland security appropriations bill signed by the president earlier in the month.

Sen. Susan Collins, R-Maine, chairman of the Governmental Affairs Committee, and Sen. Joseph Lieberman, D-Conn., the committee’s ranking member, expressed concern about perceived weaknesses in the Department of Homeland Security’s port security measures, particularly those that target high-risk cargo containers before they reach U.S. waters.

A five-page October 28 letter to Asa Hutchinson, undersecretary for border and transportation security, poses several questions and requests a response by November 28. In March Hutchinson testified before the committee about container security issues.

“Just one small lapse in security at our ports or at other points of entry can have disastrous consequences for our nation,” Collins said in announcing the letter. “While we have taken steps to protect our ports, it is clear that they are still ‘ripe for exploitation,’ as one security expert put it.”

The move by the two senators follows similar action by two colleagues in May. At that time, Sen. Fritz Hollings, D-S.C., and Sen. John McCain, R-Ariz., requested that the General Accounting Office investigate what they believe is the administration’s failure to address port security mandates set forth by the Maritime Transportation Security Act. That investigation is ongoing, according to Hollings’ office.

The Bureau of Customs and Border Protection (CBP) maintains that it has a multi-layered process to target high-risk shipments while providing a “fast lane” for legitimate cargo. The bureau stresses that it screens manifests and other data for all 5.7 million cargo containers arriving in the United States each year.

But congressional critics of the current system want more stringent measures that, if implemented, would far outpace funding granted by the fiscal year 2004 budget for Homeland Security. The monetary and legal disputes over a long-term approach to security will almost certainly carry over to future budget battles on Capitol Hill.

Meanwhile, industry officials continue to fear that tighter restrictions and increased red tape—without corresponding increases in government inspectors and high-tech tools—could lead to greater shipping delays. What’s more, government indecision on the exact nature of port security prevents long-term planning and investment by companies affected by the corresponding regulations, say trade experts.

Importers and shippers may, at best, have to make educated guesses to stay competitive, then be agile enough to adapt once comprehensive and cohesive port security measures are in place. When that could happen is debatable, given the political environment, making involvement in the ongoing legislative process vitally important.

What Container Data is Reliable?

Collins and Lieberman identify three specific weaknesses in port security that could undermine the effectiveness of the Container Security Initiative and Operation Safe Commerce. “It is critical that these and other programs be fortified, improved, and adequately funded to address the areas of vulnerability in our ports,” the letter to Hutchinson said.

The CBP’s Automated Targeting System (ATS) still relies solely on information from cargo manifests, provided according to the 24-Hour Rule, to weed out high-risk shipments for inspection. The senators call such manifests “historically highly unreliable documents” and cite expert opinion that the 14 data points required by the 24-Hour Rule are insufficient for identifying shipment anomalies.

Collins and Lieberman refer to expert testimony that recommends the additional use of purchase order data collected at the very beginning of a transaction, long before goods are loaded overseas. CBP already collects purchase order data for selected shipment audits. “If the information is already available to CBP when necessary, why should that data not be included earlier in the process to ensure a more accurate profile by ATS?” the letter asks.

The FY 2004 budget provides $62 million for the Container Security Initiative, which deploys inspector teams to 20 major foreign ports and several other strategic ports. In their letter to Hutchinson, Collins and Lieberman do not ask for, or provide, estimated government costs arising from the additional use of purchase order data.

For companies involved, however, the trend toward more detailed data requirements and increased flow of information to government entities looks like the way of the future—and a new cost of doing business.

Dealing with Multiple Shipping Points

The two senators also allege that CBP lacks a comprehensive program to track containers through multiple shipment points prior to the point of loading. Manifest data may not provide accurate information for such containers, they say, leading some experts to contend that terrorists could effectively import a container carrying hazardous cargo by moving it through numerous ports and modes of transportation.

The letter to Hutchinson highlights the European program Contraffic, which it says tracks all ports of call for both containers and ships, and suggests the expansion of programs like Operation Safe Commerce (OSC), which helps the nation’s three largest load centers track containers throughout the entire global shipping system.

The FY 2004 budget allocates $17 million to OSC, an initiative championed by Sen. Patty Murray, D-Wash., a member of the Senate’s Homeland Security Appropriations Subcommittee. Murray had pushed for $30 million, an amount that passed in the Senate version of the appropriations bill in July. The president and the House bill had set the figure much lower at $2.5 million.

The ports of Seattle and Tacoma in Murray’s state received nearly half of the initial $58 million in OSC funding, while the 2004 budget leaves limited room for OSC expansion to additional ports, as Collins and Lieberman suggest.

Industry Trust Creating a Danger?

Finally, the two senators charge that CBP does not have a credible process in place, such as random inspections, to ensure that “low risk” containers destined for the United States are actually low risk. Such a process would provide a valuable benchmark for assessing the effectiveness of the ATS system, they say.

In fact, trust shown toward long-time importers and members of the voluntary Customs-Trade Partnership Against Terrorism (C-TPAT) could create security lapses that potential terrorists could exploit, the senators imply. They say C-TPAT may only be as good as its ability to audit the more than 4,000 volunteer companies once they have been validated by Customs, to be sure companies continue to make the kinds of investments needed to sustain high security.

The recent budget includes $14 million for C-TPAT, down from the $18 million requested by the president. The administration says the funds will allow it to double the number of partnerships with industry, as well as add more than 150 supply chain security experts to provide training and technical assistance to partners.

There is no word on either side about the estimated cost of ongoing audits of C-TPAT members, or the cost to companies who must pay to maintain compliance in the wake of future program changes. Indeed, trade observers point out that programs like C-TPAT could become a convenient way of shifting more port security costs away from the federal government and into private industry.

Money for the Front Lines

While the total Homeland Security FY 2004 budget of $37.4 billion represents an increase of more than 10 percent over FY 2003, there remains little consensus over what is most important to port security.

For example, the budget provides $64 million toward technology for non-intrusive inspection of cargo—a significant reduction from the $119 million requested by the president. New inspection technologies are often cited as the chief method of reducing border wait times amid tightening security standards. If the number of direct inspections outpaces technology’s ability to streamline the flow of goods, delays at port could follow.

The budget also allocates $125 million for port security grants, although the original Senate bill had requested $150 million, compared to $100 million in the House bill and no such money requested by the president, according to Sen. Patty Murray. Ports use such grants to fund security planning and improve dockside and perimeter security.

The Coast Guard has estimated that private port facilities would require more than $1 billion in 2003 to meet the baseline measures in new federal port security laws, and more than $7 billion over the next 10 years, according to Sen. Fritz Hollings. Congress has appropriated less than $500 million in grants to date, he said.

The implication from some members of government is that private industry should bear the lion’s share of those costs for facility upgrades. That would translate to even higher shipping costs and consumer costs in the not-too-distant future.

“The small amount of port security-specific funding distributed thus far is still no substitute for the substantial, long-term [federal] funding commitment that will be required to secure our ports nationwide,” Hollings said in a September statement.

The ports of Seattle and Tacoma in Murray’s state recently received $4.1 million in grants allocated in the supplemental FY 2003 budget, and the port of Charleston in Hollings’ state received $864, 807.

This article appeared in Crain's Detroit Business, November 2003. (CO)
Topic: Politics
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On September 3, 2003, after years of intense negotiations, President Bush signed the U.S.-Chile and U.S.-Singapore Free Trade Agreements (FTAs). As a result, Chile and Singapore will join Israel, Canada, Mexico, and Jordan to become the United States’ fifth and sixth free trade partners.

Topic: Politics
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What do you get when you continually change and manipulate tax codes? A big mess! Now, throw convoluted subsidies into the mix and you also end up with a lot of unintended consequences.

Thousands Could Lose Jobs

Today, that’s the situation in both the United States and European Union (EU). And as a result, thousands of U.S. workers stand to lose their jobs at a time when the U.S. economic recovery appears shaky.

What’s happening now is tied to actions of the past. For decades, EU industries, such as aerospace and telecommunications, have been subsidized to boost their international strength or to shield them from global competition. Additionally, the EU has exempted and continues to exempt its exporters from paying a substantial value added tax.

FSC and ETI

To counter these unfair actions, in 1984, the United States crafted the Foreign Sales Corporation (FSC) tax code so exporters could compete fairly in global markets. This proved beneficial, as evidenced by a National Foreign Trade Council report that said 3.5 million U.S. export-related jobs benefited from FSC tax incentives in 1999. Unfortunately, the EU challenged the FSC rule through the World Trade Organization, and won in 2000.

In an attempt to satisfy the global trade body, the U.S. repealed the law and in its place created the Extraterritorial Income Exclusion (ETI) Act of 2000. However, the new law still didn’t satisfy the EU, who again challenged the law, and won.

Consequently, the EU is now authorized to impose sanctions of more than $4 billion annually on U.S. exports, which include steel, beef, sugar, wood and paper products, cotton, apparel, cosmetics, and electrical machinery.

Although Europe’s tax loopholes and subsidies distort trade by artificially increasing the attractiveness of its goods and services on world markets, its indirect tax system is technically WTO-compliant. WTO language doesn’t cover indirect taxes, only direct taxes like those used in the U.S.

Small Companies Are Impacted Most

So, what can the U.S. do? If Congress terminates ETI without establishing a suitable replacement, approximately 6,000 U.S. exporters who rely on ETI to compete will be hurt. And the majority of these firms are small.

Hutchinson Technology, Inc., headquartered in Minnesota, exports 90 percent of its computer disk drive components. If ETI is repealed, President and CEO Wayne Fortun, says “The company could be forced to move production operations to the Far East, resulting in the loss of 3,000 of our 3,400 employees.”

Power Curbers, Inc., a manufacturer of concrete paving equipment, employs 130 workers at its North Carolina, Iowa and Tennessee facilities. Company President and CEO, Dwight Messinger, says “Without ETI, our exports would decrease, especially to Europe. This could result in layoffs of 5 to 10 percent of our workforce.”

Small companies, many of which are struggling just to survive the economic downturn, aren’t the only ones that stand to lose. Boeing alone estimates that repealing ETI will result in the loss of nearly 10,000 of its high-tech jobs, as well as 23,000 more jobs with its suppliers.

Airbus, Boeing’s heavily subsidized European rival, has received more than $30 billion in EU financial support. This gives Airbus an unfair advantage, and affects the entire U.S. aerospace industry that employs nearly 800,000 highly-skilled workers.

The Mess Needs To Be Cleaned Up

There is no doubt that multiple layers of loopholes and convoluted subsidies artificially create winners and losers in international trade. That’s why this mess needs to be cleaned up. The U.S. response to the ETI challenge is currently being debated in Congress. And one thing remains certain: U.S. exporters need a mechanism that counters their EU rivals’ government handouts. Small and medium-size companies, which account for about 96 percent of all U.S. exporters, and large companies, as well as farmers, all need a level playing field.

Exports Are Key to Our Economy

Exports support more than 12 million higher-paying U.S. jobs, strengthen companies and farms, and improve the tax base, while sending important revenue to local communities. Plus, one in three acres of U.S. agricultural production is exported. In short, exports are a key piece of our economy.

Congress certainly has a difficult job ahead. In order to prevent the European Union from implementing $4 billion worth of trade sanctions against U.S. exports, our Congressional Representatives must act quickly. But they must do so in a way that unshackles our exporters from a system of unfair competition, does not force them out of business or offshore, and protects U.S. jobs.

This article appeared in Trade Works, Winter 2003.
Topic: Politics
Comment (0) Hits: 2189



In today’s globally competitive world, companies from countries everywhere are significantly impacted by national tax laws and subsidies. As a result, it is vital to keep abreast of changes — especially since tax laws and subsidies often evolve and become extremely complex, resulting in numerous unintended consequences.

In many ways, this is what is happening to both tax codes and subsidies in the U.S. and the European Union (EU). But today, the unintended consequences could be detrimental to thousands of U.S. companies.

Attempts To Level the Playing Field Fail

As a result of what many consider an unfair EU tax advantage, thousands of U.S. companies could be put at a competitive disadvantage at a time when the U.S. economic recovery appears uncertain. How did we get here?

Today’s situation certainly isn’t unrelated to the past. For decades, EU industries, such as aerospace and telecommunications, have been subsidized. This has boosted their international strength or shielded them from global competition. In addition, the EU has exempted and continues to exempt its exporters from paying a value added tax. In effect, this has significantly reduced their tax burden.

To counter what many U.S. companies felt was an unlevel playing field more than two decades ago, the U.S. crafted the Foreign Sales Corporation (FSC) tax code in 1984. This was designed to help U.S. exporters compete more fairly with EU companies, as well as others around the world. Many U.S. companies claim it was a success. In fact, a National Foreign Trade Council report states that 3.5 million U.S. export-related jobs benefited from FSC tax incentives in 1999.

However, the EU challenged the FSC rule through the World Trade Organization (WTO), and won in 2000. To appease the EU and global trade body, the U.S. repealed the law. In its place, the U.S. Congress created the Extraterritorial Income Exclusion (ETI) Act of 2000. But the new law still didn’t satisfy the EU. Consequently, the group of 15 European countries challenged it through the WTO, and won.

As a result, the EU has been authorized to impose sanctions of more than $4 billion annually on U.S. exports, which include steel, beef, sugar, wood and paper products, cotton, apparel, cosmetics, and electrical machinery.

Creating Artificial Winners and Losers

Although Europe’s tax loopholes and subsidies distort trade by artificially increasing the attractiveness of its goods and services on world markets, its indirect tax system is technically WTO-compliant. WTO language doesn’t cover indirect taxes, only direct taxes like those used in the U.S.

So, what can the U.S. do? If ETI is removed without Congress establishing a suitable replacement, approximately 6,000 U.S. exporters who rely on ETI to compete could be hurt. Many of these firms are small and medium-sized, but they are not the only ones that stand to lose. Large companies will be impacted too.

Boeing, for example, estimates that repealing ETI will result in the loss of nearly 10,000 of its high-tech jobs, as well as 23,000 more jobs with its suppliers. Why? Boeing’s heavily subsidized European rival, Airbus, is estimated to have received more than $30 billion in EU financial support. Boeing claims this has given the EU conglomerate an unfair advantage. Furthermore, analysts believe this has affected the entire U.S. aerospace industry that employs nearly 800,000 highly-skilled workers.

There is no doubt that multiple layers of loopholes and convoluted subsidies artificially create winners and losers in international trade. But what approach will be fair to both U.S. and European companies?

The Devil Is in the Details

The U.S. response to the ETI challenge is currently being debated in Congress. But one thing remains certain: a growing number of U.S. Congressional Representatives believe U.S. exporters need a mechanism that counters their EU rivals’ government tax incentives and subsidies. Congress also must understand that it needs to act quickly. If WTO concerns are not satisfied soon, the EU likely will implement $4 billion worth of trade sanctions against U.S. exports, a move that could start a transatlantic trade war.

If Congress scraps the current ETI program and creates a new export tax incentive, a very likely scenario, the changes in tax codes will benefit some firms, but put others at a competitive disadvantage — in both the United States and around the world. As a result, it is important to follow Congressional action over ETI and understand how changes in the law may affect your business.

This article appeared in December 2002. (BA)
Topic: Politics
Comment (0) Hits: 2540



It’s no secret that both the United States and European Union (EU) manipulate their tax structures to achieve specific results. In most cases, these practices don’t adversely affect bilateral trade relations. However, the growing crisis over the United States’ Extraterritorial Income Exclusion (ETI) Act of 2000 could change this, and cause big problems for both transatlantic trade and thousands of U.S. exporters.

Actions of the Past Are Haunting Us Today

The problems today are the result of a multitude of actions taken in the past. For example, the EU has exempted and continues to exempt its exporters from paying a substantial value added tax. Plus, for decades EU industries, such as aerospace and telecommunications, have been subsidized to boost their international strength or to shield them from global competition.

To counter these actions, in 1984, the United States created the Foreign Sales Corporation (FSC) tax code so exporters could compete fairly in global markets. This proved advantageous, as evidenced by a National Foreign Trade Council report that said 3.5 million U.S. export-related jobs benefited from FSC tax incentives in 1999. Unfortunately, the EU challenged the FSC rule through the World Trade Organization, and won in 2000. In an attempt to satisfy the global trade body, the U.S. repealed the law and in its place created the Extraterritorial Income Exclusion (ETI) Act of 2000. However, the new law still didn’t satisfy the EU, who again challenged the law, and won.

Consequently, the EU is authorized to impose sanctions of more than $4 billion annually on U.S. exports, which include steel, beef, sugar, wood and paper products, cotton, apparel, cosmetics, and electrical machinery.

Eliminating ETI Will Hurt Exporters

Europe’s tax loopholes and subsidies distort trade by falsely increasing the attractiveness of its goods and services on world markets. However, its indirect tax system is technically WTO-compliant, since WTO language doesn’t cover indirect taxes, only direct taxes like those used in the U.S. As a result, Congress needs to act. If it terminates ETI without establishing a suitable replacement, approximately 6,000 U.S. exporters who rely on ETI to compete will be hurt. And the majority of these firms, which are small, are already struggling just to survive the economic downturn. But small companies aren’t the only ones that stand to lose.

Aerospace giant Boeing estimates that repealing ETI will result in the loss of nearly 10,000 of its high-tech jobs, as well as 23,000 more jobs with its suppliers. Boeing’s heavily subsidized European rival, Airbus, has received more than $30 billion in EU financial support. This gives Airbus an unfair advantage, and affects the entire U.S. aerospace industry.

Pay Attention to the Congressional Response

The U.S. response to the ETI challenge, which is currently being debated in Congress, will affect many companies, industries and jobs. Most policymakers understand this and recognize that U.S. exporters need a level playing field. Consequently, it’s important that they craft new legislation that doesn’t hurt U.S. exporters. But Congress must act soon. If not, the EU may implement $4 billion worth of trade sanctions against U.S. exports.

Exporters who currently rely on ETI to boost exports need to reassess how their sales abroad could be impacted if ETI is eliminated, or if a substitute doesn’t offset the artificial advantages many EU exporters have.

This article appeared in October 2002. (CB)
Topic: Politics
Comment (0) Hits: 2404



Whoever said "If it ain’t broke, don't fix it," probably lived in a simpler time. In today's rapidly changing global environment, the United States needs to be proactive and anticipate problems.

Currently, the U.S. is behind the curve. We are a party to only three out of 150 free trade agreements in force around the world. Many of these agreements have evolved into trade blocs, such as the Association of Southeast Asian Nations (ASEAN) and the European Union (EU). And several blocs plan to expand.

For example, EU accession negotiations are underway to admit 13 Eastern European countries — a move that will make the EU's consumer base twice as large as the United States'. Mercosur, the South American bloc, is negotiating with the EU to establish a trans-Atlantic free trade zone. And recently, ASEAN and China agreed to consider establishing a trade bloc that would represent a market of 1.7 billion consumers.

What's the problem?

As our competitors establish larger trade blocs that eliminate import barriers among member countries, U.S. exports — which still incur duties — are placed at a competitive disadvantage. To remedy this, the U.S. needs to forge new trade agreements that level the playing field. Unfortunately, our ability to do so has been compromised since Trade Promotion Authority (TPA), previously known as Fast Track, expired in 1994.

TPA requires Congress to pass or reject trade agreements “as is.” Without TPA, foreign governments are reluctant to negotiate treaties that Congress could later change. Soon, our Senators will vote on TPA, and it’s essential they support it. TPA served Presidents Nixon through Clinton. Now, President Bush needs it to help our workers, farmers and families.

Exports support more than 12 million higher-paying U.S. jobs, strengthen companies and farms, and improve our tax base, while sending export revenue to local communities through restaurants, retail stores, etc. In 1950, trade accounted for less than 5.5% of U.S. economic growth. Today, it has become an integral part of everyday life, accounting for almost one-third of our economic growth. In fact, one in three acres of U.S. agricultural production is now exported.

Unfortunately, some blame trade for job losses and industry restructuring. In reality, less than 2% of non-farm workers are at risk from imports. Technology, not imports, is the real displacer of jobs. Would we stop technological advancement because a small number of jobs will become obsolete?

In the early 19th century, the English Luddites attempted to destroy textile machines because they replaced weavers. Today, modern-day "Luddites" want to essentially do the same — but have mistaken the impact of technology for trade.

Entering the 21st century is in many ways similar to entering the 19th century. The shift from an agrarian to an industrial economy compelled workers to leave farms in search of factory jobs. Industrialization created fear and demanded that workers learn new skills. Today, with the advent of globalization and the information economy, the U.S. is increasingly specializing in more complex, value-added goods and services. Consequently, new skills again are demanded. But for those who can't adapt, the expansion of trade adjustment assistance that's incorporated in TPA legislation is welcomed.

Without greater access to foreign markets, U.S. companies will suffer. And even companies that don't export are at a disadvantage because, chances are, portions of their components sold locally are incorporated into exported products.

To succeed in the 21st century, improve long-term economic growth and raise our standard of living, TPA needs to become law. Our companies and workers are doing their part, now Congress needs to do the same.

This article was syndicated by Knight Ridder/Tribune Information Services and appeared in the Houston Chronicle, Greenville News, Milwaukee Journal Sentinel, Sunbury Sunday Daily Item, and The Columbus Dispatch in May 2002.
Topic: Politics
Comment (0) Hits: 2518



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