International Trade Update
A partisan Congressional battle over the use of earmarks means that many U.S. companies are currently paying duties on products that had been duty-free before this year – and many other companies are missing out on getting temporary relief from duties on additional products they had hoped would get the benefit starting this year. Earmarks are usually provisions in legislation that direct that funds be used for a particular project (usually in the home district or state of the Member of Congress who proposes it), but a decision by Republicans in the House of Representatives to adopt “a unilateral moratorium on all earmarks, including tax and tariff related earmarks” has ensnared bills that direct that import duties not be collected. The dispute is costing U.S. importers, and their customers, big bucks and its prospects for resolution are far from clear. The stalemate may be the impetus for a significant reconsideration of the so-called “miscellaneous tariff bill” process.
What are Miscellaneous Tariff Bills?
Over the last nearly 30 years, a practice has evolved in Washington under which U.S. manufacturers, industry associations, and even wholesalers and retailers, have asked Members of Congress to introduce legislation to reduce or temporarily suspend, usually for just two years, duties on certain imports, or to make technical corrections related to particular importations. All of those bills are then packaged together to create a single “miscellaneous tariff bill,” or “MTB.” Most of these tariff bills cover chemicals, raw materials, or other components that are used as inputs for goods manufactured in the U.S., making those downstream products less expensive, but some suspend duties on finished products.
The number of duty suspension requests has gradually increased over time and so has the scrutiny of the practice, with skeptics depicting it as corporate welfare. As a result, the Congress – which has exclusive authority under the Constitution to set import tariff levels – has adopted rules designed to make the process more transparent, so that the beneficiaries of the duty suspensions and their congressional sponsors are readily apparent.
Although the rules vary slightly between the House of Representatives and the Senate, both bodies have special disclosure rules for legislation which provides a “limited tariff benefit,” which is defined as “a provision modifying the Harmonized Tariff Schedule of the United States in a manner that benefits 10 or fewer entities.” The House and/or Senate sponsors must be identified, along with the name and location of the intended beneficiary or beneficiaries, and the purpose of the benefit. Under Senate rules, there are additional disclosure rules for lobbying activities associated with MTBs.
In practice, the two trade committees in Congress, the House Committee on Ways and Means and the Senate Committee on Finance, manage the process of assembling an MTB, which usually come up for consideration every two years. The committee chairmen set a deadline for Members to introduce stand-alone bills, with instructions that only those bills that are non-controversial and revenue-neutral will be considered for inclusion in the MTB package. A bill is considered controversial if any domestic producer objects and revenue neutral only if the annual duty loss to the U.S. is no more than $500,000. Besides being subject to public comment, the bills under consideration for inclusion in the MTB are reviewed by the Administration, including the U.S. Department of Commerce, U.S. Customs & Border Protection (CBP), and the U.S. Trade Representative (USTR), as well as the U.S. International Trade Commission (USITC). While the USITC reports are primarily factual, identifying the value and volume of trade in the product, the estimated revenue loss if the tariff is suspended, the name of the proponent and identification of the views of others, Commerce considers whether there are U.S. producers of the product, and USTR may address how the legislation would impact U.S. trade policy, including reciprocal bilateral and multilateral negotiations and unilateral preference programs.
The most recent MTB expired at the end of 2009, with Congress failing to approve a new MTB that would have maintained the existing duty-suspensions and created new ones. As a result, CBP is currently collecting duty on many products that had been duty-free. While there have certainly been instances previously where Congress did not act in time to prevent the duty suspensions from expiring, each time before, when Congress did finally enact a new MTB, the duty-suspensions were retroactively reinstated back to the date of the prior expiration. This time, however, it is not so clear that will happen.
Earmarks, Limited Tax Benefits and Limited Tariff Benefits
Initially, many assumed that once Congress finished its work on healthcare, it would be in a position to take up legislation to extend the MTB, especially since the new individual bills that would comprise the MTB for the 111th Congress had already been introduced and vetted. However, on March 11, the House Republican leadership announced its policy decision against earmarks, declaring that “the earmark process in Congress has become a symbol of a broken Washington.” Specifically, House Republicans agreed that Republicans should not offer any earmarks in legislation and should not support any earmarks in any House vote. That decision would appear to require all Republicans to vote against the MTB if it were to come up for a vote, because the parliamentary rules of the House for earmarks include within their scope “limited tariff benefits.”
Many Republican staffers and Members of Congress have said they generally support the goals of the MTB, which helps lower costs for manufacturers and consumers. Some, such as House Ways and Means Trade Subcommittee Ranking Member Kevin Brady (R-TX), have said they are working with Republican leaders to find a way around the Republican decision and get Republicans to vote for the MTB. But for now, the policy position appears to be a serious impediment to passing the MTB. House Republican staffers have said they would expect almost all Republicans to follow it.
While it is possible that Democrats could decide to approve an MTB without any (or with only a few) Republican votes, it is doubtful they would proceed this way. The past criticism of MTBs, as a boon to corporate interests, has meant a strong preference for only moving bills with broad bipartisan support. It is far from clear whether Democrats would be comfortable moving away from this recent tradition.
The Need For a New Approach
Industry groups have taken up this issue in recent weeks by meeting with the staff for Republican Members, to see if support for the MTB can be found in a way that does not violate the GOP pledge on earmarks. Many companies are beginning to feel the pinch of higher import costs, since the MTB has now been expired for more than three months (which also reportedly makes CBP less enthusiastic about the prospect that it might have to deal with refunds for many entries if a new MTB were to retroactively reinstate the expired provisions).
Longer-term, there is now discussion of turning the MTB process into one that begins administratively, to reduce the risk that future MTBs get caught up in the politics of the day. However, because Congress has authority over tariffs, Congress either must delegate that authority to the Administration – as it has done under programs such as the Generalized System of Preferences, to permit the Administration to decide, pursuant to criteria set by Congress, which products qualify for duty-free treatment – or ultimately approve an Administration decision or process. That, too, could be challenging to achieve, especially when, as is now the case, the legislative calendar is already crowded and congressional elections, which could change the majorities in at least the House, are coming up in November.
Enlisting Administration support may be key. To the extent that the MTB can identified as a means for creating U.S. jobs and meeting the Administration’s top trade priority, the National Export Initiative, which aims to double exports over the next five years, there may be an opportunity. It also may be possible to cast a new process as a reform effort to restore the certainty that U.S. companies need in order to stay competitive globally.
Sidley Austin LLP is well-positioned to help companies shape the future of the MTB process. Sidley has a team of professionals who can help draft creative solutions to address the latest obstacles to moving an MTB and assist companies seeking to demonstrate the value to the U.S. of expeditiously approving an MTB.
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