DE KIEFFER & HORGAN, PLLC 1455 PENNSYLVANIA AVENUE, N.W. SUITE 900B WASHINGTON, D.C December 29,2015

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1 LA W OI<'FICES OF DE KIEFFER & HORGAN, PLLC 1455 PENNSYLVANIA AVENUE, N.W. SUITE 900B WASHINGTON, D.C J. KEVIN HORGAN TEL (JDOO Al<'l 'ILIATED OFFICE: SAARBRDcKEN. GERMANY December 29,2015 KEVIN.HORGAN@DHLAW.COM DHLAW.CO!vI EDIS The Honorable Lisa R. Barton Secretary U.S. International Trade Commission 500 E. Street, S. W. Washington, D.C PUBLIC DOCUMENT Re: Inv. No. TPA Trans-Pacific Partnership Agreement: Likely Impact on the U.S. Economy and on Specific Industry Sectors Dear Madam Secretary: Titanium Metals Corporation ("TIMET") makes this submission to advise the Commission that the United States titanium industry will suffer serious economic harm if the Trans-Pacific Partnership Free Trade Agreement ("TPP") is implemented in accordance with the terms set forth in the recently released text of the TPP. When the Commission conducted its 2013 investigation regarding the impact of adding Japan to the TPP negotiations, TIMET submitted extensive testimony, written commentary and economic analysis demonstrating that the elimination of the current 15% tariff on titanium products in the TPP would have serious negative consequences for the U.S. titanium industry. Since the text of the TPP was not available at that time, TIMET's prior comments were premised on the assumption that the TPP agreement would have terms similar to those used in the earlieradopted Korea-United States ("KORUS") Free Trade Agreement. While the TPP text provides for longer tariff phase out periods for Japanese titanium products than those adopted in the KORUS agreement, the TPP does carry forward the flawed KORUS rule of origin for titanium products. This flawed rule of origin will allow titanium producers from Russia, China and other non-tpp countries to unfairly exploit the TPP by shipping unwrought titanium products to TPP countries for minimal processing that will allow the products to be imported into the United States duty free. 1

2 Additionally, the TPP contains a flawed "Tariff Differential" rule for determining the tariff rate applicable to products from a TPP country when, as in the case of titanium, the rates applicable to imports from Japan are higher than the tariff rates for titanium products imported from other TPP countries. Rather than being phased out over 10 to 15 years, the tariffs on Japanese titanium products will be eliminated immediately and entirely if the Japanese products undergo more than "a minimal operation, " e.g., packaging, in one of the other TPP countries. Thus, the origin loophole for Japanese titanium products is even easier to exploit than the origin loophole for titanium produced in non-tpp countries. Because the origin loopholes created by the TPP present an immediate and significant risk of serious harm to the United States titanium industry, and the origin rules cannot be corrected prior to implementation of the TPP, TIMET opposes approval of the proposed TPP FTA. Background The current titanium provisions of the Harmonized Tariff Schedule of the United States ("HTSUS") are: 8108 Titanium and articles thereof, including waste and scrap: Unwrought titanium; powders... 15% Sponge Other: Powders Ingots Other Waste and scrap... Other: Articles of titanium... Free 5.5% Castings Other Other... 15% Blooms, sheet bars, and slabs Other bars, rods, profiles and wire Plates, sheets, strips and foil Tubes and pipes Other 2

3 TPP Terms Applicable to Titanium: The TPP text provides that the current 15% tariff on titanium products shall be eliminated immediately when the TPP enters into force with respect to all TPP countries except Japan. Imports of titanium products from Japan that are classified under HTSUS are to be phased out over a 15 year time period at a rate of 1 percentage point per year. Tariffs on Japanese titanium products classified under HTSUS are to be phased out over a 10- year time period at a rate of 1.5 percentage points per year. All other tariffs on titanium products from Japan are to be eliminated immediately on the date that the TPP enters into force. I The product specific rule of origin for merchandise classified under HTSUS through provides that a product will be considered the product of a TPP country if the processing performed in the TPP country results in: "A change to a good of subheading through from any other subheading.,,2 Thus, a titanium product will be eligible for duty free entry into the United States if the processing performed in a TPP country is sufficient to result in the reclassification of that product from an unwrought titanium product, e.g., a titanium ingot or billet, into an "Other" titanium product, e.g., bars, rods or plates. The TPP text also provides a rule for determining the appropriate tariff rate to apply when, as in the case of titanium, the tariff rates applicable to articles from different TPP countries are not the same. In such cases, the TPP provides: Section B: Tariff Differentials 8. Except as otherwise provided for in a Party's Schedule to this Annex if an importing Party applies different preferential tariff treatment to other Parties for the same originating good at the time a claim for preferential tariff treatment is made in accordance with the importing Party's Schedule to this Annex, the importing Party shall apply the rate of customs duty for the originating good of the Party where the last production process, other than a minimal operation, occurred. 9. For purposes of paragraph 1, a minimal operation is: (a) an operation to ensure the preservation of a good in good condition for purposes of transport and storage; (b) packaging, re-packaging, breaking up of consignments or putting up a good for retail sale, including placing in bottles, cans, flasks, bags, cases or boxes; (c) mere dilution with water or another substance that does not materially alter the cha racteristics of the good; 1 TPP, Appendix 2-D, U.S. Tariff Elimination Schedule. 2 TPP, Annex 3-D, Product-Specific Rules of Origin. 3

4 (d) collection of goods intended to form sets, assortments, kits or composite goods; and (e) any combination of operations referred to in subparagraphs (a) through (d).3 DISCUSSION Titanium is a strategic metal that is critical to the national security of the United States. In recognition of this fact, United States trade policy has consistently promoted the development of a vigorous and secure American titanium industry. Evidence of this policy can be found in the maintenance of a 15% tariff on imported titanium despite the lowering or elimination of other tariffs; the 2004 decision ofthe President to end duty free treatment for titanium products from Russia under the Generalized System of Preferences ("GSP"); the permanent enactment of the Specialty Metals law, 10 U.S.C. 2533b, which establishes a domestic preference for titanium used in defense articles; and the Foreign Trade Zone Board's consistent refusal to allow FTZ procedures to be used to avoid titanium duties. The loose rules of origin for titanium embodied in the text of the TPP clearly undermine this policy 1) by granting duty free entry to titanium from non-tpp countries that undergoes minor processing in TPP countries, and 2) by nullifying the extended phase out period that is nominally applicable to imports from Japan if the titanium undergoes more than "minimal" packaging operations in another TPP country. The dramatic shift in the flow of titanium trade between the United States and Korea following the implementation of the KORUS FTA bears witness to the harm that can flow from poorly crafted rules of origin. KORUS eliminated tariffs on unwrought titanium products from Korea, including titanium sponge and ingots, immediately upon implementation of the FTA in Tariffs on other titanium products from Korea were eliminated over a three year period. Thus, beginning on January 1, 2014, all titanium products originating in Korea began entering the United States duty free. This was of little concern during the KORUS negotiations because Korea had no significant titanium production at the time. But, coincident with the adoption of KORUS, South Korea's largest steel producer, POSCO, entered into ajoint venture with the Kazakh titanium producer, UKTMP, to produce titanium ingots in Kazakhstan and then ship those ingots to South Korea for processing into titanium mill products. 3 TPP, Chapter 2, National Treatment and Market Access for Goods, Annex 2-D, Tariff Elimination, Section B: Tariff Differentials. 4

5 The U.S. titanium industry felt the impact of KORUS first when it began to see a dramatic decline in its exports of titanium products to Korea. U.S. exports of titanium products dropped by approximately 50% from 2013 to HTS : TITANIUM AND ARTICLES THEREOF, NESOI FAS Value by HTS Number and FAS Value for Korea U.S. Domestic Exports Annual + Year-To-Date Data from Jan - Oct In 1,000 Dollars ,677j 59,677 50,258 50,258 Percent Change YTD YTD % -15.8% I Source: United States International Trade Commission. As POSCO saturated its home market with Khazak titanium, it began exporting converted Khazak titanium to the United States. From 2014 to 2015, Korean exports of titanium products to the United States surged by more than 500%. All of these increased impolis of Khazak Korean titanium entered the United States duty free under KORUS. HTS : TITANIUM AND ARTICLES THEREOF, NESOI Customs Value by HTS Number and Customs Value for Korea U.S. Imports for Consumption Annual + Year-To-Date Data from Jan - Oct Percent Change HTS Number Country In 1,000 Dollars YTD YTD2015 i Korea , % I Total! , % I Source: United States International Trade Commission. 5

6 By creating an incentive for POSCO to produce titanium products using Khazak origin titanium, KORUS harmed the U.S. titanium industry in two significant ways. First, it resulted in the displacement of U.S. exports of titanium products to Korea. Second, immediately upon the expiration of tariffs, exports of titanium products from Korea to the United States surged dramatically. Moreover, since the Khazak titanium company, UKTMP, has more titanium sponge capacity (26,000 MT) than the combined capacity of all U.S. titanium sponge producers (23,500 MT), there is no reason to believe that the recent surge in imports from Korea will not continue to grow as POSCO becomes a mature titanium producer. The loose origin rules of the TPP FTA pose an even greater threat to the United States titanium industry. Just as UKTMP formed an alliance with an FT A partner to expand the markets for Khazak titanium, the TPP FT A will encourage Russia and China to seek out FT A partners who can be used as a conduit for transshipping titanium for duty free entry into the United States after minimal processing in an FTA country. Under the TPP rule of origin for titanium, Chinese and Russian titanium exporters will only be required to convert a titanium billet to a titanium bar or plate in a TPP country to qualify the resulting product for duty free entry into the United States under the TPP. Such processing can be carried out on steel rolling equipment that already exists in numerous TPP countries. The threat posed by Russia and China is vastly greater than the Khazak-Korea threat because the combined titanium sponge capacity of Russia and China (70,000 MT) is more than twice that of Khazakhstan. Further exacerbating the threat posed by the TPP rules of origin are the unprecedented tariff differential rules, which were disclosed for the first time upon the recent release of the TPP text. Under these rules, quoted above, titanium products from Japan will immediately become eligible for duty free entry into the United States if the products undergo "more than a minimal operation" in another TPP country. Since a "minimal operation" is defined as repackaging or diluting with water, the rule means that any sort of production process in a TPP country other than Japan will allow the product to enter the United States duty free. Thus, a titanium product produced in Japan will enter the United States duty free immediately upon entry into force of the TPP if the product is rolled to a narrower gauge or undergoes a descaling or pickling operation in another TPP country. Other common finishing operations that could be performed in a TPP country outside Japan to exploit the "minimal operation" loophole include: coating, heat treating, surface conditioning and side trimming. Japanese origin titanium products will not have to undergo any tariff shift as a result of processing in another TPP country to qualify for immediate duty free entry into the United States due to the "minimal operation" loophole. They will immediately enter the United States duty free notwithstanding the fact that the TPP agreement calls for tariffs on Japanese titanium products to be phased out over a 10 to 15 year time period. If Japanese titanium producers choose to exploit this gaping loophole, the tariff phase out periods for Japanese titanium imports will have been rendered illusory. 6

7 The titanium industry in Japan has 70,000 metric tons of capacity, only a fraction of which can be absorbed by its home market. The Japanese industry is overbuilt and, as a result, export oriented. Its exports to Asia have been displaced by increased titanium production in China and Korea. Thus, the threat to the United States titanium industry posed by the potential duty free importation of titanium from Japan, which will be facilitated by the TPP FTA, is both immediate and substantial. The TPP's origin loopholes, which will permit the immediate elimination of tariffs on titanium produced in Japan, Russia and China, threaten the security of an important segment of the United States' defense industrial base. Titanium is a strategic material that is critical to the performance of many defense articles. As the Specialty Metals law attests, the United States has a strategic interest in maintaining secure domestic sources for titanium. The United States titanium industry currently consists of three economically viable producers who compete vigorously for both commercial and military sales. Titanium consumers benefit in terms of both price and innovation because there is substantial competition among United States producers who compete vigorously in the United States and abroad without government subsidization. The TPP FT A, if adopted in its current form, will seriously undermine what is and should remain a vibrant domestic capacity to produce a strategic metal, titanium. Because the origin loopholes created by the TPP present an immediate and significant risk of serious harm to the United States titanium industry, and the origin rules cannot be corrected prior to implementation of the TPP, TIMET opposes approval of the proposed TPP FTA. If you have any questions concerning this submission, please do not hesitate to contact us. Sincerely yours, 1 v;c, /lavrr~ J/<- J. Kevin Horgan Judith L. Holdsworth Counsel to Titanium Metals Corporation 7