US embassy cable - 05TAIPEI3982

C O N F I D E N T I A L SECTION 01 OF 03 TAIPEI 003982 
 
SIPDIS 
 
STATE PASS AIT/W AND USTR 
STATE FOR EAP/TC, 
USTR FOR WINTER AND WINELAND 
USDOC FOR 4420/USFCS/OCEA/EAP/LDROKER 
USDOC FOR 3132/USFCS/OIO/EAP/ADAVENPORT 
TREASURY FOR OASIA/LMOGHTADER 
 
E.O. 12958: DECL: 06/03/2020 
TAGS: ETRD, TW, Trade 
SUBJECT: TAIWAN CUSTOMS SLOW TO CHANGE THERMISTOR 
CLASSIFICATION 
 
REF: A. 04 TAIPEI 3728 
 
     B. 04 SECSTATE 243653 
 
Classified By: AIT Acting Director David Keegan, REASON 1.5 (b), (d) 
 
1.  (SBU) Summary:  The Tyco thermistor case remains 
unresolved.  In making a revised proposal to Customs 
September 20, Tyco reps discovered that Customs has already 
forwarded the bulk of pending cases to the court system, 
making a negotiated settlement more difficult.  The 
Ministries of Finance and Economic Affairs were unaware of 
Customs' actions and MOEA has promised to further discuss the 
case with Customs and seek an early resolution of the 
dispute.  Customs handling of the Tyco case is another 
example of Taiwan regulatory agencies taking regulatory 
actions that are out of step with international norms.  End 
Summary. 
 
Tyco Thermistors 
---------------- 
2.  (SBU) Representatives of Tyco Corporation visited Taiwan 
September 19-20 to seek a settlement with Taiwan Customs over 
the ongoing dispute about the appropriate classification of 
thermistors imported into Taiwan by Tyco.  Chief Financial 
Officer Jeff Harrison and legal advisor Bob Cassidy came from 
the U.S., while Borchee Liaw, Tyco Electronics Controller for 
Asia Pacific Global Communications and Computer and Consumer 
Electronics and Doris Tseng, Taiwan Controller for Tyco, 
joined them from Tyco offices in Taipei.  AIT/Econ met with 
the four Tyco reps on September 19 subsequent to their 
meeting with Huang Chih-peng, Director General of the Board 
of Foreign Trade (BOFT) and prior to their meeting with 
Customs on September 20.  AIT/Econ also participated in a 
dinner hosted by Bob Cassidy on September 20.  Cassidy used 
the dinner to allow Tyco to brief Ministry of Economic 
Affairs Vice Minister Steve Chen (Ruey-long) and BOFT's Huang 
on the outcome of a September 21 meeting with Customs and to 
seek their advice on how to proceed in this case. 
 
Background 
--------- 
 
3.  (SBU) Tyco has a long-standing dispute with Customs on 
the proper classification of its thermistors involving more 
than a thousand individual cases under various stages of 
consideration ranging from administrative review by Customs 
to final rulings by Taiwan courts.  Tyco has been insisting 
that the product should be classified under Harmonized System 
Code 8533 and thus eligible for duty-free importation under 
the terms of the WTO Information Technology Agreement. 
Taiwan Customs, on the other hand, has been insisting that 
the product falls under HS 8536 and thus is subject to an 
import duty.  Tyco has worked with USG agencies to seek a 
definitive ruling on the appropriate classification for this 
product in the World Customs Organization.  In April 2004, we 
understand that the relevant WCO Committee determined that 
Tyco's product should be classified under HS 8533 (the 
duty-free category) and in the fall of 2004, the WCO 
reaffirmed this decision.  According to Tyco representatives, 
in April 2005 Taiwan Ministry of Finance officials indicated 
that Taiwan would formally reclassify the products into the 
duty-free category.  As of September 23, 2005, this 
reclassification has yet to take place. 
 
4.  (SBU) In April 2005, Tyco's Harrison and Cassidy visited 
Taipei to discuss settlement of the outstanding cases.  They 
held discussions on principles of a settlement with Ministry 
of Finance and Customs officials as well as BOFT's Huang. 
Following the discussions, Tyco provided a written settlement 
proposal to Customs in April, which Customs reviewed and 
eventually rejected in August.  The accumulated duty and 
associated penalty charges could potentially run in the US$ 
millions.  On September 20, 2005 Harrison told AIT, and VM 
Chen, that Tyco would like to reach a negotiated settlement 
in early December before it issues its financial report for 
the fiscal year.  Harrison said that Tyco wishes to eliminate 
the uncertainty created by the ongoing dispute and would like 
to avoid the need to insert a footnote explaining the dispute 
in its financial statements. 
 
Customs Remains Unresponsive 
---------------------------- 
 
5.  (SBU) Cassidy described to VM Chen, BOFT's Huang and 
AIT/T the results of Tyco's meeting with Customs officials on 
September 20.  He said that Tyco made a revised settlement 
proposal to Customs based on its understanding of the 
distribution of cases between the courts and Customs.  Tyco 
also believed that Taiwan's informal acknowledgment that it 
would be reclassifying Tyco's product into the duty-free 
category would help promote settlement of the case.  Cassidy 
said that he and Harrison made a revised proposal to Customs 
noting that Tyco was prepared to pay duties and penalties for 
cases that had been decided by the courts and that were now 
pending before the court while also seeking dismissal of 
cases now under Customs review.  Customs responded that it 
has accelerated its administrative review of the cases and 
forwarded the vast majority of the cases to the court system, 
leaving only a small proportion of the cases under its 
purview.  Cassidy noted that this move seriously limits the 
latitude for Tyco to negotiate a settlement. 
 
MOF Surprised By Customs' Action 
-------------------------------- 
6.   (SBU) The Ministry of Finance sent a representative, 
Lilian Hsieh, to the Tyco/Customs meeting on September 20, 
according to Cassidy.  Hsieh and the Customs officials, 
Cassidy said, engaged in a discussion in Chinese about the 
accelerated process.  Tyco's Liaw and Tseng later told 
Cassidy that Hsieh had been unaware of the accelerated review 
of Tyco cases by Customs.  Further, Cassidy said that he 
understood from Liaw and Tseng that it is not clear when 
Taiwan will formally reclassify the products into the 
duty-free category.  Hsieh had earlier told Cassidy that MOF 
was prepared to issue the reclassification and that she had 
expected it to occur on September 16, 19 or 20.  However, in 
Hsieh's side conversation at Customs on September 20, it 
turned out that Customs has yet to provide the required 
paperwork to MOF to implement the reclassification. 
 
MOEA Promises Swift Action 
-------------------------- 
7.  (C)  VM Chen expressed some surprise at Cassidy's report 
of the meeting with Customs.  He promised to call the 
Director General of Customs, Yu Shaw-wu, to ask about the 
situation.  Chen went on to say that it would look bad for 
the Taiwan government to not get this case settled soon.  He 
indicated that he would like to see the case resolved well 
before Harrison's goal of early December.  Chen also noted 
that he viewed Customs "as quite conservative" in its 
outlook.  He said that he had worked extensively with Customs 
in 2004 on this issue in an effort to convince it that 
Customs would not bear responsibility for reclassifying the 
thermistors into another category.  (Comment:  Chen's remarks 
suggest that Customs may be concerned that reclassifying the 
thermistors into a duty-free category would reduce Taiwan's 
duty revenue and that Customs would be blamed for 
contributing to this loss of revenue.  End Comment.) 
 
Comment 
------- 
8.  (C) Both Chen and Huang appeared to be as surprised as 
AIT/T at Cassidy's description of the events.  It is 
difficult to view Customs' moves as anything but deliberate 
attempts to distance itself from responsibility for the Tyco 
cases by forwarding them to the court system for final 
adjudication.  Tyco has made at least one written proposal to 
Taiwan, purportedly in the range of millions of US$, and MOF 
and Customs avoided responding to it from April of this year 
until August.  Cassidy contacted AIT in June and July 
requesting assistance in getting a response to its April 
settlement proposal.  In each case, BOFT assured us that MOF 
and Customs were reviewing the proposal and BOFT voiced 
optimism that Tyco's proposal would be accepted.  Tyco has 
now made the effort to increase its offer through a revised 
proposal, but Customs has apparently used its long 
deliberation time to move cases from its jurisdiction to the 
courts and thus reduce the scope for a negotiated settlement. 
 
 
9.  (C) In addition to the financial uncertainty that this 
case poses for Tyco, this issue is one more example of the 
limited, Taiwan-centric view of events that some Taiwan 
regulatory agencies seem to take.  Customs took a 
classification stand long ago that turned out to be markedly 
different from the international norm and has staunchly 
resisted any efforts to reclassify the product or resolve the 
issue.  Other Taiwan agencies have imposed regulatory actions 
that are out of step with international norms.  In 2004, the 
Bureau of Standards, Meteorology and Inspections imposed new 
Taiwan-unique requirements for the importation of home 
appliances; the Department of Transportation imposed unique 
requirements on imported motorcycles (heat shields, among 
others); the Department of Health imposed a medical device 
registration requirement in December 2004 when it was 
unprepared to process the paperwork that would be generated; 
in fall 2004, Taiwan's Environmental Protection 
Administration imposed new packaging requirements for 
imported goods without notifying the WTO or consulting the 
foreign business community; and the list can go on.  US 
importers are stuck trying to comply with regulatory orders 
that are poorly thought out and agencies are often reluctant 
to admit any kind of error on their part.  The companies then 
seek AIT assistance and support from other Taiwan agencies to 
modify the rules to conform to international standards. 
 
10.  (C) We take some comfort in VM Chen's commitment to 
continue to engage with Customs on behalf of Tyco.  Chen has 
proved in the past to be an effective problem solver.  We 
have no doubt that he will exert himself in the Tyco case. 
Nevertheless, we would prefer to see a  Taiwan bureaucracy 
more willing to conduct business based on rule-based trade 
regulations rather than personal connections and pressure 
tactics.  We have set up a lunch with BOFT's Huang for 
October 4 and will follow up on the Tyco case then and also 
with VM Chen.  Absent contrary instructions from Washington 
Agencies, we will also raise the issue with Customs DG Yu 
once we know that Chen has spoken with him.  End Comment. 
KEEGAN