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104th Congress                                                   Report
                        HOUSE OF REPRESENTATIVES

 2d Session                                                     104-495
_______________________________________________________________________


 
    EXTENSION OF FREE TRADE BENEFITS TO THE WEST BANK AND GAZA STRIP

                                _______


 March 25, 1996.--Committed to the Committee of the Whole House on the 
              State of the Union and ordered to be printed

_______________________________________________________________________


    Mr. Archer, from the Committee on Ways and Means, submitted the 
                               following

                              R E P O R T

                        [To accompany H.R. 3074]

      [Including cost estimate of the Congressional Budget Office]

    The Committee on Ways and Means, to whom was referred the 
bill (H.R. 3074) to amend the United States-Israel Free Trade 
Area Implementation Act of 1985 to provide the President with 
additional proclamation authority with respect to articles of 
the West Bank or Gaza Strip or a qualifying industrial zone, 
having considered the same, report favorably thereon without 
amendment and recommend that the bill do pass.

                            I. Introduction

                        a. purposes and summary

    H.R. 3074 would provide the President proclamation 
authority to modify or eliminate tariffs on products from the 
West Bank and Gaza Strip and qualifying industrial zones.

                 b. background and need for legislation

    On April 25, 1985, the United States and Israel signed the 
U.S./Israel Free Trade Agreement. The Agreement was implemented 
into U.S. law on June 11, 1985. The main element of the 
Agreement is the reciprocal elimination of tariffs on all 
products traded between the two countries on January 1, 1995 
and the elimination of other restrictive regulations of 
commerce on bilateral trade as provided under Article XXIV of 
the GATT 1994 for free trade areas. Duties were eliminated by 
both countries over ten years in four staging categories 
depending on the level of import sensitivity of articles for 
domestic producers. Duties on certain products were eliminated 
immediately as of September 1, 1985.
    In an exchange of letters on October 17, 1995, among the 
United States, the Government of Israel, and the Palestinian 
Authority, the U.S. Trade Representative agreed to seek 
statutory authority to proclaim elimination of existing duties 
on articles of the West Bank and Gaza Strip. The Palestinian 
Authority agreed to accord U.S. products duty free access to 
the West Bank and Gaza Strip, to prevent illegal transshipment 
of goods not qualifying for duty free access, and to support 
all efforts to end the Arab economic boycott of Israel.
    Under current U.S. law, tariffs may be modified or 
eliminated in two situations. First, they may be implemented 
into law by Congress. Second, the President may proclaim 
modifications or eliminations of tariffs pursuant to a grant of 
proclamation authority by the Congress. Specifically, Congress 
has periodically delegated authority to the President to 
negotiate and proclaim reductions in tariffs under reciprocal 
trade agreement, subject to specific conditions and 
limitations, without requiring further Congressional action. 
The most recent grant of such authority was contained in 
section 1102(a) of the Omnibus Trade and Competitiveness Act of 
1988. That provision, however, has expired. Accordingly, in 
order to implement the terms of the October 17, 1995, exchange 
of letters, new proclamation authority is required.

                         c. legislative history

    H.R. 3074 was introduced on March 13, 1996 by Chairman 
Crane, on behalf of himself, Mr. Shaw, and Mr. Rangel. The bill 
was referred to the Committee on Ways and Means.
    On March 14, 1996, the Committee on Ways and Means met to 
consider H.R. 3074. The Committee ordered the bill favorably 
reported, without amendment, by voice vote.

II. Section-by-Section Summary of H.R. 3074 and Comparison With Present 
                                  Law

              section 1: additional proclamation authority

Present law

    The United States-Israel Free Trade Area Implementation Act 
of 1985 (19 U.S.C. 2112 note) eliminates tariffs on all 
products traded between the United States and Israel on January 
1, 1995 that meet the rule of origin requirements under the 
Agreement. The statute, however, does not apply to products 
from the West Bank or Gaza Strip. The President's authority to 
proclaim further tariff modifications or eliminations has 
expired.

Explanation of provision

    Section 1 would amend the United States-Israel Free Trade 
Area Implementation Act of 1985 by adding a new section 9. 
Section 9 would provide the President proclamation authority to 
modify tariffs on products from the West Bank, Gaza Strip and 
qualifying industrial zones. The provision would apply to areas 
designated as industrial parks between the Gaza Strip and 
Israel and between the West Bank and Israel. The effect of the 
provision is to offer to goods from the West Bank, Gaza Strip, 
and qualifying industrial zones (located between Israel and 
Jordan or Israel and Egypt) the same tariff treatment as is 
offered to Israel under the U.S./Israel Free Trade Agreement. 
The legislation applies the same rule of origin requirements as 
to products from the West Bank, Gaza Strip, and qualifying 
industrial zones as are already applicable to products from 
Israel.

Reason for change

    The Committee believes that granting duty free treatment 
for goods produced in these zones is important to the peace 
process, will increase employment, and will stimulate the 
economy of the region. The Committee intends, assuming the 
President takes advantage of the proclamation authority 
provided by the legislation, that the Administration will apply 
to products from the West Bank, Gaza Strip, and qualifying 
industrial zones the identical rules of origin that it applies 
to goods from Israel. Moreover, it is the Committee's 
understanding that the Administration intends to apply the 
proclamation authority to all eligible products from these 
areas. The President could terminate the grant of duty free 
treatment if changed circumstances warranted such action in the 
future.

            III. Vote on the Committee in Reporting the Bill

    In compliance with clause 2(l)(2)(B) of rule XI of the 
Rules of the House of Representatives, the following statements 
are made relative to the votes of the Committee in its 
consideration of the bill, H.R. 3074.

                       motion to report the bill

    The bill, H.R. 3074, was ordered favorably reported without 
amendment by voice vote, with a quorum present.

IV. Budgetary Authority and Cost Estimates, Including Estimates of the 
                      Congressional Budget Office

               a. committee estimate of budgetary effect

    In compliance with clause 7(a) of rule XIII of the Rules of 
the House of Representatives, the following statement is made:
    The Committee agrees with the estimate prepared by the 
Congressional Budget Office (CBO) which is included below.

    b. statement regarding new budget authroity and tax expenditures

    In compliance with clause 2(l)(3)(B) of rule XI of the 
Rules of the House of Representatives, the Committee states 
that the bill does not provide new budget, spending, or credit 
authority. The bill may result in a decrease in tariff revenues 
but would have no effect on tax revenues.

      C. COST ESTIMATE PREPARED BY THE CONGRESSIONAL BUDGET OFFICE

    Pursuant to clause 2(l)(3)(C) of rule XI of the Rules of 
the House of Representatives requiring a cost estimate prepared 
by the Congressional Budget Office, the following report 
prepared by CBO is provided.
                                     U.S. Congress,
                               Congressional Budget Office,
                                    Washington, DC, March 15, 1996.
Hon. Bill Archer,
Chairman on Ways and Means,
House of Representatives, Washington, DC.
    Dear Mr. Chairman: The Congressional Budget Office has 
reviewed H.R. 3074, as ordered reported by the Committee on 
Ways and Means on March 14, 1996. CBO estimates that this bill 
would result in a negligible reduction in governmental 
receipts. Because enacting H.R. 3074 could affect receipts, 
pay-as-you-go procedures would apply to the bill. H.R. 3074 
contains no intergovernmental or private sector mandates as 
defined in Public Law 104-4 and would impose no direct costs on 
state, local, or tribal governments.
    H.R. 3074 would amend the United States-Israel Free Trade 
Area Implementation Act of 1985 to provide the President with 
the authority to eliminate or modify the existing duty on 
articles imported from the West Bank, Gaza Strip, and 
qualifying industrial zones (designated territory of Israel and 
Jordan or Israel and Egypt). CBO believes that the 
Administration intends to utilize the proclamation authority 
established in the bill without further legislation.
    Currently, U.S. Customs collects less than $1,000 annually 
from the West Bank, Gaza Strip, and the qualified industrial 
zones. Therefore, the elimination or modification of such 
duties by Presidential proclamation would lead to a negligible 
reduction in revenues.
    If you wish further details, please feel free to contact me 
or your staff may wish to contact Stephanie Weiner.
            Sincerely,
                                           June E. O'Neill,
                                                          Director.

 V. Other Matters Required To Be Discussed Under the Rules of the House

          A. COMMITTEE OVERSIGHT FINDINGS AND RECOMMENDATIONS

    With respect to subdivision (A) of clause 2(l)(3) of rule 
XI of the Rules of the House of Representatives (relating to 
oversight findings), the Committee advises that it was as a 
result of the Committee's oversight activities concerning 
customs and tariff matters, import trade matters, and specific 
trade-related issues that the Committee concluded that it was 
appropriate to enact the provisions contained in the bill.

    B. SUMMARY OF FINDINGS AND RECOMMENDATIONS OF THE COMMITTEE ON 
                    GOVERNMENT REFORM AND OVERSIGHT

    With respect to subdivision (D) of clause 2(l)(3) of rule 
XI of the Rules of the House of Representatives (relating to 
oversight findings), the Committee advises that no oversight 
findings or recommendations have been submitted to this 
Committee by the Committee on Government Reform and Oversight 
with respect to the provisions contained in this bill.

                    C. INFLATIONARY IMPACT STATEMENT

    In compliance with clause 2(l)(4) of rule XI of the Rules 
of the House of Representatives, the Committee states that the 
provisions of the bill are not expected to have an overall 
inflationary impact on prices and costs in the operation of the 
national economy.

        VI. Changes in Existing Law Made by the Bill as Reported

    In compliance with clause 3 of rule XIII of the Rules of 
the House of Representatives, changes in existing law made by 
the bill, as reported, are shown as follows (new matter is 
printed in italics):

    UNITED STATES-ISRAEL FREE TRADE AREA IMPLEMENTATION ACT OF 1985

          * * * * * * *

SEC. 9. ADDITIONAL PROCLAMATION AUTHORITY.

    (a) Elimination or Modifications of Duties.--The President 
is authorized to proclaim elimination or modification of any 
existing duty as the President determines is necessary to 
exempt any article from duty if--
          (1) that article is wholly the growth, product, or 
        manufacture of the West bank, the Gaza Strip, or a 
        qualifying industrial zone or is a new or different 
        article of commerce that has been grown, produced, or 
        manufactured in the West Bank, the Gaza Strip, or a 
        qualifying industrial zone;
          (2) that article is imported directly from the West 
        Bank, the Gaza Strip, Israel, or a qualifying 
        industrial zone; and
          (3) the sum of--
                  (A) the cost or value of the materials 
                produced in the West Bank, the Gaza Strip, 
                Israel, or a qualifying industrial zone plus
                  (B) the direct costs of processing operations 
                performed in the West Bank, the Gaza Strip, 
                Israel, or a qualifying industrial zone,
        is not less than 35 percent of the appraised value of 
        the product at the time it is entered into the United 
        States.
For purposes of determining the 35 percent content requirement 
contained in paragraph (3), the cost of value of materials 
which are used in the production of an article in the West 
Bank, the Gaza Strip, or a qualifying industrial zone, and are 
the products of the United States, may be counted in an amount 
up to 15 percent of the appraised value of the article.
      (b) Applicability of Certain Provisions of the 
Agreement.--
          (1) Nonqualifying operations.--No article shall be 
        considered a new or different article of commerce under 
        this section, and no material shall be included for 
        purposes of determining the 35 percent requirement of 
        subsection (a)(3), by virtue of having merely 
        undergone--
                  (A) simple combining or packaging operations, 
                or
                  (B) mere dilution with water or with another 
                substance that does not materially alter the 
                characteristics of the article or material.
          (2) Requirement for new or different article of 
        commerce.--For purposes of subsection (a)(1), an 
        article is a ``new or different article of commerce'' 
        if it is substantially transformed into an article 
        having a new name, character, or use.
          (3) Cost or value of materials.--(A) For purposes of 
        this section, the cost or value of materials produced 
        in the West Bank, the Gaza Strip, or a qualifying 
        industrial zone includes--
                  (i) the manufacturer's actual cost for the 
                materials;
                  (ii) when not included in the manufacturer's 
                actual cost for the materials, the freight, 
                insurance, packing, and all other costs 
                incurred in transporting the materials to the 
                manufacturer's plant;
                  (iii) the actual cost of waste or spoilage, 
                less the value of recoverable scrap; and
                  (iv) taxes or duties imposed on the materials 
                by the West Bank, the Gaza Strip, or a 
                qualifying industrial zone, if such taxes or 
                duties are not remitted on exportation.
          (B) If a material is provided to the manufacturer 
        without charge, or at less than fair market value, its 
        cost or value shall be determined by computing the sum 
        of--
                  (i) all expenses incurred in the growth, 
                production, or manufacture of the material, 
                including general expenses;
                  (ii) an amount for profit; and
                  (iii) freight, insurance, packaging, and all 
                other costs incurred in transporting the 
                material to the manufacturer's plant.
        If the information necessary to compute the cost or 
        value of a material is not available, the Customs 
        Service may ascertain or estimate the value thereof 
        using all reasonable methods.
          (4) Direct costs of processing operations.--(A) For 
        purposes of this section, the ``direct costs of 
        processing operations performed in the West Bank, the 
        Gaza Strip, or a qualifying industrial zone'' with 
        respect to an article are those costs either directly 
        incurred in, or which can be reasonably allocated to, 
        the growth, production, manufacture, or assembly, of 
        that article. Such costs include, but are not limited 
        to, the following to the extent that they are 
        includible in the appraised value of articles imported 
        into the United States:
                  (i) All actual labor costs involved in the 
                growth, production, manufacture, or assembly of 
                the article, including fringe benefits, on-the-
                job training, and costs of engineering, 
                supervisory, quality control, and similar 
                personnel.
                  (ii) Dies, molds, tooling, and depreciation 
                on machinery and equipment which are allocable 
                to the article.
                  (iii) Research, development, design, 
                engineering, and blueprint costs insofar as 
                they are allocable to the article.
                  (iv) Costs of inspecting and testing the 
                article.
          (B) Those items that are not included as direct costs 
        of processing operations with respect to an article are 
        those which are not directly attributable to the 
        article or are not costs of manufacturing the article. 
        Such items include, but are not limited to--
                  (i) profit; and
                  (ii) general expenses of doing business which 
                are either not allocable to the article or are 
                not related to the growth, production, 
                manufacture, or assembly of the article, such 
                as administrative salaries, casualty and 
                liability insurance, advertising, and 
                salesmen's salaries, commissions, or expenses.
          (5) Imported directly.--For purposes of this 
        section--
                  (A) articles are ``imported directly'' if--
                          (i) the articles are shipped directly 
                        from the West Bank, the Gaza Strip, a 
                        qualifying industrial zone, or Israel 
                        into the United States without passing 
                        through the territory of any 
                        intermediate country; or
                          (ii) if shipment is through the 
                        territory of an intermediate country, 
                        the articles in the shipment do not 
                        enter into the commerce of any 
                        intermediate country and the invoices, 
                        bills of lading, and other shipping 
                        documents specify the United States as 
                        the final destination; or
                  (B) if articles are shipped through an 
                intermediate country and the invoices and other 
                documents do not specify the United States as 
                the final destination, then the articles in the 
                shipment, upon arrival in the United States, 
                are imported directly only if they--
                          (i) remain under the control of the 
                        customs authority in an intermediate 
                        country;
                          (ii) do not enter into the commerce 
                        of an intermediate country except for 
                        the purpose of a sale other than at 
                        retail, but only if the articles are 
                        imported as a result of the original 
                        commercial transactions between the 
                        importer and the producer or the 
                        producer's sales agent; and
                          (iii) have not been subjected to 
                        operations other than loading, 
                        unloading, or other activities 
                        necessary to preserve the article in 
                        good condition.
          (6) Documentation required.--An article is eligible 
        for the duty exemption under this section only if--
                  (A) the importer certifies that the article 
                meets the conditions for the duty exemption; 
                and
                  (B) when requested by the Customs Service, 
                the importer, manufacturer, or exporter submits 
                a declaration setting forth, all pertinent 
                information with respect to the article, 
                including the following:
                          (i) A description of the article, 
                        quantity, numbers, and marks of 
                        packages, invoice numbers, and bills of 
                        lading.
                          (ii) A description of the operations 
                        performed in the production of the 
                        article in the West Bank, the Gaza 
                        Strip, a qualifying industrial zone, or 
                        Israel and identification of the direct 
                        costs of processing operations.
                          (iii) A description of any materials 
                        used in production of the article which 
                        are wholly the growth, product, or 
                        manufacture of the West Bank, the Gaza 
                        Strip, an qualifying industrial zone, 
                        Israel or United States, and a 
                        statement as to the cost or value of 
                        such materials.
                          (iv) A description of the operations 
                        performed on, and a statement as to the 
                        origin and cost of value of, any 
                        foreign materials used in the article 
                        which are claimed to have been 
                        sufficiently processed in the West 
                        Bank, the Gaza Strip, a qualifying 
                        industrial zone, or Israel so as to be 
                        materials produced in the West Bank, 
                        the Gaza Strip, a qualifying industrial 
                        zone, or Israel.
                          (v) A description of the origin and 
                        cost or value of any foreign materials 
                        used in the article which have not been 
                        substantially transformed in the West 
                        Bank, the Gaza Strip, or a qualifying 
                        industrial zone.
    (c) Shipment of Articles of Israel Through West Bank or 
Gaza Strip.--The President is authorized to proclaim that 
articles of Israel may be treated as though they were articles 
directly shipped from Israel for the purposes of the Agreement 
even if shipped to the United States from the West Bank, the 
Gaza Strip, or a qualifying industrial zone, if the articles 
otherwise meet the requirements of the Agreement.
    (d) Treatment of Cost or Value of Materials.--The President 
is authorized to proclaim that the cost or value of materials 
produced in the West Bank, the Gaza Strip, or a qualifying 
industrial zone may be included in the cost of value of 
materials produced in Israel under section 1(c)(i) of Annex 3 
of the Agreement, and the direct costs of processing operations 
performed in the West Bank, the Gaza Strip, or a qualifying 
industrial zone may be included in the direct costs of 
processing industrial zone may be included in the direct costs 
of processing operations performed in Israel under section 
1(c)(ii) of Annex 3 of the Agreement.
    (e) Qualifying Industrial Zone Defined.--For purposes of 
this section, a ``qualifying industrial zone'' means any area 
that--
          (1) encompasses portions of the territory of Israel 
        and Jordan or Israel and Egypt;
          (2) has been designated by local authorities as an 
        enclave where merchandise may enter without payment of 
        duty or excuse taxes; and
          (3) has been specified by the President as a 
        qualifying industrial zone.