Washington Retail Insight - March 31, 2006

Volume 11, Number 7
March 31, 2006

In Today's Edition:

• Schumer, Graham Delay China Currency Bill Again

• NRF Committee Lobbies Congress on Tax Issues

• NRF Fights Effort to Block Tariff Cuts for Textiles and Apparel

• Bush Signs Bill to Close Loophole on Counterfeit Merchandise

• Congressional Outlook

• NRF Events

Schumer, Graham Delay China Currency Bill Again

     Senators Charles Schumer and Lindsey Graham this week agreed to postpone their demand for a vote on legislation that would impose a 27.5 percent tariff on imports from China, saying the Chinese had made progress in allowing their currency to float against the U.S. dollar.

     The agreement came after Schumer, D-N.Y., and Graham, R-S.C., concluded a trip to China, and in advance of next month's visit to the United States by Chinese President Hu Jintao. In addition, Senate Finance Committee Chairman Charles Grassley, R-Iowa, this week introduced an alternative bill intended to appease anti-China sentiment in Congress without inflicting the damage to the economy and international relations that would come with the Schumer-Graham legislation.

     "I've learned from this trip that their banking system will not allow them to go to a floating currency overnight, that the worst thing that could happen is destabilizing China's economic reforms," Graham said at a news conference on Tuesday. "Gradual progress is in the best interest of both nations, and I think that is where we are headed."

     "If we hadn't introduced this strong medicine, nothing would have ever happened," Schumer said. "But we also believe now that we are on the path to progress. We don't have to fire this so-called nuclear weapon, but can hold it in abeyance as we carefully wait and watch and expect continued progress."

     Both Schumer and Graham have supported claims by some U.S. manufacturers that imports from China have threatened their businesses and are to blame for U.S. job losses. In response, Schumer in February 2005 introduced S. 295, a bill that would impose a 27.5 percent tariff on all imports from China unless China ended its decade-old policy of tying the yuan to the U.S. dollar.

     The Chinese government announced last July that it would revalue the yuan by about 2 percent and tie it to a basket of currencies in the future. Schumer said he wanted a 5-10 percent increase in value, but agreed to wait until the end of the 2005 congressional session before seeking a vote in order to give China time to show more progress in revaluation. At the end of 2005, he postponed his push for a vote again, saying he would wait until March 31, 2006. This week's announcement pushes the deadline back to September 29, 2006.

     At this point, the yuan has risen about 3 percent since last July, and the currency basket approach allows it continue floating in a band of plus or minus 0.3 percent.
     Schumer and Graham spent last week meeting with high-level officials in Beijing, Shanghai and Hong Kong before returning to the United States and meeting with Treasury Secretary John Snow this Tuesday. The Bush Administration opposes the legislation.

     Also on Tuesday, Grassley and the ranking Democrat on the Finance Committee, Senator Max Baucus, D-Mont., announced the introduction of their own China bill.

     The Grassley-Baucus measure would require the Treasury Department to issue a report every six months identifying countries with currencies that are "fundamentally misaligned" and would allow sanctions to be imposed against those countries -- lowering the standard that must be met under current law before sanctions can be imposed for currency manipulation. Among the sanctions, a non-market economy nation such as China could not be designated as a market economy if its currency is misaligned. China has sought the market economy designation because it would make it harder for U.S. companies to win high anti-dumping tariffs on imports from China. The legislation would also create a new position at the Office of the U.S. Trade Representative to enforce trade agreements.

     NRF expects any increase in the cost of Chinese-made goods as a result of the rise in value of the yuan to be nominal and unlikely to be large enough to discourage retailers from sourcing merchandise in China.

     NRF has lobbied strongly against the Schumer/Graham legislation, arguing that it would increase prices for U.S. consumers while doing nothing to create or protect U.S. jobs. Ultimately, the measure would force retailers to import merchandise from other low-cost foreign suppliers because domestic manufacturers no longer produce most of the products targeted by the tariff at competitive prices or in commercial quantities.

     For more information, contact NRF Vice President and International Trade Counsel Erik Autor at (202) 626-8104.

NRF Committee Lobbies Congress on Tax Issues

     Senior tax executives from many of the nation's major retail companies gathered in Washington this week to lobby Congress for extension of important tax provisions that expired four months ago and to hear updates on other tax policy issues affecting the retail industry.

    Members of the NRF Taxation Committee visited the offices of key members of the tax-writing House Ways and Means Committee and Senate Finance Committee on Wednesday, asking that Congress move quickly to renew the Welfare to Work and Work Opportunity Tax Credit programs, along with a 15-year depreciation life for improvements to leased stores.
 
     WWTC/WOTC offer businesses an annual tax credit of up to $2,400 per employee to hire welfare recipients and other disadvantaged individuals, and have been widely used by retailers to help those individuals move into the workforce. The 15-year depreciation life is important to retailers because it is a reduction from the previous 39-year period.

     WOTC/WWTC and the depreciation provision both expired at the end of 2005, and legislation to renew them for as long as two years as part of a larger tax reconciliation bill is stalled. NRF has worked to get the reconciliation bill moved, but is also exploring options to have extension of the programs attached to other legislation.

     The meetings also touched on a range of other issues, including the need to make permanent the $1.35 trillion package of temporary tax relief passed in 2001 and 2003 that is scheduled to expire after 2010. The relief included cuts in personal income tax rates that have helped boost consumer spending, along with cuts in capital gains and dividend rates and phase-out of the estate tax. Tax executives also called for rejection of a proposal from the President's Advisory Panel on Federal Tax Reform that would take away the ability to deduct the cost of imported goods as a business expense -- a move that would effectively subject imported merchandise to a 30 percent tax.

     Ways and Means member Representative Sam Johnson, R-Texas, told the Taxation Committee at a dinner Wednesday night that his panel is working to renew WOTC/WWTC, to make the 2001/2003 cuts permanent and to limit a range of "onerous taxes" faced by businesses. He said he was particularly interested in providing relief from the Alternative Minimum Tax.

     The Taxation Committee continued its meeting on Thursday at NRF headquarters, where Bob Winters, chief tax counsel for the Ways and Means Committee, said the committee wants WOTC/WWTC and the 15-year depreciation provision extended, but that the effort has been held up by Senate budget rules.

     Winters also said retailers could face a tough battle when the 2001/2003 tax cuts come up for renewal in 2010. By that point, Congress could be balancing the desire to renew the politically popular cuts, particularly cuts in personal taxes, against rising budget deficits.

     Bob Cline, director of state and local tax policy economics at the Ernst and Young accounting firm, said retailers need to closely watch tax reform efforts going on in a number of states. A wide variety of business taxes once looked at separately are beginning to converge and need to be considered as a whole, he said. In particular, he warned of the trend toward gross receipts taxes. Committee members also heard from other E&Y experts, NRF staff and IRS retail technical advisor Dave Moser, who outlined details of a number of current tax issues.
 
     For more information, contact NRF Vice President and Tax Counsel Rachelle Bernstein at (202) 626-8168.

NRF Fights Effort to Block Tariff Cuts for Textiles and Apparel

     NRF is leading retailers' fight against a proposal to separate textiles and apparel from current World Trade Organization talks aimed at reducing worldwide tariffs on imported goods.

     WTO officials in Geneva are working toward an informal April 30 deadline for completion of an agreement on tariff-cutting formulas that will form the basis for efforts to liberalize international trade during the next session of Doha Round trade negotiations.

     U.S. textile manufacturers represented by the National Council of Textile Organizations and the American Manufacturing Trade Action Coalition are lobbying the WTO to have tariff talks for textiles and apparel conducted separately from talks on other goods, a move that would likely result in little, if any, reductions in rates.

     Textile manufacturers have also proposed the establishment of a worldwide "safeguard" mechanism allowing temporary quotas to be imposed when domestic manufacturers feel threatened by imports. A similar mechanism currently in place for China has caused chaos in retail sourcing, and NRF strongly opposes expansion of the concept.

     NRF is arguing that the tariff and safeguard proposals would roll back progress toward free trade seen under last year's elimination of worldwide trade quotas for textile and apparel.

     "Elimination of trade barriers in textiles ... has been and will continue to be essential to the growth of the global trading system," NRF said in a March 22 letter to WTO ambassadors from textile-exporting nations. "Scare tactics and gross exaggerations ... should not cloud your memory of history or your vision of the future."

     NRF also wrote to U.S. Trade Representative Rob Portman, urging in a March 10 letter that both the tariff and safeguard proposals be rejected. NRF noted that the WTO's negotiating framework clearly envisioned that separate negotiations for a given sector of goods would be allowed only to provide greater, not lesser, trade liberalization than achieved in general negotiations.

     NCTO and AMTAC have won support from some WTO members -- including Turkey, which drafted a memorandum calling for separate textile/apparel talks on the table -- but others have opposed the proposals.

     WTO Director General Pascal Lamy dismissed the chances of the proposal on Tuesday, calling it "extremely strange." Chinese WTO Ambassador Sun Zhenyu said the initiative was "not helpful and it's a recipe for failure."

     A spokeswoman for Portman said USTR was "reviewing the proposal carefully" but that "since it is not a fully detailed proposal, it would be premature to take a position on it."

     Conducting separate textile/apparel talks and creation of a safeguard mechanism would both require unanimous WTO approval, so the plan is unlikely to be adopted, but NRF is nonetheless continuing to work to see that it is rejected.

     For more information, contact NRF Vice President and International Trade Counsel Erik Autor at (202) 626-8104.

Bush Signs Bill to Close Loophole on Counterfeit Merchandise

     President Bush has signed legislation that will close a major loophole in federal law against the counterfeiting of consumer goods, giving law enforcement authorities a new tool to fight a crime that is a growing concern for retailers and consumers.

     "Current law contains a loophole literally big enough to drive a truckload of counterfeit goods through," NRF Vice President for Loss Prevention Joseph LaRocca said. "This new law will close that loophole and protect U.S. consumers from counterfeits that can range from cheap imitations of designer apparel to unsafe formula that threatens the health of infants."

     "Counterfeit goods have infiltrated every part of our country, just like organized retail crime," LaRocca said. "Counterfeiting costs America hundreds of billions of dollars and has harmful effects throughout the economy. Fake products aren't just a rip-off for consumers who've paid hard-earned money for what they think is a brand-name product. They also expose consumers to serious health and safety risks in products as diverse as infant formula, toiletries, auto parts and power tools. Furthermore, many of these goods are sold on street corners or eFenced through Internet auction sites, depriving government of the tax revenues needed for law enforcement. The Stop Counterfeiting in Manufactured Goods Act gives us a powerful new tool to bring counterfeiting to an end."

     President Bush on March 16 signed H.R. 32, the Stop Counterfeiting in Manufactured Goods Act, sponsored by Representative Joe Knollenberg, R-Mich. The legislation, which first passed the House last May, won final passage this month after the House agreed to an amendment passed in the Senate in February.

     Under current law, it is illegal to manufacture, ship or sell counterfeit products. The manufacture and distribution of counterfeit labels and packaging intended to accompany counterfeit products, however, is legal as long as the labels haven't been attached to the bogus products. The new law closes that loophole, making it illegal to traffic in counterfeit labels, patches, stickers, hangtags and similar items regardless of whether they have been attached to products. Counterfeit labeling materials that are seized could be required to be destroyed, and equipment used to make them would be forfeited, along with assets derived from counterfeiting. Those convicted would be required to make restitution to the owners of the trademarks involved.

     "This loophole helped counterfeiters cheat consumers by passing off poorly made items as brand-name goods," Bush said during a signing ceremony at the White House. "By closing the loophole, we're going to keep honest Americans from losing business to scam artists."

     Enactment of the bill comes at a time when unauthorized imitations of apparel, handbags, accessories and other general retail merchandise are costing U.S. companies an increasing amount in lost sales each year. The FBI has estimated losses due to counterfeit goods at $250 billion annually.

     Bush said law enforcement authorities last year dismantled a piracy ring in Massachusetts that planned to sell more than 30,000 counterfeit handbags, shoes, necklaces and other items. Other enforcement efforts have blocked the sale of counterfeit software, computer games, movies, music CDs and prescription medicine.

     For more information, contact NRF Vice President for Loss Prevention Joseph LaRocca or Senior Director and Government Relations Counsel Elizabeth Treanor Oesterle at (202) 783-7971.

Congressional Outlook:

House: Returns 2 p.m., Monday, April 3.

Senate: Returns 2 p.m., Monday, April 3.

NRF Events:

• April 11, Retail Education Event with Representative Mark Kennedy, Woodbury, Minn.
• April 21, Retail Education Event with House Republican Conference Chairwoman Deborah Pryce, Columbus, Ohio.
• April 26-28, Committee on Employment Law, Longboat Key, Fla.

    
For information on NRF events, contact Eileen Pryor at (202) 626-8114 or pryore@nrf.com.

     Washington Retail Insight is published each week that Congress is in session by the National Retail Federation, 325 7th St. NW, Washington, D.C. 20004.

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