Gao Says U.S. Can’t Keep Up With Textile Transshipment Inspections (Inside US-China Trade)

February 4, 2004

The General Accounting Office,the investigatory arm of the U.S. Congress, issued a report last week charging that the U.S. government is running into serious problems as it tries to combat textile transshipment. Among other things, GAO found that the U.S. is able to target just a tiny fraction of textile imports for inspection,and that U.S. reports on visits to foreign factories are often late and not distributed quickly to the authorities who might use them to fight transshipment.

In addition, the report said, the U.S. has no system in place for ensuring that in-bond shipments,which enter the U.S. and are sent to another port for re-export, actually leave the U.S. again.

GAO’s report has serious implications for China, which has become the world’s dominant supplier of textiles and apparel and which U.S. industry has long claimed is a major source of transshipment violations. In a related development, the U.S. Customs and Border Protection (CBP) finalized a report last year that many think will verify that China transshipped textiles and apparel through Vietnam (see separate story).

However, the GAO report shows that the U.S. has made no direct visits to China over the last four years to conduct textile production verification team (TPVT) checks. These checks are aimed at ensuring that countries and factories within those countries are actually producing the textiles and apparel they ship to the U.S., and are aimed at high-risk countries.

According to GAO, CBP officials did not visit mainland China once although Hong Kong, Macau and Taiwan were the top three destinations of these visits during the last four years. The report also noted that the U.S. does not make these visits to countries such as Canada, as the U.S. has “not yet been successful in persuading the Canadian government” to allow them.

GAO indicated that CBP’s efforts are likely not enough to ensure that any transshipment would be detected. The report said CBP reviewed about 2,500 shipments out of more than 3 million, or less than one-tenth of one percent of all shipments.

The report added in a footnote that it is difficult to say whether its efforts are effective at all. “Since no reliable estimates exist of the amount of imports that are illegally transshipped, CBP is unable to assess whether the number of inspections is a sufficient tool to detect and deter textile transshipment,” it said.

It also noted that once textile and apparel quotas are dropped in 2005, CBP will have no authority to conduct TPVT checks in countries formerly subject to quotas, and thus will lose an important tool in trying to determine which factories pose a risk of transshipment.

While officials are making an effort to keep tabs on transshipment through TPVT checks, they are not always receiving updated information from these checks on time. GAO noted that CBP rules require the completion of these reports within 5 weeks, but said recent data indicates that these reports instead take more than two months to finish and circulate. “The result is that questionable shipments for which criteria are intended can continue to enter commerce for another 2.3 months on average,” it said.

The GAO report said that even after quotas are dropped next year, transshipment would still be an issue, as the U.S. late last year imposed quotas on three Chinese textile and apparel products under a specific China textile safeguard. Because of the possibility of future safeguard cases against China, the report recommended that the U.S. develop cooperative customs understandings with Taiwan, Macau and Bangladesh to make it easier to detect transshipment.
“CBP will no longer have the authority to conduct TPVTs in these high-risk countries unless customs cooperation agreements are renewed,” it said.

The report did note that the U.S. has such a memorandum of understanding with Hong Kong.

GAO also noted that while CBP has the authority to charge countries’ quotas in case of transshipment, it rarely does so because these “chargebacks” require a high burden of proof. For example, it said the last chargebacks against China and Pakistan – the only countries that have been subjected to quota charges in the last decade – took place in 2001 and totaled $35 million. From 1994 to 2001, the total chargeback amount for these countries was $139 million. Instead of charging quotas, the U.S. more often decides to exclude certain shippers from exporting to the U.S. once transshipment has been found, the report said.

Regarding in-bond shipments, GAO said the U.S. has no mechanism in place to keep track of imports of textile and apparel products that move between U.S. ports before either formally entering U.S. commerce or being re-exported. GAO said recent studies show that 50 percent of all goods entering the U.S. use the in-bond system, and that “this figure will increase.”

However, the report said many officials argue that there is no way to check whether the goods move throughout the U.S. as intended. Without any real control, goods entering Los Angeles that are trucked to Texas to be exported to Mexico can instead easily be shipped to some other destination within the United States.

“At present, CBP lacks a fully automated system that can track the movement of in-bond transfers from one port to another,” it said.

As a result of its findings, GAO recommended that TPVT reports be completed on time, and that more Customs officials be assigned to high-risk countries. It also made a series of recommendations on how to improve the in-bond system, such as putting in place a fully automated tracking system. CBP in an attached letter to GAO said it agreed with GAO’s conclusions and that it was taking steps to make improvements in all areas.

ZOELLICK DUE IN CHINA THIS MONTH; USTR,COMMERCE PLAN FOLLOW-UP IN MARCH

U.S. Trade Representative Robert Zoellick plans to make a quick stop in China this month as part of a trip to various countries in an effort to build new momentum for the multilateral Doha Round trade talks, which have stalled since last September’s ministerial of the World Trade Organization collapsed. Informed sources said Zoellick’s visit would largely be aimed at assessing the chances of renewed efforts to make progress on the Doha Round, after Zoellick wrote a January letter asking all WTO members to make sure 2004 is not a lost year for the negotiations.

Specifically, sources said Zoellick would visit Japan in early to mid- February, and would leave there on Feb. 11 for Beijing. After meeting with officials there, Zoellick will travel to Singapore on Feb. 12 for a meeting with officials from Singapore, Malaysia, Indonesia, Thailand, Brunei, the Philippines, and Cambodia. After that meeting, Zoellick is expected to travel to Africa, and finish his February tour in Europe.

Informed sources this week indicated that Zoellick would be trying to raise consciousness about the need to advance the Doha talks during his visits to these countries. One informed source said Zoellick is urging officials not to raise bilateral trade issues in the meetings, and to only focus on the WTO process.

In Cancun, China was a member of the G-21, which demanded that industrialized countries do more to cut their agricultural subsidies, and said developing countries should be allowed to take on fewer obligations than proposed in a draft declaration. China also pressed for language in the declaration that would allow newly-acceded members of the WTO not take on all the negotiated commitments in the new round.

Despite these positions, U.S. officials said repeatedly that they did not view China as an obstacle to the talks,even though the U.S. blamed the G-21 as a whole for causing the talks to collapse and singled out countries like Brazil for harsh criticism (Inside US-China Trade, Oct. 8).

In his letter, Zoellick acknowledged that WTO members would be unlikely to finalize agreements until an agreement is first reached on agriculture, and more generally urged that the negotiations focus on market access for farm products, goods and services instead of other controversial areas such as new investment rules.

Separately, sources said Deputy U.S. Trade Representative Josette Shiner and Undersecretary of Commerce Grant Aldonas are expected to travel to China sometime in March to go over several bilateral trade issues with China. Sources said this meeting is being seen as a way to prepare for the late April U.S.-China Joint Commission on Commerce and Trade (JCCT).

That meeting will follow one from January by Deputy Assistant Secretary of Commerce for Asia and the Pacific Hank Levine.

The March visit and the JCCT itself are expected to cover a wide range of outstanding trade issues, including agriculture, services, trading rights and distribution, intellectual property rights, China’s industrial policies that could have an impact on trade, and other issues such as China’s export control policies. The JCCT will be the first after the U.S. and China agreed last year that the group should meet at a higher political level (Inside US-China Trade, Jan.14).

GRAHAM VOWS TO KEEP VOTING AGAINST TRADE UNTIL CHINA PROBLEMS SOLVED

Republican Senator Lindsey Graham (SC) on Jan. 30 warned that he would continue to vote against future trade agreements unless he receives assurances that these deals do not provide China with an indirect benefit. Speaking before the U.S.-China Economic and Security Review Commission at a South Carolina field hearing on China’s impact on U.S. manufacturing, Graham said he opposes language in the Central American Free Trade Agreement (CAFTA) that allows Central American countries to use third-country fabric from countries such as China to make apparel that enters the U.S. duty free.

“CAFTA and any other trade agreement that comes through the Congress is going to be met with resistance until you can prove to me that China is not going to take advantage of it and cheat,” Graham told the Commission. “I’m not going to extend any more vehicles in the trade area until we deal with the current problem of transshipment in an honest and serious way.”

Graham added that he would “ask questions” about how China might be able to benefit from future free trade agreements the U.S. negotiates with other countries, and predicted that he would be forced to vote against these agreements because they are likely to benefit China in certain ways. Graham’s threat is somewhat lessened, however, by his recent voting record on trade. Most recently, Graham voted against the free trade agreements with Singapore and Chile, fast track authority, and also voted against giving China permanent most favored nation status.

Graham also used last week’s hearing to take a shot at U.S. Trade Representative Robert Zoellick for pursuing these kinds of agreements that can benefit China indirectly. Along these lines, he also slammed U.S. free trade deals with Singapore and Chile for including language that makes it easier for nationals from these countries to enter the U.S. and work, at the expense of U.S. jobs.

“The problem I have with him [Zoellick] is he puts everything on the table,” Graham said. “I wouldn’t let him buy my car. I don’t think he’s a very good negotiator.”

Graham spoke more generally at the hearing about how U.S. textile jobs are “under siege” from Chinese imports,and said the U.S. is not doing nearly enough to combat the transshipment of Chinese textile and apparel products into the United States. He said the problem is not that U.S. textile and apparel producers haven’t modernized their operations to compete with other producers, but that China dumps its products in the U.S. and avoids U.S. quotas and duties through transshipment.

In response, Graham said the U.S. needs to fight back by forcing China to float its currency in global currency markets, which he said would help eliminate China’s unfair trade advantage. On this issue, he predicted that the Senate would consider a bill forcing China to revalue the renminbi.

Graham also said the U.S. needs to fight China in the World Trade Organization on issues such as transshipment and dumping, and that the U.S. needs to take more seriously China’s violation of U.S. intellectual property rights.

He said that South Carolina has lost jobs more quickly than the U.S. has on average, and that this is due to the production of goods there that China is able to produce more cheaply. Graham said his state has lost 41,000 jobs in 2003, largely because China’s access to the U.S. textile market has more than doubled in each of the last two years, and that U.S. steel producers in that state are also facing problems from China.

The Commission also heard testimony from Sen. Ernest Hollings (D-SC), who agreed that the U.S. needs to do more to enforce its trade remedy laws against China. Hollings also argued that the U.S. needs to create an assistant attorney general for international trade enforcement, who would be tasked with more closely examining unfair trading practices that threaten to do serious injury to U.S. companies.

Hollings cited one example in which a U.S. company brought an antidumping case against imports from Germany and Japan, only to have a Japanese producer continue to sell in the U.S. at allegedly dumped prices. As a result, the U.S. company declared bankruptcy, and then filed a claim against the Japanese company under the 1916 Antidumping Act, which allows companies to seek damages against companies that use predatory pricing practices when they export to the United States. Hollings said that in this case, the investigation showed that the Japanese company had altered documents in an effort to disguise their dumping practices.

In an effort to allow the U.S. to continue to take steps against these sorts of foreign trade practices, Hollings saidthe U.S. needs to set up a trade office in the attorney general’s office.

“What is needed to stop this type of abuse is a special prosecutorial office within the Justice Department: an assistant attorney general for international trade fraud,” he told the Commission. “This special prosecutor should be empowered with all necessary legal tools, and grant the sophisticated accounting and investigation resources needed to uncover complex, illegal transactions.”

Hollings said that once Commerce and other agencies find evidence of fraud, this new official should then be able to conduct a “full-scale investigation.” Hollings also lamented that the WTO has found that the 1916 AD act violates WTO rules by prescribing a remedy that is not allowed under the Antidumping Agreement.

In other areas, Hollings suggested that the U.S. increase funding for the Manufacturing Extension Partnership, a program that provides technical advice to small manufacturing companies. He said the Bush Administration has only funded this program about $12 million in the last two years, while Congress has requested funding at nearly ten times that level.

Also, Hollings said the U.S. should help U.S. companies develop new technologies through the Advanced Technology Program. However, he said the Bush Administration has targeted this program for elimination, and has sought just a fraction of the amount of money the program needs in the last three years.

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Fair Currency Alliance Announces Collier Shannon Will Help Prepare Section 301 Currency Petition Against China

  • The Fair Currency Alliance last week announced that the law firm of Collier Shannon Scott has been retained to help the group develop a Section 301 petition asking the Bush Administration to seek a solution to China’s currency valuation, which U.S. companies say gives China an unfair advantage in the U.S. market and abroad. The Alliance, which consists of about 30 trade associations, is hoping that a Section 301 petition could pressure the U.S. government politically to examine the effect that China’s currency policy has on trade, and might also force China to address this U.S. complaint.

“The Alliance believes that a Section 301 case will provide the Administration with critical leverage in negotiations with Beijing by helping to ensure both the necessary time dimension and the specific focus needed to resolve this issue,” Pat Mears, executive director of the Alliance, said in a Jan. 29 statement.

The statement said Collier Shannon’s team on the Section 301 petition would be led by senior partner David Hartquist and Robert Cassidy, formerly assistant U.S. Trade Representative for China and now director of international trade services. In January, informed sources said that Collier Shannon would be named to prepare a Section 301 petition, and said the Alliance was still pursuing the issue despite several months of delay (Inside US-China Trade, Jan. 22).

China Outlines New Mechanisms to Protect Domestic Companies from IPR Disputes

  • The Chinese government last week said it is considering new steps to help Chinese companies cope with the growing number of intellectual property rights issues that they are facing as China further integrates itself into the global market. However, while U.S. companies in particular have complained about the failure of Chinese companies to adhere to IPR rules, China indicated that its efforts would be aimed more at defending Chinese companies from foreign firms in IPR cases than in ensuring Chinese companies comply with IPR rules.

In a Jan. 29 statement, China announced that it would take steps “in a bid to protect the nation’s fundamental benefits and economic security,” and that China’s State Intellectual Property Office (SIPO) would soon work to establish “emergency and warning mechanisms to protect the legal rights and interests of Chinese enterprises.”

The notice said these steps must be taken because Chinese companies “have little knowledge about how to deal with such circumstances.” China noted that many U.S. companies are bringing suit against Chinese companies for  nfringement, and that Chinese companies therefore need to defend themselves.

Specifically, the notice said SIPO would help companies create systems for managing IP rights, and also begin training lawyers familiar with international IP laws. It added that the entity will seek to promote the commercialization of Chinese IP rights, and also enhance enforcement of IPR laws.

Chinese Trade Organization Urges Shrimp Producers to Fight U.S. AD Case

  • A Chinese trade association warned last week that it is trying to mobilize Chinese shrimp exporters for the purpose of fighting a pending U.S. antidumping case against shrimp that threatens to more than double the price of shrimp from China sold in the United States. A Jan. 29 notice said China’s Chamber of Commerce of Import and Export of Foodstuffs, Native Produce and Animal By-Products (CFNA) hopes to bring exporters together and indicate their opposition to antidumping duties by filing a submission to the case.

U.S. petitioners in late December filed an antidumping petition against imports from China and several other countries, which all together export more than $2 billion worth of shrimp to the United States. Petitioners asked for tariffs against China in the range of 119 to 267 percent.

The Jan. 29 Chinese notice said U.S. antidumping tariffs could affect $750 million worth of Chinese shrimp exports, and denied that Chinese exporters were selling shrimp in the U.S. at prices lower than those found in China. “China has not dumped its shrimp on the U.S. market as a whole,” one Chinese
industry source said. The statement added that because the case has already been filed, Chinese exporters must organize themselves to fight the allegations of dumping, and “should abandon the idea of leaving things to chance.”

ENGLISH BILL WOULD ALLOW CVD CASES AGAINST CHINA, OTHER NMES

Rep. Phil English (R-PA) last month introduced legislation that would amend the Tariff Act of 1930 to make explicit that the U.S. can impose countervailing duties against countries that are designated as non-market economies. The bill, introduced on Jan. 21 with three co-sponsors, would reverse a long-held Commerce Department position that the U.S. does not launch CVD cases against NMEs because of the belief that it is impossible to accurately measure the distortions caused by subsidies in a market that does not operate on the principles of supply and demand.

English’s bill follows on efforts made last year by groups such as the National Association of Manufacturers to ask Sen. George Voinovich (R-OH) to introduce a resolution saying that Congress supports the use of CVD cases against NMEs such as China. Industry sources said this step was part of a long-term plan to make CVD cases available against China in particular.

In addition, sources this week said many believe CVD cases could be used to tackle the complaint that China’s undervalued currency gives China an unfair advantage over U.S. companies. If China’s currency practice could be considered a subsidy, CVD cases could be used to impose tariffs on virtually any Chinese import.

Late last year, industry groups discussed the option of pressing the U.S. to use CVD law against China on currency, but ultimately decided that this is a longer-term goal and that companies should in the meantime continue to develop a Section 301 petition on this issue. The Fair Currency Alliance just this week named a law firm to develop this case (see separate story).

At press time, English’s bill, H.R. 3716, was co-sponsored by Reps. Artur Davis (D-AL), Melissa Hart (R-PA), and Robert Ney (R-OH).

Since the mid-1980s, the U.S. government has interpreted a decision by the Court of Appeals for the Federal Circuit in a way that it will not launch CVD cases against NME countries. However, several sources have said this is a political choice only, and that the so-called Georgetown Steel decision does not really pose a legal impediment to using CVD against China and other NME countries, although they have acknowledged that legislation from Congress would likely help change the Commerce Department’s practices (Inside US-China Trade, Dec. 4).

ARMITAGE INDICATES OPPOSITION TO MILDER TAIWAN REFERENDUM

Deputy Secretary of State Richard Armitage last week indicated that the U.S. continues to oppose referendum language offered by Taiwan President Chen Shui-bian that is aimed at polling citizens on whether Taiwan should continue to acquire missiles as long as China builds up its forces in the Taiwan Strait, and whether Taiwan should seek to enter peaceful negotiations with China. In a visit to China last week, Armitage indicated that the U.S. opposes this language, which is milder than what Chen had originally proposed, because it could still be seen as indicating that Taiwan may be trying to alter the cross-Strait relationship unilaterally.

“Referenda are generally reserved for very difficult and divisive issues, and the wording of the referendum, as I understand it, is neither difficult nor particularly divisive,” Armitage told reporters Jan. 30. “So it brings about a question of why one would put that referendum forward,” he said, adding that President Bush is opposed to any activity from Taiwan or China that could “alter[] the status quo.”

In a later press briefing, Armitage reiterated his comments, and said the U.S. believes it is not just the words in the referendum that matter, but “the context of them and how they are used domestically.”

While he said the U.S. is still studying the referendum and that it is a “fluid situation,” Armitage went further than officials did in January in indicating U.S. opposition to Chen’s language. Then, officials said they were still studying the language, and reiterated the line that the U.S. does not support Taiwan unilaterally changing the status quo.

Despite Armitage’s comments, informed sources this week stressed that Chen is expected to move ahead with his referendum in March, and that the U.S. appears to be speaking against it in an effort to remain credible with China once the referendum is considered. However, one source said it seems unlikely that the U.S. would actually penalize Taiwan once the referendum is discussed.

The original language Chen had proposed was much harsher, as it would have demanded that China withdraw its missile build-up from the Strait. Sources said last month that this tougher language in particular is what drew serious reservations from the U.S. (Inside US-China Trade, Jan. 22).

Also during his visit, Armitage said he received assurances from Chinese officials that China wants to “rigorously abide by the criteria” of the World Trade Organization. He added that he believes U.S. exports to China have increased “because of adherence to the WTO,” although the U.S. Trade Representative’s office has agreed with U.S. industry analysts that China has imported more via political decisions to buy and not necessarily because it has implemented its WTO commitments.

Armitage also noted that in April, high-level officials from both sides would meet to discuss trade, a reference to the U.S.-China Joint Commission on Commerce and Trade (see separate story).

In other areas, Armitage said he believed China was helping the U.S. work to convince North Korea to abandon its nuclear ambitions because it is in China’s self-interest, and not as “a favor to the United States.” And regarding Iraq, he said he believes Chinese companies that bid on sub-contracts for construction jobs and other infrastructure repair jobs will be able to contribute to the rebuilding of that country.

China is not on the list of countries that the U.S. Defense Department authorized in December to bid on prime reconstruction contracts. However, Armitage said Chinese companies can still bid on subcontracts, and said he is interested in making sure Chinese companies receive some of these subcontracts.

Armitage said that during his visit to China, he met with Chinese Vice Foreign Ministers Zhou Wenzhong and Dai Bingguo.He added that Under Secretary of Defense for Policy Douglas Feith is also expected to visit China later this month.

CHINA COULD BE AFFECTED BY U.S.-VIETNAM TALKS ON TEXTILE TRANSSHIPMENT

The Bush Administration is seeking a meeting with the government of Vietnam to discuss a U.S. Customs and Border Protection (CBP) report that informed sources say shows incidents of transshipment for some textile and apparel products in 2002 and 2003 through Vietnam after being produced elsewhere. One industry source familiar with the report said it has found instances of transshipment, but not a pervasive transshipment problem with Vietnam.

Findings of transshipment could lead to a U.S. decision to reduce quota levels in a bilateral textile agreement the U.S. and Vietnam reached in April 2003, as that agreement includes language allowing the U.S. to take this step.

The report could also lead to charges against U.S. quotas on Chinese textile imports if it confirms CBP’s suspicions last year that the imports from Vietnam actually originated in China, according to informed sources. Customs officials warned U.S. trade negotiators in early 2003 that there was evidence of transshipment of Chinese textiles and apparel through Vietnam, which led to language in the U.S.-Vietnam textile agreement allowing the U.S.
to reduce Vietnam’s textile quotas if transshipment were found.

A U.S. official said last week that CBP’s report on transshipment has been completed since November, and that officials are still reviewing it. However, he noted that the bilateral agreement allows consultations if the U.S. finds transshipment, and said the U.S. is hoping to consult with Vietnam “shortly” on the findings of the report, possibly in February.

A General Accounting Office report on U.S. efforts to fight transshipment provided additional evidence late last week that CBP’s report has found instances of transshipment related to Vietnam. According to the Jan. 23 GAO report, titled U.S. Customs and Border Protection Faces Challenges in Addressing Illegal Textile Transshipment, CBP officials visited Vietnam last August and found situations in several factories that could pose a risk of transshipment.

“Of the 102 factories they visited, 6 were closed or refused entry, 13 had their names used in counterfeit documents, and 18 were deemed high risk,” the GAO report said. “CBP ports issued redelivery notices to 22 importers to return their merchandise to the ports for review. CBP also consulted the Vietnamese government about hundreds of questionable certificates of origin.”

According to one industry source, the fact that hundreds of certificates of origin were called into question by CBP officials indicates that hundreds of millions of Vietnamese exports to the U.S. may have originated in other countries such as China. The GAO report also outlined other problems the U.S. has in preventing transshipment in general (see separate story).

Despite the warning from Customs on possible transshipment last year, the U.S. agreed to quotas for Vietnam that were based on Vietnam’s exports from March 1, 2002 until February 28, 2003. At the time, this represented the height of Vietnam’s exports to the U.S., which led some to criticize the deal for being overly favorable to Vietnam despite evidence that not all of the exports labeled Vietnamese actually came from that country. Critics of the deal, such as U.S. producers of textiles, said Vietnam was allowed to build up its export rate with transshipped products, and then have that level used as a base for quotas and their growth.

A U.S. decision to reduce Vietnam’s quotas could be felt for years, as the bilateral agreement is expected to be in place until Vietnam joins the World Trade Organization. If Vietnam does not join the WTO by this year, the U.S. could still keep these quotas in place, as WTO rules only ask members to eliminate quotas on textiles and apparel toward other WTO members by 2005.

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