CUSTOMS PROCEDURAL REFORM ACT OF 1977

THURSDAY, JULY 21, 1977

HOUSE OF REPRESENTATIVES,

SUBCOMMITTEE ON TRADE,
COMMITTEE ON WAYS AND MEANS,

Washington, D.C.

The subcommittee met at 10:05 a.m., pursuant to notice, in room 1301, Longworth House Office Building, Hon. Ed Jenkins presiding. Mr. JENKINS. The subcommittee will come to order.

We will continue the hearings under notice on the proposed customs procedural reform legislation, and our first witness today is Mr. James Joseph, Undersecretary of the Department of Interior. Mr. Joseph, if you will, come forward. I should say to any witnesses that do appear that your entire written statement may be made part of the record, and we will ask you to summarize the written statement, and then be available for questions.

Mr. Joseph, we are very pleased that you could come this morning, and we are delighted to hear from you on this subject.

STATEMENT OF HON. JAMES JOSEPH, UNDERSECRETARY OF THE DEPARTMENT OF INTERIOR, ACCOMPANIED BY RUTH VAN CLEVE, DIRECTOR, OFFICE OF TERRITORIAL AFFAIRS

Mr. JOSEPH. Thank you very much.

The Secretary of Interior, Cecil Andrus, is in Alaska, and I am appearing this morning in my capacity as Acting Secretary. I have with me Mrs. Ruth Van Cleve, Director, Office of Territorial Affairs, but I wanted to appear before this committee personally to underscore the significance that we attach to this particular legislation.

Mr. Chairman, I just recently returned from visiting several of the territories in the last few days, and one of the questions I brought back with me most clearly imprinted in my mind is the distinct need for economic development in the territories.

I feel that whereas we have done a decent job in preparing them for political self sufficiency, we have not done an equal job in preparing them for economic self sufficiency. It is for that reason I would like to underscore the importance of the legislation that this committee is considering.

The three territories that I am particularly concerned about are the Virgin Islands, Guam, and American Samoa. Of these three, only American Samoa is administered by the Department of Interior and receives a direct grant for Government operations from the U.S. Congress.

Guam and the Virgin Islands are self governing, and are normally self sufficient financially, but both were hard hit by the recent recession, and were slower to recover than was the mainland of the United States.

This was due, also to a high degree of dependency of the Virgin Islands' economy on tourism and the Guam economy on military installations and tourists.

Although reliable statistics on the territories are not available, it is clear that unemployment and underemployment are higher than in the mainland. Guam and the Virgin Islands have for the first time in many years found it necessary to request Federal assistance to offset the decline in local tax revenues.

To avoid a recurrence of this problem in the future, we consider it of vital importance to stimulate investment in private productive facilities.

I would like to submit to you my entire statement for the record in these proceedings, but I would like to continue only with a summary of that statement.

Mr. JENKINS. Without objection, the statement will be included. [The prepared statement follows:]

STATEMENT OF JAMES A. JOSEPH, UNDER SECRETARY, DEPARTMENT OF THE INTERIOR

It is a great pleasure for me to appear before this committee today to offer my strong support for H.R. 8222. We, in the Department of the Interior view it as essential to the continued economic development of the territories of the Virgin Islands, Guam and American Samoa.

Of these three territories, only American Samoa is administered by the Department of the Interior and receives a direct grant for government operations from the U.S. Congress. Guam and the Virgin Islands are self-governing and are normally self-sufficient financially. Both were hard hit by the recent recession and were slower to recover than was the mainland United States. This was due also to a high degree of dependency of the Virgin Islands economy on tourism and the Guam economy on military installations and tourism. Although reliable unemployment statistics in the territories are not available, it is clear that both unemployment and underemployment are much higher than in the mainland. Guam and the Virgin Islands have, for the first time in many years, found it necessary to request Federal assistance to offset the decline in local tax revenues. To avoid a recurrence of this problem in the future, we consider it of vital importance to stimulate investment in private productive facilities.

The proposed legislation, if enacted into law, would amend Headnote 3(a) of the United States Tariff Schedules which permits duty free importation into the United States Customs Area of articles produced in the insular possessions of the United States. The amendment would raise from 50% to 70% of total value the limit on foreign materials contained in articles eligible for this duty free treatment.

Watches and watch movements are excluded from the proposed amendment because a similar change was previously made by P.L. 94-88 affecting only the watch industry.

The bill would also establish a limit on duty free imports of any article during a single calendar year. The limit is $25 million, adjusted for increases in United States GNP since 1974.

The special tariff treatment for insular possessions was first provided in 1954 under Headnote 3(a) of the Customs Code. The purpose of this provision was to permit light assembly industries to establish themselves in the territories to provide opportunities and teach skills to local workers, to diversify the economy and to broaden the tax base. The Headnote 3 (a) program has been a success. It led to creation of a major watch assembly industry in the Virgin Islands and was partially responsible for two large investments in tuna canning in American Samoa. These industries now employ about 1,000 and

1,300 respectively and they contribute several million dollars annually to local tax revenues. In addition, several smaller industries such as jewelry manufacture and pharmaceuticals have been established in all three territories. However, in recent years, circumstances have made it more difficult to interest potential investors in establishing plants in the territories and in some cases have put established businesses out of operation.

This problem has been permitted to arise by the workings of the present provisions of Headnote 3 (a). Under it, duty-free treatment is accorded products of the territories "which do not contain foreign materials to the value of more than 50% of their total value." This wording does not require any specific amount of value added or labor input in the territory. What it does require is that the "product of" the territory be substantially transformed from the materials imported into the territory from a foreign country. This concept is rigorously and properly enforced by the U.S. Customs Service in order to exclude industries which might pass a product through the territory to escape duties.

The manufacturer of a Headnote 3(a) article is in effect faced with a requirement that the value (or wholesale price) of his product upon importation into the United States be at least double the cost of any foreign materials contained therein. This requirement presents no problems as long as the price of competitive products is equivalent or higher. What has happened in recent years is that competitive prices have been reduced by tariff liberalization while foreign component prices have increased due to inflation and dollar devaluation thereby catching the territorial manufacturer in a squeeze. The net result is that the advantage which the Congress had intended to give to territorial industries has been eroded.

Relief of the kind sought by H.R. 8222 has already been granted the watch industry under P.L. 94-88. Experience under this legislation is therefore instructive. The watch industry was of importance principally to the Virgin Islands where it employed close to 1200 people in 1972. Under the pressure of rising component prices and increased competition, the industry employment fell to under 400 in 1974. After P.L. 94-88 raised the permissible imported component from 50% to 70%, the industry was revived and employment in April of this year was back up over 1,000. The most significant aspect of this success story was that the manufacturing process in the Virgin Islands and other territories did not change at all; there was no reduction in the local labor input into each finished watch. The only change permitted was a reduction in the U.S. selling price and therefore a saving to the consumer.

P.L. 94-88 was limited to the watch industry because immediate action was required to prevent the total collapse of an established industry and major employer. Since that time, it has become evident that the same problem applies to other industries and for the same reasons. For example shipments other than watches under Headnote 3(a) from the Virgin Islands fell from a peak of $31.6 million in 1973 to $15.5 million in 1975. The failure of several businesses has made new investors understandably wary.

Recently, an important new factor has entered the picture, probably benefiting the U.S. consumer but posing a grave threat to territorial industries. This is the Generalized System of Preferences (GSP), created to give increased access to developed country markets for the products of the less developed countries. GSP eligible products from eligible countries may be imported dutyfree into the United States. Many of the eligible products, such as jewelry, are also good candidates for manufacture in the territories under Headnote 3(a). While the U.S. Generalized System of Preferences specifically provides that insular possessions are to receive no less favorable treatment than eligible countries, the fact is that, with fewer natural resources and higher labor costs, our territories need more favorable treatment to compete with foreign developing areas.

Finally, the stimulation of territorial industries does not pose a threat to other domestic industries. The total population of the three U.S. territories is approximately 230,000. In 1976, total imports into the U.S. mainland of territorial products (excluding petroleum products) were $214.7 million. To insure that no import under the proposed bill would significantly affect the competitive situation in the United States, a limitation ($25 million adjusted for GNP growth since 1974) on total imports of any one product from all the territories has been included in the proposed bill. This is based on the competitive need concept of the Generalized System of Preferences.

In summary, we believe that the original intent of legislation creating Headnote 3 (a) has been frustrated by changes in relative costs and duty levels. This has significantly reduced the attractiveness of the territories to manufacturing industries and has done so at a time when employment and tax revenues are down. The proposed legislation will, we believe, attract more industry to the territories, helping to return Guam and the Virgin Islands to self-sufficiency and encouraging American Samoa in that direction. Perhaps most important, the change contemplated by this proposed legislation would not reduce the existing requirements that eligible products be substantially transformed in the territories. Instead, it would permit a reduction of selling prices, with benefit to the consumer as well as the people of the territories. I would like to add to my comments a word on legislation now under consideration "to provide customs procedural reform, and for other purposes." One such procedural reform is to raise the personal customs exemption for returning U.S. residents. My understanding is that the bill under consideration would raise the exemption from $100 to $200 after 6 months and $250 after 18 months for residents returning from foreign countries. For residents returning from the territories of the Virgin Islands, Guam and American Samoa the increase would be to $400 after 6 months and $500 after 18 months. We support the maintenance of this two to one ratio as the minimum necessary to encourage tourism in the territories. In the Virgin Islands in particular, a substantial amount of tourism is based on the attraction of free port shopping and this in turn depends upon a substantial margin of duty-free imports which visitors to the territories may bring into the United States. We are confident that this effect of customs simplification on tourism in the territories will be given careful consideration by the committee.

I will now be glad to answer any questions on the impact of proposed customs legislation on U.S. territories.

Mr. JOSEPH. We believe the original intent has been frustrated by changes in relative costs and duty levels. This has significantly reduced the attractiveness of the territories to manufacturing industries and has done so at a time when employment and tax revenues are down.

The proposed legislation will, we believe, attract more industry to the territories, helping to return Guam and the Virgin Islands to self sufficiency and encourage American Samoa in that direction. Perhaps most important, the change contemplated by this proposed legislation would not reduce the existing requirements that eligible products be substantially transformed in the territories.

Instead, it would permit a reduction of selling prices with benefit to the consumer as well as the people of the territories.

In addition to that comment, I would like to add a comment on legislation now under consideration to provide customs procedural reform and for other purposes.

One such procedural reform is to raise the personal customs exemption for returning U.S. residents. My understanding is that the bill under consideration would raise the exemption from 100 to 200 after 6 months, and $250 after 18 months for residents returning from foreign countries.

Residents returning from the territories of the Virgin Islands, Guam and American Samoa, the increase would be to 400 after 6 months, and 500 after 18 months.

We support the maintenance of this two-to-one ratio as the minimum necessary to encourage tourism in the territories.

In the Virgin Islands in particular, a substantial amount of tourism is based on the attraction of free port shopping and this in return depends on a substantial margin of duty-free imports which visitors to the territories may bring into the United States.

We are confident that this effect of customs simplification on tourism in the territories will be given careful consideration by the committee.

Mr. Chairman, this concludes my summary, and I will be pleased. to answer any questions that you may have.

Mr. JENKINS. The administration supports maintaining the historical ratio of two-to-one with respect to the customs personal exemption for the territories even meaning an increase to $400 and $500?

Mr. JOSEPH. Yes; Mr. Chairman.

Mr. JENKINS. Your entire written statement has been made part of the record, Mr. Under Secretary, and I appreciate your taking the time to appear in person before this subcommittee.

Mr. JOSEPH. Thank you.

Mr. JENKINS. Our next witnesses this morning form a panel, Messrs. Roland Hummel, Jr., Leonard M. Shayne, Paul F. Wegener, Sigmund Shapiro, and William R. Casey; and I believe that Mr. Casey has with him Mr. Tompkins, Mr. Bruno, Mr. Rosenbloom, and Thomas R. Hendershot.

Each of you may come to the witness table. This panel represents the National Customs Brokers & Forwarders Association of America, Inc.

PANEL ON BEHALF OF NATIONAL CUSTOMS BROKERS & FORWARDERS ASSOCIATION OF AMERICA, INC., CONSISTING OF ROLAND R. HUMMEL, JR., PRESIDENT; LEONARD M. SHAYNE, CHAIRMAN OF THE BOARD; PAUL F. WEGENER, VICE PRESIDENT, AREA 7; M. SIGMUND SHAPIRO, VICE PRESIDENT, FOREIGN FREIGHT FORWARDING; WILLIAM R. CASEY, DIRECTOR; ALLERTON deC. TOMPKINS, CUSTOMS COUNSEL; VINCENT J. BRUNO, EXECUTIVE VICE PRESIDENT; MORRIS V. ROSENBLOOM, DIRECTOR, WASHINGTON OFFICE; AND THOMAS R. HENDERSHOT, WASHINGTON CUSTOMS COUNSEL

Mr. JENKINS. Mr. Hummel, we are delighted to have you, together with the other members of the panel, to appear before this subcommittee.

Once again, your entire written statement may be placed in the record, and you who desire to testify orally may summarize your written statement for the record. We will start with Mr. Hummel. [The prepared statement of the organization follows:]

STATEMENT BY REPRESENTATIVES OF THE NATIONAL CUSTOMS BROKERS & FORWARDERS OF AMERICA, INC.

My name is Roland R. Hummel, Jr., and I am President of the National Customs Brokers and Forwarders Association of America, Inc., One World Trade Center, New York. I am also President of Taub, Hummel & Schnall, Inc., a licensed customs brokerage firm.

Our Association is a non-profit corporation with more than 300 licensed customs brokers and ocean/air freight forwarding firms throughout the United States in its membership. It has 21 local affiliated associations of brokers and forwarders which maintain close liaison with the National Association. We