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57–710—PDF 2008

S. HRG. 110–1055

OVERSIGHT OF TRADE FUNCTIONS:

CUSTOMS AND OTHER TRADE AGENCIES

HEARING

BEFORE THE

COMMITTEE ON FINANCE

UNITED STATES SENATE

ONE HUNDRED TENTH CONGRESS

SECOND SESSION

JUNE 24, 2008

(

Printed for the use of the Committee on Finance

COMMITTEE ON FINANCE

MAX BAUCUS, Montana, Chairman

JOHN D. ROCKEFELLER IV, West Virginia

KENT CONRAD, North Dakota

JEFF BINGAMAN, New Mexico

JOHN F. KERRY, Massachusetts

BLANCHE L. LINCOLN, Arkansas

RON WYDEN, Oregon

CHARLES E. SCHUMER, New York

DEBBIE STABENOW, Michigan

MARIA CANTWELL, Washington

KEN SALAZAR, Colorado

CHUCK GRASSLEY, Iowa

ORRIN G. HATCH, Utah

OLYMPIA J. SNOWE, Maine

JON KYL, Arizona

GORDON SMITH, Oregon

JIM BUNNING, Kentucky

MIKE CRAPO, Idaho

PAT ROBERTS, Kansas

JOHN ENSIGN, Nevada

JOHN E. SUNUNU, New Hampshire

RUSSELL SULLIVAN, Staff Director

KOLAN DAVIS, Republican Staff Director and Chief Counsel

(II)

C O N T E N T S

OPENING STATEMENTS

Page

Baucus, Hon. Max, a U.S. Senator from Montana, chairman, Committee

on Finance ............................................................................................................ 1

Grassley, Hon. Chuck, a U.S. Senator from Iowa ................................................. 2

WITNESSES

Basham, Hon. W. Ralph, Commissioner of Customs, Customs and Border

Protection, Washington, DC ................................................................................ 3

Myers, Hon. Julie L., Assistant Secretary, Immigration and Customs Enforcement, Washington, DC ......................................................................................... 5

Skud, Timothy E., Deputy Assistant Secretary, Tax, Trade, and Tariff, Department of the Treasury, Washington, DC ...................................................... 7

Pearson, Hon. Daniel R., Vice Chairman, International Trade Commission,

Washington, DC ................................................................................................... 8

Maruyama, Warren H., General Counsel, Office of the U.S. Trade Representative, Washington, DC ........................................................................................... 10

ALPHABETICAL LISTING AND APPENDIX MATERIAL

Basham, Hon. W. Ralph:

Testimony .......................................................................................................... 3

Prepared statement .......................................................................................... 27

Responses to questions from committee members, with attachments ......... 35

Baucus, Hon. Max:

Opening statement ........................................................................................... 1

Cantwell, Hon. Maria:

Prepared statement .......................................................................................... 62

Grassley, Hon. Chuck:

Opening statement ........................................................................................... 2

Prepared statement .......................................................................................... 63

Maruyama, Warren H.:

Testimony .......................................................................................................... 10

Prepared statement .......................................................................................... 65

Responses to questions from committee members ......................................... 67

Myers, Hon. Julie L.:

Testimony .......................................................................................................... 5

Prepared statement .......................................................................................... 72

Responses to questions from committee members ......................................... 94

Pearson, Hon. Daniel R.:

Testimony .......................................................................................................... 8

Prepared statement with attachments ........................................................... 97

Responses to questions from committee members ......................................... 114

Skud, Timothy E.:

Testimony .......................................................................................................... 7

Prepared statement .......................................................................................... 117

Responses to questions from committee members ......................................... 122

(III)

(1)

OVERSIGHT OF TRADE FUNCTIONS:

CUSTOMS AND OTHER TRADE AGENCIES

TUESDAY, JUNE 24, 2008

U.S. SENATE, COMMITTEE ON FINANCE, Washington, DC.

The hearing was convened, pursuant to notice, at 10:06 a.m., in

room SD–215, Dirksen Senate Office Building, Hon. Max Baucus

(chairman of the committee) presiding.

Present: Senators Stabenow, Salazar, Grassley, Snowe, Bunning,

and Roberts.

Also present: Democratic Staff: Bill Dauster, Deputy Staff Director and General Counsel; Demetrios Marantis, Chief International

Trade Counsel; Hun Quach, International Trade Analyst; Ayesha

Khanna, Detailee; and Russ Ugone, Detailee. Republican Staff: Stephen Schaefer, Chief International Trade Counsel; and Claudia

Poteet, International Trade Policy Advisor.

OPENING STATEMENT OF HON. MAX BAUCUS, A U.S. SENATOR

FROM MONTANA, CHAIRMAN, COMMITTEE ON FINANCE

The CHAIRMAN. The committee will come to order.

On July 4, 1789, President Washington signed into law what the

newspapers heralded as the Nation’s second Declaration of Independence. This second act of the first Congress authorized the collection of import duties to help the nearly bankrupt Nation generate revenues to pay off its debts. Four weeks later, the fifth act

of Congress established our first Customs agency in its ports of

entry.

For the next 125 years, customs revenues funded virtually the

entire Federal Government. Remember, there was no income tax,

and customs revenues financed much of the Nation’s early growth

and infrastructure. They bankrolled the Louisiana Purchase, the

transcontinental railroad, they built the Nation’s lighthouses, the

U.S. military and Naval academies, and our capital city. In 1835,

customs revenues alone had reduced the national debt to zero.

Import duties remain a significant source of Federal revenue

today, but the mission of our customs agencies has expanded exponentially. In addition to collecting revenue, our customs agencies

must now secure our borders. These responsibilities are shared between two of the agencies before us today: Customs and Border

Protection, or CBP, and Immigration and Customs Enforcement, or

ICE. They serve as our Nation’s first line of defense against illegal

drugs, hazardous imports, weapons of mass destruction, and potential terrorists.

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We meet today for the second of two hearings on customs reauthorization. We heard testimony earlier this year from the business

community, and we will hear testimony today from the customs

and trade agencies themselves.

At the last hearing, witnesses questioned whether our customs

agencies are focused on their new security mission at the expense

of their historical trade mission. Witnesses questioned, for example,

whether proposed new security measures at American ports could

unduly delay shipments. They questioned whether those delays

could lead importers to divert their shipments to Canadian or

Mexican ports, which could damage the competitiveness of U.S.

ports and the jobs that depend on them. The witnesses questioned

whether our customs agencies have sufficient people on the ground

to ensure robust trade enforcement and facilitation.

I have questions about whether CBP has devoted sufficient resources to the northern border. At the port of Sweet Grass, MT,

more than 300 trucks cross the border every day. Now, 300 trucks

does not sound like a lot, but hundreds of small- and medium-sized

Montana businesses rely on those trucks and the cross-border trade

that comes with them. Yet, CBP has failed to fill the dozens of vacant positions in Sweet Grass, and we need to facilitate that trade.

I also have real questions about CBP’s responsiveness to this

committee, particularly CBP’s Office of International Trade. We established this office as part of the Safe Port Act in 2006 to

prioritize CBP’s trade functions, but they failed to consult this

oversight committee before releasing significant new policy proposals, notably the First Sale policy. They often fail to address committee inquiries in a timely manner. We have to find a better way

of working together.

And I have questions about whether two of the other agencies before us today, the International Trade Commission and the Office

of the U.S. Trade Representative, have the resources that they

need to fully enforce our trade laws and trade agreements. I look

forward to hearing answers to all these questions. I look forward

to introducing legislation in the coming weeks for reauthorization

of the agencies before us today. And I look forward to rededicating

the attention of our customs agencies to their revenue collection

and trade facilitation mission, the mission that our founders established more than 200 years ago.

Senator Grassley?

OPENING STATEMENT OF HON. CHUCK GRASSLEY,

A U.S. SENATOR FROM IOWA

Senator GRASSLEY. We have distinguished witnesses who are

going to help us answer a lot of questions and will be of tremendous help as we proceed with our bipartisan effort to reauthorize

customs and trade functions. These functions are more important

than ever because of the necessity now of being more concerned

about our economic security. The proper administration of our customs and international trade laws is essential to maintaining the

competitiveness of U.S. businesses in the global economy.

We have many important issues to cover. One of the most important implementation issues is the status of the Automated Commercial Environment (ACE) and its interface with the InterVerDate 11-MAY-2000 14:20 Aug 17, 2010 Jkt 000000 PO 00000 Frm 00006 Fmt 6633 Sfmt 6633 57710.000 TIMD PsN: TIMD
3

national Trade Data System (ITDS). This system will serve as a

central data collection point and improve communication and cooperation among trade-related agencies. It is essential that we get

the international trade data system fully implemented as soon as

possible. There are also a number of technical issues that we must

be concerned about.

The proposed elimination of the First Sale rule has generated

some controversy, as evidenced by the chairman already bringing

it up. This proposal appears to counter an established practice of

2 decades on the part of Customs, yet the agency did not consult

this committee before proposing a change of such magnitude, and

that is not acceptable.

In fact, it led Congress to legislate in a recently-enacted Farm

Bill. As a result, I understand that Customs will take no action to

implement this proposal until 2011 at the earliest, and not until

there has been adequate consultation with committees of jurisdiction.

Another technical issue that we need to review is the implementation of the 10+2 initiative, particularly with respect to 24-hour

advance submission of data. But more broadly, I am interested in

hearing from the Commissioner on how the agency is managing

and prioritizing commercial mandates.

Congress established by law an Office of International Trade

within the agency. How is the Commissioner utilizing the office?

Are there any additional steps that Congress can take to ensure

that our vital economic interests are fully met by the Customs and

Border Protection agency?

I am going to put the rest of my statement in the record, Mr.

Chairman.

The CHAIRMAN. Thank you very much, Senator.

[The prepared statement of Senator Grassley appears in the appendix.]

The CHAIRMAN. I would now like to welcome our panel. We begin

with Ralph Basham, Commissioner of Customs at Customs and

Border Protection in the Department of Homeland Security. Next,

Julie Myers, Assistant Secretary of Immigration and Customs Enforcement, Department of Homeland Security. Third, Timothy

Skud, Deputy Assistant Secretary, Office of Tax Policy, Department

of Treasury. The fourth witness is Daniel Pearson, Vice Chairman

of the International Trade Commission. Finally, we have Warren

Maruyama, General Counsel, Office of the U.S. Trade Representative.

Commissioner, why don’t you proceed? Our standard procedure

here is 5 minutes of testimony, and your written statements will

be automatically included in the record.

STATEMENT OF HON. W. RALPH BASHAM, COMMISSIONER OF

CUSTOMS, CUSTOMS AND BORDER PROTECTION, WASHINGTON, DC

Commissioner BASHAM. Chairman Baucus, Ranking Member

Grassley, and members of the committee, it is an honor to appear

before you today to discuss Customs and Border Protection’s trade

functions and enforcement efforts.

4

Today I would like to focus on the progress we have made since

our last authorization hearing before this committee in 2006. I specifically want to focus on aspects of law enforcement, which are so

vital to both our economy and to the health and well-being of our

citizens.

Let me begin with 10+2, our attempt to get more information

earlier in the process. We are currently working to finalize the Importer Security Filing rulemaking. As required by the Safe Port

Act, we work closely with our advisory committee, the Commercial

Operations Advisory Committee, or COAC, to develop this rule.

The trade helped us identify the data elements we would need to

increase the transparency of the global supply chain and to improve the overall targeting process for containers destined for U.S.

ports.

On the subject of First Sale and our proposed interpretation of

the rule, let me say first of all, we could have done a much better

job in consulting with the stakeholders in advance of this rule, and

I know the committee and the Congress have both acted on this

matter in the Farm Bill.

We are not going forward with any further action to implement

this interpretive rule or otherwise change the interpretation of

First Sale before 2011. We will also comply with the provisions of

the Farm Bill, including the requirements of data collection and coordination with the International Trade Commission.

Since the last authorization, we also created the Office of International Trade within CBP in October of 2006. This office consolidates the trade policy, regulatory, and enforcement functions of

CBP into one office. It makes us better able to promote compliance

with trade and border security requirements, and it allows us to

better serve our trade partners.

This office provides important legal tools and coordinates with

international partners and other U.S. Government agencies to enforce intellectual property rights and free trade agreements, and

prevent contaminated food products and other unsafe imports from

entering our country.

By promoting programs such as Account Management and Importer Self-Assessment, the Office of International Trade also helps

streamline the flow of legitimate shipments and fosters compliance

with trade laws and regulations among companies.

Similar to our security strategy, our audit program is risk-based

and helps us respond to allegations of commercial fraud. It also assists us in reviewing a company’s internal controls to ensure that

importers are complying with trade laws and regulations.

The face of trade has changed over the last few years, and this

new trade landscape has presented us with new challenges, such

as free trade agreements, changes in the textile industry that

eliminate quotas on all World Trade Organization countries and establish new quotas on China, new laws on bioterrorism and woodpacking material, and concerns about potential avian flu epidemics.

These new threats have also caused CBP to reevaluate the way we

deploy our resources, as well as the way we equip our Import Specialists and other trade personnel to address these issues.

In compliance with the Homeland Security Act and the Safe Port

Act, CBP has developed staffing models to analyze workload and

5

threat levels to determine optimum staffing. We are also developing a national trade strategy that directs actions and resources

around trade issues posing the greatest risk.

Mr. Chairman, my staff and I look forward to working with you

and the committee on the reauthorization bill that supports our

trade functions. We appreciate this opportunity to come before you

today, and I would be happy to answer any questions.

The CHAIRMAN. Thank you very much, Commissioner.

[The prepared statement of Commissioner Basham appears in

the appendix.]

The CHAIRMAN. Ms. Myers?

STATEMENT OF HON. JULIE L. MYERS, ASSISTANT SECRETARY, IMMIGRATION AND CUSTOMS ENFORCEMENT,

WASHINGTON, DC

Ms. MYERS. Thank you very much. Good morning, Chairman

Baucus and distinguished members of the committee. It is my

privilege to testify before you here today.

As the largest investigative agency of the Department of Homeland Security, we have a critical role in enforcing trade functions.

Today I will focus my remarks on ICE’s efforts to keep dangerous

and substandard products out of the United States marketplace, to

protect intellectual property rights, and the numerous ways in

which we target schemes designed to circumvent lawful trade

mechanisms.

To give you just one example, in 2007 ICE learned of an individual who was exploiting our trade system with potentially lethal

results. The pharmaceutical industry alerted ICE that Kevin Xu, a

citizen of the People’s Republic of China and owner of Orient Pacific International, was allegedly involved in the distribution of

counterfeit lifesaving drugs.

An investigation followed, and last July Xu was arrested by ICE

agents when he arrived in Houston, allegedly to personally replace

the packaging, lot numbers, and expiration date on an order of

counterfeit and misbranded drugs ordered by ICE’s undercover

agents. Working together with SEA, we secured a nine-count indictment alleging that Xu and others conspired to export counterfeit drugs from the PRC for distribution into the United States.

This case was extraordinary in that thousands of dosages of

counterfeit drugs entered the legitimate supply chain in the U.K.

and were dispensed to patients. Xu’s successful insertion of counterfeit pharmaceuticals into that legitimate supply chain there resulted in three Class I recalls of counterfeit cardiac, cancer, and

psychiatric drugs.

Cases like this really remind us that these criminals are motivated only by greed. This is one reason why, last November, ICE

initiated Operation Guardian, a targeted initiative to combat the

rise in the importation and distribution of harmful products manufactured in the PRC and in other locations. Guardian combines the

expertise of ICE, Customs and Border Protection, the Food and

Drug Administration’s Office of Criminal Investigations, and the

Consumer Product Safety Commission.

Even now, just a few months into this initiative, Guardian investigations have resulted in a number of arrests and indictments, as

6

well as a seizure of unapproved counterfeit pharmaceuticals, CPSC

regulated items, narcotics, and counterfeit merchandise, including

shipments of tainted shrimp and honey and counterfeit circuit

breakers.

Beyond working to protect the public from harmful or dangerous

products, ICE also plays a leading role in protecting the rights of

trademark holders. The ICE-led National Intellectual Property

Rights Coordination Center, or IPR center, stands as a key post in

the fight against the importation and trafficking of counterfeit

goods. The IPR center offers one-stop shopping for both law enforcement and the private sector to address the growing economic

transnational threat of counterfeit merchandise.

Our approach is working. In one initiative alone, involving large

quantities of counterfeit Cisco Systems network components, ICE

actually opened 28 investigations in 17 different field offices; 8 of

these were worked jointly with the FBI and several with the RCMP

in Canada, a key partner that provided much of the initial information about the scheme.

So far, ICE investigations have accounted for 115 seizures of

counterfeit Cisco products with an estimated retail value of over

$20 million. CBP seizures also accounted for more than $52 million

in counterfeit Cisco Systems products, with the FBI accounting for

more than $3.5 million as well. Thus far, our combined work has

led to six indictments and four felony convictions. Thanks to technical assistance from Cisco and the good work of our law enforcement partners in this and many other cases, we are succeeding in

protecting the rights of trademark holders.

In other cases it is not the goods themselves that pose the major

problem as much as it is the attempt to circumvent lawful trade

mechanisms to avoid duties on goods, or simply to attempt to illegally bring them in to the United States marketplace through

trade-based money laundering and commercial fraud.

One way that ICE is targeting these schemes is by developing

Trade Transparency Units with foreign trading partners. These

TTUs allow both countries, for the first time, to actually see the

import and export of commodities entering or exiting their countries, and by identifying anomalies in this data we are now uncovering broad fraudulent trade schemes, black market peso exchange

money laundering, and irregular import-export transshipments

more than ever before. In fact, just last week I was down in Mexico

announcing the start of our TTU with our Mexican counterparts.

Of course, these are but just a few highlights of our work. I want

to thank the chairman and the entire committee for the opportunity to speak with you today about ICE’s role in these efforts and

for your continued support. I look forward to answering your questions.

The CHAIRMAN. Thank you, Ms. Myers.

[The prepared statement of Ms. Myers appears in the appendix.]

The CHAIRMAN. Mr. Skud?

7

STATEMENT OF TIMOTHY E. SKUD, DEPUTY ASSISTANT SECRETARY, TAX, TRADE, AND TARIFF, DEPARTMENT OF THE

TREASURY, WASHINGTON, DC

Mr. SKUD. Mr. Chairman, Ranking Member Grassley, members

of the committee, thank you for the opportunity to discuss the

Treasury Department’s responsibilities for Customs’ revenue functions and for the International Trade Data System (ITDS).

The Secretary of Treasury has authority for Customs’ revenue

functions that involve taxation and regulation of international

trade for economic purposes, which have an important effect on our

economy. Authority for enforcing Customs revenue loss is delegated

to the Department of Homeland Security, but the Treasury Department has retained sole authority to approve regulations on a wide

range of these functions. We also review CBP rulings that constitute a change in practice.

In addition to these specific responsibilities, we work closely with

CBP on particular concerns. One such concern is simplification of

the duty draw-back rules. At the request of congressional staff, we

recently provided technical advice on draft draw-back legislation

and look forward to continuing to work with you on this important

matter.

Another concern has been the problem in collecting antidumping

and countervailing duties. The Treasury Department provided Congress a report on this issue last year. Overall, CBP collects over 99

percent of duties due, but for antidumping duty obligations that result from retroactive increases after entry, that figure drops below

50 percent. The problem is how to secure duties when they are assessed several years after entry.

Another important area where the Treasury Department works

closely with CBP is the International Trade Data System. Today,

traders report separately to numerous government agencies, sometimes on paper, sometimes electronically. Would it not make sense

to have a single electronic report and data distributed by computer

to all relevant agencies? This is the ITDS vision, and CBP, working

with 43 other agencies, is building that vision as part of the CBP

base program.

When I testified before this committee 2 years ago, I reported

that many agencies with an international trade role were not participating in ITDS and that performance had been uneven. This

year, however, I can report an improved situation. Most important

has been the Safe Port Act mandate that any agency requiring documentation for clearing imports or exports must participate in

ITDS. When the Act was passed, there were 31 agencies in ITDS,

now there are 43. The Office of Management and Budget (OMB)

has also joined the ITDS board of directors.

In addition, agency participation was spurred when a cabinetlevel Import Safety Working Group recognized ITDS as a key component of improved import safety. Moreover, OMB directed compliance with the Import Safety Group’s recommendations for accelerating ITDS, and OMB is also tracking each agency’s ITDS performance.

To some extent, however, ITDS has become a victim of its own

success. Fixed program resources must be spread among more

agencies, so ITDS still faces challenges. Take, as examples, two recVerDate 11-MAY-2000 14:20 Aug 17, 2010 Jkt 000000 PO 00000 Frm 00011 Fmt 6633 Sfmt 6633 57710.000 TIMD PsN: TIMD
8

ommendations of the Import Safety Group. First, although ITDS

agencies are already able to obtain much detailed information, they

are unable to access other data CBP already collects electronically.

The Import Safety Group recommended making this data quickly

available. That data is not yet available, but the Automated Commercial Environment (ACE) team is looking for ways to make it

available with as little impact as possible on the current program

schedule.

Second is implementation of global standards for customs data,

the World Customs Organization Data Standards. Today, traders

dealing with different countries must use a different computer format with each country. The cost to traders would be reduced if

they only had to maintain one messaging program. Furthermore,

governments could more easily share information about risky shipments if they used standardized data formats.

ITDS is aligning data requirements with these standards, but

there is not yet a firm schedule for implementing them in ACE.

Nonetheless, overall we are very pleased with the progress on

ITDS. We look forward to working with Congress to ensure that

progress continues.

Mr. Chairman, that concludes my oral remarks. Thank you for

the opportunity to testify. I’d be happy to take any questions.

The CHAIRMAN. Thank you, Mr. Skud.

[The prepared statement of Mr. Skud appears in the appendix.]

The CHAIRMAN. Next, Mr. Pearson?

STATEMENT OF HON. DANIEL R. PEARSON, VICE CHAIRMAN,

INTERNATIONAL TRADE COMMISSION, WASHINGTON, DC

Mr. PEARSON. Good morning, Chairman Baucus, Ranking Member Grassley, and members of the committee.

Chairman Aranoff very much wished that she could be here. She

is necessarily absent. However, I have with me three other commissioners, Commissioners Okun, Lane, and Williamson. Given the

fact that we work for the Finance Committee, among other things,

we like to show up when you have interest in our activities.

The CHAIRMAN. That is very foresightful. [Laughter.]

Mr. PEARSON. In a nutshell, the ITC does four basic things: we

enforce U.S. trade laws with respect to antidumping, countervailing

duties, and safeguards; we enforce intellectual property rights

under section 337; we conduct trade-related economic studies for

Congress and for USTR; and we maintain the harmonized tariff

schedules of the United States.

Let me review the circumstances of the past 3 years. We were

running a significant budget surplus in fiscal 2005, so in May of

that year the Commission met and determined that we should advise the appropriators to reduce our fiscal year 2006 appropriation

because we have no year funds and carry the surplus over from one

year to the next.

So we wrote to the committees, to the appropriators, with that

request—the letter to Senator Shelby is included in your materials—and our appropriation was reduced $2.75 million, as we had

asked. There were a couple of decisions on top of that. But we were

finally all right in 2006 because of our large carry-over.

9

However, in 2007 it changed because then we had no carry-over,

we had a frozen appropriation—frozen relative to the 2006 appropriation, which was artificially low. So we were in a world of hurt

in 2007, with $1.3 million less in available funds than we had the

previous year, and we had to absorb the personnel cost increases

that come with a pay raise.

So we managed that as best we could, which was by doing two

things. One was to postpone all of our IT and security projects that

could be postponed, and the second thing was, we just simply did

not hire people unless it was absolutely necessary. We ran our vacancy rate up to 16 percent. It is now down just a little from that

at 14, but we are at an unsustainably high vacancy rate.

We have managed under those circumstances, in part, by trying

to use people really well through management reforms. We have

done a lot of cross-training of people from multiple jobs; we have

shifted folks from one office to another where there was an acute

need; we have hired term employees; we have hired some temporary workers; we have brought in co-op employees; we have

brought economics professors in to help on specific projects; and we

have used career interns and presidential management fellows. So

we have scrambled, and we have managed to cover all the bases

so far.

There was a further complication late in fiscal 2007. We had

been in discussions for 15 months with the General Services Administration regarding the re-negotiation of our 10-year lease. Our

building is owned by Boston Properties. We are now in our third

10-year lease on that property, and GSA manages that negotiation

for us. GSA had led us to believe that our rent would be increasing

about 15 percent, which seemed in line with what we understood

to be happening in the commercial market.

A week before we were to sign a letter committing ourselves to

a new 10-year lease, GSA advised us, oops, 38 percent, not 15. So

there is $1.3 million out the door as we were getting into fiscal

2008. So the way we managed that in 2008 was, once again we

have postponed all of our IT-related projects and security-related

work and we have focused on trying to rebuild staff, because that,

we believed, was by far the highest priority.

While all this was going on, our workload was climbing. Let me

focus particularly on the section 337 intellectual property cases,

where this year we have had more new cases filed than in any previous year, and it is only June. We have 3 months left of the fiscal

year. So, our entire process has been over-stressed.

What we have done because of that is make a revised appropriation request, and we believe the appropriators are likely to consider

it favorably, but we are looking for an additional $1.5 million to

augment our section 337 process. I can elaborate on that in the

questions if you want.

The biggest concern I have right now is, what happens to us if

we have to deal with an appropriations freeze in fiscal year 2009?

The only way we could handle that would be to run our vacancy

rate up again, either through a reduction in force, which we could

do if we knew soon enough that we would be frozen, otherwise we

will need to take furloughs of perhaps 15 to 30 days next year. EiVerDate 11-MAY-2000 14:20 Aug 17, 2010 Jkt 000000 PO 00000 Frm 00013 Fmt 6633 Sfmt 6633 57710.000 TIMD PsN: TIMD
10

ther a reduction in force or furlough is going to leave us in a position where we are not able to accomplish our mission effectively.

With that, I will turn it over to Mr. Maruyama.

The CHAIRMAN. Thank you very much.

[The prepared statement of Mr. Pearson appears in the appendix.]

The CHAIRMAN. Mr. Maruyama, you are next.

STATEMENT OF WARREN H. MARUYAMA, GENERAL COUNSEL,

OFFICE OF THE U.S. TRADE REPRESENTATIVE, WASHINGTON, DC

Mr. MARUYAMA. Chairman Baucus, Senator Grassley, members

of the committee, I appreciate this opportunity to discuss the Office

of the U.S. Trade Representative’s 2009 budget.

At USTR, our job is leveling the playing field for American workers, farmers, companies, and entrepreneurs. We accomplish this

goal by negotiating agreements to open new markets for American

goods and services and by ensuring that our trading partners live

up to their commitments.

At USTR there is no line of demarcation between negotiation and

enforcement. We know that a trade agreement that is not being enforced is a broken promise to the American people. USTR is a lean,

efficient, and effective organization. We currently have about 226

full-time equivalents to cover the full range of U.S. trade policy, negotiations, and enforcement.

Our role is expanding. Last year, trade accounted for 40 percent

of U.S. economic growth. When President Bush took office, the

United States had free trade agreements enforced with three countries. Today, we have FTAs with 14. After last year’s May 10th

agreement with the House and Senate leadership, we have

strengthened the labor and environmental chapters of our FTAs. In

the last decade, the amount of WTO enforcement litigation has exploded, and the intensity and importance of the disputes continues

to rise.

The USTR budget is labor- and travel-intensive. The heart of our

organization is our staff. Of the $45.2 million we spent in fiscal

year 2007, $33 million, or 73 percent, went to payroll; travel accounted for $5.6 million, or 12 percent. That left only 15 percent

to cover everything else, including our WTO mission in Geneva,

Switzerland, a trade officer based in Brussels, and a new USTR office that we just opened in Beijing, China.

In fiscal year 2008 our payroll will increase to $35 million, primarily due to a COLA, or almost 80 percent of our current appropriation. As you know, the cost of everything is going up, especially

the cost of fuel, which translates into higher airline fares and

travel.

Let me briefly describe our agenda, what we have accomplished,

and what we seek to finish in the months ahead. As General Counsel, a major part of my job is ensuring that trade agreements are

enforced. In the last 17 months we have launched four WTO cases

against China: we have challenged China’s prohibited export, and

import, substitution subsidies, its failure to adequately protect intellectual property rights, and its barriers to copyrighted American

11

entertainment products—movies, home videos, DVDs, and sound

recordings.

This March, we requested WTO consultation on Xinhua’s use of

its regulatory authority to restrict foreign financial information to

providers. Last November, we successfully settled the prohibited

subsidy case on very favorable terms, with China agreeing to eliminate all of its WTO illegal subsidies effective January 1, 2008. We

are very optimistic about our China auto parts case, where a WTO

panel is scheduled to announce its final public decision in July.

Our WTO challenge to the European Union’s launch aid subsidies to Airbus is in its final stages. Last month, along with Japan

and Taiwan, we initiated a major case, challenging how the EU

classifies—or in our view misclassifies—high definition displays,

multi-function printers, and set-top boxes under the WTO’s Information Technology Agreement.

During the last year, USTR has initiated two arbitrations challenging Canadian actions under the U.S.-Canada Softwood Lumber

Agreement.

Free trade agreements with Colombia, Panama, and South Korea

await congressional approval and remain high administration priorities. Virtually all Colombian products already enter the U.S.

duty-free under the Andean Trade Preferences program. The Colombia FTA would level the playing field by converting one-way

free trade into two-way free trade, as well as strengthening our relationship with a key U.S. regional ally.

USTR continues to work toward a successful WTO Doha Round.

Despite its fits and starts and missed deadlines, the round offers

the potential to boost economics in the United States and around

the world, and lift millions out of poverty.

More broadly, the United States must be a strong, active leader

on global trade in order to safeguard U.S. interests. If we walk

away, our workers, farmers, and entrepreneurs would lose out on

new opportunities that are created by an expanding global economy.

Mr. Chairman, American taxpayers get an exceptional return on

their investment in USTR. We are a lean and efficient organization

with capable staff and a strong sense of mission. We are committed

to making sure our trading partners live up to their commitments

or face the consequences.

I will be happy to answer any questions you may have. Thank

you.

The CHAIRMAN. Thank you very much, Mr. Maruyama.

[The prepared statement of Mr. Maruyama appears in the appendix.]

The CHAIRMAN. Mr. Basham, at your confirmation hearing in

2006, I had one basic question. That is, I was concerned whether

you would strike the right balance between CBP’s historical responsibility of facilitating international commerce with its new responsibility of securing our borders. I am not yet convinced that

you have struck that right balance yet.

I, frankly, believe that you generally are not paying sufficient attention to the commerce side of your responsibilities. I thought I

would give you a chance today to explain to American businessmen

and women who are trying to do their best to import and export—

12

especially import products, when it comes to the United States—

that you are paying sufficient attention and doing a really good job

of addressing those American business concerns.

What can you state to them? What can you say here today that

is persuasive?

Commissioner BASHAM. Mr. Chairman, I fully recognize the importance of striking the balance between security and facilitation

of legitimate trade and travel. I can assure you that there is not

a discussion that we have at CBP that relates to security, where

at the same time we are not discussing how it will impact our ability, this country’s ability, to allow trade and travel to continue

unimpeded. Since 9/11, some of the initiatives that were put into

place by my predecessor at U.S. Customs were focused, yes, on security, but recognizing that, if we shut our borders down, if we

closed our borders to legitimate trade and travel——

The CHAIRMAN. Those are nice-sounding words, but what can you

quantify? How can you show to Americans that you are paying sufficient attention to the commerce side? It is one thing to say ‘‘we

are doing a good job.’’ Can you give us evidence? Can you quantify

it? Do you have goals, do you have benchmarks to show that what

you are doing is a good job here?

Commissioner BASHAM. Yes, we can show benchmarks.

The CHAIRMAN. Well, I am just curious. Here is your opportunity.

Commissioner BASHAM. Well, quite frankly, I think in the areas

of security that we have implemented—such as radiation detection

monitors, such as non-intrusive imaging equipment—we now have

that equipment located around the country, around the world in

ports overseas, to make sure that we have the ability to focus on

those issues that may be threats to our security, and at the same

time to facilitate movement of that trade.

If we can lower and reduce the size of the haystack by getting

more advanced information, which we are doing, by establishing

the national targeting center for cargo, which is new since I spoke

to this committee, those areas that we are focusing on as trying to

identify where the threats are also allows us to move trade more

quickly with less inspections.

The CHAIRMAN. Do you keep a record of concerns or complaints

from U.S. businesspeople? Like, airlines have a customer complaint

ratio. What is yours?

Commissioner BASHAM. We have no limits on the number of

issues that are brought to our attention.

The CHAIRMAN. No. But your goal is to work them down. So what

is your goal and your benchmarks on working those down so there

are fewer complaints?

Commissioner BASHAM. To bring the complaints down?

The CHAIRMAN. Yes.

Commissioner BASHAM. I would absolutely agree with you.

The CHAIRMAN. So what is your complaint ratio right now? What

number do you have?

Commissioner BASHAM. I am not sure that I can quantify that

right now, but I can get back to you.

The CHAIRMAN. Do you not think it is good to quantify? I do not

mean to give you a hard time, but I just think that, the more you

can quantify things and have benchmarks, then you would know

13

whether you are doing a good job or not, and we know whether you

are doing a good job or not.

Commissioner BASHAM. I will provide you with that information.

I do not have the percentage or production number.

The CHAIRMAN. But do you have a goal to get to a lower level

by a certain date?

Commissioner BASHAM. I do not have a particular—but on that

point, what I will say is that for the first time we are working on

a strategic plan of trade. I have asked Ann Baldwin in the Office

of International Trade to come up with a strategic plan that is

transparent to the trade, and that we will work on with the trade,

we will work on with this committee and other partners, stakeholders, to develop this strategy.

The CHAIRMAN. I appreciate you giving this committee some kind

of plan.

Commissioner BASHAM. We will.

The CHAIRMAN. What your dates are.

Commissioner BASHAM. We are working on that, and I will provide it to you.

The CHAIRMAN. And I also understand that you are about 2,000

people short along the northern border. Is that correct?

Commissioner BASHAM. I believe the original staffing plan on the

northern border or for the entire Office of Field Operations was

about 2,200. We are working to improve on that number. In fact

on the northern border we have increased the Border Patrol by

something like 50-some percent.

The CHAIRMAN. But it is probably true, though, that a partial answer to this question is more staff.

Commissioner BASHAM. We recognize that our staffing plan calls

for additional——

The CHAIRMAN. And when are you going to get your staff?

Commissioner BASHAM. When are we going to get the staff?

The CHAIRMAN. Yes. Yes. To get the job done.

Commissioner BASHAM. We are working very hard, Mr. Chairman, on accomplishing that.

The CHAIRMAN. Do you have a date by which you plan to get it?

Commissioner BASHAM. Right now, Mr. Chairman, quite frankly,

the doubling of the size of the Border Patrol is pretty much eating

up our entire resource pool to get those folks on board. However,

having said that, we have increased the number of staff on the

northern border. Percentage-wise, I would say it is something like

20, 30 percent over the past 2 years. We have asked for additional

staffing, and we will be getting additional staffing in 2009.

The CHAIRMAN. And I apologize for the interruptions, but I have

a time constraint here.

Commissioner BASHAM. That is all right.

The CHAIRMAN. My time has expired. Thank you very much.

Senator Grassley?

Senator GRASSLEY. Thank you.

Commissioner, I am concerned about the fact that Customs has

recently taken steps to alter longstanding administrative practices

without consulting the committee. I think that these actions have

broad repercussions within the trade community. Why has your

agency not engaged us with those issues? Do you consider it part

14

of your agency’s mission to keep the Finance Committee very fully

informed on such matters?

Commissioner BASHAM. Are we talking, Senator, about First Sale

particularly here or just in general?

Senator GRASSLEY. In general, but First Sale is the one I mentioned in my opening statement.

Commissioner BASHAM. Well, I would agree, Senator, that on the

First Sale, the interpretive rule, that we did not, in fact, do the

proper consultation. I have said that to COAC, the Commercial Operations Advisory Committee, and I say that to you here in this

committee, that we learned a lesson.

Although I will say that the NPIR, the interpretive rule—we had

thought that would start that dialogue, and we obviously did not

realize what kind of complications that it was going to present. But

we will, in the future, make sure that, if we are going to propose

a change of that magnitude, that we will consult with the committee prior to putting those sorts of rulings out.

Senator GRASSLEY. To you, again. How are you utilizing the

International Trade Committee that we established in the Safe

Port Act? How regularly does the committee convene, and how has

the committee helped you in leading the agency?

Commissioner BASHAM. How has this committee helped me in

leading——

Senator GRASSLEY. No, the International Trade Committee that

was set up in the Safe Port Act.

Commissioner BASHAM. Yes.

Senator GRASSLEY. Does it meet regularly, or how regularly? Has

the committee helped you in leading the agency?

Commissioner BASHAM. Absolutely it has helped in terms of—let

me just ask a question. [Pause.]

I just asked Dan Baldwin. But we have worked very closely with

them in terms of developing ACE, the Automation and Modernization Act requirements. We have worked with them very closely on,

as I spoke a few moments ago, developing a trade strategy and a

plan as we move forward. We have worked with them on human

capital, on staffing issues. So, it has been a consultive process and

very helpful.

Senator GRASSLEY. How regularly does that committee convene?

Commissioner BASHAM. Every month, Senator.

Senator GRASSLEY. What is the current status then of ACE?

Have sufficient resources been authorized for its implementation,

and are ACE resources being diverted to any other purposes? When

can we expect it to be up and completely running?

Commissioner BASHAM. We are on course with ACE, and we expect to be fully implemented by the year 2011. We have sufficient

funding to meet that requirement and, to my knowledge no funds

have been diverted to any purpose other than what it was intended

for.

Senator GRASSLEY. Mr. Skud, in your testimony you addressed

the current status of the ongoing implementation of the International Trade Data System. Do participating government agencies

have the resources to implement it? How will the Treasury Department ensure that participating government agencies prioritize the

complete implementation of the International Trade Data System?

15

Mr. SKUD. Senator, let me put this in the context of the funding

model for ITDS. There are basically two parts to ITDS when you

look at it from a funding perspective. There is the joint effort, the

interagency effort, that is funded out of CBP appropriations, and

then there are individual agency appropriations to take care of

hardware, software, and training needs on the agency side. Frankly, Senator, I have to defer to the individual agencies about their

own specific funding.

On the joint part of the effort, which is funded out of CBP funds,

we think funds are sufficient. But we also think that, frankly, large

IT projects have a long history of going off the track. So the ITDS

board monitors expenditures and the program progress vigilantly,

working cooperatively with CBP.

Senator GRASSLEY. Senator Stabenow? When you are done, Senator Stabenow, it will be Senator Bunning, then Senator Salazar,

and then Senator Snowe, just in case the chairman and I are previously engaged.

So, Senator Stabenow?

Senator STABENOW. Thank you very much, Senator Grassley.

Good morning.

Senator GRASSLEY. Would each of you abide by the 5 minutes?

Because there will not be somebody here to referee.

Senator STABENOW. How closely will you be looking, Mr. Chairman? [Laughter.] No.

We appreciate all of your being here and appreciate your work.

Collectively, you really represent a very important effort to focus

on American safety, health, commerce, and also whether or not we

have American jobs. From my perspective with a State that reflects

a large loss of manufacturing jobs, particularly since this decade

began, and certainly understanding the fact that we have lost over

3.5 million manufacturing jobs in the country, some of that—not all

of that—is just global competition. Some of that relates to what is

happening as to trade enforcement. I want to make sure we are exporting products and not our jobs, and I hope that is all of our

goals.

One of the things I have heard this morning is that we have

more trade agreements. Trade agreements have been increasing;

resources for trade enforcement have, in fact, gone down. So more

trade agreements to be enforcing, less resources for trade enforcement. Certainly that is something that we in Congress and the administration and President Bush all need to be held accountable for

in terms of overall resources.

But I do believe that we are not focused—this is not a new comment from me—sufficiently on enforcing the trade agreements that

we have. It is also concerning to me that when we talk about counterfeit products—and Ms. Myers, I appreciate what is being done

with individual examples. The counterfeit medicine you talked

about is a serious, serious issue, and I am pleased ICE is responding to that and that there is a project starting, and so on.

But it is my understanding that we know that 80 percent of the

counterfeit products that are being stopped and confiscated at our

border are coming from one country: China. So that goes to a larger

policy then of how we enforce our trade agreements. China comes

into the WTO, it is supposed to be following the rules, and is not

16

on counterfeiting, currency manipulation, and so on, which goes to

a broader issue.

My question—and Commissioner Basham, I would ask you—is,

according to the GAO report released in April, Customs and Border

Protection has failed to collect more than $613 million in antidumping and countervailing duties dollars since 2001. It is my understanding that your agency believes it is very difficult to collect

that money, that your Office of Chief Counsel plans to write off

most of that at this point in time because importers have either

disappeared, lack assets, or have declared bankruptcy.

Unfortunately, when these things happen, it sends a very bad

message internationally when we are not able to obviously enforce

those issues. So do we need to overhaul our antidumping and countervailing duty collection systems or can you make substantial improvements within the current system to fix the problem? To me

this is pretty basic. We are not collecting through those systems as

we should be.

Commissioner BASHAM. Senator, as you know, the Department of

Commerce establishes the fees or duties, penalties, on antidumping

and countervailing duties. Our difficulty has been that, in many

cases, the evaluation of the product as it comes into the country

really does not get liquidated for maybe 2 years after that point

when Commerce finally issues a liquidation order.

Many times when we try to collect those duties, the company

simply has never had any intention of paying it, or the company

goes out of business, or we just cannot locate the responsible party

after that period of time. What we have proposed is a continuous

bond, that those bonds be set upon entering, which gives us a better opportunity to actually collect those duties at that later date

when the liquidation is determined. So we do believe that there

needs to be—we are working very closely with Commerce on this.

Quite frankly, the cooperation between us and Commerce on

these issues has improved considerably. So, yes, we would like to

work with this committee to develop a better process for collecting

the duties and fees on these kinds of products that are coming into

the country.

Senator STABENOW. Thank you.

Anyone else want to respond? I think my time is up, but I would

welcome any short response from anyone else.

[No response.]

Senator STABENOW. All right. Thank you very much.

Senator BUNNING. Thank you.

Ms. Myers, I noticed in your testimony that China is the origin

of most of our troubling examples of adulterated products, besides

the shoe case, and also the case involving Cisco, where we are talking about big dollars.

Given the fact of a 500-percent increase in imports from China

during the last 10 years—a 500-percent increase—is your agency

adequately equipped to protect American consumers from adulterated drugs, counterfeit products, and tainted food?

Ms. MYERS. Well, thank you very much for that question, Senator. I certainly agree that I need the resources to execute our mission properly, working with the other agencies that do have a role.

17

In our fiscal year 2009 budget we do request about $12 million that

would help us kind of further execute our goal.

One of the reasons that we did establish Operation Guardian is

to look really more strategically, and we recognize that over the

years we had a great relationship with CBP and we do some kind

of interesting individual, kind of one-off seizures and were not

necessarily——

Senator BUNNING. Please, just answer my question, so I can ask

others.

Ms. MYERS. Absolutely. We are seeking at least $12 million in

the President’s 2009 budget to enhance opportunities, and we are

also looking to spend the money that Congress gives us more effectively and more strategically.

Senator BUNNING. All right.

Mr. Basham, I want to ask you about the Notice of Proposed Interpretation you published in January regarding the so-called First

Sale rule. This is the rule that governs how goods are valued for

tariff purposes.

I understand that, at the last minute, the Farm Bill conferees inserted a provision that would delay the implementation of any

change to the rule for several years. Can you explain for this committee how the rule works in practice today, why you think the

rule is being abused, and which other countries have abandoned it?

Commissioner BASHAM. Senator, first of all, we issued the rule

because there was a great deal of conflict between parties as to the

application of First Sale.

Senator BUNNING. Did, in fact, a delay of the rule occur in the

Farm Bill that was just passed?

Commissioner BASHAM. Yes.

Senator BUNNING. For how long?

Commissioner BASHAM. Until 2011. January 1, 2011.

Senator BUNNING. Oh. Just to 2011? So you cannot change the

rule until 2011?

Commissioner BASHAM. That is correct.

Senator BUNNING. How much harm does that do?

Commissioner BASHAM. Well, we do not feel that it does any particular harm. What we are interested in is, the Farm Bill also has

required that importers report on the number of imports that the

First Sale applies to, and that we do an analysis of that information and then make a determination as to whether or not we need

to interpret the rule at some point in the future. We will not take

any action on First Sale, the interpretation, nor will we change the

First Sale rule as it stands today.

Senator BUNNING. All right.

This is a question for Assistant Secretary Myers and Deputy Assistant Secretary Skud, or anyone else on the panel who would like

to respond.

Last August, one of your sister agencies uncovered a massive cigarette tax fraud scheme in which they stopped the sale of 600,000

cartons of counterfeit cigarettes, together with 125,000 counterfeit

revenue stamps from Kentucky, Virginia, and New York.

If Congress raises the Federal tobacco tax in order to pay for free

health care for middle-class families, do you think this might increase the incentive for counterfeiting in China or elsewhere to

18

bring contraband across the border? Has your agency ever tested

these counterfeit cigarettes to see what they contain? Is your agency equipped to handle the rise in organized crime resulting from increased smuggling of bootleg, tax-free cigarettes?

Ms. MYERS. Senator, in cases that we are involved with that involve counterfeit cigarettes, we absolutely do do testing, first of all

to determine whether or not they are counterfeit, and then whether

or not they can contain any additional carcinogens. It is certainly

true that we see in other countries——

Senator BUNNING. Well, what did you find when you tested

them?

Ms. MYERS. In the particular case you referenced, it was not

clear that that was an ICE case. In certain cases we find that there

are no additional carcinogens, in other instances we do find that

there are additional problems. That is why we absolutely have to

make sure that we do testing. Testing is part of any investigative

scheme.

Senator BUNNING. Mr. Skud?

Mr. SKUD. Yes, Senator. With respect to the impact that the increase on the cigarette tax might have on the incentive to smuggle

or to counterfeit, I think the answer has to be yes, that it would

increase the incentive.

With respect to testing the safety of cigarettes, the Treasury Department’s Tax and Trade Bureau does have a program for testing,

a sampling program for testing.

Senator BUNNING. And did they do that with these 600,000 cartons?

Mr. SKUD. I am not familiar with the case you reference, but I

would be happy to look into it.

Senator BUNNING. My time has expired.

Senator GRASSLEY. The Chairman will be back in just a minute.

To Mr. Skud, please, I want you to describe the relationship between Treasury and DHS with respect to the promulgation of Customs regulations. Is the delegation of authority from Treasury to

Homeland Security working properly? Have there been any lapses

in coordination? Specifically, why has Treasury not been more involved with respect to Customs’ recent efforts to change the First

Sale rule and the operation of heading 9801 of the Harmonized

Trade Tariff Schedule?

Mr. SKUD. Thank you for the question, Senator. I would say that,

in general, the relationship between the Treasury Department and

DHS, CBP in particular, is working amazingly well. Under our delegation order, all day-to-day operations are delegated to the Department of Homeland Security. As I mentioned earlier, we retain

the sole authority to approve regulations, and we review certain

rulings.

I talk to people at Customs, several people every day, in a wide

variety of offices from the Office of International Trade, the CIO’s

office, the Finance office, and the Chief Counsel’s office. We work

quite closely and, I think, quite successfully together.

With respect to the First Sale notice, this has been a CBP concern for a number of years. It was first formally presented to the

Treasury Department over 5 years ago in the form of a draft regulation, and the Treasury Department did not go forward with that

19

rule at the time. The reason is that, from a policy perspective, we

see the issue as a trade-off between administrative efficacy, collecting the right amount of duties sufficiently, and the potential

duty increase. But, frankly, we did not have the data available to

evaluate the scope and impact of that duty increase or the administrative benefits, so we did not go forward with the proposal then.

Earlier this year when CBP told us about the proposal, frankly,

I counseled them that it would be controversial, but I also realized

that the process of going out with notice and comment could generate the information needed to make an informed decision.

With respect to the 9801 issue, this is a proposal that is under

review at the Treasury Department, but I also understand that

there is a proposal to include language in the Miscellaneous Tariff

Bill that would make this issue moot.

Senator GRASSLEY. I hope you can move. You cannot count on the

Miscellaneous Tariff Bill, though.

Mr. SKUD. I am not counting on it. We have not made a decision

on 9801 on its merits at this time. If the Miscellaneous Tariff Bill

does not move, of course we will have to.

Senator GRASSLEY. Mr. Commissioner, the trade community has

voiced great concern about the implementation of the 10+2 rule.

Some companies have indicated that they will not be able to comply, while others have indicated compliance will cost millions. How

will 10+2 improve the security of the Nation? Would it be appropriate to begin with a pilot program before requiring widespread

implementation? How is Customs working with the trade community to minimize costs?

Commissioner BASHAM. Senator, 10+2 was a result of the Safe

Port Act that required CBP, Customs, to collect additional information, advanced information on products that were coming into the

country prior to its loading onboard ships overseas.

We sat with, worked with over the past several years, our partners in COAC, the Commercial Operations Advisory Committee,

and looked at hundreds—literally hundreds—of data elements to

determine which of those would be the most useful in developing

our targeting tools to determine what would be a threat that would

be coming to this country in the way of maritime cargo. We agreed

upon 10 of the elements out from the import community, and 2

from the shipping community. Currently, the rule is at the Department of Homeland Security. We hope to have it to OMB by the end

of the week, and then hopefully by the end of the summer have

that rule out.

Over the next year, or whatever time it takes, we will be working

with the trade to make sure that they are fully capable of providing

this information, as we have done in many other cases in the past,

working with them to ensure that they are prepared to provide

that information to us. That is our way forward.

Senator GRASSLEY. Senator Bunning?

Senator BUNNING. Thank you.

I just want to go back to those cigarettes, the 600,000. Contraband cigarettes have been tested, and there was lead in them.

Now, if the Customs agents and those who discovered them cannot

do something more drastic than confiscate and fine, or try to initiate some kind of action against the perpetrators of those frauds

20

of the counterfeit cigarettes that come in, and using our tax stamps

out of Kentucky, Virginia, and New York, then shame on the agencies that are supposed to stop the activity.

For Mr. Maruyama, I have a question. As you know, there is a

local content requirement for NAFTA treaty benefits. I have heard

that certain importers are circumventing the local content requirement by reporting an artificially low Customs valuation on imports

into NAFTA countries. This makes the NAFTA content easy to

meet, and the goods travel across our borders tariff free. Part of the

problem appears to be that our own Customs laws allow goods to

be valued using the First Sale between a factory and the first middleman and a long supply chain. That often brings in China. Is

USTR aware of this issue?

Mr. MARUYAMA. Senator, we have heard about the issue. We

would like more information about the specific situation that has

arisen. Our NAFTA agreement does contain very detailed and

elaborate rules of origin that specify how products should be valued

and situations in which they qualify for duty-free treatment under

the agreement.

So, if someone is playing games with the valuations, we would

be very interested in hearing about it, and also interested in

working——

Senator BUNNING. Do we not have specific prohibitions of transshipment to Third World or to NAFTA countries as a stopover and

then adding a widget, and then shipping them into the United

States or the NAFTA countries?

Mr. MARUYAMA. Absolutely. The rules of origin in the agreement

are designed to make sure that products are legitimately sourced

out of U.S., Canada, or Mexico.

Senator BUNNING. In other words, you would like for us to bring

to the USTR, in your office, specific violations that we know about?

Mr. MARUYAMA. We would be very interested in that, if there is

a broad problem with the agreement, but also I think we would be

very interested in working with Customs and DHS, if there is a relatively routine case of Customs fraud.

Senator BUNNING. All right. Thank you very much.

Go ahead, Pat.

Senator ROBERTS. Thank you, Mr. Chairman.

Commissioner Basham, I have some concerns. I am not sure

whether this has been brought up before; if it has, I apologize to

you.

This is a proposal to reclassify certain lower-cost shoes under a

heading that would result in higher import duties. In fact, the

change could actually triple the current duty rate and it would result in an increase of about $400 million to businesses and U.S.

consumers.

I am talking about fabric-soled shoes. In February, CBP was

looking at reclassifying these kinds of shoes imported into the

United States under a new heading that would result in significantly higher tariff duties.

This is not based on any kind of a domestic challenge, as I understand it. Additionally, there is essentially no domestic manufacturer of these types of shoes. So what I am worried about here is,

what is the current status of this proposal, if you are aware of it?

21

Is there any consideration given to the consumer end of this proposal, given the fact that these kinds of shoes are generally the

lower-cost shoes? Most commonly, they are children’s shoes.

In this economic environment, is this the best type of proposal

to consider, one that would have a negative impact, obviously, on

Americans’ pocketbooks, and more disproportionately, those with

lower incomes? About 10 years ago, I can remember a fuss like

this, and it basically boiled down to Michael Jordan athletic shoes,

over $100, versus Hakeem Olajuwon—I think I have that right—

the Houston all-star forward, who endorsed a different shoe. The

difference was remarkable, what 25, 30 bucks for Hakeem

Olajuwon’s, and of course, Michael Jordan’s were over $100. But

these are children’s shoes, so I would ask you to respond in regards

to my questions.

Commissioner BASHAM. Well, first of all, it is a classification

issue, as you point out, the difference between a shoe that has a

rubber sole versus a shoe that has a fabric sole, and in many cases

they attach a piece of fabric and list it and misclassify it. We recognize that there needs to be some work on this, and we would be

very happy to work with the committee on this issue to deal with

the problem. But again, we are enforcing the tariff laws as we interpret them. That is the purpose of our looking at this issue. But

as I say, we would be very happy to work with the committee on

this.

Senator ROBERTS. Well, it is sort of the bottom-line effect that I

am worried about, 400 million bucks to businesses and U.S. consumers, which could really be the end of these shoes being available. As I say, again, the difference in cost, as the example I used

in terms of sporting shoes, now it is children’s shoes.

I have no problem whatsoever on the classification of what the

shoe is made of, but I do have a problem in that we do not have

any domestic shoe company that is providing this. It does provide

low-income folks to have shoes for their children, so I would hope

that that would be the case.

Commissioner BASHAM. Yes, sir.

Senator ROBERTS. All right. Thank you very much.

Thank you, Mr. Chairman.

Senator BUNNING. Since there is nobody else to ask questions,

the committee will stand in recess.

[Whereupon, at 11:06 a.m., the committee recessed, reconvening

at 11:15 a.m.]

The CHAIRMAN. The committee will come back to order.

I’d like to talk now about enforcement of intellectual property

rights. The real question here is whether the various agencies

charged with intellectual property have the resources and are sufficiently coordinated. CBP works with IP issues at the border. ICE

does its investigations. Of course, the ITC has 337 investigations,

and USTR is in charge of enforcement. With all these different

agencies, it is a huge concern.

I would be interested in the panel’s thoughts on how well that

is working. Of course, everybody wants more resources. But what

advice do you have among yourselves or for this committee to make

sure that each of these different agencies gets the job done? Whoever wants to begin first, just raise your hand if you want to speak.

22

Commissioner BASHAM. Mr. Chairman?

The CHAIRMAN. Yes.

Commissioner BASHAM. First of all, I would like to say that we

have increased our efforts on enforcing intellectual property rights

violations. We have been working very, very closely with ICE. Part

of ICE is an IPR center to identify and target. We are using the

same kinds of tools that we use for our security to look at these

types of violations, particularly out of China. We have increased,

I think, something like 27 percent the number of actual interdictions that we have made.

Like someone said, 80 percent of those are coming out of China,

and we are actually working with the Chinese Government, and

have signed an agreement with the Chinese Government to share

information on investigations that ICE is conducting with the Chinese Government so that they can look back into their own system

and determine where these kinds of IPR violations are occurring.

So we are sharing information with them to try to come up with

better intelligence on targeting these kinds of violations.

Julie?

Ms. MYERS. Thank you. Senator, from a cooperation standpoint,

I think cooperation between all the different law enforcement agencies involved is only getting stronger. At ICE we recognized, frankly, that our IPR center could be more effective if we made it more

operational and more initiative-based in really looking at health

and safety. So we have always had a national IPR center, but we

are actually kind of forming a new center together and we have

buy-in from the FBI—the Criminal Division, CSIS—the Canadian

Security Intelligence Sevice, FDA, as well as CBP, who are all

going to be part of this center to target, in particular, substandard

and counterfeit goods that really affect public health and safety.

In terms of resources, we are requesting in the President’s 2009

budget an additional $4.6 million in particular for commercial

fraud and intellectual property rights, as well as an additional $5.7

million for cybercrime. We do think this funding is essential in

order for us to make the difference.

Finally, I would just note, internationally, we are seeing some

more cooperation on the law enforcement-to-law enforcement side

from the Chinese, as well as from the government of India. I recently was in India and met with the commissioner of Customs

there, and they are very interested, given the problems that they

are seeing as well, in partnering with us, kind of law enforcementto-law enforcement. There is more to be done, but I am seeing some

encouraging progress.

The CHAIRMAN. Right. During the strategic economic dialogue

talks just last week, China announced beefed up intellectual property enforcement. What are your concerns about that? Where are

the blanks? Where are the loopholes? What needs to be done there?

Again, it sounds good, and I commend China for taking that action.

But I am just curious. As you look at it, what are some of your concerns?

Ms. MYERS. Well, I think from kind of a pure law enforcement

standpoint, it is just making sure that actually the cops on the

ground are working well together and actually sharing information,

and that the agreement, in goodwill, is actually executed on parVerDate 11-MAY-2000 14:20 Aug 17, 2010 Jkt 000000 PO 00000 Frm 00026 Fmt 6633 Sfmt 6633 57710.000 TIMD PsN: TIMD
23

ticularized cases. I think we have seen some very promising things.

We have actually worked several undercover cases with the Chinese where people have been prosecuted and served jail time, both

in the U.S. and in China. I think that really represents a step forward. I think, also, the Chinese are more interested in health and

safety issues than they have been before.

Given the dangers in counterfeit pharmaceuticals, that is troubling, but I think it is really an execution that I am most concerned

about, kind of seeing how we are going to carry through from the

great promises, both in the dialogue last week, as well as kind of

the talks that we have individually with our counterparts.

The CHAIRMAN. Do you work with the provinces in China as well

as with the central government? The provinces and the cities, for

example?

Ms. MYERS. We do some. We would primarily work with the Ministry of Public Security, but we do in some kind of particularized

cases. If there are kind of particularized issues there, then we

would focus down at the provincial level. But generally we do work

most closely with MPS.

The CHAIRMAN. It is my understanding that there is a little bit

of a difference between Beijing and the provinces, a whole different

dynamic. I would just urge you to be aware of that and be effective

in dealing with the problems in some way.

Ms. MYERS. I agree, Senator.

The CHAIRMAN. All right. Thank you.

Anybody else on the coordination of IP among all your agencies?

Mr. Maruyama?

Mr. MARUYAMA. Well, just a couple of things that USTR has

going on the IPR front. We have a major case that is under way

challenging China’s inadequate IPR enforcement system. The second panel hearing was last week, so the case was moving into a

phase where it is going to be ripe for a decision. We have some of

our best lawyers working on that case, and we have had excellent

support from a strong interagency team, with lawyers and IP experts from Commerce, the PTO, copyright, and the U.S. embassy

in Beijing. We also have an anti-counterfeiting trade agreement

initiative that is an effort to try to bring together like-minded countries to more effectively combat piracy around the world.

Finally, on the SEDs, the Shipper’s Export Declarations, our dialogue with the Chinese took a hit when we filed the WTO case.

Some very senior Chinese officials took it rather badly, but the Chinese appear to be revising their efforts to work on the IP front. The

major issue there is political will. If the Chinese want to stop IP

piracy, they have shown that they are capable of doing it. The best

example of that is Olympics souvenirs, where everyone in China

knows it is big trouble if you get caught peddling counterfeit stuff

with the Olympic logos. So, they have the capability to do it when

they really get down to business.

The CHAIRMAN. Well, I am hoping that China does change a bit

when a WTO case is filed, as is the case with respect to Europe.

The Europeans understand that is just the beginning, that this is

a dialogue, a discussion. This is an indication, frankly, that economies are maturing. There is a lot more commerce, so it is more

likely more cases will be filed. We want the Chinese to recognize

24

they should not take it personally, but actually look at, hey, they

are becoming a more mature economy, and I am sure we will have

differences and so forth, but we can work out ways to deal with it.

But basically on IPR, what more do we need to do? Here you all

are, you are the agencies charged with enforcement. What kind of

job are we doing, do you think? How can we do better?

Mr. PEARSON. Mr. Chairman, if I could differentiate just slightly

between the IPR protection provided by the other agencies and provided by the ITC.

The CHAIRMAN. Right.

Mr. PEARSON. I would note that they are generally dealing with

intentional efforts to defraud or to violate law.

The CHAIRMAN. Right.

Mr. PEARSON. The ITC, quite often in its 337 cases, finds two

parties in front of us where one party believes that there is patent

infringement and the other party believes there is not, and it is an

issue to be decided by patent attorneys and others learned in those

arts. Yet, what we are finding is that the intellectual property

holders find our service to be very, very valuable because we are

faster than the District Courts and we have the ability to issue an

exclusion order to keep out infringing imports. Given the integrated nature of the global economy, the ability to keep out imports, which then is enforced by Customs, that is very valuable to

the IPR holders.

The CHAIRMAN. I appreciate that.

Let me ask Mr. Skud a question on a different subject, and that

is whether Treasury has filled the 20 oversight positions that were

authorized in the Homeland Security Act of 2002. Basically, as you

said in your opening statement, you provide oversight. You have

oversight responsibility, and that necessarily means you have a

certain number of people conducting that oversight responsibility.

The 2002 Act authorized 20 oversight positions for Treasury to do

that oversight. Do you have those positions? Can you give me a better sense of how robust your oversight functions are?

Mr. SKUD. We do not have 20 positions within the Treasury Department that are dedicated solely to our responsibility for Customs revenue functions, but we have a number of people who are

involved. I am in the Office of Tax Policy, and I work on Customs

revenue functions with colleagues there. There are also at least a

half-dozen members of the Office of General Counsel who regularly

work on Customs revenue functions. In fact, in the past year the

General Counsel has reorganized its office to provide better legal

support on these issues. Also, I work quite closely with a number

of people in the Office of International Affairs on these issues, and

we see very useful support from the Office of Economic Policy.

The CHAIRMAN. But why do you not have those 20? I may be

wrong, but it is my understanding that the 2002 Act provided for

20 positions.

Mr. SKUD. Mr. Chairman, I think the Act provided for up to 20

FTEs.

The CHAIRMAN. Well, how many do you have on an FTE basis

working on oversight responsibilities?

Mr. SKUD. I am sure there are at least 20 people who spend time

on these issues.

25

The CHAIRMAN. I meant, spend their sole time. You have how

many people in oversight, basically?

Mr. SKUD. I understand the question. I really do not know. I do

not keep track of people’s time on these issues.

The CHAIRMAN. Does somebody in Treasury do that?

Mr. SKUD. Not to my knowledge, sir.

The CHAIRMAN. But do you think it would be a good idea if somebody did? If you have oversight responsibility, it seems to me you

would want an idea of how many people are keeping track of all

that.

Mr. SKUD. Congress gave us a responsibility for this oversight

function, and I think we are doing a pretty good job of it. The bill

said up to 20 FTEs.

The CHAIRMAN. If it is you and you do not know how many people there are, it raises certain questions.

Mr. SKUD. I know how many people are involved. I do not know

exactly how much of each person’s time is spent on this function.

The CHAIRMAN. Well, I have to leave. There is a vote going on.

But this committee takes our oversight functions very seriously

with respect to Customs and trade, and clearly we have a very

equal responsibility to address security, but we also have a coequal responsibility with respect to trade and Customs. We will be

having subsequent hearings, so I would just urge all of you to do

what you know you should be doing. It is not easy, but do what

you know you should be doing so that we know next time we meet

that we are making significant progress.

Thank you very much. The hearing is adjourned.

[Whereupon, at 11:29 a.m., the hearing was concluded.]

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