U.S.-China Trade: Implementation of the 1992 Prison Labor Memorandum of
Understanding (Letter Report, 04/03/95, GAO/GGD-95-106).

GAO reviewed issues regarding the memorandum of understanding between
the U.S. and China that prohibits the import of goods made with Chinese
prison labor, focusing on the: (1) Customs Service's assessment of
China's compliance; and (2) government's ability to obtain information
sufficient to enforce the agreement.

GAO found that: (1) while China had not sufficiently demonstrated a
willingness to meet its responsibilities under the agreement, Customs
reported more recent signs of cooperation; (2) China recently signed an
implementation agreement that could enhance mutual compliance and
increase Customs' ability to visit prisons suspected of producing goods
for export; (3) recordkeeping practices in China's prison system may
inhibit its ability to comply with the agreement; (4) recently Customs
has succeeded in obtaining information sufficient to make administrative
determinations regarding potential prison-labor goods; (5) the
Department of Justice was concerned that it might not get sufficient
information to cost-effectively defend Customs' decisions; (6) Justice
attorneys must produce information before the U.S. Court of
International Trade (CIT) to defend Customs determinations to exclude
apparent prison-labor imports; (7) in December 1994, a CIT decision that
affirmed a Customs finding was upheld for the first time; and (8)
Justice officials are concerned that its ability to sustain Customs'
findings may be inhibited because much of the information necessary to
uphold Customs' findings is no longer published in China.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  GGD-95-106
     TITLE:  U.S.-China Trade: Implementation of the 1992 Prison Labor 
             Memorandum of Understanding
      DATE:  04/03/95
   SUBJECT:  Compliance
             International economic relations
             Customs administration
             Prisoners
             Interagency relations
             Documentation
             Information disclosure
             Foreign governments
             International law
             Import restriction
IDENTIFIER:  China
             
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Cover
================================================================ COVER


Report to the Committee on Finance, U.S.  Senate, and the Committee
on Ways and Means, House of Representatives

April 1995

U.S.-CHINA TRADE - IMPLEMENTATION
OF THE 1992 PRISON LABOR
MEMORANDUM OF UNDERSTANDING

GAO/GGD-95-106

U.S.-China Trade


Abbreviations
=============================================================== ABBREV

  APA - Administrative Procedures Act
  CIT - Court of International Trade
  MFN - most favored nation
  MOU - memorandum of understanding

Letter
=============================================================== LETTER


B-257850

April 3, 1995

The Honorable Bob Packwood
Chairman
The Honorable Daniel P.  Moynihan
Ranking Minority Member
Committee on Finance
United States Senate

The Honorable Bill Archer
Chairman
The Honorable Sam M.  Gibbons
Ranking Minority Member
Committee on Ways and Means
House of Representatives

The People's Republic of China has one of the world's fastest growing
economies and has rapidly become one of the U.S.' most important
trading partners.  In 1993, U.S.  imports from China totaled $31.5
billion, and U.S.  exports reached $8.8 billion.  Since 1992, the
United States and China have entered into several trade agreements to
help resolve bilateral trade issues, such as U.S.  market access in
China and the U.S.  prohibition on importing goods made with Chinese
prison labor.\1 In May 1993, President Clinton signed executive order
12850.  The executive order added a requirement for the
administration to review China's compliance with the August 7, 1992,
U.S.-China prison labor memorandum of understanding (MOU)\2 as part
of the President's annual assessment of China's most-favored-nation
(MFN) status in 1994.\3 (See app.  I for details about China's
commitments under the MOU.)

Because of ongoing congressional interest in U.S.  trade with China,
we self-initiated a review of recent issues regarding the U.S.-China
MOU on prison labor.  Specifically, our objectives were to describe
(1) the U.S.  Customs Service's assessment of China's compliance with
the prison labor MOU and (2) the experience of the U.S.  government
in obtaining information sufficient to enforce the prohibition
against goods made with Chinese prison labor since the MOU was
signed.  (See app.  II for detailed information about U.S.  laws and
regulations prohibiting prison labor imports.)


--------------------
\1 With certain exceptions, the importation of products made with
prison labor is prohibited by section 307 of the Smoot-Hawley Tariff
Act of 1930, as amended (19 U.S.C.  1307 (1988)). 

\2 According to officials at the Department of State, an MOU is
considered by the United States to be a binding international
agreement. 

\3 MFN is a commitment that a country will extend to another country
the lowest tariff rates it applies to any third country. 


   RESULTS IN BRIEF
------------------------------------------------------------ Letter :1

Although in 1993 Customs was concerned that the Chinese government
had not sufficiently demonstrated a willingness to fulfill its
responsibilities under the prison labor MOU in a timely and thorough
manner, Customs told us that Chinese officials had shown more recent
signs of cooperation.  For example, in March 1994 China signed an
implementation agreement that for the first time specified time
frames and procedures for mutual compliance with the MOU. 
Nevertheless, while this agreement may support Customs' ability to
obtain more timely responses to U.S.  requests to visit prisons
suspected of producing goods exported to the United States, Customs
officials cited significant differences in China's prison system from
those found in the United States, which may inhibit China's ability
to comply with the MOU (e.g., incomplete or missing Chinese
government records). 

Customs officials said they had experienced recent successes in
obtaining information from Chinese officials under the MOU sufficient
to make administrative determinations that prison labor may have been
involved in imported goods.  However, officials at the Department of
Justice told us they were concerned whether the MOU or any other
agreement could provide Justice attorneys with the information
necessary to defend Customs' decisions in an efficient and
inexpensive manner because of the evidence that might be required in
section 307 cases.  Justice attorneys must produce such information
before the U.S.  Court of International Trade (CIT) to defend
Customs' determinations to exclude products from entering the United
States because they were found to be made with prison labor;\4 such
Customs determinations are referred to as "findings." In December
1994, in its first case ever regarding a Customs determination that
U.S.  imports of Chinese goods were made with prison labor, CIT
upheld an affirmative Customs finding (i.e., a finding that imported
goods from China had been made with prison labor).\5 (See app.  III
for more information about this CIT case.) CIT based its decision to
uphold the government on several factors involving evidence obtained
from Chinese government documents.  Justice officials believe these
factors may not be present in future cases primarily because the
information used as evidence is no longer published in China. 
Justice officials, therefore, still have concerns regarding the
Department's ability to sustain Customs' findings in future cases
that may arise under section 307. 


--------------------
\4 CIT, located in New York City, is composed of nine judges.  The
power of the court is exercised by a single judge, although under
certain circumstances the Chief Judge may convene a panel.  The court
has jurisdiction over a broad range of civil actions involving
international trade, including jurisdiction over section 307 cases. 
Final decisions of CIT can be appealed before the Court of Appeals
for the Federal Circuit. 

\5 China Diesel Imports, Inc.  v.  The United States, No.  94-185,
slip op.  at 13 (CIT, Dec.  7, 1994).  This case involved imports of
Chinese diesel engines allegedly made with prison labor.  The
original Customs determination in this case predated the MOU. 


   BACKGROUND
------------------------------------------------------------ Letter :2

Following the Chinese government's June 1989 crackdown on protesters
in Tiananmen Square, President Bush and Congress began a debate about
linking renewal of China's MFN status to improving human rights
conditions in China.  Among the trade-related issues raised in this
debate was the U.S.  government's concern about China's exporting
goods made with prison labor to the United States.  Although Customs
officials have no authoritative estimate of such exports from China
to the United States, they told us that the amount appears to be
small.\6 The Bush administration determined that, in many cases of
suspected violations, U.S.  officials would need cooperation from law
enforcement officials in China to gather sufficient evidence
concerning Chinese prison facilities to enforce the section 307
prohibition.\7 As a result, the United States began negotiations with
China in 1991 to reach an agreement to improve U.S.  access to
information needed to enforce section 307.  In early August 1992, the
United States and China signed the prison labor MOU providing for the
exchange of information between both countries regarding their
respective prison facilities.  Specific terms for implementing the
MOU were negotiated in a separate statement of cooperation signed on
March 13, 1994. 

The MOU provides for the United States and China to exchange
information about prison facilities for the enforcement of their own
laws.  Not only does section 307 in U.S.  law prohibit importing
prison labor products, but the Chinese government prohibits exporting
them as well.  In general, the provisions of the MOU allow either
country to request (1) respondent country investigations of
facilities suspected by the requesting country to be exporting goods
made with prison labor,\8 and (2) visits arranged by the respondent
country to allow officials of the requesting country to visit
suspected facilities to gather evidence to resolve allegations of
trade in prison produced goods.  Other provisions of the MOU allow
either country to request available information and evidence from the
respondent country in a form admissible in judicial or administrative
proceedings of the requesting country. 

The U.S.  Customs Service and the Department of Justice are the
primary agencies tasked with enforcing U.S.  laws against importing
goods made with prison labor.  Customs investigates violations of
prison labor laws and makes administrative determinations to exclude
products from the United States that it determines are in violation
of section 307.  The Justice Department defends all Customs
determinations challenged in U.S.  courts, and prosecutes criminal
cases brought under section 1761(a) of title 18, U.S.  Code.\9 For
example, Justice officials concluded their first case defending an
affirmative Customs determination involving U.S.  imports of Chinese
products before CIT on December 7, 1994; however, Customs'
determination of this case predated the MOU. 

In addition to Customs and the Justice Department, the State
Department plays an important negotiating and diplomatic role. 
Customs and the State Department cooperated to negotiate the prison
labor MOU and, at certain times, the State Department worked with
Customs in monitoring progress on the MOU.  In 1993, Customs made
investigating illegal importation of forced labor goods a priority
under its 1993 national trade enforcement strategy and sent one
full-time staff member to Beijing primarily to focus on prison labor
issues. 

On May 26, 1994, President Clinton decided to renew the granting of
MFN status to China for another year.  His decision was based on the
State Department's positive assessment of China's emigration policies
pursuant to the requirements of the Jackson-Vanik amendment to the
Trade Act of 1974 (P.L.  93-618, 1975).\10 In addition, on reviewing
progress under the prison labor MOU, the President determined that
China was in compliance with the MOU's provisions.  Furthermore,
following the criteria established in his May 1993 executive order
12850, the President reviewed China's overall progress with various
nonmandatory human rights conditions listed in that executive order. 
The President also said that compliance with the Jackson-Vanik
legislative requirement would be the only condition specified for
renewing China's MFN status during his administration. 


--------------------
\6 According to Customs, as of October 19, 1994, five cases had
proceeded through the administrative process to final determination
regarding illegal Chinese exports to the United States since 1990. 
Customs makes such determinations when probable cause exists that
certain imported goods are subject to provisions of section 307 and
are therefore prohibited from importation; these determinations must
be approved by the Secretary of the Treasury.  Two of the five final
determinations remain in force, and two have been withdrawn.  The
fifth one resulted in a criminal conviction. 

\7 For further information on China's prison system, see Foreign
Affairs:  Forced Labor in the People's Republic of China
(GAO/NSIAD-90-244BR, July 23, 1990). 

\8 In this report, a "respondent" country refers to the country
answering a request to exercise options laid out in the MOU.  A
"requesting" country refers to the country that is seeking to use one
of the MOU's options. 

\9 On April 23, 1992, the E.  W.  Bliss Company of Hastings, MI,
pleaded guilty to violating two counts of the criminal code for
importing Chinese stamping machines made with prison labor.  The E. 
W.  Bliss Company was fined $75,000 and ordered to reexport the 31
stamping machines that had been seized by Customs.  This case
predated the MOU and is the only criminal case that Justice officials
were aware of, in which an importer of Chinese goods made with prison
labor was convicted and fined. 

\10 The Jackson-Vanik amendment prohibits extending, or sets
conditions upon the President's ability to extend, MFN status to
nonmarket (or centrally planned) economies.  The amendment allows
such countries to receive MFN status only if the President determines
that the country permits free and unrestricted emigration. 


   SCOPE AND METHODOLOGY
------------------------------------------------------------ Letter :3

To develop information on Customs' assessment of China's compliance
with the prison labor MOU, we interviewed officials from Customs as
well as the State Department.  We also reviewed reports and cables
prepared by both Customs and the State Department that discussed
prison labor issues regarding China; these documents generally
corroborated the information we received from U.S.  officials.  To
identify the experiences of Customs and the Justice Department
regarding the enforcement of section 307, we met with headquarters
and regional officials at the U.S.  Customs Service and at the
Department of Justice in Washington, D.C., and New York City.  We
also spoke with Customs officials at the U.S.  embassy in Beijing,
China, and the U.S.  mission in Hong Kong.  In addition, we discussed
the issues raised by Customs and the Justice Department with
officials at the State Department to obtain their views.  We obtained
the background and history of the prison labor MOU from documents
prepared by the Library of Congress, Congressional Research Service,
and the State Department. 

In December 1994, we obtained oral comments on a draft of this report
from various officials at the U.S.  Customs Service and the
Departments of Justice and State.  Their comments are presented on
pages 11 to 12.  We did our work between November 1993 and December
1994 in accordance with generally accepted government auditing
standards. 


   ASSESSING CHINA'S COMPLIANCE
   WITH THE 1992 PRISON LABOR MOU
------------------------------------------------------------ Letter :4

In testimony in the fall of 1993, Customs officials reported reaching
an impasse concerning China's compliance with the letter and spirit
of the August 1992 prison labor MOU.\11 The issue centered on the
lack of timely and thorough responses from the Chinese government to
U.S.  requests for information and visits under the MOU. 

First, according to Customs' testimony, the Chinese government had
not provided timely responses to U.S.  requests that China officially
investigate suspected prison facilities and that China make
arrangements for U.S.  officials to visit those facilities.  Customs
reported that, as of September 1993, Chinese officials had responded
in 16 of the 31 cases that the U.S.  government requested
investigation and had granted 1 of the 5 visitation requests made at
that time.\12 Customs told us that by December 1993, Chinese
officials had finally concluded investigation of all 31 alleged
prison labor cases requested by the United States.  However, Customs
officials remained concerned that the amount of time spent for each
Chinese investigation varied from case to case, and that they could
not depend on a timely response. 

Second, Customs' testimony also indicated that Chinese investigations
did not provide the evidence necessary for Customs to resolve prison
labor cases and that therefore U.S.  visits to suspected prison
facilities were required.  Customs told us that much of the
information provided by the 31 investigations that Chinese officials
had concluded as of December 1993 was insufficient for Customs to
resolve its cases.  Consequently, Customs required additional
information obtained through U.S.  visitations in order to complete
its work.  However, Customs officials also encountered delays when
requesting that the Chinese government arrange visits to Chinese
facilities.  According to Customs, as of December 1994, four of the
original five visitation cases requested in 1992 were still pending. 

While Chinese officials eventually responded to the initial 31
investigations, the U.S.  government remained concerned about the
implementation of the MOU.  During a visit by the Secretary of State
in March 1994, both countries signed another agreement, known as the
"Statement of Cooperation on the Implementation of the Memorandum of
Understanding Between the United States and China on Prohibiting
Import and Export Trade in Prison Labor Products." This agreement
specified time frames and procedures for investigating and visiting
facilities in which goods were allegedly made with prison labor.  The
agreement did not specify terms for addressing the thoroughness of
Chinese investigations cited by Customs officials.  During the
Secretary of State's trip to China, the United States presented
another 20 requests for investigation. 

Customs officials stated that significant differences in China's
prison system from those found in the United States may limit China's
ability to comply with the MOU.  One primary factor affecting
Customs' assessment of the Chinese government's compliance with the
MOU is the current status of business and personnel records that are
kept in China, including those in prison or detention facilities. 
The MOU states that

     "Upon request, each Party will furnish to the other Party
     available evidence and information regarding suspected
     violations of relevant laws and regulations in a form admissible
     in judicial or administrative proceedings of the other Party."
     (Emphasis added.)

However, Customs and State officials agreed that the standards for
record keeping in Chinese prisons were not based on the same
standards as those used in the United States.  Customs officials
reported that Chinese prison records they reviewed were often
incomplete or missing altogether.  Customs officials maintained that
the Chinese government was still developing its ability to meet U.S. 
government information needs and to produce records of prison labor
investigations in a more thorough manner.  In addition, Customs
officials stated that their ability to retrieve such documents was
limited by China's lack of data processing methods and equipment
commonly used to maintain these records in the United States. 


--------------------
\11 Testimony of George J.  Weise, Commissioner, U.S.  Customs
Service, Before the House Foreign Affairs Subcommittee on
International Economic Policy and Trade, September 9, 1993 (102nd
Congress, 2nd session). 

\12 The U.S.  government may request official visits to Chinese
facilities when it believes that initial Chinese investigations did
not provide the information and evidence necessary to resolve
specific cases. 


   BENEFITS, PROBLEMS, AND
   LIMITATIONS REGARDING U.S. 
   ENFORCEMENT OF PRISON LABOR
   LAWS
------------------------------------------------------------ Letter :5


      MOU USEFUL BUT NOT FULLY
      TESTED
---------------------------------------------------------- Letter :5.1

According to Customs officials, the prison labor MOU has assisted
Customs in obtaining information sufficient to make determinations
under section 307 of the Smoot-Hawley Tariff Act of 1930, as amended. 
Customs officials told us that the MOU had been helpful in
facilitating the gathering of information from China and had improved
Customs' ability to bring some cases to closure.  For example, since
December 1993 Customs officials utilized information obtained through
official visitations under the MOU to make determinations on two
cases regarding imports of socks produced and of grapes harvested
allegedly using Chinese prison labor.  However, Customs officials
concluded that there was no evidence of prison labor exports of these
products to the United States and that there was thus no reason for
Customs to exclude these items.  Thus, according to Customs
officials, it is too soon to tell whether the MOU will be useful to
Customs in its efforts to collect incriminating evidence.  Customs
officials said it is untested whether the Chinese government will be
as cooperative in providing evidence where exported goods have
actually been manufactured with prison labor. 


      JUSTICE'S CONCERNS
---------------------------------------------------------- Letter :5.2

Justice officials are concerned whether the MOU or any other
agreement could provide Justice attorneys with the information they
need in an efficient and inexpensive manner, if the Justice
Department has to defend affirmative Customs' findings before CIT. 
The principal reason for the Justice Department's concern is that
much of the information collected by Customs under the MOU, such as
interviews with Chinese prisoners, may not be admissible at trial
under U.S.  law.  Justice officials are concerned about the extent to
which the U.S.  government may have the burden of producing evidence
that might be required to sustain Customs' findings in future section
307 cases. 

According to Justice officials, in litigating section 307 cases the
Department sought application of the standard prescribed for informal
adjudicatory proceedings under the Administrative Procedures Act
(APA).\13 Under APA, judicial review of agency adjudicatory decisions
would usually be limited to the record compiled by the agency.  For
example, the review would essentially concern whether a reasonable
basis existed for the Customs officer's determination at the time the
finding was made.  Therefore, CIT would not decide whether the
agency's finding was factually correct, and the importer would not be
allowed to introduce new evidence that had not been part of the
record before Customs' determination.  Most importantly, any evidence
that was properly considered by Customs in reaching its determination
would be admissible as part of the record in such a proceeding. 
Consequently, information gathered under the MOU, such as the
testimony of U.S.  officials who interviewed Chinese inmates, could
be cited as part of the record in support of a Customs finding. 

If CIT did not apply the APA standard of review in section 307 cases,
the alternative would be to conduct a de novo review.  In a de novo
review, CIT makes its own findings concerning whether the goods in
question were prison labor exports; that is, CIT adjudicates all
factual issues and the importer is able to introduce new evidence. 
The problem for the Justice Department in defending a Customs
determination to exclude imports under section 307 is that in a trial
de novo, the rules of evidence in some instances might not allow
admission of certain evidence developed by Customs in making its
determination.  For example, the testimony of U.S.  government
witnesses who interviewed Chinese prison inmates might at times be
precluded by the rule against hearsay. 

Justice officials agreed that the scope of the present MOU was broad
enough to cover the various kinds of evidence that might be required
in a de novo proceeding.  Such evidence might include commercial and
personnel records of the factory in question; the live testimony of
the prison official responsible for keeping such records; and, in
some instances, a sample of the factory's product submitted for
material analysis. 

Nevertheless, Justice officials remained concerned about whether they
would be able to successfully defend Customs' findings in a de novo
proceeding for several reasons.  For example: 

The Chinese government's willingness to adhere to the MOU when the
United States seeks evidence--such as commercial or personnel records
or a sample of a factory's product--is still untested. 

According to Justice officials, even if the Chinese government
furnished all available evidence, the evidence required in a de novo
proceeding under section 307 may often not exist.  As noted earlier,
the current system of maintaining business and personnel records in
Chinese prisons is not based on the same standards as those used in
the United States, according to Customs. 

Even where commercial and personnel records are maintained by prison
factories in China, other aspects of the Chinese penal system may
limit U.S.  officials' ability to obtain information specific enough
to defend a Customs determination under section 307.  For example,
just the fact that a prison has a factory does not necessarily mean
that all goods manufactured are those produced by prisoners.\14
Justice officials stated that this may pose a problem if it becomes
necessary to establish that at least one factory worker--who was a
prisoner on a particular date--worked on a specific product that was
exported to the United States. 


--------------------
\13 5 U.S.C.  706, 1988. 

\14 Evidentiary problems arise because in China, many former
prisoners continue their employment in prison factories after their
sentences have been completed.  In addition, family members of
prisoners are often employed in the same factories. 


      CIT MADE ITS FIRST
      DETERMINATION ON IMPORTED
      GOODS MADE WITH CHINESE
      PRISON LABOR
---------------------------------------------------------- Letter :5.3

On December 7, 1994, in China Diesel Imports, Inc.  v.  the United
States, CIT issued its first determination regarding imported goods
that Customs had earlier determined were made with Chinese prison
labor.\15 In November 1991, Customs excluded diesel engines
manufactured in China under section 307 as goods made by convict or
forced labor.  The importer, China Diesel, Inc., filed suit before
CIT seeking entry of the merchandise.  In its preliminary opinion,
issued in June 1994, CIT refused to apply the APA standard of review
and held that it must adjudicate all factual issues in a trial de
novo.\16 However, in its December 7, 1994, judgment, CIT held that
the importer had the burden of proving that its diesel engines were
not made, in whole or in part, with convict labor.  Because CIT
concluded that China Diesel, Inc., had not met this requirement, it
upheld Custom's determination that the engines in question were
convict made and found that Customs had properly excluded them from
entry into the United States. 

Despite the outcome of China Diesel, Justice officials still have
concerns regarding their ability to gather evidence efficiently and
inexpensively in section 307 cases under a de novo standard of
review.  Justice officials told us that the outcome of China Diesel
may have depended on certain circumstances that may not be present in
future cases.  For example, in reaching its decision regarding the
China Diesel case, CIT said that it had relied heavily upon various
Chinese government and reference publications, which appeared to
identify as a penal institution the facility in which the engines
were manufactured.  According to the CIT's decision, these documents
alone would have sufficed to sustain Customs' determination.  Justice
officals said that this evidence is not likely to be available in
future cases because the Chinese government has ceased identifying
such penal facilities in its publications as of 1990. 

According to Justice officials, the problems in gathering evidence in
China do not reflect any inadequacy in the scope of the MOU that was
negotiated with the Chinese government.  Rather, such difficulties
reflect the differences in commercial practices and court standards
between the two countries.  Justice officials stated that these
problems are typical of the obstacles faced by the U.S.  government
or private companies seeking evidence in some developing countries
for the purposes of litigating related issues in the United States. 

Justice officials therefore question whether the current MOU, or any
other agreement negotiated with China, would be able to provide the
evidence that might be required under a de novo review of section 307
cases.  According to the Justice Department, Congress could address
the problem by modifying section 307 to require that a judicial
review be conducted under APA standards for informal adjudicatory
proceedings.  However, it would be very difficult to modify the MOU
to accommodate the needs of a de novo review. 

While Customs determinations and CIT reviews under section 307 are
civil proceedings, title 18 provides criminal penalties for the
knowing importation or transportation in interstate commerce of
convict or prison-made goods.\17 If a case is brought before a
criminal court, the standard of evidence required would be even
greater than that in a de novo review in a civil proceeding.  In U.S. 
criminal proceedings, Justice prosecutors would have to prove beyond
a reasonable doubt that the importer knowingly transported the goods
in question. 


--------------------
\15 No.  94-185, slip.  op.  (CIT, Dec.  7, 1994).  The original
Customs determination in this case predated the MOU. 

\16 No.  94-90, slip.  op.  (CIT, June 2, 1994). 

\17 Title 18 U.S.C.  1761(a). 


   AGENCY COMMENTS
------------------------------------------------------------ Letter :6

We obtained oral comments on a draft of this report from officials at
the U.S.  Customs Service and the Departments of Justice and State. 
At the Customs Service, on December 1, 1994, the Director for Fraud
Investigations and the Director of the Far East Desk, both in the
Office of Enforcement; the Associate Chief Counsel for Enforcement in
the Office of the Chief Counsel (regarding legal issues); and an
Import Specialist in the Office of Trade Operations concurred with
the information as presented.  In general, Customs officials stated
that this report was a well balanced and fair presentation of the
prison labor MOU and of Customs' views on the MOU.  They provided
other minor suggestions that we incorporated where appropriate. 

On December 1, 1994, we discussed a draft of this report with a
Senior Attorney of the General Litigation and Legal Advice Office in
the Criminal Division at the Department of Justice.  The draft was
also reviewed by the Acting Chief of General Litigation and Legal
Advice, Criminal Division.  On December 8, 1994, we discussed a draft
of this report with the Director of Commercial Litigation, Civil
Division, at the Department of Justice.  These Justice officials said
that no agreement would ensure U.S.  officials the ability to obtain
information from China sufficient to withstand de novo judicial
review in U.S.  courts.  We strengthened this point in the report. 
Overall, they agreed with the information in the report as presented
and provided other minor suggestions that we incorporated where
appropriate. 

On December 8, 1994, we discussed a draft of this report with the
Deputy Director of the Office of Chinese and Mongolian Affairs and a
Senior Attorney in the Office of the Legal Adviser at the State
Department.  They viewed the MOU as adequate to assist the U.S. 
government in obtaining information from China and said that it was
too early to determine the outcome of any U.S.  judicial review. 
While the MOU has not been fully tested thus far, we believe the
views of the Justice Department presented here provide useful insight
in anticipating future enforcement concerns regarding China.  State
officials also suggested other minor changes, which we included in
this report where appropriate. 


---------------------------------------------------------- Letter :6.1

We are sending copies of this report to the U.S.  Trade
Representative; the Secretaries of State, the Treasury, Commerce, and
Justice; and the Commissioner of the U.S.  Customs Service.  We will
make copies available to others upon request. 

The major contributors to this report are listed in appendix IV.  If
you have any questions about this report, please call me on (202)
512-4812. 

Allan I.  Mendelowitz, Managing Director
International Trade, Finance,
 and Competitiveness


CHINA'S COMMITMENT UNDER THE 1992
PRISON LABOR MOU
=========================================================== Appendix I

On August 7, 1992, the United States and China concluded the prison
labor MOU establishing four mutual commitments for exchanging
information about respective U.S.  and Chinese prison facilities.\1
Throughout these negotiations, the Chinese government was highly
concerned that access to Chinese facilities would appear to violate
China's sovereignty over its domestic affairs.  Therefore, according
to State Department documents, specific terms were included in the
MOU to address this concern.  In particular, it is the mutual nature
of the MOU that allows officials of both countries the opportunity to
obtain the information needed from the other country to satisfy
domestic enforcement needs. 

The MOU lists four broad provisions applicable to both countries. 
The terms of the MOU allow both countries to request

investigations of facilities suspected by the requesting country to
be exporting goods made with prison labor,

information on law enforcement and whether these facilities are in
compliance with the respondent country's regulations,

evidence regarding suspected violations of the respondent country's
laws and regulations in a form admissible in the requesting country's
judicial or administrative proceedings, and

visits arranged by the respondent country to allow officials of the
requesting country to view suspected facilities. 

After the MOU was signed, government officials in China and the
United States became concerned about the terms for satisfactory
implementation of the agreement.  Customs officials told us that the
lack of time frames and procedures for carrying out the prison labor
MOU rendered the agreement difficult to administer.  In addition,
Chinese government officials were concerned, once information had
been exchanged, that the United States was not promptly resolving
pending cases.  In late 1993, the Chinese government placed a hold on
any further requests for visits and information until the United
States had resolved those cases already opened.  The United States
and China continued to negotiate the specific terms for
implementation 18 months after the MOU had been signed. 

On March 13, 1994, the United States and China signed a "Statement of
Cooperation on the Implementation of the Memorandum of Understanding
Between the United States and China on Prohibiting Import and Export
Trade in Prison Labor Products." The statement of cooperation was
intended to aid the timely investigation and visitation of prison
labor facilities where goods were allegedly made with prison labor. 
The statement of cooperation acknowledged both countries' laws and
regulations regarding importing and exporting products made with
prison labor.  It also recognized the good intentions and efforts
already made by both countries in implementing the prison labor MOU. 

The statement of cooperation then specified the following procedures
to be followed under the MOU: 

"First, when one side provides the other side a request, based on
specific information, to conduct investigations of suspected exports
of prison labor products destined for the United States, the
receiving side will provide the requesting side a comprehensive
investigative report within 60 days of the receipt of the written
request.  At the same time, the requesting side will provide a
concluding evaluation of the receiving side's investigative report
within 60 days of receipt of the report. 

"Second, if the United States Government, in order to resolve
specific outstanding cases, requests a visit to a suspected facility,
the Chinese Government will, in conformity with Chinese laws and
regulations and in accordance with the MOU, arrange for responsible
United States diplomatic mission officials to visit the suspected
facility within 60 days of receipt of a written request. 

"Third, the United States Government will submit a report indicating
the results of the visit to the Chinese Government within 60 days of
a visit by diplomatic officials to a suspected facility. 

"Fourth, in cases where the U.S.  government presents new or
previously unknown information on suspected exports of prison labor
products destined for the United States regarding a suspected
facility that was already visited, the Chinese Government will
organize new investigations and notify the U.S.  side.  If necessary,
it can also be arranged for the U.S.  side to again visit that
suspected facility. 

"Fifth, when the Chinese Government organizes the investigation of a
suspected facility and the U.S.  side is allowed to visit the
suspected facility, the U.S.  side will provide related information
conducive to the investigation.  In order to accomplish the purpose
of the visit, the Chinese side will, in accordance with its laws and
regulations, provide an opportunity to consult relevant records and
materials on-site and arrange visits to necessary areas of the
facility.  The U.S.  side agrees to protect proprietary information
of customers of the facility consistent with the relevant terms of
the Prison Labor MOU. 

"Sixth, both sides agree that arrangements for U.S.  officials to
visit suspected facilities, in principle, will proceed after the
visit to a previous suspected facility is completely ended and a
report indicating the results of the visit is submitted."


--------------------
\1 To obtain assistance from other countries on customs-related
matters, the United States may enter into a Customs mutual assistance
agreement.  According to Customs officials, such agreements provide a
basis for cooperation and investigation in the areas of commercial
fraud, narcotics trafficking, and export control.  The assistance is
provided for use in all proceedings, whether judicial,
administrative, or investigative.  However, according to State
Department documents, during early negotiations in November 1991,
representatives of the United States and China were unable to agree
on such an arrangement as a framework for cooperation.  According to
Customs and State officials, no other country has signed an agreement
similar to China's 1992 prison labor MOU with the United States.  As
of December 1994, Customs officials were working with Chinese
officials to negotiate a Customs mutual assistance agreement. 


U.S.  LAWS AND REGULATIONS
PROHIBITING IMPORTS MADE WITH
PRISON LABOR
========================================================== Appendix II

Since 1890, the United States has banned importing goods made by
convict labor.  The current prison labor statute, section 307 of the
Smoot-Hawley Tariff Act of 1930, as amended (19 U.S.C.  1307 (1988))
was preceded by section 51 of the Tariff Act of 1890, which was
intended to protect domestic labor from manufactured goods produced
by foreign convict labor.\1 During consideration of section 307, a
Senate amendment was offered to extend the provision to include goods
produced by "forced labor or/and indentured labor." Since some
Members of Congress were concerned that the humanitarian aspects of
the proposed amendment might harm the U.S.  consumer, the Conference
Committee on the 1930 Tariff Act added a caveat, the "consumptive
demand" clause.  This caveat specified that the statute would not
apply to goods produced by "forced labor or/and indentured labor"
that were not produced "in such quantities in the United States as to
meet the consumptive demands of the United States." CIT described
section 307 as follows: 

     "Congress intended to protect domestic workers and producers
     from unfair competition.  But this concern as well as any desire
     to improve foreign labor conditions were clearly subordinate in
     section 307, as enacted, to concern for the American consumer's
     access to merchandise not produced domestically in quantities
     sufficient to satisfy consumer demand."\2

Thus, section 307 is intended primarily to protect U.S.  producers',
consumers', and workers' rights, rather than to promote human rights
in other countries. 

Under section 307, the Secretary of the Treasury is charged with
developing regulations to enforce this provision of the law.  The
Secretary of the Treasury has delegated to the U.S.  Customs Service
the responsibility for administering the prohibition on importing
goods made by convict or forced labor.  To enforce a ban on imports,
Customs must gather evidence and determine whether the goods were
produced by forced or convict labor.  However, such a determination
cannot be established by a simple examination of the goods
themselves.  Customs may investigate when allegations are made that
merchandise is imported or is likely to be imported in violation of
section 307.  In investigating a suspected violation, Customs
commonly obtains information from sources that include foreign
interests, importers, domestic producers, and others. 

If the information reasonably indicates that the merchandise may fall
within the purview of section 307, the Commissioner of Customs is to
advise all district directors in charge of U.S.  ports to withhold
release of the merchandise.  The importer must then produce a
certificate of origin, signed by the foreign seller or owner, that
contains sufficient information showing that prohibited labor was not
used.  If, despite the importer's evidence, there remains probable
cause to conclude that certain merchandise is subject to the
provisions of section 307 and consequently prohibited from
importation, Customs is to publish its finding in the Federal
Register.  Such a finding must be approved by the Secretary of the
Treasury.  Once the importer has filed a protest with Customs and the
protest has been denied, the importer can then file suit in CIT to
try to overturn the Customs determination. 

If Customs suspects that prison labor goods are being imported
intentionally, Customs may refer the case to a U.S.  attorney for
criminal prosecution.  U.S.  law provides criminal penalties for the
knowing importation or transportation in interstate commerce of
convict or prison-made goods.\3


--------------------
\1 [ch.  1244, 26 Stat.  567, 624 (1890)]

\2 Id.  at 1233. 

\3 Title 18 U.S.C.  1761(a) states:  "Whoever knowingly transports in
interstate commerce or from any foreign country into the United
States any goods, wares, or merchandise manufactured, produced, or
mined, wholly or in part by convicts or prisoners, except convicts or
prisoners on parole, supervised release, or probation, or in any
penal or reformatory institution, shall be fined not more than
$50,000 or imprisoned not more than two years, or both."


THE CASE OF CHINA DIESEL IMPORTS
V.  THE UNITED STATES
========================================================= Appendix III

BACKGROUND

In November 1991, the U.S.  Commissioner of Customs issued a
detention order advising all district directors to withhold the
release of certain Chinese diesel engines that had been imported to
the United States.  The U.S.  importer, China Diesel Imports, Inc.,
previously denied that the engines had been produced with prohibited
labor.  However, in January 1992, Customs determined again that the
diesel engines had been produced with convict and/or forced and/or
indentured labor and therefore should be denied U.S.  entry according
to 19 U.S.C.  1307.  China Diesel filed suit in CIT on October 16,
1992, to challenge the protest denial and to assert that the diesel
engines should have been allowed entry into the United States.\1


--------------------
\1 China Diesel Imports, Inc.  v.  The United States, No.  94-90,
slip op.  at 13 (CIT, June 2, 1994). 


      CHINA DIESEL AND THE
      STANDARD OF REVIEW
----------------------------------------------------- Appendix III:0.1

Before CIT issued its first opinion in China Diesel, the Justice
Department argued that the standard of review applied by CIT should
be limited to the records used by Customs in making its
determination.  Such a hearing would be based on the Administrative
Procedures Act (APA) (5 U.S.C.  706, 1988) standard of review, which
is usually limited to the agency's compiled record. 

On June 2, 1994, CIT refused to apply the APA standard of review and
held that it must adjudicate all factual issues in this case.  Such a
proceeding is called a de novo review.  In a de novo review, CIT
would make its own findings concerning whether the goods in question
were prison labor exports, and the importer would be able to
introduce new evidence.  Moreover, in a trial de novo, the rules of
evidence might not allow admission of much of the informal testimony
that was developed and related orally by Customs officials under the
MOU.  The testimony of government witnesses who spoke with Chinese
prison inmates, for example, might be precluded by the rule against
hearsay. 

On December 7, 1994, CIT upheld Customs' right to exclude, under
section 307, diesel engines manufactured in China.  In upholding
Customs' exclusion, CIT held that the importer had the burden of
proving that the diesel engines involved in the case were not made,
in whole or in part, with convict labor and that the importer had not
met this burden.  China Diesel Imports, Inc., did not file an appeal
within the 60 days allowed after the CIT's decision. 

In reaching its conclusion in China Diesel, CIT said that it had
relied most heavily upon Chinese government documents and reference
publications.  The documents appeared to identify the facility where
the engines were manufactured as a "Reform through Labor" facility. 
CIT held that such facilities were penal, and the inmates who worked
in them were convicts.  CIT stated that these documents alone would
have provided sufficient evidence to uphold Customs' determination. 
In addition, CIT stated that its conclusion was corroborated by (1)
testimony of State Department officials that their tour of the
Chinese facility had been staged, and by (2) failure of the Chinese
factory manager to appear at the trial. 


      OTHER ISSUES ARISING FROM
      CHINA DIESEL
----------------------------------------------------- Appendix III:0.2

CIT also reached two conclusions regarding the application of the
consumptive demand clause of the 1930 Tariff Act.  First, CIT held
that the clause's exception of imported goods made with forced and/or
indentured labor applies in instances when the product is not
available and not merely, as the government argued, when domestic
industry lacked the capability to produce goods in question.  Second,
CIT ruled that the consumptive demand exception does not apply to
convict-made goods.  This second conclusion was particularly
significant, because previous courts had declined to decide whether
importing a product produced with convict labor is permissible when
domestic production is insufficient to satisfy domestic demand.\2

In defending Customs' determination, Justice officials stated that
the MOU was particularly useful to the presentation of the U.S. 
government's case.  First, the Chinese government had arranged a tour
of the facility according to the terms provided in the MOU.  Second,
because the MOU provides that each party furnish "available evidence
and information regarding suspected violations of relevant laws and
regulations in a form admissible in judicial or administrative
proceedings of the other party," CIT allowed the Justice Department
to draw inferences from the Chinese government's apparent
unwillingness to allow the factory manager to testify.  Justice
officials explained that, were it not for the language of the MOU,
the U.S.  government would normally not have been permitted to argue
that the failure of the factory manager to appear suggested that his
testimony would be damaging to the importer's case. 


--------------------
\2 See McKinney v.  United States Department of the Treasury 614 F. 
Supp.  1226 (CIT 1985). 


      JUSTICE OFFICIALS' CONCERNS
      REGARDING FUTURE CASES
----------------------------------------------------- Appendix III:0.3

Despite the outcome of China Diesel, Justice officials still have
concerns regarding their ability to gather evidence efficiently and
inexpensively in section 307 cases under a de novo standard of
review.  They are concerned that the outcome of the case may have
depended on certain circumstances that may not be present in future
cases.  These circumstances include

(1) the availability of Chinese government and reference publications
that identified the facility in question as a "Reform through Labor"
facility.  According to Justice officials, the Chinese government
ceased identifying "Reform through Labor" facilities in its
publications as of 1990. 

(2) the availability at trial of the State Department officials who
conducted the on-site investigation.  Justice officials explained
that the U.S.  government personnel who conduct the factory tour may
not always be available to testify. 

(3) the paucity of evidence produced by the importer.  Even assuming
that future courts place the burden of proof on the importer, the
U.S.  government may nevertheless be required to produce evidence in
order to refute evidence introduced by the importer.\3

Finally, because different CIT judges may decide similar cases
differently, the future application of CIT decisions is unclear until
the issue in question is decided by the Court of Appeals for the
Federal Circuit.  Thus, despite the decision in China Diesel, it is
uncertain whether CIT will apply a de novo standard of review in
future section 307 cases. 


--------------------
\3 Evidence which, if unexplained or uncontradicted, is sufficient to
sustain judgment in favor of the plaintiff, is called prima facie
evidence. 


MAJOR CONTRIBUTORS TO THIS REPORT
========================================================== Appendix IV

GENERAL GOVERNMENT DIVISION, WASHINGTON, D.C. 

Virginia C.  Hughes, Assistant Director
Elizabeth Sirois, Assistant Director
Anthony L.  Hill, Project Manager
Jaime L.  Dominguez, Deputy Project Manager
Rona Mendelsohn, Evaluator (Communications Analyst)

OFFICE OF THE GENERAL COUNSEL, WASHINGTON, D.C. 

Sheila Ratzenberger, Assistant General Counsel
Richard R.  Perruso, Attorney

FAR EAST REGIONAL OFFICE

Kathleen M.  Monahan, Senior Evaluator
Joyce L.  Akins, Senior Evaluator
Karen Strauss, Evaluator
