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                                                       Calendar No. 163
105th Congress                                                   Report
                                 SENATE

 1st Session                                                     105-82
_______________________________________________________________________


 
         CLARIFYING THE DESIGNATION OF NORMAL TRADE RELATIONS

                                _______
                                

               September 15, 1997.--Ordered to be printed

_______________________________________________________________________


    Mr. Roth, from the Committee on Finance, submitted the following

                              R E P O R T

                         [To accompany S. 747]

      [Including cost estimate of the Congressional Budget Office]

    The Committee on Finance, to which was referred the bill 
(S. 747) to amend trade laws and related provisions to clarify 
the designation of normal trade relations, having considered 
the same, reports favorably thereon without amendment and 
recommends that the bill do pass.

                             I. Background

    Since the 18th century, the policy underlying trade 
relations between the United States and other countries has 
rested on the principle of nondiscrimination--i.e., that the 
United States will give equal treatment, in terms of tariff 
rates, etc., to the same product it imports from any other 
country. In return, other countries apply the same tariff 
treatment to products they import from the United States as 
they apply to imports from other countries. More recently, the 
principle has also been extended to areas beyond just trade in 
goods (e.g., trade in services).
    The traditional term for this principle of 
nondiscrimination is ``most-favored-nation,'' or MFN treatment. 
This term is rooted in a very old concept of international law, 
which states that in trade relations, a country will provide 
the same trade treatment under its laws to all countries as it 
provides to the ``most-favored nation.'' \1\
---------------------------------------------------------------------------
    \1\ A comprehensive history of the MFN principle is described in a 
July 1973 report of the Committee on Finance (U.S. Senate Committee on 
Finance, Executive Branch GATT Study No. 9, The Most-Favored-Nation 
Provision, 93d Congress, 1st Session (July 1973)).
---------------------------------------------------------------------------
    Although the term harkens to a hypothetical most-favored 
nation, in fact, MFN status does not provide any special 
position or preferential treatment to other countries. Rather, 
MFN refers to trade treatment that the United States normally 
provides to all but six countries in the world \2\ and denotes 
the ordinary, not the exceptional, trading relationship between 
the United States and the vast majority of other countries.
---------------------------------------------------------------------------
    \2\ As of September 11, 1997, these countries were: Afghanistan; 
Cuba; Laos; North Korea; Vietnam; and Yugoslavia (Serbia and 
Montenegro).
---------------------------------------------------------------------------

                        II. Summary of the Bill

    Section 1(a) of the bill sets out the following four 
Congressional findings:

          1. Since the 18th century, the principle of 
        nondiscrimination among countries with which the United 
        States has trade relations, commonly referred to as 
        ``most-favored-nation'' treatment, has been a 
        cornerstone of U.S. trade policy.
          2. Although the principle remains firmly in place as 
        a fundamental concept in U.S. trade relations, the term 
        ``most-favored-nation'' is a misnomer which has led to 
        public misunderstanding.
          3. It is neither the purpose nor the effect of the 
        most-favored-nation principle to treat any country as 
        ``most favored.'' Rather, the principle reflects the 
        intention to confer the same trade benefits on a 
        country that are conferred on any other country--i.e., 
        that there is no intention to discriminate among 
        trading partners.
          4. The term ``normal trade relations'' is a more 
        accurate description of the principle of 
        nondiscrimination as it applies to the tariffs 
        applicable generally to imports from U.S. trading 
        partners--i.e., the general rates of duty set forth in 
        column 1 of the Harmonized Tariff Schedule of the 
        United States (HTSUS).

Section 1(b) of the bill sets forth a sense of the Congress 
that U.S. laws, treaties, agreements, executive orders, 
directives, and regulations should more accurately reflect the 
underlying principles of U.S. trade policy. Therefore, the term 
``most-favored-nation'' should, where appropriate, be changed 
to ``normal trade relations.''
    Section 2 of the bill amends the following statutory 
provisions to reflect the change of the term ``most-favored-
nation'' to ``normal trade relations'':

          1. The heading for section 251 of the Trade Expansion 
        Act of 1962 (19 U.S.C. 1881);
          2. Section 402 of the Trade Act of 1974 (19 U.S.C. 
        2432);
          3. Section 601(9) of the Trade Act of 1974 (19 U.S.C. 
        2481(9));
          4. Section 302(a)(3)(C) of the United States-Canada 
        Free Trade Agreement Implementation Act of 1988 (19 
        U.S.C. 2112 (note));
          5. Section 202(n) of the North American Free Trade 
        Agreement Implementation Act (19 U.S.C. 3332(n));
          6. Section 2(c)(11) of the Support for East European 
        Democracy (SEED) Act of 1989 (22 U.S.C. 5401(c)(11)); 
        and
          7. Section 103(4) of the United States-Hong Kong 
        Policy Act of 1992 (22 U.S.C. 5713(4)).

    Section 3 of the bill specifies that the Act will have no 
effect on the meaning of any provision of law, Executive order, 
Presidential proclamation, rule, regulation, delegation of 
authority, other document, or treaty or other international 
agreement of the United States relating to the MFN principle, 
which was in effect on or was to become effective on or after 
the effective date of the Act. Rather, all of the foregoing, 
shall continue in effect according to their terms until 
modified, terminated, superseded, set aside, or revoked in 
accordance with law.

                        III. General Explanation

A. Senate Action
    On June 27, 1996, all 20 Members of the Senate Committee on 
Finance cosponsored S. 1918, which, in substance, is identical 
to S. 747. Although S. 1918 passed the Senate on September 10, 
1996, by unanimous consent, the House did not consider the 
legislation before the conclusion of the 104th Congress. This 
legislation was reintroduced as S. 747 in the 105th Congress on 
May 15, 1997, with the cosponsorship of 19 Members of the 
Committee on Finance.
B. Committee Views
    The Committee believes that the term ``most-favored-
nation'' treatment has become a source of confusion in 
describing the principle of nondiscrimination in trade 
relations with other countries and has unnecessarily 
complicated the conduct of American foreign trade policy. MFN 
is, in fact, a misnomer in that it inaccurately implies that 
the United States confers some special trading privilege or 
preferential treatment on countries to which it applies the 
nondiscrimination principle.
    Despite its name, MFN is not a special trading privilege or 
reward, nor is it the most favorable trade treatment that the 
United States gives its trading partners. Rather, MFN refers to 
the normal trade treatment that the United States gives to 
nearly every country in the world. Because there are only six 
countries in the world to which the United States does not give 
MFN status, MFN denotes the ordinary, not the exceptional, 
trading relationship. Furthermore, the United States extends 
better than MFN treatment to 150 countries and territories, 
through the Generalized System of Preferences, the Caribbean 
Basin Initiative, the Andean Trade Preferences Act, the United 
States-Israel Free Trade Agreement, and the North American Free 
Trade Agreement.
    In order to correct the misconception created by the term, 
``most-favored-nation,'' the Committee believes that the term 
should be changed. It is the Committee's view that the term 
``normal trade relations'' more accurately describes the 
principle of nondiscrimination in trade relations and clarifies 
that this principle under U.S. law denotes the ordinary and 
normal, rather than the exceptional, trade relationship that 
the United States has with nearly every country in the world.
    It is not the Committee's intention to alter U.S. 
international rights or obligations by virtue of this 
legislation. MFN is a term with a long history of application 
and interpretation. Therefore, the changes effected by this 
legislation merely modify the language, not the content of U.S. 
trade policy in order to make it more accurate and 
comprehensible.
    Accordingly, the Committee strongly supports enactment of 
S. 747 to change the term ``most-favored-nation'' to ``normal 
trade relations'' in U.S. law and regulation, wherever 
appropriate.

                       IV. Vote of the Committee

    In compliance with section 133 of the Legislative 
Reorganization Act of 1946, the Committee states that S. 747 
was ordered favorably reported unanimously by voice vote on 
September 11, 1997.

                          V. Budgetary Impact

    In compliance with sections 308 and 403 of the 
Congressional Budget Act of 1974, and paragraph 11(a) of Rule 
XXVI of the Standing Rules of the Senate, the following letter 
has been received from the Congressional Budget Office stating 
that the bill would have no budgetary impact:





                         VI. Regulatory Impact

    In compliance with paragraph 11(b) of Rule XXVI of the 
Standing Rules of the Senate, the Committee states that the 
bill will not significantly regulate any individuals or 
businesses, will have no impact on the personal privacy of 
individuals, and will result in no significant additional 
paperwork.

                      VII. Changes in Existing Law

    In compliance with paragraph 12 of Rule XXVI of the 
Standing Rules of the Senate, changes in existing law made by 
the bill, as reported, are shown as follows (existing law 
proposed to be omitted is enclosed in black brackets, new 
matter is printed in italics, existing law in which no change 
is proposed is shown in roman):

                      TRADE EXPANSION ACT OF 1962

          * * * * * * *

                       TITLE II--TRADE AGREEMENTS

          * * * * * * *

                     Chapter 6--General Provisions

          * * * * * * *

SEC. 251. [MOST-FAVORED-NATION PRINCIPLE]  NORMAL TRADE RELATIONS. 

    Except as otherwise provided in this title, in section 
350(b) of the Tariff Act of 1930, or in section 401(a) of the 
Tariff Classification Act of 1962, any duty or other import 
restriction or duty-free treatment proclaimed in carrying out 
any trade agreement under this title or section 350 of the 
Tariff Act of 1930 shall apply to products of all foreign 
countries, whether imported directly or indirectly.
          * * * * * * *

                           TRADE ACT OF 1974

          * * * * * * *

   TITLE IV--TRADE RELATIONS WITH COUNTRIES NOT CURRENTLY RECEIVING 
                      NONDISCRIMINATORY TREATMENT

SEC. 401. EXCEPTION OF THE PRODUCTS OF CERTAIN COUNTRIES OR AREAS.

    Except as otherwise provided in this title, the President 
shall continue to deny nondiscriminatory treatment to the 
products of any country, the products of which were not 
eligible for the rates set forth in rate column numbered 1 of 
the Tariff Schedules of the United States on the date of the 
enactment of this Act.

SEC. 402. FREEDOM OF EMIGRATION IN EAST-WEST TRADE.

    (a) To assure the continued dedication of the United States 
to fundamental human rights, and notwithstanding any other 
provision of law, on or after the date of the enactment of this 
Act products from any nonmarket economy country shall not be 
eligible to receive nondiscriminatory treatment [(most-favored-
nation treatment)] (normal trade relations), such country shall 
not participate in any program of the Government of the United 
States which extends credits or credit guarantees or investment 
guarantees, directly or indirectly, and the President of the 
United States shall not conclude any commercial agreement with 
any such country, during the period beginning with the date on 
which the President determines that such country
          (1) denies in citizens the right or opportunity to 
        emigrate;
          (2) imposes more than a nominal tax on emigration or 
        on the visas or other documents required for 
        emigration, for any purpose or cause whatsoever; or
          (3) imposes more than a nominal tax, levy, fine, fee, 
        or other charge on any citizen as a consequence of the 
        desire of such citizen to emigrate to the country of 
        his choice,
and ending on the date on which the President determines that 
such country is no longer in violation of paragraph (1), (2), 
or (3).
    (b) After the date of the enactment of this Act, (A) 
products of a nonmarket economy country may be eligible to 
receive non-discriminatory treatment [(most-favored-nation 
treatment)] (normal trade relations), (B) such country may 
participate in any program of the Government of the United 
States which extends credits or credit guarantees or investment 
guarantees, and (C) the President may conclude a commercial 
agreement with such country, only after the President has 
submitted to the Congress a report indicating that such country 
is not in violation of paragraph (1), (2), or (3) of subsection 
(a). Such report with respect to such country shall include 
information as to the nature and implementation of emigration 
laws and policies and restrictions or discrimination applied to 
or against persons wishing to emigrate. The report required by 
this subsection shall be submitted initially as provided herein 
and, with current information, on or before each June 30 and 
December 31 thereafter so long as such treatment is received, 
such credits or guarantees are extended, or such agreement is 
in effect.
    (c)(1) During the 18-month period beginning on the date of 
the enactment of this Act, the President is authorized to waive 
by Executive order the application of subsections (a) and (b) 
with respect to any country, if he reports to the Congress 
that--
          * * * * * * *

                      TITLE VI--GENERAL PROVISIONS

SEC. 601. DEFINITIONS.

    For purposes of this Act--
          (1) Me term ``duty'' includes the rate and form of 
        any import duty, including but not limited to tariff-
        rate quotas.
          * * * * * * *

          (9) The term ``nondiscriminatory treatment'' means 
        [most-favored-nation treatment] trade treatment based 
        on normal trade relations (known under international 
        law as most-favored-nation treatment).
          * * * * * * *

               UNITED STATES-CANADA FREE-TRADE AGREEMENT

                       IMPLEMENTATION ACT OF 1988

          * * * * * * *

SEC. 302. RELIEF FROM IMPORTS.

    (a) Relief From Imports of Canadian Articles.--
          (1) A petition requesting action under this section 
        for the purpose of adjusting to the obligations of the 
        United States under the Agreement may be filed with the 
        United--States International Trade Commission 
        (hereafter in this section refereed to as the 
        ``Commission'') by an entity, including a trade 
        association, firm, certified or recognized union, or 
        group of workers, which is representative of an 
        industry. The Commission shall transmit a copy of any 
        petition flied under this paragraph to the United 
        States Trade Representative.  
          * * * * * * *

          (3)(A) By no later than the date that is 30 dew after 
        the date on which the President receives the report of 
        the Commission containing an affirmative determination 
        made by the Commission under paragraph (2)(A), the 
        President shall provide relief from imports of the 
        article originating in Canada that is the subject of 
        such determination to the extent that, and for such 
        time (not to exceed 3 years) as the President 
        determines to be necessary to remedy the injury found 
        by the Commission.
          (B) The President is not required to provide import 
        relief by reason of this paragraph if the President 
        determines that the provision of such import relief is 
        not in the national economic interest.
          (C) The import relief that the President is 
        authorized to provide by reason of this paragraph with 
        respect to an article originating in Canada is limited 
        to--
                  (i) the suspension of any further reductions 
                provided for under the Agreement in the duty 
                imposed on such article originating in Canada,
                  (ii) an increase in the rate of duty imposed 
                on such article originating in Canada to a 
                level that does not exceed the lesser of--
                          (I) [the most-favored-nation rate of 
                        duty] the general subcolumn of the 
                        column rate of duty set forth in the 
                        Harmonized Tariff Schedule of the 
                        United States that is imposed by the 
                        United States on such article from any 
                        other foreign country at the time such 
                        import relief is provided, or
                          (II) [the most-favored-nation rate of 
                        duty] the general subcolumn of the 
                        column rate of duty set forth in the 
                        Harmonized Tariff Schedule of the 
                        United States that is imposed by the 
                        United Sates on such article from any 
                        other foreign country on the day before 
                        the date on which the Agreement enters 
                        into force, or
                  (iii) in the case of a duty applied on a 
                seasonal basis to such article originating in 
                Canada, an increase in the rate of duty imposed 
                on such article originating in Canada to a 
                level Chat does not exceed [the most-favored-
                nation rate of duty] the general subcolumn of 
                the column rate of duty set forth in the 
                Harmonized Tariff Schedule of the United States 
                imposed by the United Sates on such article 
                originating in Canada for the corresponding 
                season immediately prior to the date on which 
                the Agreement enters into force. 
          * * * * * * *

                  NORTH AMERICAN FREE TRADE AGREEMENT

                           IMPLEMENTATION ACT

          * * * * * * *

                      TITLE II--CUSTOMS PROVISIONS

          * * * * * * *

SEC. 202. RULES OF ORIGIN.

    (a) Originating Goods.--
          * * * * * * *

    (n) Origin of Automatic Data Processing Goods.--
Notwithstanding any other provision of this section, when the 
NAFTA countries apply the [most-favored-nation] rate of duty 
described in paragraph 1 of section A of Annex 308.1 of the 
Agreement to a good provided for under the tariff provisions 
set out in Table 308.1.1 of such Annex, the good shall, upon 
importation from a NAFTA country, be deemed to originate in the 
territory of a NAFTA country for purposes of this section.
          * * * * * * *

                  SUPPORT FOR EAST EUROPEAN DEMOCRACY

                           (SEED) ACT OF 1989

          * * * * * * *

SEC. 2. SUPPORT FOR EAST EUROPEAN DEMOCRACY (SEED) PROGRAM.

          * * * * * * *

    (c) SEED Actions.--Assistance and other activities under 
the SEED Program (which may be referred to as ``SEED Actions'') 
shall include activities such as the following:
          * * * * * * *

          (11) [Most Favored Nation Trade Status] Normal Trade 
        Relations.--The granting of temporary or permanent 
        nondiscriminatory treatment [(commonly referred to as 
        ``most favored nation status'')] to the products of an 
        East European country through the application of the 
        criteria and procedures established by section 2432 of 
        Title 19.
          * * * * * * *

               UNITED STATES-HONG KONG POLICY ACT OF 1992

          * * * * * * *

SEC. 103. COMMERCE BETWEEN UNITED STATES AND HONG KONG.

    It is the sense of the Congress that the following, which 
are based id part on the relevant provisions of the Joint 
Declaration, are and should continue after June 30, 1997, to be 
the policy of the United States with respect to commerce 
between the United States and Hong Kong:
          (1) The United States should seek to maintain and 
        expand economic and trade relations with Hong Kong and 
        should continue to treat Hong Kong as a separate 
        territory in economic and trade matters, such as import 
        quotas and certificates of origin.
          * * * * * * *

          (4) The United States should continue to grant the 
        products of Hong Kong nondiscriminatory trade treatment 
        [(commonly referred to as ``most-favored-nation 
        status'')] by virtue of Hong Kong's membership in the 
        General Agreement on Tariffs and Trade.
          * * * * * * *