its Government. Granting duty-free treatment to rum would have a devastating impact on one of the Virgin Islands' most significant industries and sources of governmental revenue and would be contrary to the historical and legal covenants between the Virgin Islands and the United States. Congress has, in the past, refused to abandon those covenants and, in particular, the interests of the domestic rum industry. Because of the current weakened fiscal state of the Virgin Islands Government, the case against including rum in WTO tariff reduction negotiations is even more compelling today. For the reasons set forth above, Congress should strongly urge that the United States preserve the careful compromise embodied in the 1997 U.S.EU rum accord and exclude rum from any future WTO tariff reduction negotiations.

Joint Statements of The Government of the U.S. Virgin Islands and the Virgin Islands Watch Producers

INTRODUCTION

The Government of the U.S. Virgin Islands (the "GVI") and Belair Watch Corporation, Hampden Watch Company, Inc., Progress Watch Co., Unitime Industries, Inc. and Tropex, Inc. (the "V.I. Watch Producers) hereby jointly file this written submission in opposition to any reduction in duties on watches and watch parts in conjunction with the upcoming World Trade Organization (“WTO”) Seattle ministerial meeting or any other future tariff negotiations scheduled under the auspices of the WTO. The watch industry is the largest light manufacturing industry in the U.S. Virgin Islands and remains one of the most important sources of private sector employment in the Territory. The GVI, which has a mandate to protect the fragile manufacturing base of the U.S. Virgin Islands, and the V.I. Watch Producers, which represent a substantial majority of the U.S. insular watch industry, strongly oppose any reduction in current tariff levels for imported watches and watch parts without enactment of new compensatory legislation to maintain the present balance of competitive advantages enjoyed by the V.I. Watch Producers and conferred by Congress.

Congress has consistently demonstrated its special concern for the health and survival of the Virgin Islands and domestic watch industries over the last quarter of a century. Since 1988, for example, Congress has recognized the import-sensitivity of watches by imposing a strenuous test before watches can even be considered for special tariff preferences under the Generalized System of Preferences ("GSP”): under the Omnibus Trade and Competitiveness Act of 1988, watches are deemed import-sensitive and thus ineligible for GSP preference unless the President first makes an affirmative determination that such preferences would not cause "material injury" to either the U.S. domestic or the U.S. insular watch industries. In numerous attempts over the last decade, a single foreign-owned company has petitioned for duty-free treatment of its foreign-produced watches but has repeatedly failed to meet the high burden imposed by this Congressionally established test. The administrative reviews triggered by these petitions, together with more recent trade data, conclusively demonstrate that the U.S. and insular watch industries operate in an increasingly competitive environment and are extremely vulnerable to tariff reductions and import penetration.

For reasons explained more fully below, the reduction or elimination of tariffs on watches and watch parts would have severe economic effects on the Virgin Islands watch industry-an industry which has merited special congressional concern. Accordingly, the United States must oppose any effort to reduce or eliminate these tariffs, unless Congress first enacts compensatory legislation to maintain the present delicate competitive balance on which the Virgin Islands watch industry depends for its survival. Elimination of duties on watches, in the absence of such compensatory legislation, would only accelerate the trend of global watch producers to move watch assembly and manufacturing operations to low-cost countries and to take advantage of significant duty savings now denied under GSP.

DISCUSSION

Watches have long and consistently been determined to be import sensitive by the Congress and the USTR. Indeed, much of the domestic production of watches has moved off-shore in search of low-cost labor and other competitive advantages, even as imports of foreign-produced watches have continued to increase at double digit rates. Any effort to eliminate or reduce duties on watches and watch parts, in the context of forthcoming WTO tariff negotiations, would only accelerate these trends at the inevitable expense of the remaining U.S. and insular watch industries.

Even if such reductions were to occur in the context of a zero-for-zero agreement, the duty-savings would necessarily and disproportionately favor foreign producers to the competitive disadvantage of domestic and insular producers. In fact, trade data suggests that total U.S. and insular watch exports equal less than five percent of total U.S. imports of foreign-produced watches. Moreover, because existing production incentive programs tie Virgin Islands watch production to the U.S. market, V.I. producers would have little opportunity to avail themselves of any reductions in foreign tariffs. Thus, the value of duty savings for foreign producers resulting from any such agreement would far outweigh any benefit to U.S. and insular producers, while increasing the competitive pressures that threaten further erosion of the U.S. market share of domestic producers and their ultimate survival. Accordingly, the GVI and the V.I. Watch Producers strongly urge that Congress and the Administration affirm existing U.S.-trade policy by opposing any reductions in duties on watches and watch parts during forthcoming WTO tariff negotiations.

A. Congress and the USTR Have Previously Determined that the U.S. and Insular Watch Industries Are Import-Sensitive and Require Special Protections

The Trade Act of 1974, Pub. L. No. 93-618, 88 Stat. 1978 (Jan. 3, 1975), included watches in the list of import-sensitive products statutorily ineligible for duty-free treatment under GSP. Beginning with the Omnibus Trade and Competitiveness Act of 1988, Pub. L. No. 100418, 102 Stat. 1107 (Aug. 23, 1988)-which amended the 1974 statute pursuant to a legislative compromise negotiated by the American Watch Association ("AWA"), Timex Corporation ("Timex") and others-watches may now be considered for GSP duty-free treatment in limited circumstances but are subject to special procedural requirements designed to prevent harm to the domestic and U.S. insular watch industries. In particular, current law limits GSP treatment only to those categories of watches "the President specifically determines, after public notice and comment, will not cause material injury to watch or watchband, strap, or bracelet manufacturing and assembly operations in the United States or the United States insular possessions." 19 U.S.C. § 2464 (emphasis added). The clear presumption of this statutory scheme is that watches will remain on the list of ineligible articles unless a petitioner has first proved the negative, i.e., GSP treatment would not result in material injury to the USVI or U.S. industries.1

Congress' presumption that watches will remain on the statutory list of ineligible articles may be defeated only by a clear preponderance of the evidence, tested in the course of a comprehensive administrative proceeding, that duty-free treatment will not result in material injury to either the domestic or the insular watch industries. To assist in constructing the fullest possible record in compliance with its legislative mandate, the USTR has required that, in any administrative review, the International Trade Commission should provide more comprehensive analysis than the "probable economic effects" advice it normally dispenses in ordinary GSP cases.2 Specifically, USTR has requested in past GSP watch investigations that the Commission should analyze-in addition to standard GSP criteria-the probable effects of duty-free treatment on USVI and U.S. watch and watch band companies with respect to such relevant factors as annual production, capacity, capacity utilization, domestic shipments, exports, inventories, employment, wages and financial experi

ence.

In short, in making any material injury recommendation to the President based on the fullest possible record with respect to any GSP watch petition, the USTR and Commission must analyze and weigh all of the factors regularly considered by the ITC in injury investigations conducted pursuant to Title VII of the Trade Agreements Act of 1979, as amended. Unless the record clearly demonstrates that GSP treatment for watches will not result in adverse effects with respect to these enumerated factors, Congress has expressly prescribed that GSP treatment must be denied. The GVI and the V.I. Watch Producers respectfully submit that the USTR must not vitiate the clear congressional construct for GSP treatment of watches by agreeing to support duty reductions on a Most Favored Nation ("MFN") basis without comprehensive analysis by the Commission of probable economic effects of such reductions and the same material injury determinations that are required under the GSP statute.

1 The presumption in favor of current dutiable treatment is further reinforced by the legislative history of the 1988 statute. As instructed by the Senate Finance Committee Report, “watches [will] remain ineligible for GSP except those watches...that, if given preferential treatment, would not cause material injury to watch or watch band. .manufacturing and assembly operations in the U.S. or the U.S. insular possessions." S. Rep. No. 71, 100th Cong., 1st Sess. 238 (1987) (emphasis added).

2 See,e.g., 61 Fed. Reg. 54677 (Oct. 21, 1996).

In weighing the impact of duty reductions on watches, in the context of future WTO negotiations, Commission and the USTR should also remain mindful of other expressions of Congressional intent regarding the U.S. insular watch industry. The General Note 3(a) program set forth in the Harmonized Tariff Schedule, and related production incentives of the U.S. and USVI governments, were designed to rehabilitate and promote the watch industry in the U.S. insular possessions. These incentives are working, but would be completely undermined by watch duty reductions on an MFN or GSP basis. As testimony in earlier watch investigations has made clear, the General Note 3(a) tariff incentive for the insular industry is dependent on its differential or relative advantage, i.e., it is completely vitiated by extending similar tariff treatment on an MFN, GSP or other regional basis. The related production incentive program minimizes, but does not overcome, the labor cost advantages presently held by producers in low wage countries. Because the potential duty savings may be many times as great as the existing labor cost advantages, duty reductions under the auspices of the WTO would totally undermine the purpose of the Congressionally-sanctioned insular watch production incentives program.

B. The United States Has Consistently Denied the Petitions of Foreign Producers for Tariff Reductions Under the Generalized System of Preferences

In 1988-on the very day of the enactment of the 1988 law-a single foreignowned producer with substantial manufacturing operations in the Philippines filed a petition requesting duty-free treatment under GSP for all watches. This petition resulted in one of the most thorough investigations in the history of the GSP program and certainly one of the most comprehensive investigations of the worldwide watch industry. Interested parties submitted for the record voluminous studies, economic analyses and numerous briefs to guide the President in his decision. In addition, the Commission prepared a comprehensive report on the probable economic effects of duty-free treatment on manufacturing and assembly operations in the United States and its insular possessions.3 This unprecedented investigation culminated with the November 1989 decision by the President to deny duty-free treatment to a substantial majority of watch tariff categories, including all quartz watches and most categories of mechanical watches.4 The President specifically rejected GSP treatment as to these watch categories "because of the potential for material injury to watch producers located in the United States and the Virgin Islands."5

In June 1991, the same foreign producer filed a petition for the inclusion of several categories of watches, previously rejected, to the list of GSP eligible articles. After challenge by the GVI, the V.I. Watch Producers and the AWA, the foreign producer withdrew its petition.

In June 1993, the company again petitioned for GSP treatment for a limited number of specific categories of watches. The USTR again rejected the petition for review on grounds that it failed to provide any new information on changed circumstances or to rebut the reasons why the President first rejected GSP treatment for the watches at issue in the President's 1989 decision. The petitioner also failed to demonstrate that the circumstances of the domestic or U.S. insular watch industry had improved or were better able to withstand foreign imports. Later, in 1996, Congress rejected an attempt by the same company to eliminate the material injury test in the GSP statute. And finally, in 1997, the USTR excluded, after extended review, watches_and_watch_parts from the expanded list of eligible GSP articles reserved for Less-Developed Countries (“LDC”).

This procedural and legislative history amply demonstrates that, despite substantial lobbying by a single foreign-owned producer, Congress, the USTR and the Commission have consistently concluded, after comprehensive investigation and administrative review, that the grant of duty-free treatment for watches-even on a limited GSP basis-poses a special and unacceptable risk to the U.S. domestic and insular watch industries. The GVI and the V.I. Watch Producers are unaware of any data trends to support the conclusion that the U.S. or insular watch industries are better today able to withstand foreign competition than they were during the most recent administrative reviews triggered by the various GSP petitions.

3 See Probable Economic Effects of Providing Duty-Free Treatment for Watches Under the Generalized System of Preferences (USITC Publication 2181, April 1989).

4 The President specifically rejected GSP treatment for 40 watch categories, while granting duty-free treatment to fourteen watch classifications. These latter classifications include liquid crystal display and mechanical watches at the very low end of the price range and jeweled pieces at the very high end of the price range. This determination was premised on the understanding that the domestic and insular watch industry does not compete with digital or mechanical watches at the two extremes of the price range. See Proclamation 6058 of October 31, 1989 (To Amend the Generalized System of Preferences), 54 Fed. Reg. 46,348 (Nov. 2, 1989).

5 White House Press Release of November 1, 1989.

C. Just as the Virgin Islands Watch Industry Could Not Survive Increased Competition under GSP, It is Axiomatic that the Insular Industry Could Not Survive the Extension of Duty-Free Treatment on an MFN Basis

If the Virgin Islands watch industry could not withstand increased competition from developing countries under the limitations and protections of the GSP program, it is manifestly clear that it could not withstand more broad-based competition from imports provided duty-free treatment on an MFN basis. Indeed, the overwhelming majority of U.S. watch imports over the last 10 years have been from nonGSP eligible countries, including such highly developed countries as Hong Kong, China, Japan and Switzerland.

Of the approximately 200 million watches imported into the United States in 1988, for example, Hong Kong supplied over 100 million units, China supplied 41 million units and Japan supplied over 27 million units. Insular producers in the Virgin Islands, on the other hand, shipped less than 3 million units to the United States that same year. Because Virgin Islands watch shipments to the United States have continued to decline in recent years, it would take only a slight increase in import penetration to completely overwhelm the U.S. insular industry.

Indeed, publicly available data demonstrate the decline in the health and competitiveness of the Virgin Islands watch industry since Congress established the special material injury test in 1988 and the President rejected GSP treatment for most watches in 1989. Since 1988, the USVI and its watch industry have been battered by three devastating hurricanes. Between 1988 and 1995, the number of watches shipped from the Virgin Islands to the United States for domestic consumption steadily declined from 3.44 million units in 1988 to approximately 805,000 units in 1998-a reduction of more than 75 percent. During the same period, the value of such shipments declined from approximately $36 million to less than $10 million. This sharp decline in sales has resulted in more than a 50 percent reduction in employment in the Virgin Islands watch industry from a high of 660 workers in 1988 to under 300 workers in 1998. In addition, during this ten year period, the number of Virgin Islands watch producers has dropped from seven to five.

Notwithstanding this decline, in a small economy like the USVI, 300 high-wage, high-skill jobs provided by the V.I. Watch Producers-and the many other jobs indirectly supported by their operations-continue to be critical to the manufacturing sector and the overall health of the USVI economy. Indeed, the V.I. watch industry remains the largest light manufacturing industry in this U.S. possession. Moreover, when Congress recently reauthorized the GSP program, it specifically continued the special material injury test for watch producers in the U.S. insular possessions, clearly demonstrating its continuing concern for the special role of watch production in the USVI. Under these circumstances, it is incomprehensible that the Administration should be permitted to sanction the death knell of this important Virgin Islands industry by broadly extending, on an MFN or basis, trade benefits which it has consistently denied under the substantial limitations of the GSP program.

CONCLUSION

The GVI and the V.I. Watch Producers note with approval the concern expressed by the American Watch Association for the import sensitivity of the Virgin Islands industry and its support for compensatory measures in the event of future tariff reductions. However, unless and until compensatory legislation, designed to maintain the present competitive balance, is firmly in place, the Government of the U.S. Virgin Islands and the V.I. Watch Producers must respectfully request, for all the reasons noted above, that Congress and the Administration oppose any duty reductions for watches and watch parts in forthcoming WTO tariff negotiations. Any such duty reductions would have severe economic effects for the U.S. insular watch industry. Overwhelming evidence from earlier trade investigations conclusively demonstrates that such reductions would necessarily result in material injury or threat of material injury to the U.S. and the U.S. insular watch industries in contravention of long standing and express Congressional policy.