Feb 23, 1990

U.S. WANTS CURBS ON PRE-SHIPMENT INSPECTIONS.

GENEVA, FEBRUARY 20 (BY CHAKRAVARTHI RAGHAVAN) -- The United States has put forward proposals to curb the use by Third World countries of shipment inspection services to check on the quality and quantity of goods being shipped and to prevent illegal capital flows out of their countries through transfer pricing.

The U.S. proposals for an agreement have been tabled in the Uruguay Round negotiating group on non-tariff measures to be considered under its procedures for multilateral rule-making approach.

As in other areas of the negotiations, the U.S. has trotted out the theory of trade "distortion" to justify disciplining and penalising governments seeking to safeguard their national economic interests.

The U.S. draft would severely restrict these pre-shipment inspection agencies in their work on behalf of the customs authorities of importing countries on such questions like quality and quantity verification of goods purported to be shipped, price verification and comparisons with prevalent prices, etc.

Some of the limitations and deadlines on the service companies sought by the U.S. would not be possible of imposition, even via GATT if the customs authorities in the importing country exercise it.

For example, no customs administration in the U.S. can be required to give a reason why a particular imported package or even a visitor is subject to intense scrutiny, search (and delays in clearance) whether it be to check contraband goods, drugs or merely attempt to evade customs tariffs.

But the U.S. wants such limitations on such service enterprises which acting on behalf of the governments of countries concerned, and acting as they do before shipment are more effective than customs authorities at the receiving end.

With use of such services - to check bogus and fraudulent shipments or inflated invoice prices as a transfer pricing mechanism or for aiding flight capital - becoming widespread in the Third World, TNCs find it an interference with their efforts at profit maximisation and global capital accumulation.

An added advantage of using such services, especially in transactions between private parties (importers of a country and exporters abroad) lies in the fact that detection of quality, quantity or price verification before shipment means that the exporters cannot get payment before clearance - the letters of credit opened in their favour can be cashed only on basis of invoices and shipping documents and verification certificates.

Otherwise, if fraud is detected when the goods arrive, only the importer can be dealt with; the foreign exchange remittance would already have taken place and passed into the hands of the exporter.

A Swiss enterprise, Societe Generale de Surveillance (SGS), began this work for Third World countries, but now there are a number of such enterprises undertaking this work on behalf of importing countries. Some countries have engaged such services to eradicate corruption in their customs administration and delays in clearance of imports, while others have been using them to check transfer pricing and flight capital whether through collusion of exporters and importers or in transactions of TNCs between parents and subsidiaries.

The use of such service enterprises to do work within the ken of customs administrations is perhaps a case of "privatisation" and expansion of "trade in services" before these words became slogans to reduce the role of the State in Third World countries.

In its communication in 1988, justifying the use of such services, Zaire had said that it was one of the first Third World countries to introduce it when it found shipments arriving at its ports containing bricks instead of cloth, second hand clothing instead of new, and sand in barrels instead of oil - fraudulent practices to illegally transfer foreign currency.

As Zaire explained it, the use of inspection services, began for checking quality and quantity before shipment and payments under letters of credit, was extended to price comparisons to check against "abusive over-invoicing" and "arbitrary and discriminatory pricing practices" of some TNCs operating in Third World countries particularly in chemical and pharmaceutical sectors.

Some countries like Indonesia also found it useful to eradicate corruption in their customs administration and eliminate delays in customs clearance and speed up levy and collection of duties.

As early as 1987, when the negotiating group began its work, and the secretariat had put forward a kind of agenda, the issue of preshipment inspection services as a non-tariff barrier was listed. However, Philippines and a number of countries using such services protested and the item went off the agenda.

The attempt to raise it in the Tokyo Round customs valuation code committee ran into trouble when some of its Third World members questioned how conduct of non-signatories could be discussed. Later it was raised in the negotiating group on MTN codes and agreements.

Meanwhile some U.S. exporters and TNCs went to court in Miami Florida, and tried to use the S. 301 route in the U.S. Trade Law to dub such practices as "unfair" and invoke U.S. trade retaliation.

Indonesia and a few other countries, at this stage, agreed to discuss the issue in the negotiating group on non-tariff measures to head off U.S. unilateral measures.

But ultimately the U.S. court did not accept the plea of the U.S. exporters against the service companies, finding nothing illegal or wrong in preshipment inspection.

At one stage in 1989, the various service enterprises providing these services, particularly the Swiss one, were involved in some lobbying to persuade its users to take a joint stand. However, according to some of the Third World countries, some of the service enterprises slightly cooled off because of pressures brought against them by the governments of some major trading countries.

In this situation, Zaire put forward a proposal for an agreement that would have enabled continued use of such services, setting some broad guidelines such as for "non-discrimination" and for promotion of a code of conduct by such enterprises, and for disputes between Contracting Parties arising out of use of such services to be settled multilaterally through the GATT mechanism.

The U.S. has now put forward a proposal that would seemingly recognise right of countries to use such services, but severely restrict and curb such activities, and lay down some very tight timetables and mandatory guidelines in these matters.

In conducting pre-shipment quality inspection of imports, the enterprises concerned are required to apply only the technical criteria about quality that are applied by the user government to identical or similar domestic goods.

Quite often consumers in the Third World purchase imported goods on the view that imported goods are of higher quality. Sometimes governments of Third World countries allow imports to promote quality competition with domestic goods, and higher prices are charged by the exporter on the ground of the better quality of the imported goods. The U.S. proposal would in effect use the application of "national treatment" principle to thwart all this and enable an exporter, in collusion with the importer, to send same quality of domestic goods but charge higher prices.

The U.S. proposal would also restrict the inspection services from obtaining what are described as "confidential" business information, and mandate them to share such information with the governments employing them only as "necessary". User governments are also obliged to require only such confidential information as are "customarily required" for letters of credit or other forms of payment or for customs, import licensing or exchange control purposes.

While for price verification, inspection companies are required to make "appropriate allowances" for a number of factors including "licence or other intellectual property fees", they would be precluded from seeking information about manufacturing data relating to the patented process or product. In effect while the exporter and importer could claim patent licence fees as part of the price, whether any such patent was used or whether the patent had passed into public domain could not be verified.

In its communication, Zaire had pointed out that abusive transfer pricing practices had been found to be indulged in by TNCs particularly in pharmaceutical and chemical imports.

Some of the same criteria used by U.S. and other ICs in deciding on issues of dumping or fair prices for imported goods are not to be used by the inspection companies in price verification.

For example selling price in the country of importation of goods produced in such a country are not to be used to verify import prices, though when it comes to quality standards, the same technical criteria applied by a user government for domestic goods are to be used under the "national treatment" criteria of equality of treatment for domestic and imported product!

Other elements not to be used for price verifications include the price of goods on the domestic market of exporting country, cost of production, price of goods exported to other countries, reference price or minimum values. Some of these criteria are used by U.S. and others for customs purposes as a measure against under-invoicing and dumping and is not viewed as a non-tariff measure or barrier.

Perhaps the logic is that principles of "free trade" or "fair trade" require protection of domestic producers against dumping, but on the principle of "buyer beware", governments should not intervene to protect consumers and the country against price gouging.

Inspection companies are also required to stick to deadlines provided in the agreement - for e.g. three working days to decide on grievances - or provide written detailed reasons for decisions (a requirement that no government, in the importing or in exporting countries, would accept for sovereign quasi-judicial or administrative actions and decisions).