Statement of Ronald Schoof, Customs and Export Regulation Administrator,
Caterpillar Inc., Peoria, Illinois, and Chairman, Joint Industry Group

Testimony Before the Subcommittee on Trade
of the House Committee on Ways and Means

Hearing on Trade Agency Budget Authorizations and Other Customs Issues

July 17, 2001

INTRODUCTION

Mr. Chairman and distinguished Members of the House Ways & Means Subcommittee on Trade, my name is Ronald Schoof and I am responsible for customs and export regulation administration with Caterpillar Inc., in Peoria, Illinois. I am also Chairman of the Joint Industry Group (JIG), a coalition of more than one hundred and sixty members representing Fortune 500 companies, brokers, importers, exporters, trade associations, and law firms actively involved in international trade. The Joint Industry Group enjoys a close and cooperative relationship with the US Customs Service and frequently engages Customs on trade-related issues that affect the growth and strength of American imports and exports.

It is my honor to appear again before this Subcommittee to express to you the position of the Joint Industry Group and its membership regarding President Bush's proposed Fiscal Year 2002 budget for the Customs Service, particularly as it impacts the design and implementation of the Automated Commercial Environment (ACE). I will also discuss Customs' efforts to modernize and simplify the process used to handle the trillions of dollars of trade that enters the United States every year.

FY2002 BUDGET AUTHORIZATION

For several years we have worked with the previous Administration and Congress to emphasize the importance of the US Customs Service and its efforts to modernize its systems.

We were encouraged when President Bush included $257 million for Customs modernization, and $130 million was specifically earmarked for ACE, in his FY2002 budget proposal. Although $130 million is a start, at this funding level it will take over 14 years to fund the $1.3 billion Customs estimates will be needed to build a fully operational and efficient system. Last week, the House Appropriations Subcommittee on Treasury, Postal Service, and General Government, increased this amount to nearly $428 million. This increase of $170 million over the president's request MUST be specifically appropriated for ACE development. This level of funding now puts ACE development back on its original four-year development plan. The trade community has been ready since passage of the Customs Modernization Act in 1993 to begin developing this system. Here we are eight years later still fighting for funds to develop a system that Congress told the Customs Service to develop.

With the current system, the Automated Commercial System (ACS), operating at 95 percent capacity and with projections of rapidly increasing trade flows, ACS will be unable to handle the workload without costly life support. Continued life support efforts will eventually cost more to US taxpayers than will building a modern and efficient system that not only facilitates trade, but also strengthens the government's ability to secure our nation's borders.

We applaud Chairman Istook and his Subcommittee for understanding that ACE facilitates US exports and imports, while enhancing Customs ability to protect America's borders from illicit narcotics flows and terrorist activities. We urge the Subcommittee on Trade to authorize the additional funds the House Appropriations Subcommittee is already prepared to appropriate to return ACE to its original 4-year timeframe.

AUTOMATED COMMERCIAL ENVIRONMENT: ENFORCEMENT

An expanding economy, globalization, and an information technology revolution are increasing the burden and pressure on the borders and enforcement resources of the United States. With this increase in volume of trade and travel, the responsibilities of US Customs to protect America's borders from dangerous threats have grown exponentially.

In recognition of these many dangers facing the nation, the US Customs Service has relied upon technology to keep pace with the volume of trade and the threats posed by transnational criminal organizations. Unfortunately, the systems and technology that form the backbone of Customs enforcement efforts have aged, compromising their ability to handle the enforcement challenges of the new century and compete with the technology of the criminal element.

This system is not a Customs' system alone but part of the nation's border enforcement system. It is the FBI's system, the State Department's system, the Food and Drug Administration's system, and the system of every agency of government that has a responsibility to protect our nation at its borders.

For example, traditional border enforcement responsibilities in the areas of narcotics control and revenue protection have been expanded to include a multitude of new concerns including:

· Terrorism and trafficking of weapons of mass destruction and chemical and biological substances;

· Threats to consumers and children from dangerous imported products, such as flammable pajamas;

· Threats to health and safety of imported foods and medicines;

· Child pornography;

· Money laundering;

· Trafficking in environmentally hazardous materials;

· Trade with prohibited countries such as Iraq, Iran, North Korea, and Cuba;

· Goods manufactured with child and prison labor;

· Trade of endangered species;

· Protection of intellectual property; and,

· Cargo theft which is estimated at $10 billion per year.

The new ACE system will represent the nation's most effective and cost efficient tool for achieving one of government's highest priorities, protecting national sovereignty at our borders. The selectivity of the ACE system will allow for more efficiency in specifically targeting and eliminating illicit and destructive transactions. The new ACE system will add two important weapons to the arsenal of our national law enforcement agencies: technology and intelligence.

AUTOMATED COMMERCIAL ENVIRONMENT: TRADE FACILITATION

ACE is the key component in allowing Customs to do business the way the private sector conducts business. ACE will allow Customs and the private sector to interact in an account-based environment, providing efficiency, predictability and transparency to this critical link in the supply chain.

The current ACE prototype known as the National Customs Automation Prototype or NCAP, being tested on the northern border, uses transponder-based technology that allows shipments to clear Customs in just 15 seconds. Fifteen seconds as opposed to an average three to four hours under the present ACS system. That means less time for trucks to sit with idle engines at the port. That means less time for manufacturers to wait for components vital to just-in-time delivery systems. It ensures that the supply chain moving goods from production to the consumer moves quickly and uninterrupted.

Customs and industry have already spent the past several months working together to redesign the import entry process. Today's ACS system operates, in many respects, the way Customs processed imports for the past 200 years. As technology and automation improved the trade's ability to move goods around the world, we are still faced with a cumbersome, out-dated import system. Customs recognized this deficiency as well and has committed to working with industry through their Trade Support Network (TSN) to design, develop, and implement a new entry process which can only be fully implemented within ACE.

We encourage Congress, and specifically the House Ways & Means Committee, to become more involved in the ACE development process. As we work out the specific details, we are sure there will arise a need for legislative changes to allow ACE to work the way it is designed and provided for under the Customs Modernization Act. The trade community will be sure to come back to this Committee with specific requests as needed.

MERCHANDISE PROCESSING FEE

Although the Merchandise Processing Fee (MPF) should not be a topic of this hearing, recent legislative action in the Senate has forced this issue to the forefront. MPF is a so-called "user-fee" paid by importers to cover the cost incurred by Customs to process imports. The MPF money collected by Customs, however, does not directly fund Customs operations. Instead it is placed in the general revenue fund where it is used for any number of government programs that may or may not be related to Customs operations.

Last month, the Senate passed Senator John McCain's Bipartisan Patient Protection Act (S. 1052), which extends the MPF expiration from 2003 to 2011. The House will probably begin considering its version of the Senate bill before the August recess. We urge this committee to do all within its authority and jurisdiction to prevent MPF extension language from inclusion in any form of the Bipartisan Patient Protection Act or other legislation.

Every year, Customs collects over $1 billion from companies, including JIG members, importing goods into the United States. Additionally, we are burdened by administrative costs associated with the fee, since Customs imposes complex reporting and accounting requirements in the course of collecting fee payments. All this is occurring at a time when tariffs on products are declining and approaching zero.

If the Customs Service is to continue collecting MPF, it MUST directly fund improvements to Customs processing, specifically for ACE and other initiatives that are greatly needed to improve the trade process. While Section 502 of S. 1052 does not earmark user fees for health care purposes, it does use the fee as de facto justification for the revenue neutrality of the bill. JIG is greatly concerned that this approach will prevent user fees from being applied to the commercial operations of the US Customs Service for which they are intended and needed.

Use of the fee to offset the revenue impact of S. 1052 could also increase potential for a WTO dispute. In the late 1980's, a GATT panel found that the user fee was GATT-illegal because it was being collected in amounts exceeding the cost of Customs processing. While the US addressed that problem by placing certain caps on the fee, it was clear from the panel finding that linkage of the fee to the cost of Customs commercial operations is of significant importance to the question of GATT legality. If our trading partners believe Customs user fees are being used to fund health-care related goals, another GATT challenge is virtually certain to surface in the WTO and JIG would have no choice but to support such a challenge.

CONCLUSION

Mr. Chairman and members of the Trade Subcommittee, the Joint Industry Group supports the President's FY2002 request for funds to develop the Automated Commercial Environment and Chairman Istook's efforts to increase the needed funding levels to allow a four-year ACE development cycle. We ask this committee to authorize the necessary funds to allow ACE to be fully operational in a four-year timeframe. Again, ACE will allow the Customs Service to better fulfill its dual mission of protecting America's borders from foreign threats, while facilitating the flow of trade through our air, sea, and land ports.

Finally, we urge the Ways & Means Committee and all members of the House of Representatives to prevent an extension of the Merchandise Processing Fee from inclusion in any legislation to reform health care in the United States.

We thank you for your time and consideration of these issues.