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than $159,400 which is very important in that economy. In addition, there was a loss of income tax receipts.

The gain from tax receipts on 4 additional cartons would be a direct offset to the U.S. Treasury impact of $208,000 just mentioned.

The one carton limitation which took away the previously unlimited duty free exemption for U.S. Territories has had a very serious adverse effect on business in the possessions.

It has taken away an extremely desirable psychological advantage in attracting tourists.

Wholesale and retail trade has been hurt to the extent of approximately 29 percent in the Virgin Islands alone by the one carton limitation.

Not only is there a loss to merchants, but the entire economy suffers as all losses extend out through the employer-employee relationship.

The revenues of the local governments were reduced at a time when funds are sorely needed, and

The price advantage heretofore offered tourists by the U.S. possessions have been seriously eroded through tariff reductions and the decline of the U.S. dollar's purchasing power in foreign markets.

The restoration of an additional four cartons of duty free exemption even though only a partial restoration of the unlimited privilege previously enjoyed, will be of great economic assistance to the people of the U.S. Territories.

Mr. VANIK. Thank you.
Mr. Jones, this is your bill.

Mr. JONES. Mr. Chairman, I want to compliment all three of the panelists. As the author of the 1978 customs reform bill, along with Mr. Frenzel, who is the ranking Republican, I can certainly agree with your statement that this restriction on cigarettes was not intended to apply to the Virgin Islands, and was aimed at a situation other than the Virgin Islands. I strongly believe that we should correct the problem that developed in the 1978 bill.

I have no knowledge of any opposition to this legislation. I wanted to ask if any of the panelists have knowledge of anyone, any agency or anyone that opposes the legislation?

Mr. Evans. I have no knowledge.
Mr. FRANCIS. I know of none, sir.
Mr. JONES. I appreciate that very much. Thank you.
Mr. VANIK. Mr. Guarini.
Mr. GUARINI. No questions.
Mr. VANIK. I won't ask Mr. Moore.
Mr. MOORE. No questions.
Mr. VANIK. I have a question.

With respect to liquor, we apply the exemption to each adult. Is there any such provision for cigarettes? Do you count your infants in determining the cigarette quota? How does the legislation speak to that? It says “U.S. residents.” That means 2-year olds, and 3year olds, and 5-year olds, I guess.

Does the author intend that if you multiply the exemption by the number of returning Americans, returning residents to the mainland, that would be included?

Mr. JONES. If the chairman would yield, I believe even counting each resident returning, Mr. Chairman, that we would not be going back to as liberalized a procedure as existed prior to the 1978 act. So I would intend it to be as the legislation is written, “to each resident returning,” which would get us halfway between what the law was prior to the 1978 bill and what we propose it to be now.

Mr. VANIK. Mr. Guarini.

Mr. GUARINI. Mr. Chairman, I was just wondering, as a matter of curiosity, how many different cigarette proprietors do you have? How many cigarette stores do you have that are dealing in cigarettes duty free? How broad is the base in the Virgin Islands? Is it a few or is it well spread out in the economy?

Mr. FRANCIS. It is well spread out. I would say no less than 50 and quite possibly as many as 100 establishments.

Mr. GUARINI. And cigarettes, of course, are just one item. There is no place that just sells cigarettes. It is just another item on the store shelf?

Mr. FRANCIS. That is correct.

Mr. GUARINI. And most of the people that sell liquor sell cigarettes because it is a duty free store?

Mr. FRANCIS. That is correct.

Mr. VANIK. I have no further questions. There was no administration, so I presume there will be no problem with this.

I want to thank the panel for your time and for your cooperation.

Mr. EVANS. I would also like to express my sincere appreciation to the members of the committtee, and especially to Hon. Mr. Jones for introducing this bill, which I was privileged to cosponsor. We certainly appreciate this.

Mr. VANIK. Well, it did not hurt you to have Mr. Jones as a cosponsor, but you may have a problem with a desire of the committee to do some oversight work in December after we get through with the lameduck session.

Mr. EVANS. We welcome that, too.

Mr. VANIK. I will have to probably be limited to what I can do as an individual citizen. But I will do the best I can to advise my colleagues.

The next bill is H.R. 7802, Mr. Downey's bill to amend the Tariff Schedules, of the United States with respect to the rates of duty on ephedrine, racephedrine, and their salts.

We have with us Mr. Donald Alexander, who represents Knoll Fine Chemicals, Inc.

Your statement will be submitted in the record, and you may read from it or excerpt from it as you see fit. STATEMENT OF DONALD C. ALEXANDER, COUNSEL, KNOLL

Mr. ALEXANDER. Thank you.

I won't read any of my statement. I understand it is going to be placed in the record.


INC. My name is Donald Alexander and I am a partner in the law firm of Morgan, Lewis & Bockius in Washington. I am here today on behalf of Knoll Fine Chemicals, Inc. to testify in support of H.R. 7802, a bill that would amend the Tariff Schedules of the United States to equalize the tariffs on imported ephedrine.

Ephedrine is a mild central nervous system stimulant and smooth muscle relaxant of the bronchial tubes, and is the active ingredient in many asthma medications and in nasal decongestants. Ephedrine is also processed into pseudoephedrine, an effective nasal decongestant used in many prescription and over-the-counter cold remedies. Although ephedrine is an alkaloid that occurs naturally in certain species of the ephedra plant, most of the ephedrine used in the United States is manufactured synthetically.

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Knoll Fine Chemicals, a New Jersey corporation with its principal office in New York City, is engaged in the importation, distribution, and sale of pharmaceutical chemicals, including ephedrine. Knoll has imported synthetic ephedrine for 15 years, and has been a reliable supplier of ephedrine to the U.S. market.

There is no American production of ephedrine (or racephedrine). Thus, all of the domestic consumption of ephedrine is imported, and the bulk of the imports have consisted of synthetically produced ephedrine from Europe. Synthetic ephedrine is classified to item 411.32 of the Tariff Schedules of the United States, and currently is dutiable at 15.5 percent ad valorem.

Ephedrine extracted from the ephedra plant, so-called natural ephedrine, is classified in item 437.20 of the TSUS. Although natural ephedrine is pharmacologically identical to synthetic ephedrine, natural emphedrine currently is imported at a duty rate of 4.8 percent ad valorem, in contrast to the 15.5 percent ad valorem duty rate for synthetic ephedrine. The United States is the only major developed country that imposes different tariffs on synthetic and natural ephedrine. Our trading partners have only a single classification for ephedrine, whether of natural or synthetic origin; ephedrines imported into those countries are dutiable alike, regardless of chemical origin.

The impact of the duty rate disparity became evident only upon the grant of most-favored-nation trading status to China, effective February 1, 1980. Prior to February 1, natural ephedrine from China was imported at a duty rate of 25 percent ad valorem, a rate sufficiently high that it discouraged substantial imports of natural ephedrine. Since February, however, natural ephedrine from China has enjoyed a substantial competitive advantage because of its preferential duty rate, an advantage that, in the absence of this legislation, would diminish only slightly through duty rate reductions over the next 642 years.

Against this historical backdrop, the need for enactment of H.R. 7802 becomes clear: Given the substantial duty rate advantage of natural ephedrine over synthetic ephedrine, natural ephedrine will replace synthetic ephedrine in the U.S. market. China is the only major source of natural ephedrine, and it would clearly be an unreliable source of supply. To the extent that synthetic ephedrine would continue to be imported, it would bear a substantially higher duty rate, a cost that would be passed on the American consumer.

Enactment of H.R. 7802 would equalize the duty rates on synthetic and natural ephedrine, giving American purchasers two competitive sources of supply. The bill would also provide for simultaneous, identical duty rate reductions for both synthetic and natural ephedrine.

H.R. 7802 is narrowly drawn to have only the effects I have described. There will be no injury to any American industry because there is no American production of ephedrine. Since there is American production of pseudoephedrine, that product has been carved out by section 2 of the bill; its duty rate and schedule of staged reductions would be the same after enactment of H.R. 7802 as were negotiated in the multilateral trade negotiations.

In sum, enactment of H.R. 7802 will permit fair competition between imports of natural and synthetic ephedrine, and will assure American users and consumers of ephedrine products of continued reliable supply at the lowest possible cost.

Mr. ALEXANDER. I think Mr. Cavitt of the Department of Commerce covered the situation very well. What we are talking about, Mr. Chairman, is a product used in many U.S. consumer products on the market to relieve asthma, wheezing, and to serve as nasal decongestants.

We are talking about, as Mr. Cavitt pointed out, a disparity in the treatment between natural ephedrine grown in China and synthetic ephedrine produced in Germany. There are no U.S. producers of this product or of racephedrine, also included in the bill. That disparity is great.

As Mr. Cavitt pointed out, the rate of duty now in effect on natural ephedrine is 4.8 percent ad valorem. The rate on synthetic ephedrine is 15.5 percent ad valorem. Now, that disparity is so great there is no way that synthetic ephedrine can continue to compete in the U.S. marketplace with natural ephedrine.

Mr. VANIK. Are they identical in quality?


Mr. ALEXANDER. They are absolutely identical in every respect, Mr. Chairman.

Mr. VANIK. You say it is produced in China. Now, what is it? Is it a variation of a seed, like poppy?

Mr. ALEXANDER. Well, in China it is produced from the ephedria plant, which has grown there for thousands of years, perhaps, as this is one of China's oldest drugs. It was reproduced synthetically in Germany. The natural and synthetic products are pharmacologically identical. They are identical in every respect except one, and that is the great disparity in the duty.

As Mr. Cavitt pointed out, that disparity-Mr. VANIK. What is the history of the disparity of the duty? Mr. ALEXANDER. The history of the disparity is quite short. The disparity was produced by granting China most-favored-nation status in February. And what we have found since February is exactly what you would expect. The importation of natural ephedrine from China has greatly increased, and it will continue to greatly increase because of this very large differential in duty.

Those who consume ephedrine, which are the manufacturers of a number of products which are essential to the American health, are concerned about having only a single source of supply. However friendly and reliable China might be today, it is hard to predict what China might be next year or the year after next.

They are concerned about a single source of supply of doubtful reliability. And, of course, we all know what single sources of supply beyond these shores can produce. They want to have, as Mr. Cavitt pointed out, competition in the marketplace. And this bill to equalize the duty is what they need, because all we need is equality. We don't want a competitive advantage, but we do want to be relieved of the great competitive disadvantage now present.

So equalization of the duty would permit those who use ephedrine in these essential products to continue to have two sources of supply, which would give both an assured and continuous source of the product as well as lower costs to the American consumer.

Mr. VANIK. Mr. Jones, any questions?
Mr. JONES. Only one question, Mr. Chairman.

I, too, want to welcome back our old friend Don Alexander to the subcommittee. What is the nature of the opposition to this bill?

Mr. ALEXANDER. I don't think there is any opposition to the bill, Mr. Jones. We have not heard of any.

Mr. JONES. Very good.
Mr. VANIK. Mr. Moore.
Mr. MOORE. No questions.
Mr. VANIK. Mr. Guarini.
Mr. GUARINI. No questions.

Mr. VANIK. I have no further questions. I think you make a good case. I think it is indefensible that your problem is caused by the action of this committee in recommending most favored nation treatment for China. We haven't heard anybody who finds any opposition to this. The only problem we have is about a $200,000 revenue loss to the Federal Government, but I think we are within our budget limitations to consider it, so I see no problem with it. I want to thank you very much for your presentation.

Let me ask you about this. This affects asthma victims. I have somebody I know that is just completely and totally handicapped with asthma. What are the final products of it? Are they common drugs?

Mr. ALEXANDER. There are a whole host of final products.

Mr. VANIK. We have had problems with ephedrine some years back being used by truck drivers to facilitate the movement of freight. Is that controlled now?

Mr. ALEXANDER. That is not a controlled substance, Mr. Chairman. Ephedrine actually is a very mild drug. It is made into pseudoephedrine or isoephedrine, depending on the title one chooses to give it, Mr. Chairman, for use in a number of common nasal decongestants; and asthma products. As I understand it, and I may be corrected here by Mr. Spaeth, some are prescription drugs. Many are sold over the counter because of the mildness of this particular

product. Mr. VANIK. The more sophisticated drugs are under prescription. Mr. SPAETH. Yes; and it depends on the dosage. The higher the FDA set limits, it is subject to prescription or OTC-dispensed. So ultimately the doctor would have the control of how much the patient is taking within a certain time span.

Mr. VANIK. Do you know the extent to which this might be used by the Asthma Institute in Colorado?

Mr. SPAETH. For asthma there is a competitive drug called theophylline, which has gained enormous asthma support. But ephedrine as well as pseudoephedrine as a nasal decongestant in cold preparations in combination with other products, of course, is one of the most effective drugs and with the least side effects.

Mr. ALEXANDER. By the way, theophylline is also an imported product. So there is no domestic competition or concern there.

Mr. VANIK. Thank you very much. We very much appreciate your testimony.

The subcommittee will make an effort in the next 5 minutes to see if we have a quorum. I realize the problems that we may have in doing so.

[Whereupon, the hearing was adjourned.]

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