Washington Post, September 20, 2006
Bayer, Wal-Mart, Lanxess: A Quiet Break for Corporations
Tariff Suspensions, Often Initiated by Companies Based Overseas, Keep Millions of Dollars From Flowing to the Treasury Each Year
For three generations, the Dungey family of Auburn, N.Y., has produced handmade dog collars and leashes for pet stores around the country. The family's six-person shop has staved off competition from cheaper foreign labor by offering a range of products, from affordable "Sparky's Choice" leashes to a $100 beveled-brass collar known as the "Gatsby."
One day this spring, the company president, Anita Dungey, happened across a few words on a Web site, leading her to a startling discovery: One of her small advantages over imports was about to disappear, thanks to a little-noticed proposal in the Senate. The plan, it turned out, had been promoted by Wal-Mart Stores Inc.
In Connecticut, chemical company executive Kenneth Kelly got a similar jolt when a business associate called to warn that a bill tailored to benefit a German-owned competitor was working its way through Congress.
Dungey and Kelly had stumbled upon a largely unknown congressional apparatus that allows companies to erase tariffs -- taxes levied on products and materials shipped to the United States from overseas -- for years at a time.
Each legislative season, corporate executives and lobbyists quietly draft hundreds of bills to suspend tariffs. Over time, the changes cost taxpayers hundreds of millions of dollars in lost revenue, a Washington Post analysis of U.S. trade data found.
Most of the tariff suspensions involve obscure chemicals and dyes, but many other products show up, including boilers for nuclear reactors, green peanuts, child potty seats, unicycles -- even chocolate coatings for laxatives.
"It's become sort of a lobbyists' dream," said Jim Schollaert, a former State Department trade specialist who now represents domestic manufacturers. "It's a gravy train, and there's little work to it."
The bills in Congress generally give no hint of whom the suspensions have been designed to benefit and sometimes refer to the products only by strings of numbers linked to phone-book-size tariff tables. But many corporate names can be found in reports on the legislation produced for Congress by the U.S. International Trade Commission.
Lawmakers usually introduce the provisions at the behest of companies in their districts. Many of those companies and their executives have given federal campaign contributions totaling millions of dollars.
The dog-collar proposal was introduced by Sen. Blanche Lincoln (D), who represents Wal-Mart's home state of Arkansas. Rep. Henry E. Brown Jr. (R-S.C.) sponsored the suspension of tariffs on a chemical virtually identical to one produced by Kelly's firm, R.T. Vanderbilt Co. The request came from Lanxess Corp., which has two plants in South Carolina.
Since 2003, Wal-Mart's political committee has contributed $9,000 to Lincoln's campaigns. Lanxess is a 2004 spinoff of Bayer AG, a German company whose U.S. political committee has donated $3,500 to Brown's campaigns since 2000.
Congressional sponsors of such bills said they are trying to lower consumer prices and create jobs by cutting costs for U.S. manufacturers and retailers. They said they do not want to hurt domestic businesses and they generally drop legislation if trade officials find a U.S. company that objects.
"Removing these tariffs will help reduce costs for American businesses," House Ways and Means Committee Chairman Bill Thomas (R-Calif.) said in a statement in March, when the House passed an omnibus bill with hundreds of tariff suspensions. "This is absolutely the right thing to do."
The practice of not naming companies in the legislation obscures a fact revealed by The Post's analysis: The biggest beneficiaries of the rising tide of tariff-suspension bills are domestic subsidiaries of foreign corporations. Of the 10 companies that stand to benefit from the greatest number of bills examined in the study, eight are owned by or affiliated with German and Swiss chemical companies.
Companies linked to Bayer and Lanxess, for example, initiated more than 100 bills in the current session of Congress, records show. If passed, over the next two years the bills could cost the U.S. Treasury more than $44 million.
The Post's findings come at a time when pork-barrel spending in the form of congressional earmarks is drawing increasing criticism from the public -- and occasional attention from federal prosecutors. Meanwhile, tax breaks delivered to corporations in the form of tariff suspensions have gone largely without public notice.
The current session of Congress is on track to enact a record number of suspensions, the Post analysis found. Since the beginning of last year, legislators have introduced more than 1,400 bills seeking new or renewed tariff waivers or reductions.
"It's a huge number," said John Deming, a lobbyist for Ciba Specialty Chemicals, which the analysis shows has initiated more than 30 tariff-suspension bills in the past two years. "The chemical industry has always been doing this, and now other people are doing it. It's amazing this time, everybody understands how this works now."
Although suspensions are supposed to be shelved if competitors object, trade officials acknowledge that some smaller companies may never hear about the proposals.
"I was shocked when I saw how many there are, and I wondered how you could possibly keep abreast of what's proposed," said Kelly, the chemical executive.
Congress's Tip Sheet
Tariffs have been around since the earliest years of the republic -- they funded the government long before income taxes. In the 19th century, legislators began using them increasingly to protect domestic businesses from cheap imports.
Tariff suspensions have a long history, too. Traditionally each suspension was introduced as a separate bill. Their popularity leapt 20 years ago when Congress decided to combine most of the unopposed suspension bills into one huge piece of legislation, to be passed quickly and unanimously at the end of each session. Today corporate lobbyists deliver a steady stream of proposed tariff suspensions to congressional aides, who use computer spreadsheets to track the avalanche of paperwork.
The last time Congress passed an omnibus bill, in 2004, budget analysts estimated that the waivers would result in at least $172 million in lost revenue. The next set of suspensions, slated for passage this fall, is looking much more costly.
Budget analysts estimate that the grab bag of tariff suspensions passed by the House in March, if approved by the Senate and signed into law, would cost taxpayers $278 million. Last month, in an unusual move, the Senate attached 262 of the suspensions to a pension bill. The rest, with an unknown number of the Senate's own proposals, are expected to be rolled into a miscellaneous tariff bill this month.
The House Ways and Means Committee and the Senate Finance Committee review most of the bills in what members say is an attempt to weed out those too costly to the Treasury. Making the tariff suspensions temporary -- usually three years -- avoids interference with trade negotiations, aides said.
The process has become so standardized that Ways and Means has drawn up a tip sheet for companies to streamline the procedure. One tip says sponsors should "avoid using trade names for products." Instead, a product "should be described precisely" in the bill. That can help customs officials in the field identify obscure chemicals. But it also can mask which companies would benefit.
The Post analysis shows that some members of Congress went to bat repeatedly for their corporate constituents. At least 36 members of Congress have introduced five or more tariff-suspension bills in the current session.
Rep. Sue Myrick (R-N.C.) has introduced at least 34 such bills. She did not respond to interview requests.
South Carolina's Brown ranked second among House members, with 32 bills. Brown declined to be interviewed but issued a statement calling the suspensions "a budget-neutral means of promoting a positive economic climate."
Other leading bill sponsors in the House included Pennsylvania Republicans Tim Murphy and Phil English, each with 23, and Emanuel Cleaver (D-Mo.) with 21.
Murphy said in a statement: "American companies are being forced to pay duties on materials not available in the United States that they need. Eliminating these duties keeps American businesses globally competitive and thousands of jobs right here at home."
Juggling the Ball Bills
Under guidelines set by Congress, each tariff suspension is supposed to cost taxpayers no more than $500,000 a year. Many proposals above the limit are rejected; others win approval anyway.
Some lawmakers adopt another strategy, The Post's analysis found. On June 8, 2005, Rep. Richard E. Neal (D-Mass.) introduced a bill seeking to suspend the tariff on one small category of inflatable balls -- in this case, leather basketballs.
Before the day was over, Neal introduced a nearly identical bill covering rubber basketballs, another for synthetic basketballs, and another covering basketballs "other than leather, rubber or synthetic." Still not done, Neal introduced yet another bill covering "certain volleyballs."
Neal returned the next day to introduce a final bill for what he described simply as "certain . . . inflatable balls other than basketballs and volleyballs."
Each change is supposed to be reviewed before passage by analysts at the trade commission. The analysts found that each of Neal's six bills would result in annual revenue losses that fell just below or somewhat above the guideline. Added together, however, the bills could cost $3.7 million a year.
In an interview, Neal said he was unaware of how much the bills would cost taxpayers, but he added, "I think it's really negligible."
The bills mention no beneficiaries, but Neal said he was asked to sponsor the suspensions by Spalding, a sporting goods maker in Springfield, Mass. "For a company in my district, I was happy to help," Neal said.
Neal's legislative director, Peg McGlinch, acknowledged that multiple bills were filed to avoid violating the $500,000 guideline. "That's why they split it up," she said. An aide on the Ways and Means Committee confirmed: "We advise people to do it that way."
Bryan Wolfe, customs director for Russell Corp., Spalding's parent company, said the tariff reductions would benefit a number of U.S. importers and would not hurt American manufacturers because most inflatable balls are made in China.
Provisions covering four types of balls were rolled into the Pension Protection Act of 2006, which President Bush signed into law on Aug. 17. The other bills remain pending.
There are many similar examples. Shoes of various stripes are the subject of at least 19 tariff-suspension bills. Payless ShoeSource Inc., listed as the proponent of the bills, did not respond to phone messages.
David Beck, acting director of the trade commission's tariffs office in Washington, said analysts have noticed the strategy. "Depending on how you look at it, it might not pass the sniff test," Beck said. He said Congress has been "pretty liberal on it."
No government agency has calculated the economic impact of the tariff suspensions. Some corporations acknowledge keeping some or most of the savings, but many say consumers also benefit.
"Any ability we have to eliminate a 1 to 3 percent tariff and save a couple pennies for our consumers, we think is important," said Wal-Mart lobbyist Angela Marshall Hofmann, who previously helped oversee the process as an aide for the Senate Finance Committee.
Hofmann has written to lawmakers that Wal-Mart supports 41 current tariff-suspension bills but that "it is our understanding that these products are not manufactured in any commercially viable manner in the United States."
Lobbyists and lawmakers said many tariff suspensions aid small businesses. The savings "can be especially meaningful for a small company, or one struggling to stay afloat in the United States," Senate Finance Chairman Charles E. Grassley (R-Iowa) said in a statement.
But The Post's analysis of data from nearly 600 trade commission reports from this session of Congress found that the biggest winners are not small U.S. firms but rather domestic subsidiaries of European corporations.
During this session, eight foreign corporations alone have generated at least 277 tariff-suspension bills. The total is undoubtedly higher, since the Post study could not identify the corporate sponsors of many bills.
The analysis shows that various Bayer subsidiaries were the unnamed primary beneficiaries of more than 70 suspension bills covering imported chemicals, including the ingredients for aspirin. Over the next two years those suspensions would cost the Treasury more than $35 million on imports worth nearly $850 million. A Bayer spokesman would say only that Bayer expects other corporations to share in the savings.
Since 2000, Bayer's political committee has made campaign contributions totaling $951,000, according to the nonpartisan Center for Responsive Politics. In 2005 alone, Bayer and its U.S. affiliates spent $3.2 million on lobbying.
To safeguard domestic producers, trade commission analysts try to identify U.S.-based companies that might make the products, then ask them whether the suspensions would be damaging.
But identifying affected companies that are small and based far from Washington can be difficult. The trade commission's Beck said that despite analysts' best efforts, they occasionally miss such firms. "It happens, but not very often," he said. "In the last 10 years I'd say I've seen one or two examples."
Grassley said his staff posts proposed suspensions on his committee's Web site and welcomes public comment. "Our process is transparent and well publicized," he said. "It probably isn't perfect, but no process is."
Kelly, general manager of R.T. Vanderbilt Co. of Connecticut, said it was largely luck when a colleague tipped off his firm about Brown's bill to suspend the tariff on Vulkanox ZMB, a chemical used in rubber production. Kelly's company produces a similar chemical at a Kentucky plant that employs more than 100 people.
The company dashed off a letter to the Ways and Means Committee, arguing that the waiver would give Lanxess, which imports Vulkanox, a competitive advantage and might force Vanderbilt to shut its factory.
"We do not understand why this legislation is needed, and its sponsor has not provided an explanation," the letter said. ". . . The only result of the legislation would be windfall profits at our expense to the German, Indian and Chinese suppliers."
The letter also called it "ironic" that the European Union charges a 6.5 percent tariff on Vanderbilt's chemical.
Kelly said his company has no practical way to ensure another waiver does not slip through without its knowledge -- short of hiring a lobbyist just to keep watch.
"There maybe should be a higher bar on our elected officials on making clear why they want to do this," Kelly said.
Dungey, who co-owns Auburn Leathercrafters in Upstate New York, launched a one-woman campaign against four bills that would cut the 2.4 percent tariff on imported dog collars and leashes. She argued that anyone familiar with the industry would realize domestic producers would find the waivers "devastating."
She said she believes that Wal-Mart and other big importers count on U.S.-based manufacturers never learning about the obscure legislation. "A lot of people just don't have the time to devote to staying on top of it," Dungey said.
Wal-Mart officials said their only motivation is to save consumers money. While the dog-collar bills would cost taxpayers more than $9 million over the next three years, the company stressed that all importers would share the benefits.
The bills' legislative sponsor, Sen. Lincoln, said in a statement that she was pleased that the Senate process had allowed Dungey to raise objections. In response, Lincoln said, the measures have been removed from consideration.
Dungey said no one had told her the tariff suspension was dead. Had she not stumbled across the mention on a Web site and spent days on research, Dungey said, she is convinced the cut in tariffs would have passed without opposition -- and led to the end of her company.
"The suspension is . . . just about long enough to put most of the small guys out of business," Dungey said. "I would have just shaken my head and said, 'How can Wal-Mart sell for this price?' " (By Joe Stephens, Sarah Cohen contributed to this report)