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Letter from Sir Leon Brittan to U.S. Trade Representative Charlene Barshefsky on the Administration’s Harbor Service Fund proposal

Brussels, 20 August, 1999

Dear Charlene,

On 29 March 1999, you wrote to me announcing a draft Bill by the Administration proposing a Harbor Services Fee (HSF). On 7 May 1999, the Commission received a copy of this draft legislation from your services. Since then, the Commission has been analysing and discussing the proposal and its implications internally, with EC Member States and with EC industries affected. We have also compared the proposal with the criteria for reform I had set out in annex to my letter of 19 June 1998, when I declared my willingness not to proceed with further WTO action against the Harbour Maintenance Tax (HMT) on condition that satisfactory reform were adopted before 1 January 2000.

While I sincerely appreciate your efforts to resolve the WTO problems of the HMT, the proposal the Administration has made to replace the HMT with a new fee is far from satisfactory. It fails to meet several of the criteria I had mentioned. The new fee would not be a true user fee, but a tax. This tax would directly and significantly affect the profit and loss account of EC shipping lines, which will be asked to bear a disproportionate burden to finance activities that benefit the entire US economy. EC goods will continue to be negatively affected. The WTO legal difficulties encountered with the HMT would not therefore be resolved by the HSF. You will find our specific comments annexed to this letter. These comments show clearly the reasons for the EC’s dissatisfaction with the Administration’s current proposal.

The HSF will therefore have to be treated as a priority item for discussion in the TEP framework. The EC stands ready to work intensively with the Administration in this framework in an effort to resolve the significant problems we see in the HSF, as currently drafted. I hope the Administration will be open to take the EC concerns into account and modify the proposal in an appropriate manner. We reserve the EC’s position as to the WTO compatibility of any reform based on the current proposal and the actions the EC would take in its respect.

The serious problems we see in the HSF mean that in our view this proposal should not be adopted. Neither the US nor the EC has an interest in the adoption of legislation that would fail to meet your own declared objectives of creating a true user fee and of respecting US WTO obligations.

This does not, however, mean that we could accept that the HMT remain operative on imports for an indefinite period of time. That is an entirely different matter. In my letter of 29 June 1998 I requested that the levying of HMT on imports be suspended immediately. Port operation and maintenance in the US could, as in the past, be financed from general revenues. They could be financed for at least another two years from the existing surplus, while better proposals for reform are considered. What is not acceptable for the EC is that at present, imports alone pay for the entire operation and maintenance of US ports, to the tune of $500 million per year. Of this amount, imports from the EC are charged around $100 million per year. US exports pay nothing. Collections on US domestic shipments amount to around $45 million only. This discriminatory application of a fee that is not justified in the first place simply cannot continue. Therefore, should the HMT continue to be levied on imports after 1 January 2000, the Community intends to initiate WTO panel action against the HMT.

Leon Brittan

19 August 1999

EC comments on Harbor Services Fee (HSF)

1. The Administration proposes that in addition to port operation and maintenance, the new fee should also cover new port development. Previously, such activity had been funded out of the general budget. Sir Leon’s letter of 29 June 1998 had put as one of the conditions for refraining from further WTO action that "Expenses should be limited to port maintenance and operation, no new activities should be funded from the HMT". This condition would clearly not be met.

2. The more general point here is that the US seems to be extending the concept of "user fee" far beyond the narrow scope fees and charges we are exceptionally allowed to have in exchange for true individual "services" in the GATT/WTO meaning.

3. Linked to this is the fact that the proposal would charge a small group of economic operators (shipping lines) for activities that really benefit the entire US economy and that used to be financed from the government’s general revenues.

4. Most of the exemptions that currently exist for US domestic interests would be maintained in the HSF. Reference is made to the fact that the fee would not apply to trade between the US mainland and Alaska, Hawaii, or any possession of the US, nor to fishing vessels, government vessels, ferries, recreational vessels, or vessels of less than 3,000 tonnes. These are essentially US ships carrying US goods and persons. Their exclusion means that the fee is disproportionately higher on those types of "commercial" vessels that will be charged for the total amount of expenses made. One of the criteria in Sir Leon’s letter of 29 June 1998 was that "Exemptions should be eliminated".

5. The fee is also not a true "user fee" because it is not directly related to the cost of any individual service offered. Vessels would be required to pay for using deep water harbors that do not require any dredging or new port development.

6. The structure of the fee punishes container vessels, which face fees that are up to 25 times higher than the fees on other types of vessels. This creates a de facto discrimination against container vessels and the cargo they carry. Imports use a higher proportion of container vessels than domestic shipping and exports. This again shows that the "fee" is effectively a tax, and one that hits EC shipping lines and EC imports particularly hard, rather than a true user fee. One of the criteria in Sir Leon’s letter of 29 June 1998 was that the fee should be based on an "objective, non-value criterion". There is no valid objective reason why container vessels should pay 25 times more than other types of vessels. By taxing containers carrying high value items much more heavily than low-value bulk, the proposed fee would simply re-introduce, through the back door, the ad valorem structure of the HMT.

7. All of the above points lead to the inescapable conclusion that the HSF is not a true user fee, but a tax on EC shipping lines and EC imports of goods. The WTO legal difficulties encountered with the HMT are therefore not being resolved with the HSF.