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NEGOTIATING AUTHORITY

Section 102(b) of the bill grants the President authority to negotiate on nontariff barriers to trade, including methods of customs valuation. While the American Selling Price (ASP) system is the only valuation method specifically defined as a "barrier" for purposes of this section, the United States has nine different methods of customs valuation. It could even be said that our f.o.b. basis of valuation is a "method" of valuation as compared to the c.i.f. basis of valuation used by many of our trading partners. While we will confine our remarks to ASP, which applies to the benzenoid products manufactured by our members, many of the points we shall make would be equally applicable if other broad shifts in valuation were to be negotiated under this section.

The bill originally introduced in the House on behalf of the Administration (H.R. No. 6767) granted the President advance authority to change methods of customs valuation embodied in the statutory law of the United States. The Ways and Means Committee wisely declined to grant the Executive such sweeping powers. However, the bill it reported out does not provide for meaningful Congressional review of any agreement made on ASP, it subjects benzenoid and rubber soled footwear manufacturers to the potental loss of more import protection than all other industries, and it makes essential pre-negotiation procedures optional rather than mandatory.

What is ASP?

To place our objections to the present bill into focus it is helpful to recall how the American Selling Price actually works. Under ASP valuation the duty paid is based on the wholesale price of a comparable domestic product, rather than the price of the imported product as is the case with foreign export (f.o.b.) valuation more commonly used by the United States or the c.i.f. valuation used by many of our trading partners. If there is no comparable domestic product, ASP valuation does not apply. The principal difference between ASP and these other methods is that the duty is tied to prices (and hence costs) in this country rather than those abroad.

I will not debate the merits of ASP, but there are several points worth making: (1) The basic reasons ASP was originally selected for benzenoid products are still valid. Benzenoid products are manufactured in the EEC and Japan by a few relatively large companies which are rationalized (whether or not under government supervision) and which "discipline" an industry among other things, by dumping. The U.S. antidumping laws do not provide an effective remedy for an industry in which reliable foreign price data is rarely obtainable. ASP provides an automatic partial protection against dumping since the dumper does not receive the benefit of reduced duties when he offers at dumping prices.

(2) Because reliable foreign benzenoid price information is difficult, if not impossible, to obtain, it is completely appropriate as a matter of cusoms valuation procedure to refer to the selling price of a like product in this country.

(3) Because ASP based duty rates apply to U.S. rather than foreign values, the tariff protection increases as U.S. prices increase. ASP thus performs one of the traditional functions of a tariff: it helps to reduce the differential between foreign and U.S. costs of production. In point of fact, 1971 foreign invoice prices for benzenoid chemicals were up to 56% lower than the U.S. prices for equivalent products,1 in large part because European chemical workers were paid approximately 40% less than in the U.S. and Japanese workers were paid approximately 60% less. Unlike an inflexible tariff, however, the ASP system results in a constant updating of the level of protection. For example, because of current shortages foreign invoice prices for some products are now higher than their American selling price resulting in lower import duties on those products than would be the case under a foreign value system.

1 See chart on p. 18, infra.

2 U.S. Department of Labor, 1972 data.

500

Imports of Benzenoid Chemicals
1967-1973 Growth in Dutiable Value 1967-1972: 204%

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1967

1968

1969

1970

1971

1972

Source: Foreign Invoice Value, U.S. Tariff Commission

Dutiable Value, IM 146, Schedule 4, U.S. Department of Commerce

1973

(first half annualized;

1973 data on Foreign Invoice Values

unavailable)

(4) ASP has not prevented a steady increase in the foreign import penetration of the United States market. While chemical imports have increased an average of 16% per year during the last six years, the rise in benzenoid chemical imports has been even more dramatic. (See chart on facing page). During the period 1967-1972 benzenoid imports increased 204%, an average of 23% per year. In the first half of 1973 benzenoid imports increased at an annual rate of 26%. We believe that this steady increase in chemical imports is largely due to the Kennedy Round 50% tariff reduction on chemicals, the last stage of which was only reached on January 1, 1972. The comparatively greater increase in benzenoid imports and the fact that their present dutiable value under ASP is much greater than their foreign invoice value demonstrates the import-sensitive nature of this important segment of the chemical industry.

The increasing tide of benzenoid imports is also reflected in a steady advance in their share of the U.S. market. On the basis of U.S. wholesale value, dye imports in 1970 had a 16% share of the domestic market and all benzenoid imports a 6% share. In 1971 (the latest year for which date is available), these percentages increased to 21% and 7% respectively."

Criticism of ASP

We are aware that ASP has been subject to criticism from importers, principally on the grounds of delay and uncertainties in the administrative process. In 1966, we proposed various changes in ASP administration to meet these points. We have repeatedly urged the adoption of our proposed administrative changes and as late as December 6, 1972 in a letter to Ambassador Pearce. We believe that the adoption of our proposal (attached hereto as Appendix A) would largely remove ASP as a bone of contention.

Lest we leave the impression that ASP is the only method of valuation subject to criticism, we hasten to call the Committee's attention to criticism of the administration of the Brussels Tariff Nomenclature (BTN). In the recent Tariff Commission investigation of valuation practices, the American Importers Association strongly criticized the administration of BTN, particularly the uncertainty of the so-called "uplift" procedures under which foreign customs officials have broad discretion to make arbitrary increase in the value of imports. The Association said: '

"We are told by our members, in fact, that administration of the Brussels Standard is anything but "uniform." To the contrary, the standards actually applied when the importer confronts the local customs officials vary greatly from country to country and even from port to port. And indeed we understand that the practicalities within the Common Market led the authors of the Standard to deliberately design it so that an umbrella of apparent uniformity would be created which would in practice permit the continuation of considerable diversity from country to country. Furthermore, it is of course true that the actual values arrived at will not be uniform from country to country, or even from shipment to shipment at the same port, even if the Standard is uniformly applied.

"The next question is whether the Brussels Standard is at least applied equitably, even if it is not applied uniformly. Our members' experience with countries which have adopted the Brussels Standard as corroborated by the Tariff Commission Staff Report, is that the application of the Brussels Standard is considerably more arbitrary than the application of present United States standards, and that the power of the appraising officer to be arbitrary is, at least in some countries, a potential source of corruption."

The BTN standards, the Association concluded, focus "on what would or should be, instead of what is, are too loose and leave so much leeway as to defeat uniformity, vitiate effective review, and render duty charges unpredictable."

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3 Ways and Means Committee Print. Background Material on Selected Trade Legislation Introduced in the U.S. House of Representatives (May 1973), p. 310. fn. 2 (U.S. wholesale value is derived by multiplying foreign invoice value by a factor of 1.8).

Statement re Customs Valuation to the Tariff Commission in connection with TC Staff Report on Investigation No. 332-58 by Simon Katz., First Vice President, September 11. 1972.

5 Statement submitted to the Tariff Commission by Counsel to the American Importers Association, September 30, 1972.

The Industry's Position on ASP and Tariff Negotiations

It is clear that our trading partners want to increase their exports of chemicals to the United States and will therefore press for the elimination of ASP and significant tariff cuts on chemicals in the upcoming trade talks. It should also be clear that if we give up ASP, we give up valuable protection for an import-sensitive segment of the American chemical industry. We are not contending that there is anything sacrosanct about ASP. What we are urging is that if Congress approves using ASP as a bargaining chip in the trade negotiations, Congress should also require our negotiators to be as hard-nosed as their European counterparts and insist upon a fair, reciprocal deal for the U.S. chemical industry.

The Kennedy Round Experience

The need for some reasonable limitations on the otherwise unfettered discretion given our trade negotiators by this bill is clearly demonstrated by the unreciprocal concessions we made on chemicals during the Kennedy Round negotiations in 1967. At a time when our European trading partners were increasing their variable levies on U.S. agricultural exports and preparing to increase their border taxes on chemicals and other U.S. exports, they insisted that we eliminate American Selling Price valuation on benzenoid chemicals and agree to tariff reductions in excess of 50%. Our negotiators succumbed to European pressure and agreed to two patently unreciprocal “deals."

In the first deal, our negotiators agreed to a 50% reduction in U.S. chemical tariffs in return for a 20% chemical tariff reduction by the Europeans. There was absolutely no justification for this unreciprocal 50%-20% detal. The key issue in determining reciprocity can only be the effect on future trade. With the higher production costs prevailing in this country, it would have taken a higher cut in foreign tariffs to generate an equivalent U.S. export increase, not the other way around.

Our negotiators then entered into a second deal-the so-called "separate package" agreement. Even though the Trade Expansion Act did not authorize the elimination of ASP valuation or the reduction of chemical tariffs by more than 50% and even though the Senate passed a resolution during the negotiations instructing our representatives not to enter into any deals on ASP, they nevertheless agreed both to eliminate ASP and to cut chemical tariffs by more than 50%. In exchange, our European trading partners magnanimously agreed to return to us the remaining 30% reduction in their chemical tariff reductions which we had already bought and paid for with our 50% cut.

One of the basic mistakes we made during these Kennedy Round talks was to negotiate using a faulty schedule of converted duty rates. In 1965 the Administration requested the Tariff Commission to prepare a schedule of converted duty rates to substitute for the rates then in effect for the four classes of products subject to ASP valuation. The Commission frankly said that its converted rates did not afford equivalent protection. The Commission explained that it was precluded by "the request of the Special Representative" from distinguishing between products on the basis of their competitive status even though it recognized that to do so would have provided "a more equivalent degree of protection". (T.C. Publication 181, p. 55) Because ASP valuation is only applicable to "competitive" imports (those which compete directly with domestically manufactured products) separate converted rates must be determined for them to achieve equivalent protection. By not distinguishing between competitive and noncompetitive products, the Commission's converted rates had the anomolous effect of increasing the effective rates of duty on products which we did not make while substantially decreasing the effective rates on products which were produced in the United States. Indeed, based on the Commission's own numbers, the conversion process alone produced a unilateral duty cut of from 14% to 44% on a large number of benzenoid products. Based on industry data the cuts were even higher. It is clear that these Kennedy Round chemical deals were negotiated in this manner in an attempt to coerce the Congress and our industry into agreeing to the "separate package." However, after carefully studying the supplemental agreement and the effect it would have upon our industry, we came to the conclusion that the elimination of ASP and the substantial tariff reductions provided for in that agreement would cause a significant increase in chemical

imports which would not begin to be offset by any additional chemical exports which might result from the 30% tariff reductions by the EEC. In other words, the industry directly affected by these deals believed them to be highly unfair to the United States.

While we were struck with the 50%-20% deal because the Trade Expansion Act authorize the Executive to conclude that arrangement without Congressional approval or review, we were at least able to have our objections to the "separate package" heard. The obvious unfairness of the "separate package" agreement properly resulted in the Congress declining to ratify it despite the urgings of the Johnson and Nixon Administrations. In our view this experience amply demonstrates the wisdom of having agreements involving major changes in our law reviewed by the Congress in the normal manner.

Indispensable Safeguards

We are concerned that the House bill gives the Executive carte blanche to repeat the mistakes our negotiators made during the Kennedy Round. On the basis of the Kennedy Round experience, we urge that any trade agreement on items as basic as U.S. methods of valuation should be submitted to the Congress as a separate agreement for affirmative approval through the regular legislative process. We believe the unduly broad grant of tariff cutting authority in the bill, particularly the triple cut on benzenoid chemicals, should be trimmed. We also urge that our negotiators be required to follow certain essential prenegotiation procedures before they enter into any agreement to eliminate ASP or other methods of customs valuation.

A. Congressional Review

The bill's 90-day Congressional veto procedure may perhaps be appropriate for review of some matters. However, it does not in our opinion give the Congress an adequate opportunity to review meaningfully a complex trade agreement making a basic change in valuation standards mixed in with other agreements on NTB's.

We understand that the Administration argues that it needs this unprecedented grant of negotiating authority so that our negotiators can be on a par with their foreign counterparts. However, these foreign negotiating teams are headed by members of their legislative bodies who are available for questioning by their colleagues on a regular basis. Obviously, our system is different; the argument that Congress should only retain a veto power over trade agreements negotiated by bureaucrats in the Executive branch reverses our Constitutional procedures and would be imcomprehensible to many of our trading partners.

We believe there can be no meaningful review of an ASP agreement if it is one of many agreements and the veto applies to the whole package not just to the ASP agreement. We therefore urge that the bill require (1) the submittal of any agreement on ASP for review separate and apart from any agreements reached on other non-tariff barriers and (2) ad referendum review of any agreement on ASP.

B. Negotiating Authority on Tariff Reductions

Section 101 permits tariffs of 25% or less to be cut by 60% and tariffs of over 25% to be reduced by 75%. In our opinion, it would be a serious mistake for our negotiators to approach these talks as a tariff cutting exercise, and we therefore urge that their advance authority be limited to 50% on all tariffs over 5%, and that tariffs over 25% not be cut below 15%. Greater tariff cuts, of course, could still be negotiated subject to Congressional review and approval.

As a result of the Kennedy Round reductions, the last stage of which only went into effect January 1, 1972, the average chemical tariff is approximately 9%. However, non-tariff barriers to our trade have been erected which completely offset the tariff concessions made by our trading partners during the Kennedy Round. This next round of negotiations clearly should be devoted to obtaining fair access to oil and other raw materials and reducing these non-tariff barriers to our trade. The request for authority to cut our tariffs by up to 75% is certainly inconsistent with what our negotiating objectives should be.

It should also be recognized that significant tariff cuts without changes in the GATT rules on border tax adjustments would result in an increase in imports that could not be matched in terms of trade by exports induced by foreign tariff concessions. This can be easily demonstrated for benzenoids by comparing recent

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