[House Hearing, 106 Congress]
[From the U.S. Government Publishing Office]



 
                        WTO 2000: THE NEXT ROUND

=======================================================================

                                HEARING

                               before the

                  SUBCOMMITTEE ON TELECOMMUNICATIONS,
                     TRADE, AND CONSUMER PROTECTION

                                 of the

                         COMMITTEE ON COMMERCE
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED SIXTH CONGRESS

                             FIRST SESSION

                               __________

                            NOVEMBER 4, 1999

                               __________

                           Serial No. 106-71

                               __________

            Printed for the use of the Committee on Commerce


                                


                      U.S. GOVERNMENT PRINTING OFFICE
 61-042CC                    WASHINGTON : 1999
------------------------------------------------------------------------------
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                         COMMITTEE ON COMMERCE

                     TOM BLILEY, Virginia, Chairman

W.J. ``BILLY'' TAUZIN, Louisiana     JOHN D. DINGELL, Michigan
MICHAEL G. OXLEY, Ohio               HENRY A. WAXMAN, California
MICHAEL BILIRAKIS, Florida           EDWARD J. MARKEY, Massachusetts
JOE BARTON, Texas                    RALPH M. HALL, Texas
FRED UPTON, Michigan                 RICK BOUCHER, Virginia
CLIFF STEARNS, Florida               EDOLPHUS TOWNS, New York
PAUL E. GILLMOR, Ohio                FRANK PALLONE, Jr., New Jersey
  Vice Chairman                      SHERROD BROWN, Ohio
JAMES C. GREENWOOD, Pennsylvania     BART GORDON, Tennessee
CHRISTOPHER COX, California          PETER DEUTSCH, Florida
NATHAN DEAL, Georgia                 BOBBY L. RUSH, Illinois
STEVE LARGENT, Oklahoma              ANNA G. ESHOO, California
RICHARD BURR, North Carolina         RON KLINK, Pennsylvania
BRIAN P. BILBRAY, California         BART STUPAK, Michigan
ED WHITFIELD, Kentucky               ELIOT L. ENGEL, New York
GREG GANSKE, Iowa                    THOMAS C. SAWYER, Ohio
CHARLIE NORWOOD, Georgia             ALBERT R. WYNN, Maryland
TOM A. COBURN, Oklahoma              GENE GREEN, Texas
RICK LAZIO, New York                 KAREN McCARTHY, Missouri
BARBARA CUBIN, Wyoming               TED STRICKLAND, Ohio
JAMES E. ROGAN, California           DIANA DeGETTE, Colorado
JOHN SHIMKUS, Illinois               THOMAS M. BARRETT, Wisconsin
HEATHER WILSON, New Mexico           BILL LUTHER, Minnesota
JOHN B. SHADEGG, Arizona             LOIS CAPPS, California
CHARLES W. ``CHIP'' PICKERING, 
Mississippi
VITO FOSSELLA, New York
ROY BLUNT, Missouri
ED BRYANT, Tennessee
ROBERT L. EHRLICH, Jr., Maryland

                   James E. Derderian, Chief of Staff
                   James D. Barnette, General Counsel
      Reid P.F. Stuntz, Minority Staff Director and Chief Counsel

                                 ______

   Subcommittee on Telecommunications, Trade, and Consumer Protection

               W.J. ``BILLY'' TAUZIN, Louisiana, Chairman

MICHAEL G. OXLEY, Ohio,              EDWARD J. MARKEY, Massachusetts
  Vice Chairman                      RICK BOUCHER, Virginia
CLIFF STEARNS, Florida               BART GORDON, Tennessee
PAUL E. GILLMOR, Ohio                BOBBY L. RUSH, Illinois
CHRISTOPHER COX, California          ANNA G. ESHOO, California
NATHAN DEAL, Georgia                 ELIOT L. ENGEL, New York
STEVE LARGENT, Oklahoma              ALBERT R. WYNN, Maryland
BARBARA CUBIN, Wyoming               BILL LUTHER, Minnesota
JAMES E. ROGAN, California           RON KLINK, Pennsylvania
JOHN SHIMKUS, Illinois               THOMAS C. SAWYER, Ohio
HEATHER WILSON, New Mexico           GENE GREEN, Texas
CHARLES W. ``CHIP'' PICKERING,       KAREN McCARTHY, Missouri
Mississippi                          JOHN D. DINGELL, Michigan,
VITO FOSSELLA, New York                (Ex Officio)
ROY BLUNT, Missouri
ROBERT L. EHRLICH, Jr., Maryland
TOM BLILEY, Virginia,
  (Ex Officio)

                                  (ii)


                            C O N T E N T S

                               __________
                                                                   Page

Testimony of:
    Brickell, Mark C., Managing Director, J.P. Morgan and Co.....    34
    Free, Brant W., Senior Vice President, International External 
      Affairs, the Chubb Corporation.............................    46
    Papovich, Joseph S., Assistant U.S. Trade Representative for 
      Services, Investment, and Intellectual Property, Office of 
      the United States Trade Representative.....................     7
    Regan, Timothy, Vice President for Government Affairs, 
      Corning Inc................................................    39
Material submitted for the record by:
    Koenig, Eric, Senior Federal Government Affairs Manager and 
      Senior Corporate Attorney, Microsoft Corporation, prepared 
      statement of...............................................    64

                                 (iii)


                        WTO 2000: THE NEXT ROUND

                              ----------                              


                       THURSDAY, NOVEMBER 4, 1999

              House of Representatives,    
                         Committee on Commerce,    
                    Subcommittee on Telecommunications,    
                            Trade, and Consumer Protection,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 10 a.m., in 
room 2322, Rayburn House Office Building, Hon. W.J. ``Billy'' 
Tauzin (chairman) presiding.
    Members present: Representatives Tauzin, Oxley, Largent, 
Rogan, Shimkus, Bliley (ex officio), Markey, Eshoo, Luther, 
Sawyer, and Dingell (ex officio).
    Staff present: David Cavicke, majority counsel; Brian 
McCullough, professional staff; Robert Simison, legislative 
clerk; and Bruce Gwinn, minority professional staff.
    Mr. Tauzin. The subcommittee will please come to order with 
my sincere apologies for keeping you waiting.
    The subcommittee will consider the important work of the 
World Trade Organization in the upcoming Seattle Ministerial 
Conference. The WTO exists to promote open and free trade 
throughout the world. The 1997 Accord on Trade in Services, 
which was entered into in the last Ministerial Conference, has 
been particularly helpful to U.S. providers of financial and 
other services by encouraging countries with restrictive 
practices to end them.
    Since the creation of WTO in 1994, American exports have 
risen by over $200 billion annually. The WTO also provides a 
system for settling trade disputes. The United States has filed 
the most cases of any member and has a strong record of 
prevailing in those cases. There are a number of things that we 
would like to learn at this hearing this morning as we consider 
the upcoming Conference.
    First, what are the U.S. negotiating goals for Seattle? 
What trade barriers will we be focusing on removing? In 
particular, how do we hope to encourage the European Union and 
the other areas to reduce barriers to telecommunications and 
high tech services in which the U.S. is a clear world leader?
    Second, what has been the follow-up of the successful 1997 
round and the implementation of general trade and services? 
Have countries like Malaysia which promised to eliminate 
barriers to U.S. insurers, actually repealed those barriers? 
What steps have been taken to encourage countries to sign the 
GATS? Third, with respect to the emergence of electronic 
commerce, what steps are being taken to keep the Internet tax 
free and free of other restrictive barriers to worldwide 
commerce? Our witness on the first panel, Mr. Joseph Papovich, 
the U.S. Trade Representative is charged with developing and 
implementing our trade strategy for the WTO negotiations. The 
second panel of witnesses will be from J.P. Morgan, Corning, 
and Chubb regarding what specific concerns these industries 
have with world trade.
    We look forward to their testimony. It is my pleasure to 
welcome the Ranking Minority Member, Mr. Markey, for an opening 
statement.
    Mr. Markey. Thank you, Mr. Chairman. As a Democrat who 
voted for GATT and NAFTA and who has been a member of this 
subcommittee since he arrived in Congress in 1976, I do believe 
that it is critical for the United States to continue to expand 
its global economic presence and for us to capture as many of 
the technological opportunities that have been created largely 
by the policies that have been created domestically by this 
committee so that our companies, including telecommunications 
and computers and software down the line have the benefits of 
the global marketplace.
    I also believe that we have to have an integrated plan that 
includes trade policy, education, a universal service, and tax 
policy that prepares the next generation of Americans with the 
skill sets necessary to succeed in the new economy.
    And that is why I think it is imperative for us to work as 
effectively as possible to ensure that foreign markets are 
open. And I think that the upcoming meeting in Seattle gives us 
an excellent opportunity to gauge our progress in this respect.
    Without question, there are also important issues 
surrounding foreign efforts to get the U.S. to soften some of 
its positions and eliminate antidumping or countervailing duty 
remedy laws at the Seattle meeting.
    In addition, it remains unclear whether the nature and 
extent to which worker concerns and labor rights issues will be 
given prominence by the administration at the upcoming meeting 
in Seattle.
    I look forward to hearing from our witnesses on these 
issues because without question, while all of these economic 
opportunities are being opened up to the largest companies and 
to the most well-educated within our society, it is critical as 
well that we have a national strategy that articulates quite 
clearly how we ensure that every worker, regardless of income 
and regardless of race, is allowed to be able to participate in 
the benefits of this new global economy.
    I thank you, Mr. Chairman.
    Mr. Tauzin. I thank my friend. The Chair is now pleased to 
recognize the vice chairman, Mr. Oxley, from Ohio.
    Mr. Oxley. Thank you, Mr. Chairman, for holding this 
hearing and giving Members the opportunity to explore the 
telecommunications and finance issues that will be debated in 
Seattle at the ministerial meeting to begin at the end of this 
month. I want to welcome all of our witnesses and particularly 
those from Charlene Barshefsky's office for doing such a 
tremendous job in preparing for this ministerial. I look 
forward to seeing you in Seattle, and I know a strong 
delegation from Congress will be there to support your efforts.
    The United States goes into this new round with a strong 
and unified position again leading the world on free trade. I 
recently coordinated a letter from 19 members supporting 
Ambassador Charlene Barshefsky's initiative to keep electronic 
telecommunications tariff-free worldwide. Clearly the Internet 
has taken the more advanced countries by storm in the last few 
years, and that is happening more and more in the lesser 
developed countries as well. So it is a critical moment and a 
critical decision to maintain that environment. If we lose it, 
we are never going to be able to get it back, and I want the 
U.S. Trade Representative to know that she has rock solid 
support on this point from the Congress.
    Another key goal of interest to this committee is to draw 
more countries into the WTO's financial services agreement. 
Technological advances have expanded the breadth and depth of 
this industry in ways that demand the deregulation of 
international financial and credit markets. That is why 102 WTO 
countries made market opening commitments in late 1997 in 
Geneva encompassing $18 trillion in securities assets, $38 
trillion in bank lending, and $2.5 trillion in insurance 
premiums.
    Hopefully, through Seattle and the new round of 
negotiations, we will be able to bring in more WTO members 
under that umbrella and further promote free trade in that 
industry. We hope to make similar kinds of progress under the 
1997 basic telecommunications agreement. We want to bring more 
countries in and press them to meet their commitments to 
liberalize trade. Mr. Chairman, I look forward to the largest 
trade event ever to be held in the United States where we can 
discuss these issues with representatives from the 133 member 
countries of the WTO. I look forward to hearing the witness' 
testimonies.
    Mr. Tauzin. I thank gentleman. The Chair is now pleased to 
recognize the ranking minority member from the full Commerce 
Committee, Mr. Dingell.
    Mr. Dingell. Mr. Chairman, thank you for your courtesy. I 
also want to thank you for holding this hearing. Trade is one 
of the areas in which public policy is hardly ever clear. Too 
often one set of priorities is advocated to please a certain 
group while conflicting priorities are advocated to placate a 
different group with competing interests. This ``be everything 
to everybody'' approach on trade may have certain short-term 
tactical advantages, but it creates a long-term danger in that 
the issues become confused and blurred and we lose sight of our 
real trade interests and how to serve these interests. And in 
this world, that is very important to this country. We must be 
clear about our commitment to fair trade, not only in foreign 
markets but also here in our domestic market. The U.S. 
merchandise trade deficit is currently running at an annualized 
rate of more than $330 billion, 35 percent higher than last 
year's deficit.
    When I came here, the real deficit in trade was something 
like $4 billion a year. Our trade deficit in goods and services 
is already $61 billion ahead of where it was last year at this 
time. More and more our trade deficits are being fed by battles 
that we are losing here on our home ground, not in foreign 
markets. Whether it is steel, semiconductors, photographic 
paper, softwood lumber, cement, or agricultural products, 
American workers and American industry are increasingly being 
forced to compete against foreign products that are unfairly 
subsidized or dumped in the United States market, and unfair 
trade practices abound.
    I believe the administration understands this which is why 
both the President and the Vice President have repeatedly 
stated their opposition to negotiated changes to U.S. 
antidumping and countervailing duty laws in the upcoming world 
trade round. I hope that they will maintain this position very 
strongly because if they don't, they will have significant 
problems here in this Congress.
    Unfortunately, our trading partners don't take the 
administration or the U.S. concerns seriously. Clearly the 
administration's views have either been ignored or 
misunderstood by others in the WTO General Council, especially 
by the chairman who recently called on those who will attend 
the upcoming Seattle Ministerial meeting to adopt a declaration 
proposing changes to WTO dumping and subsidy laws which would 
gut U.S. antidumping and countervailing duty laws, something 
which is clearly unacceptable to this country. If the WTO 
leadership is not responsive to the U.S. position on changes to 
the dumping and subsidy codes, how can anyone, the 
administration or anyone in this Congress, really think that 
anyone else takes the U.S. position seriously.
    The administration must not allow there to be any doubt of 
its resolve to ensure and I repeat, to ensure that a future 
agreement does not require changes to U.S. fair trade laws. 
More than half the Members of the House, 223 members, including 
25 Democrat and Republican members of this committee, a 
majority, have cosponsored H.Res. 298. This resolution calls on 
the President not to participate in any trade negotiation where 
changes to the dumping and subsidy codes are part of the 
agenda.
    It is time for both the President and the Vice President to 
make it clear: One, they are opposed to the inclusion of trade 
law changes in a new millennium round agreement; and two, they 
would refuse to submit trade law changes for approval by the 
Congress under fast track or any other expedited approval 
procedures should such expedited procedures be reauthorized.
    I want to make it clear that a lot of us here in the 
Congress who want to support fair trade, because of the 
unfairness of the situation, find ourselves incapable of doing 
so. The situation which we are now confronting in this country 
with regard to trade, trade rules, and things of that kind, is 
converting a lot of us here and a lot of people out there from 
free traders and fair traders and driving us to oppose these 
kinds of agreements and even these kinds of negotiations.
    I would point out that undercutting the last viable fair 
trade remedies under U.S. law is far too high a price to pay to 
win support for any future trade agreements, and I will not 
support them under those conditions. Any changes to these vital 
trade laws should be considered by the Congress under normal 
legislative procedures. And I think this is a warning to all 
that fast track is in trouble simply for this reason if not for 
others. Without strong and effective U.S. trade laws, companies 
like Corning, Intel, Motorola, and their employees would not 
have enjoyed the success and fortune that they have attained; 
hundreds and thousands of Americans would be living poorly; and 
a lot of jobs that we now have in this country would not be 
here to benefit our workers and our economy.
    Had Corning not been successful years ago in its petition 
to prevent the dumping of foreign television picture tubes in 
our market, it may not have been able to develop and market 
optical fiber cable and other telecommunications equipment 
which now account for so much of its business. These and many 
other American companies are viable today because they are able 
to use U.S. antidumping and countervailing duty laws to force 
foreign manufacturers to compete fairly right here in the U.S. 
market.
    If we permit U.S. trade laws to be weakened, we sacrifice 
the ability of American companies to compete fairly and 
successfully in the future. No agreement is worth denying U.S. 
companies the ability of innovate and to reap rewards of their 
innovation. The sooner the WTO leadership and WTO partners of 
the United States understand this, the sooner we can begin to 
focus on things that will open markets and ensure all parties 
the ability to compete fairly and openly in world trade.
    I would make one last observation and that is anyone who 
thinks that free trade measures are going to face an easy time 
here is making a prodigious mistake, and one of the reasons 
that the difficulty confronts those kinds of measures is simply 
the kind of statements that we have heard from the WTO 
leadership and the fact that we are not permitted to insist on 
fair treatment for the United States, for its people, for its 
workers, and for our economy. Thank you, Mr. Chairman.
    Mr. Tauzin. Thank you, Mr. Dingell.
    The Chair now recognizes the gentlelady from California, 
Ms. Eshoo, for an opening statement.
    Ms. Eshoo. Good morning, Mr. Chairman, and thank you for 
holding this hearing. I look forward to hearing the testimony 
of our witnesses and getting the preliminary snapshot of the 
issues that will be negotiated and discussed at the upcoming 
Seattle Ministerial conference.
    I have written a number of letters to Ambassador Barshefsky 
regarding several issues which I believe deserve attention 
during the Seattle Ministerial conference, and specifically the 
trade related aspects of intellectual property, known as the 
TRIPs agreement should not be extended. The TRIPs agreement 
bound participating countries to provide a basic set of 
protections to prevent the international theft of films, music, 
software, video games and pharmaceuticals.
    The deadline for implementing the basic set of protections 
is January 1, 2000 which is not very far away, and all 
countries have had 5 years to comply with this agreement. I am 
hopeful that we will hold fast to this date.
    Additionally, I believe we should oppose any further 
cultural exemptions limiting the sale and import of U.S. 
entertainment products. Last week, we heard an update of the 
WIPO agreement; and I left the hearing with at least some hope 
that the entertainment and high technology industries will come 
to an agreement which will facilitate the sale of movies and 
entertainment products over the Internet. If trade barriers are 
imposed on the sale of these products, the agreement will only 
work domestically limiting the scope of these industries reach 
and more importantly, I think, will stifle the growth of e-
commerce.
    So I thank you, Chairman Tauzin, for calling this hearing, 
and I look forward to hearing more about the game plan for 
Seattle from today's witnesses. I yield back the balance of my 
time.
    Mr. Tauzin. Further requests for opening statements? The 
gentleman from Ohio, Mr. Sawyer, is recognized.
    Mr. Sawyer. Thank you, Mr. Chairman. I have a longer 
opening statement that I request permission to submit to the 
record.
    Mr. Tauzin. Without objection, so ordered.
    Mr. Sawyer. In lieu of reading that entire statement, just 
let me suggest that my appreciation to the Chair for calling 
this hearing, and I thank the witnesses for being here. The 
whole notion of removing trade barriers, making the WTO process 
more transparent and accessible, the need to ensure the 
implementation of current commitments and encourage increased 
economic integration and promote environmental standards are 
all very important to all of us regardless of the side of the 
aisle that we sit on.
    My opening statement concentrates primarily on e-commerce, 
and I would associate myself with the statements of the 
gentleman from Massachusetts regarding labor standards and an 
early warning process for dispute resolution.
    In conclusion, just let me say thank you to the 
administration for its leadership and the WTO ministerial and 
offer my support in all of our efforts to further liberalize 
trade to the benefit of the global trading system and to the 
continuing strength of America's position within it. Thank you, 
Mr. Chairman.
    Mr. Tauzin. I thank the gentleman. Any further opening 
statements?
    [Additional statement submitted for the record follows:]
 Prepared Statement of Hon. Tom Bliley, Chairman, Committee on Commerce
    The Commerce Committee has always been committed to improving 
competition in all areas of our jurisdiction. Competition lowers prices 
and improves services for consumers. The Committee has taken 
considerable effort to deregulate the telecommunications industry, we 
are ready to enact financial modernization legislation. We continue to 
move forward on fostering fair retail electricity markets. These 
efforts benefit consumers.
    Despite all the improvements that allow new entrants to compete in 
our country, trade barriers to international commerce still remain. The 
recent conference on financial services modernization raised solutions 
to problems US financial companies encounter when it comes to competing 
abroad. This is good, but I fear it is not enough.
    As our economy continues to rely on foreign trade partners, it is 
essential that a structure exists to permit a global economy that is 
fair. Without providing advantage to one country over another.
    In this regard, the USTR has been able to make significant 
progress. Two years ago in Geneva, the WTO adopted the General 
Agreement on Trade in Services for financial services. Agreements were 
reached to allow our insurance and securities companies, and banks to 
compete in Foreign markets that were previously closed. That is only 
fair. That is the progress we need across all international trade 
fronts that maintain significant hurdles to free trade.
    I look forward to hearing the testimony of our witnesses today and 
I am interested to learn in more detail the plans for the upcoming 
Ministerial Conference in Seattle at the end of this month. I will be 
on the look out for progress in promoting fair competition in the 
global economy. Thank you Mr. Chairman for conducting this hearing 
today.

    Mr. Tauzin. The Chair will now recognize and welcome our 
first witness, Mr. Joseph Papovich, Assistant U.S. Trade 
Representative for Services, Investment, and Intellectual 
Property. Mr. Papovich, we have heard stories that Seattle may 
look like the Democratic convention in Chicago before it is 
over. We will not impose the 5 minute rule on you in the 
interest of making sure that we get a full statement.

     STATEMENT OF JOSEPH S. PAPOVICH, ASSISTANT U.S. TRADE 
   REPRESENTATIVE FOR SERVICES, INVESTMENT, AND INTELLECTUAL 
   PROPERTY, OFFICE OF THE UNITED STATES TRADE REPRESENTATIVE

    Mr. Papovich. Thank you, Mr. Chairman. I too have had that 
image flash through my mind.
    I am here to discuss today specifically our objectives and 
aspirations and goals for services in this new round that will 
be launched in Seattle.
    As the President has said, opening trade and services is 
among our central goals in the round that we expect to launch 
at the Ministerial Conference in Seattle. With this event now 
less than a month away, I welcome this opportunity to testify 
on our services trade agenda.
    In few areas, Mr. Chairman, are the potential rewards of 
successful trade negotiations as great as they are in services. 
Our services industries range from finance and 
telecommunications to distribution, health, education, 
environment, environmental services, travel and tourism, 
construction, law, engineering, architecture, it is really a 
vast part of our economy.
    We estimate that more than 86 million jobs are involved in 
these firms and companies and entities. Over $5.5 trillion 
worth of production, 70 percent of the American GDP, more than 
one in seven in world economic activity. American service 
providers are very successful exporters. The U.S. is in fact 
the leading exporter of services with $246 billion in private 
sector services exports last year, and we have an $80 billion 
trade surplus in services.
    Some of the sectors, the magnitude of some of the exports 
of some of the sectors is interesting. There is $71 billion in 
travel services last year; $37 billion in royalties and 
licensing fees for such things as audiovisual services, 
software, copyright payments, franchise fees, and other 
services; $25 billion in freight and port services; $24 billion 
in business professional and technical services; $14 billion in 
financial services; $4 billion in construction services; $4 
billion in telecommunications services exports.
    This is some of the most thriving parts of our economy. But 
these are also diverse industries, and our world leadership in 
them rests on widely applicable principles. We are generally 
open to both domestic and foreign competition here in the U.S., 
and we combine this with high standards of consumer protection 
and transparent impartial regulation where many parts of our 
services economy are not regulated. Our goal in services trade 
policy, speaking broadly, is to open markets and foster the 
same kind of competition transparency and efficiency in the 
world economy that we enjoy here at home.
    Over the past decade, we have built a foundation for 
achieving this goal. Through the Uruguay Round of trade 
negotiations which created the WTO, we completed the General 
Agreement on Trade and Services which is generally called the 
GATS which established a framework of multilateral rules 
governing trade in services.
    Then in 1997, we reached agreements on basic 
telecommunications and financial services which brought us 
further with commitments to market access and national 
treatment in two of the highest value service fields. These 
commitments are now showing impressive results.
    Since the basic telecommunications agreement went into 
effect 18 months ago, it has progressively eroded the ability 
of dominant carriers in foreign countries to keep rates 
artificially high and depress demand for telecommunications 
services and electronic commerce. This has helped bring down 
rates by half to levels as low as 10 to 20 cents a minute for 
calls between the U.S. and countries like Japan and Mexico in 
just the past 18 months. As a result of the broader market 
access and increased investor stability provided by WTO 
commitments, new investment in undersea fiberoptic cables may 
result in an fiftyfold increase in capacity by the end of 2001 
compared to mid-1999.
    The financial service agreement came into effect even more 
recently, at the end of 1997. It has already helped U.S. 
service suppliers expand existing operations and find new 
market opportunities across a wide spectrum of developed 
countries and emerging markets through both investment in 
foreign markets and cross-border trade. Growth potential for 
competitive financial service suppliers is high, including in 
helping emerging markets modernize their financial service 
systems and to improving their infrastructure for trade in 
goods and services.
    At the same time, our regional initiatives in Europe, Latin 
America, Asia, and Africa together with our negotiations with 
33 economies who are acceding to the WTO helped create models 
and set precedents for future openings in services in the WTO.
    But these are only the first steps. While the 1990's have 
seen a fundamental change for the better, services trade 
remains restricted in too many areas. This significantly 
inhibits American exports and has broader costs as well. A few 
examples, telecommunications markets reserved for government 
monopolies make service worse for consumers and business more 
difficult for firms. Inefficient pollution-prone power and 
transport reduce efficiency, worsen the quality of life, and 
waste investment. Monopolies and distribution reduce the 
efficiency of farms, fisheries, and manufacturers throughout 
economies. And the recent financial crisis highlighted the need 
to work to strengthen the world's financial systems and make 
them more open and competitive.
    Our agenda for the round, this new round will help address 
these problems and open opportunities for Americans. We have 
worked closely with Congress as well as with our own government 
agencies like the Treasury Department and Commerce Department, 
for example, with private industry, State and local government 
or regulatory associations, and others to set the following 
objectives for market access in this round for services:
    As a general principle, we will strive to liberalizing 
substantially a broad range of services sectors. This must 
include broader and deeper commitments in areas like 
telecommunications and financial services, and fundamental 
improvements in the commitments of existing--of the commitments 
of existing WTO members in such sectors as distribution, 
audiovisual, construction, travel and tourism, education and 
training, health, and environmental services.
    We are proposing three approaches in pursuit of this 
objective. This is in services now. We have three specific 
proposals that we are putting on the table that we want to see 
reflected in the ministerial declaration that is approved in 
Seattle.
    The first is for the possibility of sectorial agreements in 
service sectors developed through creation of model sets of 
GATS' commitments for key sectors of interest in the United 
States. These model schedules or what one might call templates 
would be equivalent to the zero for zero tariff elimination 
that we have already achieved in certain goods sectors. These 
model schedules would create significant movement toward free 
trade, in particular service sectors, through removal of as 
many restrictions in that sector as possible.
    Second, we are proposing that we agree in the negotiation 
to pursue horizontal methods of services liberalization, and 
that may not mean much to some people but that means to pursue 
commitments that would cut across all of the services sectors, 
for improving regulatory policies across sectors requiring 
countries to provide transparency and good government practices 
to ensure that domestic regulations don't undermine the value 
of our trading partners' commitments. This could include, for 
example, across the board commitments to services 
liberalization such as agreeing to common levels of ownership 
across sectors. That would be foreign ownership across sectors.
    And then third, the third approach which was the one used 
in the Uruguay Round. The sole approach used in the Uruguay 
Round is called request and offer. It is country by country, 
issue by issue where we would make specific requests of other 
countries to make commitments in specific sectors and then they 
would bind those commitments in their GAT schedules.
    All three of these areas would be used to get the deepest 
and broadest commitments that we can in the most efficient way 
possible given that this is just a 3 year negotiation. Our 
objectives for the Seattle declaration and for the negotiation 
beyond would also include disciplines to underpin market access 
and national treatment commitments by ensuring that regulations 
in services are transparent and fair. This is a major problem 
that U.S. service providers complain about in other countries, 
that regulations that they have to comply with are not 
transparent in certain instances and they are not fair, they 
are discriminatory in favor of local service providers.
    At the same time, we need to maintain the ability of 
regulators to meet legitimate objectives and that is important 
on the opposite side of that as well.
    Other objectives that we would seek to pursue in these 
negotiations are increasing participation in the basic telecom 
and financial services agreements, get more countries to sign 
up. Another is to ensure that service rules anticipate the 
development of new technologies which is very important in this 
area.
    We want to prevent discrimination against particular modes 
of delivering services, including, for example, electronic 
commerce or the right to establish. Separate from the services 
negotiation itself but also essential to success is our work on 
electronic commerce. Clearly a number of services, for example, 
financial services, telemedicine, distance education, various 
forms of entertainment, and news are efficiently and easily 
delivered electronically.
    We are therefore pursuing broad electronic commerce 
objectives at the WTO beginning in Seattle with our duty-free 
cyberspace proposal in which we seek continuation of the WTO's 
current moratorium on the application of tariffs to electronic 
transmissions. Over the longer term, we are seeking to ensure 
that our trading partners avoid measures that unduly restrict 
development of electronic commerce. We also seek to ensure WTO 
rules that do not discriminate against new technologies or 
methods of trade, to accord proper agreement of digital 
products under WTO rules, and to ensure full protection of 
intellectual property rights on the Internet. With this, we 
must add capacity building, that is helping developing 
countries strengthen their ability to use the net so that our 
companies can then exploit the net in making sales in those 
countries.
    In addition to these things, we are developing ideas for 
transforming and improving the WTO in areas directly related to 
services. One example is trade facilitation. We have a separate 
initiative underway that we hope to accomplish in time for the 
Seattle Ministerial in an area called trade facilitation where 
we are pushing for improved rules and commitments from 
countries regarding timely and reliable customs procedures. 
This is especially important for providers of distribution 
services, express delivery services, Federal Express, United 
Parcel Service, who need to move packages quickly; and to the 
extent customs procedures are complicated, it is very damaging 
to them. This is also important for smaller and medium-sized 
companies who don't have batteries of customs agents to combat 
each country's customs service officers.
    Another idea that we are pursuing is upgrading the WTO 
capacity-building function to insure that WTO members, 
especially the least developed countries, are able to make and 
comply with commitments in the services field. I have to say 
some developing countries I think, particularly the least 
developed, have a hard time understanding some of these areas 
like services, like intellectual property which are so high 
technology in orientation. We need to help them build capacity 
for handling the rules that we want them to commit to.
    In addition to building consensus on these substantive 
goals, we are working with other WTO members to set a 3-year 
timetable for the overall negotiations with benchmarks for 
progress along the way that will ensure that the round yields 
significant benefits rapidly. At this point, most WTO members 
agree to such a schedule and to these benchmarks.
    In conclusion, Mr. Chairman, the task ahead of us in 
services trade is challenging but offers the potential for 
immense rewards. It can create new export opportunities for 
American service providers, and it can help us develop a more 
stable, efficient, and environmentally sustainable work 
economy. We look forward to close consultation and cooperation 
with the committee as the round begins and as the negotiations 
proceed. Thank you very much.
    [The prepared statement of Joseph S. Papovich follows:]
    Prepared Statement of Joseph S. Papovich, Assistant U.S. Trade 
   Representative for Services, Investment and Intellectual Property
    Mr. Chairman, Congressman Markey, Members of the Subcommittee
    Thank you very much for inviting me to testify on our services 
trade agenda. We are rapidly approaching the WTO Ministerial Conference 
in Seattle next month, and the new Round of international trade 
negotiations we expect to launch at the event. And as the President 
said in his address on the WTO last week, in this Round, opening trade 
in services will be a central goal.
                      services in the u.s. economy
    Let me begin with some basic observations on the services 
industries, their place in our economy, and the rules we have developed 
thus far at the WTO to facilitate trade in these fields.
    The American services sector includes a vast array of industries: 
from finance and telecommunications to distribution, health, education, 
environmental, travel and tourism, construction, law, engineering, 
architecture and more. These industries provide 86 million private-
sector jobs and over $5.5 trillion worth of production--more than 75% 
of America's private-sector economic production, and more than one 
dollar in seven of world production.
    In addition to this productive capacity, services play a subtle but 
essential role in our industrial economy, to which they directly 
contribute about 2.1% of GDP in the form of construction, and provide 
the infrastructure which allows manufacturing industry and farmers to 
function.

--Efficient transport and distribution allow farmers to get their 
        products to market without spoilage, ensures that auto parts 
        reach the plant in time for efficient production, and enables 
        exporters to compete effectively over the Internet for retail 
        customers in other countries.
--Strong insurance, accounting, finance and legal industries ensure 
        that farmers and manufacturers have access to capital; that 
        contracts guarantee predictable, transparent and reliable 
        business decisions; and that consumers have high standards of 
        protection.
--Telecommunications, software and news dissemination are essential to 
        the functioning of all modern industries.
--And new technologies now developing, in particular but not only the 
        Internet and electronic commerce, promise a vast increase in 
        the efficiency and productivity of American service industries 
        in the years ahead.
    In many of these fields, the U.S. is the world's leader. As a 
general matter, our success rests on our openness to both domestic and 
foreign competition, combined with guarantees of high standards of 
consumer protection through transparent, fair and impartial regulation 
where relevant. The competition this creates speeds innovation and 
helps develop a productive, efficient economy.
                       services in american trade
    American services industries are highly successful exporters. In 
fact, the United States is by far the world's leading exporter of 
services, with $246 billion worth of private-sector services exports 
last year (the U.S. government also exported approximately $18 billion 
in services) as compared with $165 billion in private sector services 
imports. To cite some specific examples, this includes:

--$71.3 billion in travel services;
--$36.8 billion in royalties and licensing fees from audiovisual 
        services, software, copyright payments, franchise fees and 
        other sources;
--$25.5 billion in freight and port services;
--$24.3 billion in unaffiliated business, professional and technical 
        services, including among others:
    --$4.1 billion in construction, architecture, engineering and 
            mining;
    --$3.7 billion in equipment installation, maintenance and repair;
    --$2.5 billion in legal services;
    --$2.0 billion in computer and data processing;
    --$1.2 billion in medical services;
    --$0.9 billion in research and development;
    --$140 million in sports and performing arts;
--$13.7 billion in financial services;
--$9.0 billion in education;
--$3.7 billion in telecommunications services exports.
    Altogether, our two-way services trade makes up over 16% of the 
total $1.4 trillion in world services trade. The pattern of U.S. trade 
in these industries is somewhat different from our trade in goods. In 
particular, the European Union and Japan take 46% ($114 billion) of our 
private sector services exports, as opposed to 30% of our goods 
exports.
           current status of multilateral services agreements
    These figures indicate how much services industries now contribute 
to our economic growth, and to our export performance. Our goal in 
services trade policy, speaking very broadly, is to open markets and 
foster competition, transparency, and efficiency in the world economy, 
as in our domestic services markets. This will facilitate American 
exports of services, and also have potential to help create a more 
stable, efficient and productive world economy.
1. General Agreement on Trade in Services
    In contrast to goods trade policy, however, trade policy in 
services is a relatively new development. In fact, as recently as 1993, 
the world trading system had no rules for trade in services.
    Thus, a major achievement of the Uruguay Round trade negotiations 
was completion of the General Agreement on Trade in Services (GATS), 
which for the first time established a framework of rules governing 
services trade, as well as commitments in many individual services 
industries.
    Implementation of these commitments has been generally good. And we 
have since made substantial additional progress, with commitments to 
market access and national treatment in two of the highest-value 
service fields through the Agreement on Basic Telecommunication and the 
Agreement on Financial Services.
2. Basic Telecommunications Agreement
    The Basic Telecommunications agreement, now in effect for a year 
and a half, is already showing benefits. Through commitments on market 
access, national treatment and regulatory safeguards by over 70 WTO 
Members, its pro-competitive principles have encouraged billions of 
dollars in international investment in new telecommunications 
facilities, much of it led by U.S. firms. As a result, low-cost 
telecommunications services are removing geography (and borders) as a 
constraint on the delivery of a broad range of services and products.
    Since this agreement went into effect, the ability of dominant 
carriers in foreign countries to keep rates artificially high and 
depress demand for telecommunications services and electronic commerce 
has weakened significantly. This has helped to bring down rates by 
half, to levels as low as 10 to 20 cents per minute, for calls between 
the United States and countries such as Japan and Mexico in the past 18 
months, benefitting consumers here and abroad. And as a result of the 
broader market access and increased investor stability provided by WTO 
commitments, new investment in undersea fiber optic cables may result 
in a fifty-fold increase in capacity by the end of 2001, compared to 
mid-1999. Such expansion has created competition for investment to 
develop regional data and electronic commerce hubs, encouraging many 
WTO members--e.g. Hong Kong, Korea, Japan, India, Singapore and 
Jamaica--unilaterally to improve their market access commitments.
    At the same time, U.S. exports of telecommunications services and 
equipment have increased significantly following the entry into force 
of the WTO basic telecommunications services agreement in February 
1998, (as well as the Information Technology Agreement, which is on 
course to eliminate import duties on virtually all equipment related to 
the Internet.)
    These results are tribute to the quality of the agreement, and also 
to our active enforcement program mandated under Section 1377 of the 
1988 Trade Act, for telecommunications trade agreements. For example, 
thanks to Section 1377 actions:

--Canada last year eliminated discriminatory rules that prevented use 
        of U.S.-based networks for routing of Canadian domestic and 
        international long distance calls;
--Japan agreed to lower substantially its interconnection rates and 
        took a variety of steps to deregulate its telecommunications 
        services market under our bilateral deregulation initiative, 
        now in its third year. We are now strongly urging Japan to 
        build on these actions through implementation of a 
        telecommunications ``Big Bang.''
--European industry compromised with U.S. firms in developing standards 
        for third generation mobile telecommunications systems, and we 
        are actively pushing for steps by EU Member State regulators to 
        assure fair licensing rules by the end of this year, to allow 
        American technology unfettered access in Europe;
--Taiwan agreed last year to lower interconnection rates for mobile 
        telecommunications services firms by approximately 40% over 
        three years; and
--Mexico and Germany currently are under out-of-cycle Section 1377 
        monitoring as we await regulatory decisions that will implicate 
        their WTO commitments and which will be important to U.S. firms 
        operating in those markets.
3. Financial Services Agreement
    Likewise, the 1997 Financial Services Agreement represents a 
successful effort by the United States to open global financial 
services markets to U.S. suppliers of insurance, banking, securities 
and financial data services. While it came into effect more recently 
than the Basic Telecommunications Agreement, the Financial Services 
Agreement has already contributed to the ability of U.S. service 
suppliers to expand existing operations and find new market 
opportunities across a wide spectrum of developed country and emerging 
markets, including Asia, Europe, Eastern Europe and Latin American.
    The improvements encompass the ability to supply services through 
investment in foreign markets or via cross-border trade. And as in 
other WTO agreements, these benefits are ``locked in'' through recourse 
to the GATS dispute settlement mechanism, if necessary. Growth 
potential for competitive U.S. financial services suppliers is high, 
including to help emerging markets modernize their financial services 
systems and to improve their infrastructure for trade in goods and 
services. The Agreement will provide an effective launching pad for 
further negotiation of financial services trade issues in GATS 2000.
                             the work ahead
    These are, however, only the first steps. While the 1990s have seen 
a fundamental change for the better, services trade remains highly 
restricted in many areas. This significantly inhibits American exports; 
the costs to the world of closed markets in services are far greater:

--Inefficient, pollution-prone power and transport reduce efficiency, 
        worsen the quality of life and waste investment.
--Telecommunications markets still reserved for government monopolies 
        make service worse for consumers and business more difficult 
        for firms.
--Monopolies in distribution reduce the efficiency of farms, fisheries 
        and manufacturers throughout economies, and make exports much 
        more difficult for many American industrial and agricultural 
        producers as well.
--And the recent financial crisis has highlighted the need to work to 
        strengthen the world's financial systems, and make them more 
        open. Measures like those exemplified by the Financial Services 
        Agreement are important steps in that direction. Foreign 
        participation with fair competition in financial services is a 
        key ingredient in building a reliable and durable financial 
        system. This in turn builds confidence, fosters growth, and is 
        thus critical for stability.
                        preparing for the round
    Our agenda for the Round will help us address these problems as we 
open new opportunities for Americans. Since the WTO's last Ministerial 
in 1998 reconfirmed that we would open negotiations in services this 
year, in consultation with the Committee, U.S. industries, and trading 
partners interested in services trade, we have been developing an 
agenda that can bring significant liberalization, opening of markets, 
and reforms throughout the world services economy. We have worked 
closely with our colleagues in a number of other agencies and the 
business community to develop these objectives. The result of this work 
is as follows:
    First, as we prepare for the Seattle Ministerial, our goal is to 
launch a negotiation which enables us to secure maximum liberalization 
in a broad array of sectors from all WTO members, through a broadening 
and deepening of the services commitments of all WTO countries. In 
preparation for these negotiations, we have set both objectives and a 
negotiating process which will allow us to achieve the greatest 
liberalization possible. This includes:

--Liberalizing substantially a broad range of service sectors: This 
        should include deeper commitments in finance and 
        telecommunications, together with fundamental improvements in 
        the commitments of existing WTO members on distribution, 
        audiovisual, construction, travel and tourism, the professions, 
        education and training, health, express delivery, energy and 
        environmental services. (Liberalization of distribution 
        services is also a critical aspect of liberalizing trade in 
        goods, helping ensure that agricultural goods and manufactured 
        products reach markets as rapidly as possible.) This would 
        include several different types of approaches, capable of 
        achieving substantial liberalization in many industries, as 
        follows:
    --Sectoral agreements, developed through creation of ``model'' sets 
            of GATS commitments for key sectors of interest to the 
            United States. These model schedules, or ``templates,'' 
            would be equivalent to the zero-for-zero tariff elimination 
            we have already done for goods. The model schedules would, 
            in essence, create significant movement toward free trade 
            in a services sector through removal of as many 
            restrictions in that sector as possible.
    --Examining cross-sectoral or ``horizontal'' methods of service 
            liberalization, by improving regulatory policies across 
            industries, for example, for all countries to provide 
            transparency and good-government practices to ensure that 
            domestic regulations do not undermine the value of our 
            trading partners' commitments. This could also include 
            across-the-board commitments to services liberalization, 
            such as agreeing to common levels of ownership across 
            sectors.
    --And ``request-offer'' talks like those under the Uruguay Round, 
            in which we selected top priorities for liberalization of 
            services in the economies of particular trading partners.
--Ensuring that services rules anticipate the development of new 
        technologies. Examples of the potential of new 
        telecommunications, information technologies and the Internet 
        to support trade in services are obvious in almost every field, 
        from colleges which can teach, hold examinations and grant 
        degrees via the Internet; to home entertainment products 
        delivered by satellite; long-distance environmental monitoring 
        of air and water quality; and advanced health care delivered 
        directly to the home or to rural clinics via telemedicine. 
        Service providers in years to come will find many new 
        opportunities to use new technologies to deliver their products 
        overseas, and should not encounter discrimination based on 
        choice of technology.
--Preventing discrimination against particular modes of delivering 
        services, such as electronic commerce or rights of 
        establishment.
--Increasing participation in the Basic Telecommunications and 
        Financial Services Agreements: Expanding country participation 
        is a goal in several of our regional initiatives, notably in 
        Africa, and will also be a focus in the Round.
                             related issues
1. Electronic Commerce
    Separate from the services negotiations, but essential to success, 
are the U.S. goals in electronic commerce. While we believe broad 
classification of digital products as goods or services is premature, 
clearly a number of services--telemedicine, distance education, some 
forms of entertainment, news--can be efficiently and easily delivered 
electronically. We therefore have a broad program underway at the WTO 
to help ensure unimpeded development of electronic commerce.
    This begins at the Seattle Ministerial with our ``duty-free 
cyberspace'' program, in which we are seeking extension of the WTO's 
current moratorium on application of tariffs to electronic 
transmissions. We will also embark upon a program to ensure that our 
trading partners avoid measures that unduly restrict development of 
electronic commerce; ensure WTO rules do not discriminate against new 
technologies and methods of trade; accord proper treatment of digital 
products under WTO rules; and ensure full protection of intellectual 
property rights on the Net. Together with this is a capacity-building 
program, to help developing countries develop their ability to use the 
Internet, speeding their development and technological progress.
2. WTO Reform: Trade Facilitation and Capacity-Building
    At the same time, we are developing ideas for reforming and 
improving the WTO in some of the areas directly related to services.
    One example is trade facilitation, with a special focus on ensuring 
timely and reliable customs procedures. This is especially important in 
the context of distribution services--an efficient distribution network 
can lose much of its value if long delays let food spoil in transit or 
delay shipment of auto parts and semiconductors for factories.
    A second is upgrading the WTO's capacity-building function, to 
ensure that members are able to make and comply with commitments in the 
services field. Services trade is a new and highly complicated issue 
for many WTO members, especially the least developed countries. The 
National Statements circulated by many of these nations at the WTO's 
1998 Ministerial Conference in Geneva, for example, showed a widely 
shared concern that domestic regulatory agencies are having trouble 
meeting even existing WTO commitments. As we seek greater participation 
in the Basic Telecommunications and Financial Services agreements, and 
liberalization of further sectors, it is essential to address these 
concerns to ensure that services commitments will have meaning in the 
real world.
                 preparing for a successful negotiation
    In addition to building consensus on these substantive goals, we 
are working with other WTO members to create a timetable and process 
that will ensure that the Round yields significant benefits rapidly.
1. Timetable
    One element of this is agreement on a limited time-table for 
completing the negotiations. At this point, most WTO members agree with 
us that a three-year schedule would be appropriate.
    In practical terms, the schedule would be as follows. At Seattle, 
the Ministers will take decisions launching the Round, agreeing on the 
subject matter, and setting out in specific terms the objectives of the 
three-year negotiations. Negotiations should begin in earnest at the 
beginning of 2000, with, as some WTO members suggest, the formal 
tabling of initial negotiating proposals by the middle of the year. 
Further benchmarks to ensure progress would follow, such as a possible 
``mid-term'' Ministerial review at the 18-month point.
2. Manageable Agenda
    Second, we are working toward consensus on an agenda which meets 
the top priorities of all participants in the Round, and is broad 
enough to create political consensus among WTO members; but is also 
focused and manageable enough to complete within three years. Of 
particular importance for the services negotiations, many developing 
countries have raised concerns about a negotiating agenda so large that 
it would make implementation difficult. We have stressed this point in 
a number of international discussions, most recently in Switzerland 
last week.
3. Consultations at Home
    In addition, we are consulting intensively at home on specific 
objectives for each sector with Congress, industry, labor, and civil 
society groups, as well as Governors, state regulatory officials, and 
state legislators. This will continue, of course, beyond the 
Ministerial through conclusion of the Round.
    Consultations with state officials are especially important if the 
Round is to succeed. In America as in some other countries, service 
standards and regulations are often established by state governments or 
private professional associations rather than national governments; and 
there are often good reasons for this. Trade policy must respect and 
work with the relevant bodies.
4. Toward Seattle
    Finally, we are working toward consensus on several specific 
achievements, to be completed by the Ministerial, that will yield 
concrete benefits, build momentum for the services negotiations and 
help us achieve our broader goals. These include progress toward an 
agreement on transparency in government procurement, which is a major 
purchaser of services worldwide; and as I noted earlier, in electronic 
commerce, work toward extension of the moratorium on tariffs applied to 
electronic transmissions.
              role of accessions and regional initiatives
    Last, let me note our services initiatives in two other areas--the 
33 separate negotiations on accessions to the WTO now underway, and the 
regional initiatives we have begun in Europe, Africa, Asia, the Middle 
East and the Western Hemisphere. These offer their own immediate 
benefits for American service providers; but also help us set 
precedents and develop models for the goals we have set in the Round.
1. WTO Accessions
    With respect to the WTO accessions, in the past year we have 
completed the accessions of Latvia and Kyrgyzstan. Estonia has also 
completed its accession, and will enter the WTO on November 13th. We 
have completed bilateral negotiations with Albania, Croatia, Georgia 
and Taiwan; and made significant progress on a number of other 
accessions, including those of Armenia, Jordan, Lithuania and Oman. 
Significant progress has also been achieved with respect to China's 
accession. In each of these accessions we have sought commitments in 
broader ranges of service sectors, and agreement to participate in the 
Financial Services and Basic Telecommunications agreements. These set a 
foundation from which we can work in the WTO Round.
2. Regional Initiatives
    Regional initiatives also play an important role, again for their 
direct and intrinsic benefits but also as models for what we might hope 
to achieve worldwide.
    An especially important case is the work toward establishment of a 
Free Trade Area of the Americas (FTAA). These talks include a 
Negotiating Group entirely devoted to trade in services, which like the 
other FTAA Groups has completed an ``annotated outline'' of an FTAA 
services chapter this fall. This will help us build a Western 
Hemisphere consensus on shared goals as the Round approaches. Likewise, 
the FTAA has established a special Committee to advise us on ways to 
develop electronic commerce in the hemisphere.
    The Transatlantic Economic Partnership (TEP) with the European 
Union--our largest overseas services market, taking over a third of our 
private sector services exports last year--offers another forum. Here, 
we aim to make it easier for U.S. professionals and firms to operate in 
Europe, safeguard U.S. interests as the EU expands, and set an example 
of bilateral liberalization which the world can follow in the Round. 
Under the ``TEP Action Plan,'' we are working with the EU toward an 
agreement setting a framework for negotiating Mutual Recognition 
Agreements--that is, agreeing to recognize accreditation or licensing 
granted under one another's regulatory standards--in services fields, 
as appropriate.
    Our bilateral work in Japan has similar goals. Our initiatives are 
aimed at improving access for US firms and professionals to Japan's 
vast market, through negotiation and enforcement of agreements covering 
such sectors as insurance and telecommunications. During Prime Minister 
Obuchi's visit to Washington this summer, through the Enhanced 
Initiative on Deregulation and Competition Policy we agreed that Japan 
will take concrete deregulatory measures in sectors including 
telecommunications, financial services, energy and distribution 
services, as well as broader horizontal issues such as transparency.
    The President's Africa initiative offers another dimension of 
experience. This encourages deeper services commitments--Ghana and 
Uganda have this year agreed to join the Financial Services Agreement--
and includes a major capacity-building component to help African 
nations develop regulatory, legislative and technical capabilities in 
services sectors. One prominent example is USAID's Southern Africa 
Regional Telecommunications Restructuring Program, which helps promote 
modern telecommunications laws and regulation in six southern African 
nations through technical advice, seminars for regulatory officials and 
suggestions on legislation. Another is the Leland Project, which has 
helped eight African countries develop Internet gateways and enter 
electronic commerce. This experience will help the WTO strengthen its 
own capacity-building work, and is crucial to ensuring strong 
developing country support for a new Round.
                               conclusion
    In conclusion, Mr. Chairman, the task ahead of us in services trade 
is very challenging, and will offer immense rewards both in terms of 
new export opportunities for American service providers, and for the 
development of a more stable, efficient, and environmentally 
sustainable world economy. We look forward to close consultation and 
cooperation with the Committee as the Round begins, and as the 
negotiations proceed.
    Thank you very much.

    Mr. Tauzin. Thank you, Joe.
    We have a vote on the floor. Mr. Largent has already voted, 
and so we will just continue the hearing. We will come back 
from the voting in just a few minutes. I am going to recognize 
Mr. Largent as the Chair that he might continue the hearing.
    I just want to lay some things down. How many members now 
in WTO?
    Mr. Papovich. I think it is 134.
    Mr. Tauzin. I read your statement on the new accessions 
that you are working on, but obviously China is the biggest of 
the companies who are still out of WTO. How close are we to 
agreements with China on WTO accession?
    Mr. Papovich. It is not my area of responsibility so I 
cannot speak definitively. We have been frustrated in recent 
months that we have not been able to get back to the table.
    Mr. Tauzin. Are there any other major countries not part of 
WTO that we ought to be concerned with?
    Mr. Papovich. Russia, and they are also in the accession 
process; but I must be frank in saying that they are very 
reluctant to make the kinds of commitments that we feel 
countries must make in order to become a WTO member.
    Mr. Tauzin. However, there have been accessions with 
Latvia. You mention volatile negotiations with Albania, 
Croatia, Georgia, Taiwan, and significant progress on Armenia, 
Jordan, Lithuania, and Oman, and so the process still 
continues?
    Mr. Papovich. Right. These countries are making 
commitments. They have to buy their way in. They are making 
commitments beyond what many WTO members have made.
    Mr. Tauzin. Tell us about what countries are part of the 
FTAA, Free Trade Area of the Americas.
    Mr. Papovich. There are 34 countries with democratically 
elected governments in this hemisphere, and that is everyone I 
believe but Cuba, I could be wrong. And all of those countries, 
we are one of them, all of us are participating together to try 
to conclude a Free Trade Area of the Americas by 2005. This 
week, there was a ministerial meeting in Toronto on that 
subject.
    Mr. Tauzin. I am going to recognize Mr. Largent as the 
Chair, and he can continue questioning.
    Mr. Largent [presiding]. I have several questions here, Mr. 
Papovich. I don't know if I have enough to last until the rest 
of the members get back, but we can have a good conversation 
anyway.
    The upcoming meetings that are going to occur in Seattle, 
and by the way if you need to know a couple of good 
restaurants, I can give you some recommendations. But some of 
the improvements that USTR is attempting to make in trade, in 
telecommunications and financial services, that is your area of 
expertise, isn't it?
    Mr. Papovich. Right. I don't know how much time I will have 
to visit any of those restaurants. I would love to have the 
chance, but I don't know.
    First in telecommunications, one of the great achievements 
of the 1997 agreement was the so-called reference paper. It 
established what is called pro-competitive regulatory 
principles. Basically countries--yes, in the telecom areas, so 
often countries have a dominant supplier, a dominant 
telecommunications company which has to make its line available 
for competitors to compete against them.
    This reference paper has a number of aspects to it, but one 
of its most important is that countries commit that this will 
happen, that the lines will be made available at competitive 
rates, and that the regulatory authority that oversees this, 
every country has an FCC-like entity, will be independent of 
the major--if there is a major dominating telecommunications 
companies.
    We want to get more companies to sign on. Sixty-two signed 
on as part of the 1997 agreement. As I said a little while ago, 
there are 134 members of the WTO, we want to get more of those 
countries to sign onto that paper. We also want to get 
companies to guarantee national access and national treatment 
for our telecommunications companies. We would like to make the 
telecom paper in effect--one of our goals is not just to get 
more countries to sign onto this reference paper, but to make 
it mandatory, make it such that everybody who is a member of 
the WTO must adhere to the principles of the telecommunications 
reference paper. So those are the goals.
    We are still developing our specific proposals, and this is 
the way that it is for all sectors of the WTO. We are--for the 
Seattle Ministerial, we want to have fairly broad, specifically 
as possible but a fairly broad mandate so we can pursue all of 
the goals that we want. Then from January until June of next 
year, we would be putting on the table specific proposals 
sector by sector throughout the services area. In the months--
we have already started, but we will intensify our efforts 
working with Congress and private sector parties to fine-tune 
the demands that we will put in writing on the table once the 
negotiations begin. Those are the general things that we want 
to achieve in the telecommunications area.
    One other thing that is important to say in 
telecommunications, 70 countries signed this important 
telecommunications reference paper that I referred to. So far--
--
    Mr. Largent. You said 62 earlier.
    Mr. Papovich. Seventy signed the telecommunications 
agreement. So far 62 have signed onto this reference paper; and 
of the 70 that signed the telecommunications agreement, 5 have 
not yet ratified the agreement. In many instances, that means 
that they have to get legislative approval for the commitments 
that they undertook throughout the telecommunications agreement 
which is more than just this reference paper. There are what we 
will call five laggards who we are pushing to ratify the 
agreement as quickly as possible. So in addition to the goals 
that we have for getting more countries to sign on, we want to 
get those five remaining to get that done.
    Mr. Largent. I have a question about that. Is Taiwan one of 
the countries----
    Mr. Papovich. No, they are not a WTO member, and their 
membership is linked to China's entry. We have completed an 
agreement with them, but they are not yet a WTO member.
    Mr. Largent. In the agreement--it is my understanding that 
a part of the agreement that was reached with Taiwan had to do 
with opening their telecom market?
    Mr. Papovich. Uh-huh.
    Mr. Largent. And their regulators have proposed that U.S. 
carriers be subject to an up-front investment and build-out 
requirements. From my view, that is not consistent with the 
agreement that was reached with Taiwan. And that USTR had sent 
a letter regarding that. Have you had a response?
    Mr. Papovich. Yes. And there are talks underway, and we are 
trying to negotiate this out. It is hard to predict exactly 
when those negotiations will end, but we are hopeful that in 
the next couple of months they will be done and we will solve 
this problem. We agree this is a problem that needs to be 
corrected.
    Mr. Largent. Go ahead. I didn't mean to interrupt you.
    Mr. Papovich. On financial services, again our specific 
goals still--our objectives still need to be finalized working 
with industry. But the general goals we have are the following.
    First, as I said in my testimony, my statement, 70--we also 
have, in 1997, specific agreement on financial services 
separate from telecommunications and separate from all of the 
rest of the services agreement. Seventy signed the services 
agreement. So far 60 have ratified that agreement, so our first 
objective is to get the other ten to finish their process. Most 
have to enact legislative measures, and in some countries their 
legislative process is slower than others. So we have to get 
those ten to ratify that important agreement.
    Second with respect to what is next, again, we want to do a 
number of things in the area of market access and national 
treatment. We want to get improved commitments with respect to 
what is called commercial presence. That is another word for 
investment. Improved commitments from countries allowing our 
financial service providers to invest in their countries, 
whether it is through majority joint ventures or 100 percent 
foreign-owned subsidiaries or branches. We want to get more on 
that.
    We also seek improved national treatment commitments and 
improved commitments for cross-border financial services, 
delivering financial services from here rather than having to 
go there to establish, including the electronic means.
    Third, we want to work with these countries to--in the area 
of regulation, again regulation and financial services is 
always a high--let's face it banking, insurance, securities, 
there are important prudential issues when it comes to these 
areas. In some instances, we still know of significant areas 
where those regulations are nontransparent or not sufficiently 
transparent, where they are discriminatory and otherwise 
unfair; and we want to explore with countries how to fix that. 
That is very important.
    And I know on the next panel after me, you will have a 
representative of the financial services industry. I am sure 
that he will stress this. We know that we have to put more 
energy into this.
    Finally in financial services, we want to do some more work 
on the definitions of what is covered by financial services. 
For example, among other things, recently the U.S. insurance 
industry has brought to us the fact that as populations age, 
many countries have been establishing private pension systems. 
Still public ones too but where there are private pension 
systems and private entities are managing those systems, that 
there should be an opportunity for U.S. pension and private 
pension providers to be able to participate; and I know that 
our financial services industry, particularly the insurance 
folks, would like to have us do more in this next round in 
giving them opportunities to deliver their services in the 
pension area and in other insurance areas that didn't get much 
attention the last time around.
    So those are our essential goals. Again, we will have to 
fine-tune them considerably in the coming months as we put our 
offer on the table for the negotiations.
    Mr. Largent. One of the issues that we talk about in this 
subcommittee is the advent and rapid growth of electronic 
commerce. From my perspective, it almost seems like electronic 
commerce is pushing the WTO maybe faster that it is willing to 
go or can go which is a good thing. We talk about the global 
economy all of the time and that is really what the WTO serves 
to serve--or to enhance. One of the concerns we have about that 
is, you know, I think one of the reasons that we have seen the 
growth in it is that we have basically said this is something 
that we don't know a lot about and let's first adhere to the 
Hippocratic oath, do no harm; and so we have stayed away from 
tariffs or taxation on the Internet. What is the USTR guiding 
principles in terms of protecting the Internet and looking at 
the tariff structures that I think many companies are 
considering imposing on electronic commerce?
    Mr. Papovich. You are absolutely right, the Internet is 
moving too fast and governments, by nature, are slow. It is 
zipping ahead of us.
    The essence of what you are saying is exactly the same view 
that we have. This is an area that needs to be left free to 
develop. This is an area that is also to our advantage because 
the U.S. is a huge participant in electronic commerce. U.S. 
companies are huge participants, but we feel strongly that it 
needs to stay free. I want to say a few words about that. That 
is clearly our operating--or modus operandi. That is what we 
want to have happen. I am not so sure that is where other 
countries are. I think they are still more into a let's 
regulate everything mode than the U.S. tends to be.
    To our benefit, I don't think that the means exist yet for 
folks to apply taxes and duties to electronic commerce so we 
have a moment in time at least when we can accomplish something 
before anybody can figure out how to tax and apply tariffs to 
the Internet.
    Our goals for Seattle are the following, and we will be 
taking these issues beyond Seattle because this is not going to 
get all resolved there:
    First, at the last WTO Ministerial meeting which was in May 
last year, not this past May, we achieved for the first time 
this moratorium on any tariffs on Internet transmissions. 
Everybody agreed, whatever number of countries, 130 or 
whatever, agreed to temporarily not apply any tariffs to 
Internet transmissions; but that moratorium only runs through 
this next Ministerial and then it ends.
    Our preference would be to make it permanent. I don't know 
that we can accomplish that. So we want to have our next 
position which we are now articulating an indefinite extension. 
Rather than an extension to the next ministerial after this 
one, we want people to agree to an indefinite extension. It is 
almost the same as a permanent and then with a view to making 
this commitment permanent at the earliest possible time. That 
is important to getting--an agreement on extending the 
moratorium is very important to achieve by Seattle because 
otherwise it ends.
    We are also seeking commitments from WTO members in the 
following areas, and I touched on this in my statement. We want 
them to affirm that the existing agreements, like the GATS 
agreement, are technology neutral so that the rules that 
currently apply to physical trade, national treatment, 
commitments not to discriminate, et cetera, automatically apply 
to electronic transmission so we don't have to negotiate a new 
agreement on electronic commerce, it is already fixed in place.
    We also want countries to agree that they will refrain from 
taking measures that will inhibit the growth of electronic 
commerce. We want to get agreement that existing WTO 
commitments apply to the delivery of services on the Internet. 
We have a little debate with our European colleagues about 
whether all electronic transmissions are services or whether 
some can be goods. Most electronic transmission, like data that 
is transmitted by a bank, that is clearly a service. But if a 
book gets reduced to an electronic form or software gets 
reduced to an electronic form and it is transmitted and sold to 
someone over the Internet, is that book a service? That book is 
a product.
    So we think that WTO rules governing trading goods which, 
frankly, are more extensive because the GATT has been around a 
lot longer than the GATS, should apply to electronic 
transmissions. We don't want to foreclose the fact that some 
transmissions are goods and some are services.
    Finally, we want WTO members to commit that whatever they 
do when it comes to electronic transmissions, that countries 
will behave--take the most trade liberalizing approach possible 
to electronic commerce. There is nothing specific there, but 
countries make a commitment to us if they come to the place 
where they will regulate the Internet, our own country may 
decide to apply taxes to Internet transmissions, I don't know, 
but we are dealing with tariffs here. Whatever countries do 
when it comes to regulating the Internet, they will do it in a 
way that is as trade liberalizing as possible. Those are the 
kinds of things that we want to get countries to agree to now 
on electronic commerce.
    Mr. Largent. I have one other question, and then, Ms. 
Eshoo, if you have questions, I will yield to you.
    Mr. Largent. When I came to Congress 5 years ago, one of 
the questions that I got asked all the time was what was it 
like being in the locker room of an NFL football game. The 
answer was pretty easy, just a bunch of big hairy, sweaty, 
nasty guys.
    I am curious, how many Ministerial meetings like the one in 
Seattle have you participated in, and how does it actually 
work? When the doors close and you have how many countries, 134 
countries in the WTO, how do you actually negotiate this 
process?
    Mr. Papovich. The negotiations are actually happening as we 
speak in Geneva. One of the most important products coming out 
of this meeting in Seattle will be the declaration. It will be 
the rules for the negotiations that we will conduct over the 
next 3 years. And I explain in my statement that we have these 
three objectives for services negotiations: Sectorial, 
horizontal, request/offer. We want to make sure that the 
declaration incorporates those ideas into it. So we want the 
declaration to say that.
    We are negotiating that now. Hopefully, as much of that as 
possible will be done when we get to Seattle. In the services 
area, we are actually optimistic that most of it will be done 
and that there will not be too much negotiating left to do.
    In some other areas, they may not be able to resolve all of 
the issues on the declaration before Seattle; and in that case, 
there are going to have to be some around-the-clock negotiating 
sessions in Seattle.
    There are a lot of small group negotiating sessions. If you 
put 134 individuals in one room, it is difficult to have 
meaningful give and take. Fortunately, as large as we are, 
everyone needs to include us.
    But you have a lot of arm twisting and giving and taking 
that goes on. As you probably know, we have serious offensive 
interests, and we also have serious defensive interests. 
Congressman Dingell spoke to some of those in his opening 
statement, and we need to guard against some and get what we 
really need. And in the context of that, do some giving and 
taking so that all of the countries feel that they come out of 
this with some--their interests addressed in some way.
    Mr. Largent. Thank you. I yield to the gentlelady from 
California for questions.
    Ms. Eshoo. Thank you, Mr. Largent; and thank you, Mr. 
Papovich for your testimony.
    As I mentioned in my opening statement, I am concerned 
about the pressure being placed on the United States to agree 
that the WTO's rules on trade in services and not its rules on 
trade in goods should govern electronic commerce. I had to 
leave the room during some of your statement to vote, so I may 
have missed--obviously I missed some parts of your 
presentation.
    Can you tell members of the subcommittee what kinds of 
assurances you can give us that the WTO will classify Internet 
transactions individually depending on the kind of product 
involved, be it service or good or intellectual property rather 
than lumping these very different transactions together? I 
think maybe when I came back into the room you were just 
beginning to touch on it. But if you would like to elaborate, I 
think you can be very instructive to us on that issue.
    Mr. Papovich. We have a disagreement with a major trading 
partner across the Atlantic on that. They happen to think that 
all electronic transmissions should be classified as services. 
We don't agree and--but we hold very strongly to our view. 
Basically it is what you just said. We are not going to concede 
this point.
    My guess is that by the Seattle Ministerial we will not be 
able to solve this, but the importance--and probably the 
important thing coming out of the ministerial is that we don't 
concede the issue. And we will have to continue to work on it 
during this next Round in some way so when we come out the 
other end, this is clarified.
    I don't know that we are hurt by having a delay. In my 
consultations with our service providers who rely upon the 
Internet and who are worried about this and many of them are in 
the IP area, as you probably know, I think they are comfortable 
with that outcome. As long as we don't concede the issue, we 
are okay. But we have no intention in conceding the issue that 
all Internet transmissions are just services.
    Ms. Eshoo. Thank you for your good work and certainly that 
of our Trade Representative, Charlene Barshefsky. She is 
absolutely outstanding, and the contributions that you are 
making are enormous. I salute you for the work that you are 
doing. Thank you, and thank you, Mr. Chairman.
    Mr. Tauzin. The Chair asks unanimous consent that Mr. Jack 
Metcalf be permitted to join the panel and ask questions. 
Without objection, so ordered.
    Mr. Papovich, I know that you responded to the tariff free 
question that was proposed to you by Mr. Largent, but I want to 
expand on that just a bit. GATS, as you know, allows countries 
to have border adjustable taxes, and many countries do. 
Countries such as those in the European Union who have value 
added taxes often rebate those taxes to the manufacturers when 
their products are sold in this country.
    I go to Britain today and buy a product, I fill out a form 
and get the taxes back. In effect, they are importing to 
America value added tax free. The American tax system is not 
border adjustable. Income taxes basically become part of the 
purchase price of products we sell. That is inevitably true of 
services we sell over the Internet. If I am a service provider 
in America and all of my employees and I are paying income 
taxes and we are hiring accountants and lawyers to deal with 
the IRS, those costs are part of our cost of doing business 
which eventually become part of our product cost as we send 
those services over the Internet or receipts.
    The dean of the Harvard Economics School estimates that the 
average additional cost to American products because of the 
income tax code is 25 percent. That is a pretty big number. 
Here is my question.
    If GATS allows countries who are part of the WTO to import 
telecommunications services into America value added tax free, 
and American companies without a border adjustable tax are in 
competition with them both here and abroad with a 25 percent 
IRS average cost impact on their products, until and unless we 
adopt a border adjustable tax which as you probably know I have 
been advocating for a long time, aren't we at a significant 
disadvantage if all we accomplish is a tariff-free cyberspace?
    In short, if we simply substitute value added taxes 
collected by the country of import on American services, rebate 
it on their exports to America, haven't we set ourselves up to 
continue to lose American jobs to folks who can import their 
services into this country value added tax free and who can 
sell their services in their own country in a competitive 
marketplace where American services carry the extra 25 percent 
income tax burden and are then value added taxed in those 
countries? In short, has a value added tax replaced the tariff 
as an unfair trade barrier to American competition?
    Mr. Papovich. I was unprepared for this one. First, you are 
asking me a question about tax policy which is not my agency's 
area of responsibility. And I say anything, it risks--Treasury 
Department may be unhappy with what I say.
    Mr. Tauzin. That is okay.
    Mr. Papovich. Your question applies equally to trading 
goods or trading physical products?
    Mr. Tauzin. It may be especially true in electronics 
because there we enjoy a significant trade advantage.
    Mr. Papovich. We say that any taxation should be 
nondiscriminatory. That is neutral and consistent. I don't know 
how that applies to your question because implicit in your 
question is there is a discriminatory aspect to all of this.
    In the OECD, there is an international forum where we are 
apparently trying to reach a global consensus on this question, 
and Treasury is an active participant in this process. They are 
addressing international tax issues on exactly this question, I 
am told by looking at this paper. I can't take the answer much 
further because I simply don't know.
    Mr. Tauzin. The point of my question is to alert you to the 
problem and through you to alert Charlene Barshefsky to the 
problem. Pat Buchanan is rallying peasants with pitch forks to 
assault the fortresses of GATT and NAFTA as if they are the 
objects of the problems in our trade deficits, when as I 
examine the problem, the peasants with pitch forks ought to be 
assaulting the fortress we call IRS.
    We are literally entering an age and it is going to be 
serious when it comes to Internet commerce where here in 
America we are debating how do we handle taxation of commerce 
when it is an Internet commerce instead of a brick and mortar 
commerce. What local and State jurisdiction has the right to 
levy a sales tax or a consumer tax on that transaction.
    I don't know that we are paying enough attention to the 
fact that GATT and NAFTA allow consumer taxes to be placed upon 
American imports and consumer taxes to not be placed upon 
foreign exports into this country and more and more countries 
are doing that, and they are literally substituting VAT taxes 
for tariffs. So while we are bragging how we are getting 
everybody to lower the tariffs, they are quietly raising the 
VAT taxes, and those VAT taxes become as effective a tariff as 
there ever was as long as we in America don't reciprocate. As 
long as we in America have income taxes that are not border 
adjustable and they have VAT taxes that are border adjustable, 
it seems to me that we are trading away our labor and our 
manufacturing base.
    In the electronic commerce area, we may be trading away our 
advantages. To put it very simply, if I am an electronic 
commerce retailer in America and I can't rebate the income 
taxes, the American taxes, on my sales overseas, I don't get 
that rebate, and my competitor overseas does get a rebate when 
it sells those goods into this country, and they also 
additionally tax my products when they go over there, not with 
a tariff but with a value added consumer tax. It seems to me 
that--duh--we are going to continue to have a trade deficit ad 
infinitum, and it is going to continue to grow. And the 
advantages that we have in some markets like electronics and 
intellectual property sales are going to be quickly lost.
    At a 25 percent disadvantage, how can we survive when in an 
electronic commerce age the cost of doing business on the 
Internet is exponentially going down.
    I know that you don't have an answer, and I know that you 
can't put yourself on a grill for someone at Treasury to roast 
you, but I hope you and our Trade Representative become 
increasingly sensitized to that fact. The answer is if we sign 
trade agreements that allow our friends across the world to get 
rid of the tariffs and substitute VAT taxes for tariffs, we 
have to be smart enough in America to get rid of the income tax 
code and go to some kind of a consumer, border adjustable tax. 
I have suggested the retail sales tax.
    We have to do something, or we have to quit signing these 
trade agreements. All of the countries that are permitted to 
substitute VAT for tariffs have to quit doing that, and we have 
to negotiate our way out of this mess.
    I am particularly sensitized to it because I have spent the 
last year debating with Dick Armey around the country on tax 
policy. And I am particularly keen to the fact that having 
signed these treaties, we ought to be smart enough to 
understand what our next step is; and we are not taking that 
next step.
    I want to sign fast track agreements and get China in WTO, 
and I want to open up America to free trade in our own 
hemisphere. But if we keep doing this and we are stupid enough 
to let our trading partners substitute VAT for tariffs and we 
don't have tariffs or VATs, we are going to get killed; and we 
deserve to get killed. Just be sensitized to that, please and 
we will have a lot more discussions about it in the future.
    Mr. Papovich. And I guarantee that I will point that out to 
Representative Barshefsky. So far, no one has figured out how 
to apply taxes or tariffs to electronic transmissions and 
services, so we have a little breathing space.
    Mr. Tauzin. And you have the moratorium. But as you told 
Mr. Largent, your focus is on getting tariffs eliminated, and 
you have also drawn a clear line between the capacity of 
countries to tax internally American products sitting on the 
shelf next to their own domestic products. If that continues to 
be the way that we treat this issue, we are going to get 
killed. An American product carrying a 25 percent American 
income tax effect sits on the shelf with a British product and 
then gets taxed with the British VAT. That is the way that it 
works. The British product comes to America not having the 
American income tax effect on it, and there are no VAT taxes on 
it when it comes to America. We don't put a national sales tax 
on it, and we wonder why they have an advantage. I mean, duh.
    Mr. Papovich. I hear you.
    Mr. Tauzin. The Chair yields to the gentleman from Ohio, 
Mr. Sawyer.
    Mr. Sawyer. I am going to pass for a moment, Mr. Chairman.
    Mr. Tauzin. The Chair yields to Mr. Metcalf.
    Mr. Metcalf. I don't have any questions at this time.
    Mr. Tauzin. Mr. Oxley is just arriving in time to be 
recognized.
    Mr. Oxley. Thank you, Mr. Chairman.
    Mr. Papovich, you testified that we have an $80 billion 
surplus in trade services. I have always been curious as to why 
when the trade deficit figures always come out that it is a 
merchandise trade deficit and we never include services, as if 
they don't count.
    Why is that? And shouldn't we take a look at the real 
benefits of expanding trade and services, as you obviously 
spoke to, and the real benefits for our economy, just the same 
way that the merchandise and the agricultural products are 
reported--wouldn't that give the average person who reads these 
figures a little more realistic view of what is going on out 
there in regard to international trade?
    Mr. Papovich. You are right, but I want to check on that. I 
am not an expert on the data that gets collected.
    But I think that when they say merchandise trade, they 
include services as well as food products.
    Mr. Oxley. I don't think that is right. I don't think that 
is correct. And I have always been curious as to why that 
dichotomy existed. I understand--I know that it is not your 
shop that does those statistics?
    Mr. Papovich. It is the Commerce Department.
    Mr. Oxley. Commerce Department. I think separating those 
leaves misinformation out there regarding the trade deficit, 
and the trade deficit in the past has always been a very 
volatile political issue which in many ways hurts our efforts 
at free trade.
    We are about to enact--as a matter of fact this afternoon--
major reform of our financial services laws that will allow 
cross ownership of securities firms, banks, and insurers. 
Glass-Steagall will no longer be the law of the land. When we 
were negotiating with Europeans, they cited Glass-Steagall as 
anti-competitive U.S. law, and that took place in the last 
round in Geneva. With the elimination of Glass-Steagall, can we 
make progress in the financial services area?
    Mr. Papovich. I am still waiting to see what the final 
results of your work are, but I think so. This has often been 
cited as a barrier that countries have vis-a-vis us, and so I 
would hope that we can get something in return for that.
    Mr. Oxley. You may have noticed an article in the 
Washington Post regarding the WTO and the number of anti-WTO 
types that are running around out there, and I think there are 
45 anti-WTO websites and the like.
    In that article there was a reference to the fact that the 
anti-WTO forces had won a victory regarding the financial 
services area, I don't know whether you picked that up or not, 
but it stuck out like a sore thumb to me, and I am wondering 
what kind of a victory that might have been, because as you 
cited in your testimony, there are over a hundred countries 
signed to the financial services agreement which I think is the 
second agreement under the WTO after telecommunications; is 
that correct?
    Mr. Papovich. Under services.
    Mr. Oxley. Under services, right. Do you know of anything 
like that?
    Mr. Papovich. The last 3 days there has been a world 
services Congress in Atlanta, Georgia. So I didn't get to see 
the Post for the last 3 days so I didn't see that article. 
Based on what I know, those who oppose us at Seattle, based on 
what I know of their objectives, I can't imagine what would be 
in the--in this act.
    Mr. Oxley. I will be glad to send you that article.
    Mr. Papovich. I can get it.
    Mr. Oxley. I would love to hear your take.
    Mr. Papovich. Okay.
    Mr. Oxley. Last April, the administration rejected a very 
favorable deal with China on that country's WTO entry. And in 
fact, at that time China was offering unprecedented access for 
U.S. insurance companies, was willing to grant U.S. firms up to 
51 percent ownership of Chinese telecommunications ventures. At 
that time, the administration refused to take yes for an 
answer, and here we are now trying to put Humpty-Dumpty back 
together again.
    It looks like from what I can read that we will be forced 
to accept a less favorable deal in advance of the Ministerial 
as it related to insurance and telecommunications. We have been 
historically wide open to foreign telecommunications investment 
since the FCC implemented the WTO telecom agreement, which I 
strongly supported. I understand that USTR is going to accept 
the Chinese prohibition of majority foreign investment in 
Chinese telecommunications companies. Is that correct?
    Mr. Papovich. I am not personally involved in negotiating, 
and I don't know that that is the case. I read that in the 
newspaper myself. I talked to my counterpart who is responsible 
for China, and he said that is not so. We would need to ask our 
China negotiator to talk to you about exactly what is happening 
in the negotiation.
    I don't know, in fact, that there are negotiations going 
on. I talked to my counterpart about that, and he was a little 
surprised about these articles and these assertions that we 
have seen in the press about making concessions like the one 
you just mentioned.
    What I do know is that in the April agreement or the status 
of the April negotiation, there were some significant things we 
still wanted to get. And in my area, services, we still felt 
that the Chinese had not done enough in banking, and securities 
and the audiovisual areas. So there were improvements that we 
felt that we needed to get. It has been regrettable that all of 
these months have gone by, and we still don't have an 
agreement.
    It is also not clear to me that this is going to get done 
in time for the Seattle Ministerial. The press has given the 
impression that suddenly the process has started again. I don't 
know that is so.
    Mr. Oxley. We were briefed before Jiang Zemin's visit, the 
Commerce Committee was briefed at least once, maybe twice, and 
all of us, I think, left those meetings with a very solid 
feeling that the deal was going to be completed during Jiang 
Zemin's visit.
    When that did not happen, I think there was a lot of 
disappointment up here on the Hill. Frankly, we were given 
information from Ms. Barshefsky personally that they felt very 
comfortable with where those offers were and that they were 
ready, I got the distinct impression that we would accept that 
offer and that would, of course, have solved a lot of problems 
and obviated the need to do this dance before Seattle.
    And so we are hopeful, of course, that that can be 
completed, but based on what we saw in April, all of us are not 
necessarily holding our breath. I yield back the balance of my 
time.
    Mr. Tauzin. I thank the gentleman. The Chair recognizes the 
ranking minority member from Massachusetts, Mr. Markey.
    By the way, Mr. Papovich, why did your statement end in a 
half sentence?
    Mr. Papovich. There is a mistake, obviously.
    Mr. Tauzin. I would like to know what the rest of the 
statement says.
    I recognize Mr. Markey.
    Mr. Markey. Thank you, Mr. Chairman. On the other hand, 
many verbal presentations by witnesses before this committee 
have been interrupted in a way that when reading the transcript 
will always leave historians wondering what the witness would 
have said when the congressman interrupted.
    I understand that Ms. Eshoo has already raised questions in 
the areas that I am about to pursue.
    Electronic commerce in many ways renders the distinction 
between goods and services obsolete or at least more confusing. 
I would like your views on this issue. If I receive a book, a 
physical book, from a transaction with amazon.com, would that 
be treated as a good or a service from your perspective?
    Mr. Papovich. The problem is that we don't know. As a 
practical matter, there are no duties or other restrictions in 
the WTO on electronic transactions right now, partly because 
technologically know how to do it, so we need to sort that out.
    Mr. Markey. What is your view?
    Mr. Papovich. If you received a book in electronic form, I 
would say it is a good.
    Mr. Markey. It is a good?
    Mr. Papovich. Uh-huh.
    Mr. Markey. If I get the same book downloaded onto my 
computer to read on-line or peruse as an electronic book, does 
the answer change?
    Mr. Papovich. I don't know the answer to your question. 
This is what----
    Mr. Markey. Do we have a position as a country?
    Mr. Papovich. Working closely with industry, we are still 
formulating a position. We talked about this before.
    I said that some of our trading partners would like to 
finalize this debate now, and their argument is that it is a 
service. Anything that is transmitted electronically is a 
service.
    And because this is such a new technology and these sorts 
of transmissions like books being transmitted on-line are so 
new, we don't have a final view. Let me check with my 
colleagues. Maybe I should make sure that I am speaking 
correctly.
    Mr. Markey. Okay, that is good.
    Mr. Papovich. We want to keep the question open for the 
time being.
    Mr. Markey. The duties on goods are generally higher than 
on services as a general rule. How do we handle that issue?
    Mr. Papovich. There are no duties on services. It is not 
something that has been dutiable in the past. There are duties 
on goods, and of course they are coming down. In certain areas, 
like textiles and footwear, they are still very high. But in 
technology products, duties are very low. In fact, we have an 
agreement that we have negotiated already, it is called the 
ITA, it is the Information Technology Agreement; and we are now 
negotiating ITA II to add more products which would provide 
zero duties on as many physical information technology products 
as possible.
    So what we are trying to do is move to a point where there 
is no duty on any good or service in the information technology 
area.
    Mr. Markey. You note in your testimony that services 
comprises a very significant percentage of our trade and a very 
large portion of our employment, and obviously economic growth 
within the United States is largely driven by this sector over 
the last decade.
    This services area is a very knowledge-based employment 
sector. In other words, it is not widgets, it is software 
dependent, people-oriented provision of services. That means 
that there are new issues being raised. In today's Washington 
Post, there is an article about hackers who have cracked the 
encryption protecting DVD movies and software from being 
copied. My question relates to how we address trade relations 
and trade deals where piracy and low cost labor make us as a 
country seemingly so vulnerable in an era where increasingly we 
rely economically on service-oriented, software-based 
employment opportunities here at home. How are we doing?
    Mr. Papovich. This is another third of my portfolio, the IP 
part. We have one major effort underway, and then we are just 
starting again because it is so new on the other--which is the 
Internet side.
    One of the biggest problems that we have in terms of piracy 
is the ease with which people can make pirated versions of 
these disks, whether it is a compact disk or a CD-ROM or in 
Asia they have video compact disks. And I just finished a six 
country trip where we are putting pressure on countries in a 
coordinated way to put in place policies to prevent nefarious 
individuals from setting up facilities to make millions of 
copies of these disks. That is today's technology, and that is 
something that we at least know what to do about.
    We have started meeting with the motion picture 
association, the music people, the business software alliance 
about Internet piracy, and they have shown us the programs they 
are beginning to put in place, the monitoring that they do.
    Mr. Markey. They thought that they had reached an agreement 
on a technology on DVD ROM drive that now a group of 
programmers has duplicated the software equivalent to a 
skeleton key and placed it on the Internet for anyone to 
download. And The Washington Post staffer downloaded a Monty 
Python movie in a matter of minutes using the code.
    So this is--if you can just give us some larger view of 
what is going on because obviously globally we are going to 
have piratical activity targeting the creative work of the most 
imaginative and productive people of our generation going to 
the best universities of our country without full financial 
return.
    Mr. Papovich. In 1997, we negotiated at the World Trade 
Organization a new copyright treaty establishing definitively 
that Internet transmissions are covered by copyright law and 
all countries have to ensure that it is a violation of 
copyright law to do the types of things that you described.
    Last year, Congress enacted the Digital Millennium 
Copyright Act modifying our own copyright law to make it a 
clear crime to do this sort of behavior and to establish 
obligations on not only those who would--to make it a crime to 
do the sort of thing that you just said, and to also establish 
obligations on Internet service providers that if they are 
notified that someone has put something up on their service 
that is pirated, that they are obligated to take down that 
service, remove it from their Web sites and the services that 
they provide.
    There is going to be a need, first, for continued vigilance 
probably in the first instance by the industry associations to 
be patrolling what is put up on the Internet, and then an 
ability to move quickly to get action against those who put the 
product out there for consumers to see and download. And the 
role of government is still evolving on this. Here domestically 
there is a role for our Copyright Office and our Patent and 
Trademark Office and the FBI and Justice.
    For us in the international trade area, the role in the 
first instance is making sure that countries ratify this WIPO 
treaty and make it clearly a crime in their country when this 
happens.
    But I think--earlier I said that it is good that 
governments have not been able to figure out how to tax and 
tariff Internet transmissions, it is moving faster than we are 
moving, similarly the pirating activities are moving faster 
than we in the private sector or government can move to stop 
them.
    Mr. Markey. I went with the President to China last summer 
for 10 days. When we were in Beijing and we went out to the 
area where all of the pirates were, they sell these movies from 
the United States and they--what they had done, it is like a 
giant Blockbuster store. Think of a Blockbuster ten times 
bigger than the biggest store you have ever seen. The Chinese 
had cleaned out all of these alleys in the week before we 
arrived so when we walked down them, none of these American 
movies were for sale, none of the software were for sale, and 
they were policing the area because it is only two blocks from 
our embassy.
    Everyone in our embassy knows this because a lot of people 
might clandestinely go out and buy the movies themselves. And 
so there is a duality some American negotiators might have, and 
I can't name any individual, but I suspect. It is a huge issue 
that American negotiators are very familiar with, and the 
Chinese would clearly not like an American delegation arriving 
that might not have the intimate relationship with them to 
observe.
    Have the hackers stolen a good or a service that you know 
of?
    Mr. Papovich. That I know of or the example that you gave 
me?
    Mr. Markey. Yes. What you would use in a negotiation as an 
example in terms of what hackers are doing?
    Mr. Papovich. In the first instance, the bigger problem now 
is what you described a few moments ago, the bazaar is full of 
physical product. No. 1, that is a bigger more commercially 
damaging problem; and No. 2, one that is easier to deal with.
    And the way we are trying to deal with it, we are trying to 
stop the production. Rather than arresting all of the 
merchants, if you walk not too far from my office you can find 
venders who are selling fake Rolex watches and other things. 
Rather than arresting those people and stopping the production 
of pirated physical product, and we work very hard with 
industry on that, the hackers, the Internet side, making sure 
that countries have laws in place, a lot of countries don't 
have laws in place making illegal that sort of behavior. At 
least we have a law then.
    If our law drives these people out of the U.S. if we can 
possibly be successful, we have got to make sure that people 
don't flee to somewhere else because you can transmit on the 
Internet pirated product from anywhere in the world.
    Mr. Markey. That is my point. It goes from the virtual to 
the real. You can transmit it digitally across international 
boundaries, turned in a physical product, and then it is sold 
in these bazaars around the world. I think that is a big 
problem. Thank you, Mr. Chairman.
    Mr. Tauzin. I might, as a reference for Mr. Papovich, point 
out that one of the problems with negotiations between 
Hollywood, the electronic manufacturers, and the internet folks 
is that they have left out the broadcasters in those 
negotiations, and the broadcasters are being pushed by Congress 
to move their analog broadcasts to digital.
    And once they do, they will have many of the same problems, 
particularly when their broadcasts are loaded up on satellites 
and moved around. For example, when Disney wants to show the 
Lion King in digital format on a Disney channel, the future 
means that they have to wait until all of the value in other 
productions of that product are exhausted because they know 
once they put it in digital form in a broadcast format, it is 
gone. It is gone in multiples of hundreds of thousands and 
perhaps millions of copies, and they have been left out of 
these negotiations.
    They are very interested in joining in those negotiations 
because they are totally perplexed how they are going to enter 
this digital world without some technology or legal 
protections. I would suggest that you advise Charlene that you 
might want to invite representatives of the broadcast industry 
into your negotiations on the international side as well.
    The Chair will recognize the gentlelady from California.
    Ms. Eshoo. Thank you, Mr. Chairman.
    Mr. Papovich, I want to go back to something, a question 
that I asked you, and what I heard you saying to Mr. Markey 
when he asked you a similar question. There is a difference 
between the answers, and I think that it is important to get 
some clarification here because I think it is a very important 
area.
    Just to refresh your memory, I asked you what further 
assurance you could give both myself and the members of the 
subcommittee that the WTO will classify Internet transactions 
individually depending on the kind of product involved, be it a 
service, a good or intellectual property rather than lumping 
these very different transactions together.
    Your response was that you had, we have no intention of 
conceding on this issue. You were very clear which left me 
feeling very, very comfortable, when I sensed in your answer to 
Mr. Markey that you were back-pedaling in classifying the 
sources and the goods by saying we don't know yet.
    Which set of words do you want to retract?
    Mr. Papovich. As he took me in his discussion, the 
conversation evolved I guess I could say. We have no intention 
of conceding this issue at Seattle. We are--some would like us 
to concede it now that it is a service and that is all that it 
is. We have said no, we will not concede that.
    But when Mr. Markey pressed me to say have you decided, in 
fact, that certain transmissions are in all cases a good? And 
he took me through these different verifications, a book.
    I had to say, we don't have a definitive knowledge 
ourselves that certain types of products and certain types of 
products transmitted over the Internet will, in all instances, 
be a good and others will be a service.
    Ms. Eshoo. You must have some sense of clarification of 
defining what these things are?
    Mr. Papovich. In some instances that was sort of the 
problem with how he was taking me along. In some instances, in 
my view, it is clear, like the transmission of the hypothetical 
book, it is clearly a good. And one can't say it is always 
going to be a service. No, we feel there are instances when it 
is a good; but are there other instances when that transmitted 
product in the way, in the final analysis it might end up being 
a service, and my answer was I don't know definitively. And 
that, in essence, is why it is important that we not concede 
the issue now.
    Ms. Eshoo. Are you going to concede the issue in the 
future?
    Mr. Papovich. I am not saying that we will concede it ever. 
I am saying that we are keeping the issue open until we have a 
clearer understanding in our own mind on this topic. I don't 
have the final answer.
    Ms. Eshoo. I am going to leave this area now less 
comfortable with what you have said than when I first posed the 
question to you because I think it is an enormously important 
area for the United States to bring some definition to. If we 
are going to say that we are not going to concede on something, 
it is because we have clarity about what we would be conceding.
    And so I suggest that you go back and bone up on this 
because I think someone else could really have us for lunch.
    Mr. Papovich. I will do that, but I will say that when I 
sit and talk with industry people, and I will talk to them 
again, that they are not certain that in all instances that the 
item being transmitted is definitively a good versus some other 
format definitively a service.
    Ms. Eshoo. It seems to me that we had some of these debates 
during the WIPO discussion in this very hearing room.
    Well, I thank you for being as frank as you have been, but 
again I am not leaving here very comfortable with the answer.
    Thank you.
    Mr. Tauzin. I thank the gentlelady. The Chair would advise 
the members that you ain't seen nothing yet. When we get the 
report from the Internet taxation committee in April as to how 
to handle it internally in this country, there is going to be a 
lot of unease in this room and around Congress. The gentleman 
from Ohio.
    Mr. Sawyer. Thank you, Mr. Chairman. I share the lady's 
discomfort. I suspect that we are dealing in an area of 
definition that we have very little experience. There are not 
good analogs. It sounded like the debate in the course of this 
century whether light is a wave or a particle; and the answer 
is yes, it is. Is it a good or a service, and the answer is 
that we are dealing in a different arena.
    I represent Akron, Ohio, and we made tires for automobiles. 
We have not done that for 20 years, and we are in better 
economic condition than we have been for a very long time 
because we have not tried to recapture what we once were and 
have tried to build on things that we can do better.
    We are still a command and control center for a global tire 
industry and research and development center for all of--not 
just tires but all of the synthetic materials that come out of 
that; and when people ask me what we make in Akron, they say if 
you don't make tires, what do you make?
    I say that we make decisions, and we make progress.
    The very topic that you are talking about is at the heart 
of the potential strength of my local economy deep into the 
next century if we continue to do things well that we are doing 
well now.
    So the ability to come to decisions about this sort of 
thing is not, I am sure, to be taken lightly. I know that you 
don't take it lightly. You would have given a casual answer if 
it were possible, but it is not wise nor possible. I am 
actually more comforted that you didn't resort to a quick 
answer to this because it is going to be an abiding question 
with us for some time.
    Let me turn specifically to the whole business of dispute 
resolution and the kind of thing as you would say in your terms 
horizontally spreads across an awful lot of areas.
    The whole business of trying to develop a transparent 
dispute resolution mechanism, an early warning system, before 
WTO panels are established, it seems to me is enormously 
important. Can you talk about our current experience with that 
kind of consultive process and whether there will be discussion 
on how to improve it at the Ministerial?
    Mr. Papovich. I can't say too much because it is not my 
area of responsibility. We have been making----
    Mr. Sawyer. But in your area of responsibility, if these 
kind of discussions mean anything, you will rapidly be 
confronting the need for that kind of system.
    Mr. Papovich. We have brought more--my statistics show the 
U.S. has instituted more WTO disputes on intellectual property 
than any other single area. We have used the TRIPS agreement 
very vigorously. There have been proposals made to try to make 
the dispute settlement process more open and transparent, and 
we have made our own proposals to, for example, require that 
the decisions be issued promptly and these decisions are not 
short. It is not just guilty or not guilty, they are long 
papers, that these be published promptly to enhance 
transparency.
    We have argued that there should be the possibility for 
third parties to file amicus briefs and that sort of thing. We 
are trying to get agreement on at least some of these things 
that the ministers could approve for Seattle. There will be 
further negotiations required because we will not get 
everything that we want, so we will continue to negotiate over 
the Round. But we have hopes that at Seattle we can get 
agreement, for example, on the prompter publishing of the 
results just so that the public knows sooner what is being done 
here.
    So we are hopeful to have, A, a decision point in Seattle, 
but it is not going to be the definitive decision. There is a 
lot of resistance to things like amicus briefs and opening the 
process for public witnessing of what is going on. There is a 
lot of opposition.
    Mr. Sawyer. Thank you, Mr. Chairman.
    Mr. Tauzin. We have got a vote on the floor. Joe, we are 
going to thank you and dismiss you, and with the agreement of 
the second panel, we are going to recess until 3 p.m. to give 
everybody a chance to go to lunch. We will alert all of the 
members to be back at 3 so we can have a full and uninterrupted 
discussion.
    Joe, before you leave, let me make one point again. I think 
we have two ways to go as we move into the future of free 
trade, particularly as we tackle the tough issues of 
cyberspace. Whether you decide a book on the Internet is a good 
or a service. One way to confront the tax issue is to begin 
trying to negotiate agreements that will not allow people to 
substitute VAT taxes for tariffs on American products as they 
are shipped overseas; otherwise in this country we are going to 
have to recognize that we don't have any choice but to move to 
a border adjustable position ourselves.
    It may help if we get some situation from all of you at the 
tradeoffice whether or not it is even possible to think of new 
WTO, a new GATT agreement that would prevent the substitution 
of VAT taxes for tariffs. Because if that is not possible, I 
think that tells us as a people, as a Congress that we have to 
consider an alternative here in our own country in order to 
deal with this inequity that I think is growing and could 
create a lot more problems.
    Let me say that the anger and the protesting and the shouts 
and the noise that you are going to hear in Seattle from people 
in this country who are concerned about free trade are centered 
right on that notion. If free trade isn't truly fair in terms 
of the way in which in a globalized free trade society some of 
these new forms of taxes and new forms of discrimination are 
permitted under our agreements, then workers in this country 
are going to continue to oppose any further extensions of free 
trade.
    We are going to have the backlash that Tom Freedman talks 
about in this book in this country. We cannot have the 
backlashes in our own country disrupting the progress of free 
trade agreements around the world. You folks need to focus on 
that.
    I have been told that we lose 19,000 American jobs for 
every billion dollars of trade deficit. If that number is 
accurate, that explains why there will be noise in Seattle and 
why backlashes are developing here and around the world. I urge 
you to please focus on it.
    Joe, thank you for your excellent presentation. We will 
dismiss you and recess the hearing until 3.
    [Brief recess.]
    Mr. Tauzin. The subcommittee will please come back to 
order.
    We have notified all of the members. Hopefully, we will get 
some members in. We are going to be interrupted by votes about 
every half hour.
    We will get the testimony on the record. Your written 
statements, as you know, are part of our record already, so you 
don't need to read them to us, but we would appreciate if you 
would kind of summarize for the record the highlights of your 
testimony.
    We will begin with Mr. Mark Brickell, Managing Director of 
J.P. Morgan, which is a small mom-and-pop company.

STATEMENTS OF MARK C. BRICKELL, MANAGING DIRECTOR, J.P. MORGAN 
AND CO.; TIMOTHY REGAN, VICE PRESIDENT FOR GOVERNMENT AFFAIRS, 
    CORNING INC.; AND BRANT W. FREE, SENIOR VICE PRESIDENT, 
     INTERNATIONAL EXTERNAL AFFAIRS, THE CHUBB CORPORATION

    Mr. Brickell. Mr. Chairman, thank you for inviting me to 
join this panel. The new round of WTO negotiations is important 
to J.P. Morgan where I work. We are a global bank, and in an 
average year about half of our revenues come from international 
operations.
    Controls on international trade and on capital flows have 
far-reaching and destructive effects, and eliminating those 
barriers is critically important. The United States in this 
round of trade talks should encourage other nations to open 
their borders to trade and should lead the way by eliminating 
its own trade barriers. As part of that policy, we should 
ensure that there are no barriers, no tariff barriers to e-
commerce, and we should look beyond the elimination of tariffs 
and quotas and find other ways to strengthen international 
trade. We should encourage the enforcement of contracts here 
and abroad. These policies will be good for Americans and for 
our friends overseas.
    Free trade and capital flows are very close to Morgan's 
heart and its history. Our bank was founded in the 1800's as 
the New York affiliate of a London merchant bank. After the war 
between the States, free trade permitted us to move our 
headquarters from London to New York, and we continued doing 
business in both places, and we still have our international 
character.
    In the same way that we were channeling foreign capital 
into the emerging U.S. economy in the 1800's, in recent years 
we have helped Americans find promising investments in other 
parts of the world; and as globalization goes on and as trade 
barriers are reduced, our business has grown. We believe that 
these are powerful, important, and highly desirable trends.
    I would like to say a couple of words about free trade and 
a couple of words about policies for financial services.
    Few things have survived the test of time better than the 
economic case for free trade. Economists of all political 
stripes have made that case. Dropping barriers to trade enables 
consumers to save money and investors to earn more.
    In the simplest terms, free trade makes human beings 
happier because they get to do what they want to do as 
government steps out of the way. The increase in WTO membership 
shows that more and more countries subscribe to this view, but 
there are some groups which argue to exceptions to the 
principle of free trade. They worry about individuals and 
businesses who will be hurt as they adjust to the new business 
environment when trade barriers fall, and they are right. Those 
adjustments can be painful.
    But business conditions change every day, and most of the 
changes have little to do with trade policy. We run low on some 
resources, we invent better ways to do things, old jobs 
disappear, new jobs are found. Whaling ships don't set sail 
from New Bedford, Massachusetts, any more. We found cheaper 
sources of energy and new jobs pumping oil from the seabed off 
the Louisiana shore.
    Mr. Tauzin. Good example, by the way.
    Mr. Brickell. The creative destruction of those kinds of 
shifts in the marketplace requires adjustments that dwarf the 
disruptions that are caused by breaking down trade barriers.
    Change will sweep across our workplace in America as a 
result of e-commerce over the next decade. That will cause far 
greater disruption than would the dropping of all U.S. trade 
barriers, but no one would repeal the Internet.
    The benefits of free trade are so great that in 1963, when 
he wrote the book Capitalism and Freedom, Milton Friedman urged 
America to move unilaterally to a free trade policy, and he 
pointed to Hong Kong where there were thousands of newly 
arrived Chinese immigrants as a country that had low trade 
barriers and he predicted that would benefit them. It was still 
true last year. The Index of Economic Freedom published by the 
Wall Street Journal and Heritage Foundation gave Hong Kong the 
highest rating for free trade policies. So we have a country 
that shows us what happens when you follow a free trade policy.
    In 1970, a few years after Friedman wrote his book, per 
capita GDP in Hong Kong was $957 per person. That was about 40 
percent of the per capita income back in the United Kingdom. In 
the next 3 decades, the income of Hong Kong people went 
rocketing up. Last year, per capita GDP there hit nearly 
$25,000. The free trade policy and other sound economic 
policies and low taxes drove income up so fast that citizens of 
Hong Kong now have higher GDP than those in the United Kingdom 
where trade is not so free.
    The fact is a good reminder that free trade for the United 
States is most important because it will raise the living 
standard for American workers.
    Turning to financial services, for most of this century 
financial services have been a protected industry, and barriers 
to free trade have included capital and exchange controls, 
restrictions on foreign ownership and taxes on foreign 
investment. We believe these obstacles to free exchange should 
be reduced and eliminated. Fortunately, over the past 2 decades 
these barriers have been reduced.
    Perhaps the most fundamental advance in this direction is 
taking place today as the financial services modernization 
legislation you and Chairman Bliley and others on this 
committee have worked so hard to pass is adopted. That law will 
tear down barriers between American financial firms at home, 
and it will also tear down barriers that have prolonged the 
separation of American financial institutions from the rest of 
the world. We seem to be headed back to the future toward an 
era of competitiveness and opportunity similar to the time when 
J.P. Morgan was formed. We are glad to see this trend. We are 
glad that the WTO has included financial services on its 
agenda. Formal barriers to trade and finance are becoming less 
and less important as obstacles to free trade in financial 
services.
    Instead, it is our experience at J.P. Morgan that some of 
the most significant barriers in trade and finance consist of 
differences among countries in the enforceability of contracts. 
Financial relationships should be governed by this principle: 
When two parties agree to a contract, each party should be able 
to rely on performance by the other. If a party has second 
thoughts and can exit that contract without making the other 
party whole, even a market that is totally open to trade and 
financial services would not be attractive.
    Sanctity of contract and the rule of law are cornerstones 
of free trade, and it should be U.S. policy to foster those 
values at home and abroad because you cannot build financial 
markets without this foundation. Not all trade barriers are as 
explicit as tariffs and quotas and ownership limits. U.S. trade 
negotiators and international trade bodies should reinforce 
sanctity of contracts and the rule of law as a key to trade and 
investment.
    What else should concern the U.S. negotiators? Obstacles to 
commerce on the Internet would be a major setback. We believe 
that there should be no tariffs on the Internet, and we commend 
the U.S. Trade Representative and the administration for 
pursuing this policy.
    Mr. Chairman, we appreciate the fact that the 
administration has taken a leading role in encouraging the 
liberalization of trade policy, and we are glad that this 
committee is overseeing those efforts. We hope to see further 
progress as a result of the Seattle meetings and the Millennium 
Round. Thank you.
    [The prepared statement of Mark C. Brickell follows:]
 Prepared Statement of Mark C. Brickell, J.P. Morgan & Co. Incorporated
    Mr. Chairman, members of the Committee, thank you for inviting me 
here today to testify about the importance of the next round of WTO 
negotiations. I work for J. P. Morgan, a global financial services firm 
that provides products and services for businesses, governments, and 
individuals worldwide. In an average year, about half our revenues 
result from international operations.
    Mr. Chairman, controls on international trade and capital flows 
have far-reaching and destructive effects. Reducing and eliminating 
those barriers to trade is a critically important endeavor. The United 
States, in the Millenium Round, should encourage other nations to open 
their borders and should lead the way by eliminating its own trade 
barriers. That policy will be good for Americans and our friends 
overseas. This Congress has already lead the way on Internet policy, by 
insuring that the United States imposes no duties on Internet commerce. 
We should also encourage the enforcement of contracts here and abroad.
    Free trade and capital mobility are close to J.P. Morgan's heart 
and to its history. Our bank was founded as a New York affiliate of a 
London merchant bank. Free trade in financial services between England 
and the United States permitted us to adapt to new business conditions. 
After the War Between the States, we move our headquarters from London 
to New York but continued doing business in both places. We have never 
lost our international character.
    We understand the U.S. economy and the world economy and the 
growing links between the two. Just as we channeled foreign capital 
into the emerging U.S. economy in the 1800s, so, in recent years, we 
have helped Americans find promising investments in other parts of the 
world. Our business has been stimulated by globalization--the 
inexorable liberalization of trade flows over the last 50 years and 
capital flows over the last two decades. We believe these are powerful, 
important and highly desirable trends.
    In the next few minutes, I would like to touch on two topics. One 
is the benefit of free trade; because others have made the case before, 
our statement will be brief. The other topic is trade in financial 
services, in which we have a more direct stake.
Why do we favor free trade?
    Few things have survived the test of time better than the economic 
case for free trade. Economists of all political stripes have made that 
case, from Nobel Laureate Milton Friedman to MIT's Paul Krugman. 
Dropping trade barriers enables producers and consumers to buy and sell 
freely. Consumers save money and have more choices, resources flow to 
their most efficient use, and human beings are happier because they get 
to do what they want to do as government steps out of the way.
    Reducing trade barriers is an increasingly accepted goal among 
nations. But, in the short run, some individuals and businesses will be 
hurt as they adjust to competitive changes. Of course, business 
conditions change every day. We run out of some resources, we invent 
better ways to do things, old jobs disappear and new ones must be 
found. Whaling ships don't set sail from New Bedford, Massachusetts, 
anymore. We've found cheaper sources of energy--and new jobs--pumping 
oil from the seabed off the Louisiana shore.
    The ``creative destruction'' of the marketplace requires 
adjustments that dwarf the disruptions that are caused by breaking down 
of trade barriers. Change will sweep across the American workplace over 
the next decade as e-commerce grows. That will cause far greater 
disruption than would the dropping all U.S. trade barriers. But no one 
would repeal the Internet.
    The benefits of free trade are so great that, in 1963, when he 
wrote Capitalism and Freedom, Milton Friedman urged America to move 
unilaterally to free trade. ``We are a great nation, and it ill 
behooves us to require reciprocal benefits' from other countries, he 
said. Let us set the pace.''
    Friedman pointed to Hong Kong, where thousands of newly arrived 
Chinese refugees were hard at work, as a rare example of a country with 
low trade barriers. And it was still true last year; The Index of 
Economic Freedom, published by the Wall Street Journal and the Heritage 
Foundation, gave Hong Kong the highest rating for free trade policies.
    What happens to the countries that follow a free trade policy? In 
1970, a few years after Friedman wrote his book, per capita GDP in the 
Hong Kong colony was $957--only 43 percent of per capita income back in 
the United Kingdom. In the next three decades, the income of Hong Kong 
people went rocketing up. Last year per capita GDP there hit nearly 
$25,000. The free trade policy, and other sound policies, drove income 
up so rapidly that citizens of Hong Kong now have higher GDP per capita 
than those in the United Kingdom where trade is not as free.
    That fact is a good reminder that free trade for the United States 
is most important because it will raise the living standard for 
American workers.
Financial services
    Let me turn now to our own industry, financial services. For most 
of this century, financial services have been a protected industry, 
both in the United States and other countries. Barriers to free trade 
in financial services have taken many forms. They include capital and 
exchange controls, restrictions on foreign ownership, and taxes on 
foreign investment. We believe these obstacles to free exchange should 
be reduced and eliminated. Fortunately, the past two decades have 
witnessed substantial liberalization of financial services, to the 
point where financial services were included in multilateral trade 
negotiations following the Uruguay Round, which concluded in 1994.
    Mr. Chairman, we are now on the threshold of an even more 
fundamental advance. The Financial Services Modernization legislation, 
which you and Chairman Bliley have worked so hard to pass, will soon 
become law. The law will not simply tear down barriers that separated 
American financial firms from each other; it will tear down barriers 
that prolonged the separation of American financial markets from the 
rest of the world. We are headed back to the future, toward an era of 
competitiveness and opportunity similar to the time when J.P. Morgan 
was formed.
    The trend today is toward free trade in financial services, despite 
occasional crisis-induced backsliding. Including financial services in 
the World Trade Organization agenda should only hasten this trend. Even 
where barriers continue to exist, they tend to be eroded by financial 
activities that place offshore. Offshore arrangements might not be the 
most efficient solution, but they are a means for beneficial activity 
to take place. Formal barriers are less and less important as obstacles 
to free trade in financial services.
    Instead, our experience is that some of the most significant 
barriers to international financial trade consist of differences among 
countries as to the enforceability of contracts and of the sanctity of 
contracts in general. We believe financial relationships, wherever they 
occur, should be governed by the following principle: when two parties 
agree to a contract, each party should be able to rely on the 
performance of the other. Once that is gone, once a party with second 
thoughts can exit the contract without making the other party whole, a 
crucial foundation of our financial system is gone. If contracts are 
not consistently enforced, even an otherwise totally open market would 
not be attractive.
    Hand in hand with upholding the sanctity of contract is adherence 
to the rule of law. Courts should decide cases on their merits, and not 
on other factors such as social policy objectives, ideological 
leanings, or a desire to avoid offending one's countrymen. An 
environment in which courts cannot be relied upon to adhere to the rule 
of law is an environment in which businesses will be reluctant to 
invest, and in which development will be stunted.
    Sanctity of contracts and the rule of law are a cornerstone of free 
trade. It should be US policy to foster those values at home and 
abroad, because you cannot build financial markets without this 
foundation. Not all trade barriers are explicit barriers, such as 
tariffs, quotas, and ownership restrictions. Some consist of procedures 
that, while appearing to treat all the same, favor domestic 
competitors; others may consist of standards or restrictions that, 
while billed as protecting workers or the environment or safety and 
soundness, have the effect of excluding foreign goods and services. 
U.S. trade negotiators and international trade bodies should draw 
attention to the importance of sanctity of contracts and the rule of 
law to trade and investment.
    What other possible impediments to free trade should concern U.S. 
negotiators? Obstacles to commerce on the Internet would be a major 
blow. Leading financial firms have taken note of the potential for the 
Internet and electronic commerce in general to change drastically the 
way we do business. There is a general awareness among banks and other 
financial services firms that they ignore e-commerce at their peril. 
The Internet has tremendous potential for at least two reasons: First, 
it will change the way many clients interact directly with banks. And 
second, by automating transactions it will reduce the costs and risks 
of our businesses. Before long, the volume of financial transactions 
handled over the Internet will be a substantial part of the whole. But 
it is also possible that, if states or other governments impose tariffs 
on internet transactions, many of the benefits of e-commerce will be 
lost. Further, since the Internet is not confined to international 
boundaries, barriers at the state level could have international 
repercussions as well. We believe there should be no tariffs on the 
Internet, and we commend the U.S. Trade Representative for pursuing 
this policy.
Conclusion
    Mr. Chairman, we appreciate the fact that the Administration has 
taken a leading role in encouraging the liberalization of trade policy. 
We are glad this Committee is overseeing those efforts. We hope to see 
further progress as a result of the Seattle meetings and the Millenium 
Round.

    Mr. Tauzin. Thank you very much, Mr. Brickell.
    Next is Tim Regan of Corning.

                   STATEMENT OF TIMOTHY REGAN

    Mr. Regan. Thank you, Mr. Chairman.
    I am here wearing two hats. One is for Corning and the 
other is for a group called the Labor/Industry Coalition for 
International Trade. This is a group of firms and trade unions 
who share a common interest in the promotion of good, high-wage 
jobs in America's manufacturing sector.
    Mr. Tauzin. Give us an example of some of the companies and 
unions involved?
    Mr. Regan. The glass workers and the communications workers 
are members. The AFL-CIO is no longer a part of it. The 
chemical workers are in it. The steelworkers are in it.
    On the firm side, we have companies like Corning. We have 
Bethlehem Steel and Daimler-Chrysler. We have had a number of 
other groups involved in the past that, for a variety of 
reasons, are not today. We have had Motorola and Intel, folks 
that really make things here and are interested in exporting 
and promoting, if you will, high-wage jobs in America, 
manufacturing. And, as you know, manufacturing jobs generally, 
on average, pay higher wages than service sectors, many service 
sectors in the economy.
    So it is a field which we believe has been neglected 
traditionally in U.S. trade policy, and we can't afford to 
neglect it.
    I am not going to read any statement because a lot of 
things that were said we agree with as a group and I agree 
with. And some we don't agree with.
    We think that the issue of trade is more complicated than 
free trade versus protectionism. It is really much more 
complicated. It is really the question of fairness. And, as my 
colleague just pointed out, the sanctity of contracts 
ultimately is an issue of fairness. And the question of whether 
or not countries can engage in injurious dumping and injurious 
subsidies is also a question of fairness, and we think that the 
system has to deal with these issues of fairness by 
establishing good, sound rules that will allow entities to 
compete fairly against one another in the world market.
    We are very concerned--the Labor/Industry Coalition for 
International Trade is very concerned that the administration 
and the United States will be under tremendous pressure to 
weaken these fundamental statutes, both statutes that exist in 
the international system today and in the United States.
    There is no news. The Asian countries, the developing 
countries are putting this pressure on the United States 
because they want to be free to dump in this market or 
subsidize in this market with impugnity. And we are concerned 
because the United States was exactly in this position in the 
Uruguay Round, and the United States said we are not going to 
weaken the laws. But in the end, in the final hours, and I was 
there in Geneva at the time, the United States buckled and 
conceded and made major concessions which have fundamentally 
undermined the effectiveness and the ability of the U.S. firms 
and workers to seek relief.
    Mr. Tauzin. Can you give us a couple of examples?
    Mr. Regan. One is sunset. Under U.S. law if you can prove 
that you face injurious dumping, you can get relief, and the 
relief comes in the form of antidumping duties, and the case 
also holds for subsidies.
    The United States agreed as a matter of law it would cap 
relief at 5 years, no matter what. It was a random negotiated 
number that came out of the blue. Now if you happen to be in 
the crawfish industry back in Louisiana and you file a dumping 
case, which your constituents did 2 years ago, and they win, 
and they pay a half million dollars to win the case, they get 
relief, but they get relief for 5 years, and in 5 years they 
have to go back and fight it all over again.
    Now, in these--these fights that occur over and over again 
cost the industries a tremendous amount of money to litigate. 
And again, there is no special number here. Five was literally 
taken out of the air. It was a negotiated limitation.
    The fact of the matter is that a lot of these firms don't 
have the resources to go back and fight these orders again. So 
the system has essentially been capped at 5 years. I know that 
one of the industries we are involved in, we have decided not 
to pursue the defense of sunset because of the cost associated 
with doing it and the likelihood of succeeding. The likelihood 
of succeeding is extremely low.
    So I think that it is very important that the Congress send 
a signal--and I know that you just voted on this issue across 
the street, and it is truly unfortunate that essentially we 
send a message to the rest of the world that when Charlene 
Barshefsky goes in there and says, I am not going to negotiate 
an unfair trade, they are going to say, why not. She is going 
say, because the Congress is against it; and they are going to 
point to those votes and say, why didn't they pass a nonbinding 
resolution to tell us that they are not willing to vote for it.
    I think we have now set ourselves into a course of events 
which is going to make it more difficult for her, not less 
difficult for her going forward. And I don't mean to be 
critical.
    I should also add that your points this morning about 
indirect taxes are absolutely right on the mark. You couldn't 
be more accurate in your perception. The fact that we have 
these--face these indirect taxes on our exports and then we 
face rebates of indirect taxes on products coming into the 
United States is a fundamental issue. I would say it is 
probably the biggest barrier that we face in the world.
    Because when we show up in Brazil with fiberoptics, we are 
showing up there having paid our 34 percent corporate income 
tax. We show up in Brazil, and we get slapped with a 17 percent 
tax. And our European counterparts show up, and they got their 
taxes rebated at the border, and they get a 17 percent tax, but 
their total tax burden is less, and it hurts. It hurts 
everywhere. It is in China, Europe, everywhere we go, and today 
it is a huge problem.
    So I would endorse what you are trying to do strongly. I 
think it is the right way to go. I think that the United States 
ought to take a stand and tell the world either we are going to 
fix this problem internationally or we are going to fix it at 
home.
    Then I would like to move on to some of Corning's concerns. 
Corning is the inventor of optical fiber. We export about 50 
percent of what we make, and we make it here in America, and 
this is a classic case. We employ former textile workers in our 
plant in North Carolina. We have 4,000 people down there, and 
we are able to export because we have high returns to scale for 
the manufacture of this product. We pay high wages, and this 
stuff is so light you can ship it in air freight. You can have 
a delivery in 24 hours anywhere in the world. It is a perfect 
export product, but we face barriers everywhere we go in the 
world.
    Mr. Tauzin. I saw a figure that said that we lay enough 
fiberoptic in America to wrap the world every year 800 times?
    Mr. Regan. I don't know about that figure, but we lay about 
28,000 miles a day in the world. It is quite phenomenal, and it 
is being driven, to a large degree, by what has happened with 
e-commerce and what happened with the Telecommunications Act.
    And I will move on and use that as a segue to e-commerce.
    E-commerce is huge. Whether it continues to be developed 
around the world at the pace it has been developed around here 
depends on what governments do to inhibit it, and there is the 
propensity to inhibit it, and is much greater overseas than it 
is here.
    You have heard that story this morning. I want to reinforce 
the notion that we want to encourage governments to keep their 
hands off. It is in everybody's interest. They are going to be 
better off if somebody in Brazil can sell their product in the 
United States without having to necessarily have a presence in 
the United States. Just like it is good for us. So it is good 
for everybody for e-commerce to work.
    I would also like to note that for e-commerce to continue 
to prosper in the United States--and this gets off track; it 
gets into the debate on telecommunications policy--we need to 
move forward to get truly high-speed bandwidth capability for 
residences in America. The fact is that we don't have high-
speed capability to most residences.
    The Telecommunications Act has worked very effectively in 
accelerating the deployment of this capability to businesses, 
and all you have to do is drive down the street and see how 
many different holes are dug for MFS or next level or MCI. The 
other day I saw three trenches, one for each one. It was marked 
in the street. That shows you what is happening. It is 
happening because of what you did.
    The competition for the business customers are phenomenal. 
That is where the opportunity is going to be in terms of lower 
prices and better quality and higher speed. But the residences 
really do face a struggle. There is a lot that can be done in 
terms of removing barriers to investment and adopting 
incentives for investments. We have to replace about $200 
billion of existing infrastructure in this country in terms of 
copper wire and outmoded circuit switching to really bring it 
on home.
    Finally, I want to warn the committee against the prospects 
of what I call unfair tariff deals. We have a peculiar 
situation in telecommunications equipment, and that is that the 
rest of the world can discriminate against us, and we can't 
discriminate against them. The reason for that is there is a 
provision that goes back to 1947 that was put in the GATT that 
says that governments can discriminate in the procurement of 
goods for their own use, and since most of the world has public 
telephone and telegraph administrations which are owned by 
their governments, these entities are free under that provision 
to discriminate, and there is really nothing we can do about 
it. We have faced it time and time again where we go over there 
and we say we can't get in the door because they have a buy 
national policy, and we have been told, unfortunately, that is 
okay, it is a loophole.
    Any tariff deal in the United States on which we agree to 
eliminate our tariffs and telecom equipment which does not 
involve a comprehensive deal to get at tariff and nontariff 
barriers overseas, particularly the discriminatory procurement 
provision or loophole, is tantamount to unilateral disarmament, 
and we ought not to do it.
    Thank you very much.
    [The prepared statement of Timothy Regan follows:]
  Prepared Statement of Timothy Regan on Behalf of the Labor Industry 
       Coalition for International Trade and Corning Incorporated
    I appreciate this opportunity to testify on the Seattle Ministerial 
and the proposed new round of WTO talks. I am wearing two hats today--
one for Corning, a world leader in telecommunications, where I am Vice 
President for Government Affairs, and one for the Labor/Industry 
Coalition for International Trade (LICIT), of which Corning is a 
founding member.
                          i. licit's concerns
    For two decades, LICIT has brought companies and unions together in 
support of increased and equitable international trade. Companies and 
unions affiliated with LICIT include: American Flint Glass Workers; 
AMT--The Association for Manufacturing Technology; Bethlehem Steel 
Corp.; Communications Workers of America; Corning Incorporated; 
DaimlerChrysler; International Brotherhood of Electrical Workers; 
Milacron Inc.; Paper, Allied-Industrial, Chemical & Energy Workers 
International Union (PACE); Union of Needletrades, Industrial and 
Textile Employees (UNITE); and United Steelworkers of America/United 
Rubber Workers Conference.1
---------------------------------------------------------------------------
    \1\ Members do not necessarily associate themselves with every 
LICIT report or recommendation.
---------------------------------------------------------------------------
    The goal of the Seattle Ministerial is to launch and set parameters 
for a new round of multilateral trade negotiations. The agreed ``built-
in agenda'' for these talks involves revisions to the existing WTO 
rules on agriculture trade, services trade and intellectual property. 
There is much that the United States can and should seek to accomplish 
in these areas. However, none of these positive results can be achieved 
unless the United States resolutely blocks efforts by a handful of WTO 
Members to go outside this agreed list of topics and reopen debate over 
the WTO's antidumping and anti-subsidy rules.
Antidumping Rules Should Not Be Reopened
    Antidumping and antisubsidy rules are a pillar of the multilateral 
trading system. From its inception, the GATT has provided that 
injurious dumping ``is to be condemned'' and has provided for remedies 
to offset and deter dumping and trade-distorting government subsidies. 
These rules are designed to ensure a basic level of fairness in 
international trade and to prevent abuse. The clear intent of the 
countries who want to reopen these rules, however, is to weaken them. 
Allowing this effort to succeed would inevitably lead to abuse of the 
world's open markets--including that of the United States, the world's 
most open market--and would rapidly undermine confidence in the WTO.
    As the United States observed in a 1998 submission to the WTO 
Working Group on the Interaction between Trade and Competition Policy, 
the antidumping remedy is:
        necessary to the maintenance of the multilateral trading 
        system. Without this and other remedial safeguards, there could 
        have been no agreement on broader GATT and later WTO packages 
        of market-opening agreements, especially given the 
        imperfections which remain in the multilateral trading system . 
        . . [T]he antidumping rules represent an effort to maintain a 
        ``level playing field'' between producers in different 
        countries . . . [and] are a critical factor in obtaining and 
        sustaining necessary public support for the shared multilateral 
        goal of trade liberalization.
    From the standpoint of the trading system, there is no reason to 
reopen these rules in a new round, and there are many reasons not to do 
so. First, the current rules were concluded only with great difficulty 
during the Uruguay Round, have hardly been tested, and certainly have 
not proven defective. Another divisive fight over antidumping would 
only make the new round impossible to conclude, or its results 
impossible for the United States to ratify. Second, there are many new 
users of antidumping laws, often developing countries, trying to come 
into compliance with Uruguay Round rules. What is needed is a period of 
repose and certainty, not continued shifting of the rules which could 
spur confusion and negatively affect all WTO Members' exports. Third, 
antidumping measures affect only a tiny fraction of world trade. Where 
applied, they simply ensure a modicum of fairness, but even if that 
were not the case, it would hardly be plausible to argue that use of 
antidumping is a major problem in international trade. There is other, 
much more important, work to do in Geneva.
    Permitting these rules to be undermined would not only put the 
trading system's prior accomplishments at risk and preclude progress on 
the core WTO trade agenda; it would also rob U.S. industries of their 
last remaining remedy against injurious, unfair trade. Chairman Tauzin, 
your own crawfish industry in Louisiana has been beset in recent years 
by dumping and would have been defenseless without an effective 
antidumping law. Likewise, Louisiana's softwood lumber industry would 
have had no remedy to huge Canadian subsidies without a strong and 
effective CVD law.
    You can imagine our concern, then, upon learning last month that 
the incumbent WTO General Council Chairman, Ali Mchumo, had released a 
draft ``Declaration'' for the Seattle Ministerial with a lengthy list 
of proposed changes to WTO dumping and subsidy rules--changes that 
would, if adopted, eviscerate the U.S. fair trade laws and the relief 
those laws provide to domestic industries injured by dumped and 
subsidized imports. The Mchumo draft recites almost verbatim a series 
of negotiating demands tabled by countries seeking to alter the deal 
they signed in the Uruguay Round. Although clothed as suggestions 
relating to ``implementation'' of the Uruguay Round rules, these 
proposals actually seek to reopen those rules and dramatically alter 
the balance of rights and obligations achieved in the Uruguay Round.
    While many of the Mchumo proposals are designed to provide special 
benefits for developing countries, some of the worst proposals apply to 
all countries and would introduce a bias in international trade rules 
favoring all dumpers and subsidizers. Meanwhile, the special rules 
proposed for developing countries are both dangerous--they would 
provide a license and a road map for engaging in unfair trade--and 
unnecessary since the claim that developing country exports are being 
shut off by trade remedy measures has no basis in fact. In the last 
official study by the U.S. International Trade Commission, no 
developing country in the GATT system had even 1% of its U.S.-bound 
exports subject to antidumping orders. The Mchumo draft, however, 
proposes such far-reaching changes as:

 requiring national authorities to impose duties that are less 
        than the calculated margin of dumping or subsidy;
 slanting the Antidumping Agreement's criteria on product 
        comparisons and exchange rate shifts so as to minimize or erase 
        dumping margins;
 exempting developing countries altogether from discipline on 
        the worst forms of subsidies--export subsidies and import-
        substitution subsidies;
 sharply increasing the already-liberal de minimis dumping, 
        subsidy and market share thresholds below which trade remedies 
        cannot be imposed on developing country products; and
 imposing lengthy moratoriums on antidumping actions in 
        particular sectors such as textiles and apparel.
    Several of these ideas were floated in the Uruguay Round and were 
soundly rejected. There was no basis for them then, and there is none 
now. Yet, Mr. Mchumo has proposed many amendments to take effect 
immediately--as if a basis for them had somehow already been 
established, which plainly is not the case.
    The Mchumo draft represents an assault emanating from the WTO 
itself on the U.S. trade laws and on the international rules of fair 
trade which underlie U.S. acceptance of the WTO agreements. This is not 
what America bargained for when it joined the Organization and ratified 
the WTO agreements.
    Forceful intervention by Congress is urgently needed. The most 
important and immediate step is to pass H Res. 298--introduced last 
month by Reps. Visclosky and Ney--which directs the President to refuse 
to participate in any new negotiations on antidumping and anti-subsidy 
rules, and to refrain from submitting to Congress any agreement that 
might undercut current U.S. trade laws or enforcement practices. By 
passing this important measure, Members of Congress can bolster the 
existing U.S. position and send a strong message that Congress will not 
tolerate attacks by or within the WTO on our fair trade laws.
    The Commerce Committee and this Subcommittee have traditionally 
supported America's manufacturing base and the fair trade remedies 
which are essential to keeping that base healthy. Unfortunately, fewer 
than half the members of the Committee are presently signed on as co-
sponsors of H Res. 298. LICIT respectfully urges those Committee 
members who have not signed on to join the more than 220 of your 
colleagues in the House who have stood up for America's working men and 
women by co-sponsoring this important measure.
    The resolution reaffirms existing U.S. policy as articulated by 
both the Congress and the Administration. Here in the House, the 
Committee on Ways and Means, in 1997 approved and reported out a 
provision instructing U.S. negotiators to reject any agreement that 
would weaken current disciplines against dumping and subsidies:
        In the course of negotiations conducted under this title, the 
        United States Trade Representative shall-- . . . preserve the 
        ability of the United States to enforce rigorously its trade 
        laws, including the antidumping and countervailing duty laws, 
        and avoid agreements which lessen the effectiveness of domestic 
        and international disciplines on unfair trade, especially 
        dumping and subsidies . . .
    Formalizing this position through prompt passage of H Res. 298 will 
provide crucial support to the Administration as the Seattle 
Ministerial approaches and send a strong message that the Congress is 
not prepared to compromise the effectiveness of our fair trade laws.
Reforms to the WTO Dispute Settlement Understanding (DSU)
    Experience during the last 5 years has highlighted the need for DSU 
reforms. These reforms, which were supposed to be completed by the end 
of 1998 as a result of a review scheduled in 1994, are essential if the 
WTO and its dispute settlement mechanism are to succeed in the new 
Millenium.
    The key U.S. priority at this point must be ``defensive'' concerns. 
Although the United States has been more frequently a complainant than 
a defendant, this pattern cannot be expected to continue, and there is 
now an alarming pattern of attacks on U.S. trade law measures coupled 
with panel decisions fabricating new restrictions on those measures 
which were never accepted in negotiations. The United States should 
therefore insist that any legal instrument extending the DSU (1) 
reaffirm the critical importance of the Antidumping Agreement standard 
of review, and (2) expressly clarify the applicability of that standard 
to CVD disputes.
    The United States should also seek reform in the following areas:

 Transparency. A revised DSU should require Members 
        participating in dispute settlement proceedings to submit, 
        promptly after each submission to a panel, a public version 
        sufficient to permit a full understanding of the arguments. It 
        should also require panel and Appellate Body meetings to be 
        open to all WTO Members and to the public, and should allow 
        affected private parties to participate in panel proceedings. 
        These changes will enhance the credibility and performance of 
        the system while allowing governments to utilize fully the 
        resources and expertise of private parties who have the most 
        direct stake in WTO cases.
 Limits on the WTO Secretariat's role. Secretariat officials 
        often have strongly-held personal views on how to interpret 
        agreements they participated in drafting, and in many cases 
        they do not agree with the substantive rules which it is the 
        responsibility of panels to enforce. It is not appropriate for 
        these officials to be involved, other than perhaps in a purely 
        secretarial capacity, with the work of dispute settlement 
        panels. The Secretariat does not exist to espouse positions 
        attacking individual articles of the GATT, or to side with 
        particular Members who want to rewrite the existing rules in 
        particular subject areas. This has already been a problem in 
        WTO dispute settlement, and if not corrected it threatens the 
        system's credibility and future.
                         ii. corning's concerns
E-commerce
    Now I would like to address the issues before the Committee in 
which Corning has a significant concern. As you know, Corning is the 
inventor and world's leading manufacturer of optical fiber and photonic 
components. We are thus greatly affected by both globalization and 
convergence, the two major driving forces of our time in the world 
economy.
    The power of convergence--that is the combined use of computing and 
networking--has brought E-commerce to the forefront. In the last two 
weeks alone, E-commerce has been the subject of feature articles in 
such widely read weeklies as Time and Fortune. It is indeed a 
phenomenon that is affecting the way we work and the way we play--the 
ultimate realization of the value inherent in the information economy.
    Whether E-commerce continues to evolve at a rapid pace will depend 
on whether governments worldwide take steps to constrain it.
    So far, in the United States, we've done a good job of nurturing it 
by virtue of our willingness to trust the marketplace and to avoid 
excessive regulation. Our challenge now is to ensure that ``true 
broadband,'' as opposed to wideband solutions like ADSL, is deployed to 
every business and to every home in America as soon as possible. This 
will require additional measures by government to eliminate barriers 
that are inhibiting deployment and to adopt technology neutral 
incentives to accelerate deployment.
    On the international side, we need to adopt an aggressive program 
to move E-commerce into the forefront of the discussion for the WTO 
Ministerial. It is critically important that Ministers agree in 
principle to refrain from taking any measures that restrict or inhibit 
the development of E-commerce. They need to adopt four specific 
commitments to keep E-commerce ``barrier-free,'' an environment which 
will enable this new phenomenon to develop at an optimal pace to the 
benefit of the world economy.
    At Seattle, the Ministers must:

 agree to continue May 20, 1998 Moratorium on Customs Duties on 
        Electronic Commerce for at least the duration of the New Round, 
        and to clarify that the exemption from tariff applies to both 
        the transmissions themselves and their contents;
 reaffirm that current WTO obligations, rules, disciplines, and 
        commitments apply to E-commerce, just as they do to trade in 
        goods and services;
 commit to refrain from taking measures as a matter of domestic 
        policy that would inhibit growth of E-commerce and, when 
        domestic regulatory action is necessary, adopt only those 
        measures which are the ``least trade distortive''; and
 initiate a process to establish a new ``Trade Framework for 
        the Information Economy'' to integrate the disciplines of the 
        WTO throughout E-commerce.
    It is important to emphasize that these are commitments in 
principle, not legally binding obligations. These commitments encompass 
an approach for embracing E-commerce based upon limited government 
intervention which we believe has worked enormously well for the United 
States and will do the same for others.
Imbalanced Tariff Deals
    I might also add a special point of concern which I believe affects 
all U.S. telecommunications equipment manufacturers. We face an 
unbalanced situation in the world. Our market for telecommunications 
equipment is wide open, while foreign markets for our equipment remain 
highly restricted.
    The only barriers we have left are relatively small tariffs. The 
rest of the world, however, has tariffs plus non-tariff regimes which 
discriminate against our trade. Some of these non-tariff measures are, 
frankly, WTO consistent because there is a huge loophole in the system. 
This loophole allows public telephone and telegraph entities, which are 
owned or controlled by their governments, to discriminate against 
imports with impunity.
    Since the United States has no government-owned public telephone 
and telegraph administrations, we simply have no means to engage in 
such WTO legal discrimination. The carriers that buy telecommunications 
equipment in the United States are privately-owned entities that 
purchase purely on the basis of commercial considerations--price, 
quality and delivery--not on the basis of national origin.
    This inherent discrimination in the world trading system against 
American manufactured telecommunications equipment is problematic. In 
light of it, any decision on the part of the United States to eliminate 
U.S. tariffs on telecommunications equipment must be matched by a 
commitment on the part of other countries to eliminate both tariff and 
non-tariff barriers. Otherwise, any tariff deal is unbalanced and 
tantamount to unilateral disarmament.
                            iii. conclusion
    The built-in agenda for the next round is an important one. There 
may also be other WTO issues on which the United States can and should 
seek progress at Seattle and in the talks that follow. However, to 
achieve a result that will enhance U.S. trade objectives and the 
welfare of America's working men and women, it is essential that the 
United States defeat any and all efforts to weaken the existing fair 
trade rules of the WTO. In practice, this means that those rules should 
not be reopened at all.
    LICIT looks forward to working with this Subcommittee, with the 
Congress as a whole, and with the Administration to ensure that the 
promise of the upcoming multilateral talks is not squandered through a 
useless and unwise debate over antidumping rules.

    Mr. Tauzin. Thank you, Mr. Regan.
    And, finally, Mr. Brant Free, Senior Vice President of 
International External Affairs of The Chubb Corporation here in 
Washington, DC.

                   STATEMENT OF BRANT W. FREE

    Mr. Free. Thank you, Mr. Chairman.
    Like my good friend Tim, and he is always chiding me for 
being from the services sector and not from manufacturing, I am 
wearing two hats this afternoon also.
    Chubb is a high-tech insurance company which operates in 35 
countries around the world but has business in 110. Aside from 
selling insurance and other financial services products, we 
view ourselves as a bridge for U.S. exporters to get their 
products around the world into markets in which they have to be 
insured, and the same for investments. We can help companies 
get into markets, small and medium-sized companies who just 
don't have the skill and knowledge about the environment that 
they are going into.
    I am actually here more importantly representing the 
Coalition of Service Industries. The chairman of Chubb is the 
chairman of the Coalition, and the more than 60 member firms 
and trade associations of the Coalition cover all of the 
sectors--subsectors of services that Joe Papovich outlined this 
morning.
    Mr. Tauzin. Give us some examples of the companies 
involved?
    Mr. Free. Aetna, America on-line, Bank of America, Boeing, 
Dow Jones, EDS, Goldman Sachs, IBM, the Investment Company 
Institute, MasterCard, Visa, American Express, Ford Financial 
Services Group. We have got the American Consulting Engineers 
Council, the American Council of Life Insurance.
    Mr. Tauzin. You are speaking for all of them? I should have 
put you first.
    Mr. Free. We don't speak for them on all subjects, but 
luckily in the services sector we have had a common voice with 
some variations by sector.
    We have made a lot of progress, as you pointed out this 
morning, at getting success for services, but when Tim and I 
first met each other and I was a trade negotiator in the U.S. 
Government, they called services the new issue, and it is now 
20 years old.
    We did have a good success, frankly, in getting a services 
agreement in the Uruguay Round and subsequent agreements on 
financial services. And the companies that are members of the 
Coalition were strong supporters of those agreements, but in 
all reality they broke no new ground. Yes, they created a 
framework for dealing with services liberalization down the 
road, but in fact most countries of the world only made offers 
that reflected the level of liberalization they already 
achieved or even committed themselves to, less than the level 
of liberalization that they achieved. So the negotiations ended 
up being an exercise in how you write down your commitments, 
not give and take, we will do this if you do that. So 
liberalization generally was not achieved except in very 
limited circumstances; and, more ironically, the liberalization 
is really in investment in the establishment side of the 
equation, not the cross-border sale or export of services.
    When I first started out many years ago working on this 
issue, we first raised the question, could services be in GATT? 
We were told, no, services are not goods. There is no room for 
services in GATT. They are very different.
    We got past that obstacle, and we were talking about trade 
in services, including establishment questions. And the 
reaction of the trade policy people was, but GATT doesn't deal 
with investment, it only deals with trade and cross-border. But 
in the final deals we really dealt with the establishment 
issues, not the cross-border issues.
    Financial services which is the sector I represent. Within 
the Coalition there is a separate financial services group. In 
building support for international agreements, we have 
developed a financial leaders group which includes the CEOs of 
financial firms from Europe, North America, from Latin America 
and Asia. But when we raised financial services after crossing 
all of these other barriers, we were told financial services 
were so different they couldn't be in the GATT either, but 
ultimately succeeded.
    Why am I going through that? To bring you to where we are 
today and to really cut to the quick.
    Yes, in this next generation agenda, now that we have 
legitimacy for services as a negotiating area, we really do 
want to see real market access and liberalization provisions.We 
want to see some real negotiations where, as a result, you get 
market opening you didn't have before.
    E-commerce. E-commerce has an extraordinarily important 
impact on virtually every service sector, just like it does 
every business in the United States, and we are working on 
those issues. But the particular cut for us beyond taxation, 
jurisdiction, definition, becomes the question of what do you 
do with regulated industries. And I will in a minute tell you 
or talk a little bit about pro-competitive regulatory reform, 
which is where we want to move to next. In fact, let me move 
there now.
    The Internet, from an e-commerce perspective, if you are an 
insurance company operating in the United States and you run a 
web page, it can be accessed by anyone anywhere in the world. 
What if someone wants to buy one of your policies but they are 
residing in France? It would be an illegal transaction for us 
to sell an insurance policy to a French individual because 
there is no international agreement about where the point of 
sale takes place and who has jurisdiction over that.
    From a practical point of view, we have had one example, 
and it was in the securities area. The Securities Industry 
Association asked the British Financial Services Authority how 
they would view advertisements on the Internet aimed at the 
U.S. audience but could be accessed by the United Kingdom 
residents. And they were told that, under U.K. provisions, 
whether it was intended for a U.K. audience or not, by virtue 
of its availability on the Internet that the securities 
industry must conform to U.K. standards of advertising, 
marketing and whatever simply because someone could access a 
U.S.-focused advertisement through the Internet.
    That just begins to show you the problems that we face.
    And again, as I point out, they are particularly in 
financial services but in other areas of services, since there 
were so few deals on allowing cross-border trade, this brings 
this matter very much to a head.
    And that takes me to the real focus that I have here today, 
which is pro-competitive regulatory reform. We talked a bit 
about the telecom reference paper, but it has become clear to 
us in financial services, and I won't speak specifically for 
the insurance industry, that unless the next round begins to 
deal with regulatory barriers to your operations in a foreign 
market, that market access in itself can be completely 
meaningless.
    The best example is the U.S.-Japan insurance agreement. You 
are aware of it. It has been in existence for 5 years, and it 
has been a bone of contention. I should say that the Japanese 
are moving to deregulate in the way that we want to see them 
go. But what I want to point out here is to define what we mean 
by pro-competitive regulatory reform.
    We are not suggesting that regulators should not regulate 
financial markets. What we are saying is that they ought to 
focus on the solvency of their institutions, certainly on the 
consumer issues about adequate information and consent.
    But in the case of Japan, and this is prevalent throughout 
many parts of the world, in the Japanese system you could not 
issue, Chubb Japan, a new insurance policy unless it was turned 
over to the local trade association for approval; and the local 
trade association then recommends to the Japanese government 
whether a policy can be issued with new provisions, something 
new for the Internet, something new for a power plant, 
something new for the software sector.
    Well, of course they have got all of your commercial 
information. They design their own policies. The Japanese 
government approves your new policy when all of your 
competitors can issue it. They further control price so you 
have neither the ability to innovate on product or price.
    So this is what we mean by pro-competitive regulatory 
reform. You heard Joe Papovich say this morning that they are 
going to include regulation in the three points of the services 
program that the U.S. is pushing in Seattle. He referred to 
transparent and fair regulation. We don't have a definition of 
what fair is. And most of our discussions with our own 
regulators and through USTR and through the Treasury Department 
have indicated a real reluctance to want to support this 
effort, much as they did not want to originally support 
financial services in the GATT agreement.
    We find this very shortsighted because, in most cases, the 
U.S. market has a very good record in this area. We would have 
little to give up and much to gain if we could introduce our 
new products and price them to market abroad. So for us in the 
Coalition of Service Industries and in the financial services 
sector, this pro-competitive regulatory reform is an issue 
whose time has come.
    Joe mentioned this morning that he spent 3 days at the 
World Services Congress. This is the first time that such a 
Congress has ever been held. It was in Atlanta. My company 
happened to be the host, and the Coalition of Service 
Industries was the major sponsoring group. Seven hundred 
business, government and academic leaders gathered from around 
the world to talk about the next round and to set an agenda for 
the ministerial.
    Part of that agenda that came out over and over again, 
whether it was airlines and other parts of transportation, air 
courier, financial services or professional services, was we 
need to get regulatory reform on the GATT agenda--or the WTO 
agenda. That doesn't mean the WTO should become the regulator, 
but it means, just as we have in product standards, health 
standards for goods, there ought to be some negotiated 
boundaries around which regulators of the various service 
sectors can operate. Their regulations should be appropriate to 
the purposes for which they are intended and should not be for 
protectionist purposes.
    We are going to need Congress's help. Again, I have been 
around long enough to know that we would never have had 
services in GATT if it was not for Congress. We would never 
have had financial services in the WTO had it not been for 
Congress. And it is critical for us now that we get the 
Congress interested in this area of regulatory reform in 
foreign markets so when we negotiate market access we can then 
develop and introduce new products at market-based or flexible 
pricing.
    Thank you.
    [The prepared statement of Brant W. Free follows:]
      Prepared Statement of Brant W. Free, Senior Vice President 
International External Affairs, The Chubb Corporation and the Coalition 
                         of Service Industries
    It is a pleasure to appear today to testify on behalf of The Chubb 
Corporation and the Coalition of Service Industries (CSI) on WTO 2000: 
The Next Round. I look forward to the opportunity to speak, in 
particular, about the private sector's objectives for services at the 
Seattle WTO ministerial meeting, and the Services 2000 negotiations 
scheduled to begin this coming January.
    First, I would like to tell you about Chubb and why we are so 
interested in these issues. The Chubb Corporation is a global specialty 
property and casualty insurance company with offices in 32 countries. 
Last year, over 25 percent of our premium dollars came from our 
operations located outside the United States. Over the next few years 
we expect this to increase to one-third. It is critical to our future 
growth that Chubb is able to enter foreign markets and compete on a 
level playing field with domestic insurers as well as other 
international competitors and the WTO negotiations are an essential 
part of assuring that we have this opportunity.
    My Chairman, Dean O'Hare, is also the Chairman of the Coalition of 
Service Industries. CSI was established in 1982 to create greater 
public awareness of the major role services companies and their workers 
play in our national economy; promote the expansion of business 
opportunities abroad for US service companies; advocate an increased 
focus on liberalization of trade in services in international trade 
negotiations; and encourage US leadership in obtaining a fair and 
competitive global marketplace.
    CSI members include an array of US service industries including the 
financial, telecommunications, professional, travel, transportation and 
air cargo, and information technology sectors. Included in the broader 
coalition of sectors with which we work are energy services, 
entertainment, retail distribution, and education.
    CSI has been active in multilateral trade negotiations since before 
the Uruguay Round and has played an aggressive advocacy role in writing 
the General Agreement on Trade in Services and obtaining successful WTO 
negotiations in telecommunications and financial services.
Services 2000 Negotiations
    We are equally committed to a comprehensive, highly ambitious new 
multilateral services negotiation starting in 2000. We believe that 
these negotiations will further expand our global markets, enabling our 
sector to increase its 77 percent share of US employment, its 79 
percent share of GDP, and its trade surplus of about $80 billion (about 
30 percent of US exports). Because foreigners have a high propensity to 
consume US services, we believe that negotiations that reduce barriers 
across a wide range of highly protected foreign services markets could 
materially stimulate US trade. The US is very competitive in virtually 
every category of services trade, examples of which are given in the 
appendix to this statement.
    It has recently been suggested that US services exports could 
offset the structural goods deficit as a result of successful 
multilateral negotiations. Catherine L. Mann, in a study for the 
Institute for International Economics \1\ wrote:
---------------------------------------------------------------------------
    \1\ Catherine L. Mann, ``Is the U.S. Trade Deficit Sustainable?'' 
Institute for International Economics, 1999, p. 9.
---------------------------------------------------------------------------
        ``. . . as income in a foreign country grows, its imports of US 
        services tend to rise disproportionately. Successful broad-
        based negotiations on trade in services will likely increase US 
        exports of services even further, with a positive effect on the 
        trade deficit. The long-term trajectory of the US external 
        balances could be altered significantly by the combination of 
        successful service-sector negotiations and broad-based 
        liberalization and deregulation at home and especially abroad. 
        These together would unleash higher productivity and faster 
        growth at home and abroad, which would narrow the US current 
        account deficit.''
    In recent testimony before the Senate Finance Committee, Dr. Mann 
cited estimates that comprehensive liberalization of services could 
raise global GDP by 4 to 6 percentage points, and raise the long-run 
global growth rate from 3.2 to 5 percent.\2\
---------------------------------------------------------------------------
    \2\ Gary Clyde Hufbauer and Tony Warren, ``The Globalization of 
Services, What Has Happened?'' Institute for International Economics, 
1999
---------------------------------------------------------------------------
    My point is that the United States has a powerful national economic 
security interest in making the coming services negotiations a major 
success. But, so does the rest of the world economy.
The Seattle Ministerial
    Because we need highly successful new services trade negotiations, 
we need a successful Seattle WTO Ministerial Meeting. What defines 
success? For the service sector a successful Ministerial must:

 give a very strong mandate to the start of comprehensive 
        services negotiations in 2000
 provide that this 3 year negotiation be focussed mainly on 
        services, agriculture, and industrial products so that there is 
        a real chance that negotiators can focus on services trade and 
        complete an ambitious agenda of liberalization in areas where 
        the likelihood of liberalization exists.
 recognize that electronic commerce is an important new 
        technique for trading, not a new sector in and of itself; 
        extend the existing moratorium on duties on electronic 
        transmissions, call on countries to refrain from adopting 
        measures that would unnecessarily restrict electronic commerce, 
        provide that electronic delivery of services falls within the 
        scope of the GATS, and that there be no discrimination among 
        foreign and domestic providers in their access to electronic 
        networks.
 provide that the entire new ``round'' be completed by December 
        31, 2002, in order to force closure on the existing agenda, 
        reap what gains can be garnered, and begin again with a fresh 
        agenda that could include items like investment.
    CSI has been very actively engaged in the preparations for the 
Seattle Ministerial. We are organizing a day of activities during the 
week of the Ministerial to demonstrate the importance of the service 
sector to the 21st Century, knowledge based, ``third wave'' economy. At 
our major ``World Services Congress'' in Atlanta, which began this past 
Sunday and just wrapped up yesterday, over 800 people from services 
companies and organizations around the world developed a series of 
recommendations to support and guide the Ministerial and the 
negotiations to follow. Also at Atlanta we formed a Global Services 
Network to link organizations and individuals in all parts of the world 
and to provide a support system for the services negotiations.
Ambitious US Goals for Services 2000
    CSI believes strongly that the US should enter the new negotiations 
with a bold agenda, calling for sweeping commitments to liberalization 
across all service sectors.
    We would like our negotiators to propose broad commitments to 
liberalization in areas such as the right to establish a business 
presence in foreign markets (commercial presence), the right to own all 
or a majority share of that business, and the right to be treated as a 
local business (national treatment).
    If we are to succeed, our negotiating methods will need to be bold 
and innovative. We support the efforts of US services negotiators, 
joined by their colleagues in the Quad and a group of other countries 
with strong interests in services trade, to find new approaches to 
services trade liberalization. These are designed to supplement the 
usual ``request-offer'' approach, save time, and bring better results.
    These new approaches could include commitments applying 
``horizontally'' across all service sectors, the negotiation of 
transparency and other pro-competitive regulatory commitments, and the 
negotiation of model schedules for each sector under negotiation. 
Countries would have the right, as they do now, to list exceptions to 
the model schedules and pro-competitive regulatory commitments. Once 
the models had been adopted, countries could engage each other in 
negotiations to improve the scope and depth of other countries' 
commitments.
Mobility of Business Personnel
    One of the areas requiring fresh, bold thinking here and abroad, 
includes the provisions used by countries, including the US, for the 
temporary entry of foreign managerial and technical personnel. 
Increasingly large, highly competitive US companies such as consulting, 
accounting, legal, architectural, and engineering firms need to 
transfer personnel at short notice to service the needs of their 
clients throughout the world. Delivering services via transfer of 
natural persons is known in GATS parlance as ``mode 4'' of supply. The 
WTO has been unable to make any progress on achieving liberalization of 
this form of supply of services. Because it is of increasing importance 
to US firms, and to some other countries, it should be an important 
element of the coming negotiations.
The Need for ``Pro-Competitive'' Regulatory Reform
    Foreign companies entering new markets often face formidable 
barriers in the form of arbitrary and non-transparent regulations and 
regulatory institutions. Such regulations too often deny foreign 
companies the opportunity to compete on an equal basis with domestic 
firms. They can effectively negate the benefits of trade liberalization 
commitments.
    Pro-competitive regulatory reforms mean abandoning forms of 
regulation by which governments limit the introduction of new products, 
restrict use of market-based pricing, and constrain competition in 
other ways that go beyond legitimate regulatory goals. This issue is 
particularly important to my company because our real competitive 
advantage has been in the development of new and innovative products to 
meet the needs of customers in a wide range of specialty areas. If 
regulatory regimes in a foreign country restrict our ability to quickly 
develop and offer such products in their market, our opportunity to 
compete with local insurers is limited.
    Transparency of regulatory processes is an important element of 
pro-competitive reform. This means adopting many of the procedures 
embodied in our more open system of government, such as the publication 
of existing and proposed regulations, and the right to comment and to 
be heard in administrative proceedings. It also means applying higher 
principles of how companies operate, such as regulations ensuring 
solvency, promoting transparency in intra-company transactions and 
financial reporting, and improving the reliability of financial data 
that would allow customers and investors to make better informed 
judgments.
The Need for Integrated US International Economic and Tax Policies
    At the same time that we pursue an aggressive trade strategy, we 
must be sure that our domestic policies do not inhibit the global 
competitiveness of our own companies. A case in point is the active 
financing exception to Subpart F that expires at the end of the year.
    Extension of these rules permitting US-based financial services 
companies to reinvest earnings overseas without first being taxed by 
the US will be an important step in the right direction as we better 
coordinate our trade and tax policies to foster the ability of our 
companies to compete in foreign markets.
The WTO and Services
    The reduction of barriers to trade in goods began many decades ago 
with the 1934 reciprocal trade agreements program of the Roosevelt era. 
The reduction of barriers to trade in services is in its infancy. The 
Uruguay Round wrote the ``constitution'' or legal framework for 
liberalization of trade in service: the GATS. But countries' actual 
commitments to liberalization were disappointing. The actual work of 
liberalization was advanced in the successful 1997 Basic 
Telecommunications and Financial Services negotiations. The next 
negotiation, services 2000, is the first real opportunity to bring to 
bear the lessons we have learned about the complex process of 
negotiating freer trade in services and to broaden binding commitments 
across all sectors and deepen commitments within product categories and 
sub categories.
    As I said at the outset, the United States has a particularly big 
stake in a successful multilateral negotiation. We are already highly 
competitive in services. We can secure and enhance this comparative 
advantage by removing restrictions to our exports, and at the same time 
make a bigger and bigger dent in our structural trade deficit.
    The Seattle Ministerial is a preamble to the main event, the 
negotiation itself. But it is essential that the Seattle Declaration 
give a strong impetus to an ambitious, achievable negotiation in 
services.
                               appendix i
    Examples illustrating the stake of US service industries in 
expanded global markets.
     Travel and tourism contributed over $25 billion to the 
services trade surplus in 1997. This is the largest sectoral 
contribution to the overall services surplus. In addition, travel and 
tourism are estimated to support over seven million direct jobs and 
generate roughly $71 billion in tax revenues for federal, state and 
local governments.
     Business, professional and technical services is a largely 
unrecognized powerhouse in American trade. In 1997, we exported more 
than $21 billion in these services and we had a $16 billion trade 
surplus. These data do not include the earnings from foreign 
investments and foreign affiliates, which are very substantial. Trade 
in business, professional and technical services--such as accounting, 
legal, engineering, architectural and consulting services--is 
especially important because it frequently paves the way for trade and 
investment in other service and manufacturing sectors.
     Telecommunications services are an integral component of 
operations of all businesses, and are essential in promoting domestic 
and global growth. Telecommunications services provide the necessary 
infrastructure for the development and continued expansion of the 
information society and electronic commerce. An estimated $725 billion 
in revenue was generated in 1997, and projections for the next five 
years indicate that traded telecommunications services will increase at 
about 20 percent annually for outbound calls from the US to foreign 
markets.
     The information technology industry is also dependent on 
trade and trade expansion. The WTO estimates that over the next five 
years, sales over the Internet will double each year.
     The US asset management industry is the largest in the 
world. It is estimated that by 2002, 51% of total asset management 
revenue of $160 billion will come from abroad, not the US. Today, US-
domiciled investment managers manage 14% of the total of non-US 
retirement plan assets and 5% of non-US mutual fund assets.
     US law firms, when billing foreign clients, produce 
services exports. Overall US legal services exports approach $1.0 
billion.
     Foreign students coming to American schools, net after 
scholarship and local assistance, spent $8.3 billion in the US, which 
is a US services export. We have a surplus in trade in education 
services of $7.0 billion.
     Although few doctors imagine themselves as US exporters, 
medical services rendered in the US to foreign citizens produced an 
export surplus of $0.5 billion.
     Air cargo transport accounts for well over a third of the 
value of the world trade in merchandise. However, restrictions on 
market access (including cabotage), ownership and control, the right of 
establishment, capacity, frequencies, intermodal operations in 
connection with air services, wet leasing, customs, groundhandling, the 
environment in particular local airport access times, all limit the 
ability of cargo carriers to plan their operations purely on the basis 
of commercial and operational considerations. A WTO framework could 
provide cargo carriers with clear rules addressing these problems and 
resulting in enhanced delivery options to the benefit of businesses, 
shippers and consumers worldwide.
     Energy services have received little attention in trade 
negotiations to date. But drastic changes in the international and 
domestic business climate for this industry--which in the US accounts 
for 1.4 million jobs and about 7% of US GDP--have shown the need for 
global trading rules, which can provide new, common understandings on 
such key matters as monopoly power, anti-competitive practices and 
discrimination against new market entrants, including of course US 
companies. Thus the energy services industry looks to the coming round 
as a critically important opportunity to map out a blueprint for market 
access and free competition in energy service.

    Mr. Tauzin. Thank you, Mr. Free.
    Mr. Free, you mentioned the Japan insurance agreement, and 
you mentioned France. I raised the question of Malaysia in the 
opening statement. What is the condition there?
    Mr. Free. Nothing has changed in Malaysia.
    Mr. Tauzin. So we have not seen a lot of progress?
    Mr. Free. There has been no progress.
    Mr. Tauzin. In that regard, the panel focused on the need 
for openness and transparency and fairness in the equations of 
global free trade.
    First let me mention that we have H.Res. 298 before 
Congress and it now has 297 cosponsors. It is still in the Ways 
and Means Committee, I think, but it literally calls upon the 
administration not to reopen negotiations in antidumping and 
countervailing. And interestingly, as of March, 1999, 90 
products from 59 countries are under antidumping and 
countervailing duty orders. Mr. Regan pointed out that ends in 
5 years.
    Mr. Regan. You essentially have to go back and reprove your 
case.
    Mr. Tauzin. So you have to deal with that every 5 years.
    Mr. Regan. Your crawfishermen have to deal with that again 
in 3 years.
    Mr. Tauzin. They have 3 years left.
    In regard to that, we are hearing you can't have free trade 
as long as you have different labor standards, environmental 
standards, regulatory standards, tax standards, or licensing 
standards. You can go through a whole category of nontariff 
differences among nations who might be all parties to the same 
organizations and same treaties and yet end up with some very 
large inequalities in terms of the way that goods and services 
are produced and treated in a global economy.
    Which of those, in your opinion are honest, legitimate 
differences and which are not? Obviously, if one country has 
more natural resources than the other, it has an advantage in 
global trade. If one country has a greater information base in 
the information age, it is going to have an advantage. We will 
have that advantage, I think. What are the fair and what are 
the unfair advantages? Should we go into this round in Seattle 
arguing that some are fair and some are not fair, and which are 
they?
    Mr. Regan. I will try to go after that.
    I used to be a trade negotiator. I spent 12 years at USTR, 
and back when I started in the 1970's it was easier because we 
had a lot of high tariff barriers and we knew pretty much what 
the problem was. And we have succeeded. The WTO is a great 
success story because we have succeeded in eliminating those 
visible tariffs. And with globalization our economies are 
becoming more and more intertwined. As they have become more 
and more intertwined, the fabric of domestic regulation becomes 
a barrier in itself.
    How a telephone company is regulated in France affects 
telephone companies that operate in the United States under a 
wholly different set of rules. And the same holds for French 
cases. When I was doing this back in the 1970's, we didn't 
worry about how folks regulated service sectors. It wasn't an 
issue.
    Mr. Tauzin. Today it is.
    Mr. Regan. Now it is. We have to look at the negotiations 
as a process, not necessarily an end. We are not going to let 
the best become the enemy of the good. We are going to continue 
to try to do good. And, by doing that, we are going to identify 
those areas of biggest conflict and we are going to try to 
resolve them over time, and that is what we are going to try to 
do with this round.
    I believe this is going to be the ninth round since 1947, 
and so it is important to realize that we are trying to 
identify those areas of greatest conflict and begin to work on 
those.
    Now, what is fair and what is not fair. It is sort of like 
your debates in telecommunications, you know, what is one man's 
competition is another man's threat.
    What is fair and isn't fair really depends, in my view, on 
the adoption of standards of behavior that we are going to 
agree with internationally as standards which are acceptable 
for civil behavior, and we have them in the United States. We 
have competition laws in the United States. And our competition 
laws I think tend to be more well-defined, clearer for everyone 
to understand and to seek relief under and become an 
interesting model for the rest of the world to work off it.
    Mr. Tauzin. Do we have to go to motive? Do we have to 
examine whether or not a regulation for example, is there as a 
protectionist regulation or whether it is there to serve as a 
legitimate answer to consumers' concerns about the security of 
a financial market, the safety of an insurance product, or the 
importance of an environmental issue? How do you discover, in 
these negotiations, whether a regulation is a legitimate 
domestic interest concern that countries ought to be able to 
possess and exercise for the good of their citizens as opposed 
to a regulation truly designed to create protectionism and/or 
serve as a barrier to entry?
    Mr. Free. There is a building body of expertise around the 
world as to what you need to regulate: securities, banking, 
insurance, whatever.
    Within the broad range of all of the options, there are 
things that you can conclude such as there used to be applied 
something called the economic needs test. This was the basis 
for prudential regulation, particularly in Asia. It was based 
on the assumption that the government would decide what the 
public needed and so they would have a very strong control over 
the introduction of products or the entrance of new markets.
    It also found the Japanese approach, which was that 
financial stability was guaranteed by size. So whereas we have 
5,600 insurance companies in the United States, you would find 
two dozen in Japan. We all know that some of the largest of the 
Japanese insurance companies are the ones that have failed or 
are failing. So size alone does not guarantee solvency or 
stability. The Japanese approach again on product introduction 
was it destabilized the market to have competition. Well, even 
they have recognized that now.
    So you can put boundaries through discussion of experts and 
others about what is, quote, legitimate regulation and what is 
not legitimate regulation. And, having said that, you can even 
make some recognition for the need for a developing economy to 
have more control over the regulatory system during transition 
periods and far more developed economy.
    Joe Papovich, in talking about this, used the term 
``capacity building'' is going to be one of the focuses of the 
Ministerial and the WTO agenda, and that is often meant in 
terms of helping countries understand what the WTO means and 
how they can comply with their requirements.
    In regulatory reform, there is another side to it. We as an 
industry around the world have spent lots of money and provide 
lots of advice and certainly recognize that the regulators in 
Indonesia or Korea or even Japan are not up to the level of our 
regulators in terms of an open, competitive marketplace.
    What we are looking at is, if we want in this next round to 
get commitments from countries not quite able to completely 
open their market and change their regulatory structure, they 
ought to get help from the World Bank and the IMF. In fact, 
they are getting some help from these institutions and some 
others. You could link it and say, if you are willing to take 
on this commitment in the WTO, put it in your schedule, as we 
call it, sign on. That will be recognized by these two other 
institutions that often do nothing with the WTO to get credit 
for the funds that they need to raise their level of 
supervision so they can safely and soundly do the things that 
need to be done.
    I think that is an area that Congress ought to talk a bit 
more about when we talk about this next round.
    And we use the term capacity building because when we had 
the Asian financial crisis, at a meeting in Atlanta and others 
that I have attended around the world assessing the cause of 
the crisis, we determined it was not liberalization that caused 
it. It was, in many cases, inadequate regulatory structures in 
place. And the IMF and World Bank went in and provided funds to 
help countries and asked commitments from them. But when we as 
an industry said put those commitments in the financial 
services agreement, the WTO said these are two separate things. 
This is World Bank IMF, and this is the WTO.
    Let's find a way to link it together positively to give 
countries a reason to sign on. Most countries realize they have 
to move toward liberalization. Services are an infrastructure. 
When people look at the U.S. economy from around the world, 
they keep saying to us, how do you get all of these new 
businesses? And it is simply because we have a services 
infrastructure that helps to incubate new businesses, whether 
it is financial, whether it is consulting, whether it is 
finding you an office space and telling you how to furnish it 
or do your business abroad or whatever. So countries are 
beginning to realize this, and we ought to be able to give them 
some help in doing it.
    Mr. Tauzin. Mr. Mohammad blamed everybody in a speech to 
the World Bank following the Asian crisis. He blamed George 
Soros. He blamed the Jewish conspiracy. He blamed the 
international electronic herd for abandoning his country and 
savaging his markets and depressing his currency.
    Thomas Friedman, in a book of his, imagined a speech 
Secretary Rubin might have given. Friedman was in the audience 
that day, and he imagined a speech that Rubin might have given, 
and it is an interesting couple of pages. Have any of you read 
it?
    Mr. Regan. Yes.
    Mr. Tauzin. I recommend it to you.
    Mr. Free, he basically makes these points: Quit trying to 
blame somebody. The electronic herd is going to desert you when 
you build buildings so you have the tallest building in the 
world but it is half occupied, when you self-speculate in 
currencies and when you yourself have not liberalized the way 
you should have or failed to maintain regulated services the 
way that you should have. And he concludes by saying that I 
don't even keep a phone on my desk anymore because there is 
nobody to call to blame anymore.
    I live in fear of the electronic herd just like you because 
they could savage the American currency and the economy 
tomorrow if we unbalanced our budget, if we made some stupid 
economic or fiscal decisions in this country.
    Mr. Free. You asked about Malaysian insurance. There is a 
connection to what you are saying now.
    I actually had discussions with the prime minister and with 
his finance minister on insurance in particular, where they are 
extraordinarily restrictive, trying to force selldown of local 
companies, keeping the market highly restrictive. They have 
created a high-tech economy that needs high-tech risk 
management. High-tech risk management requires technical 
capacity and financial capacity if you are going to insure it.
    They have a huge outflow on what we call reinsurance. 
Reinsurance plays a natural place in the economic picture, but 
theirs is highly distorted because they have pushed offshore 
the expertise and the capital that they need to accomplish 
their own economic objectives. And yet we cannot get them to 
move off the dime on this issue even though they would be the 
ones to whom the benefit would redound.
    Mr. Tauzin. I invite you all to help me. Let's take hedge 
funds. Obviously, there is some interest in Washington about 
hedge funds all of a sudden. Are they properly regulated? Do 
they need to be regulated? Do they require some reporting, some 
minimal disclosures?
    So we have an issue that may develop here in Washington in 
reference to hedge funds. Hedge funds are important all over 
the world, and they are part and parcel of George Soros' 
operations. Where and when is it proper for us to see a problem 
and to exercise some domestic jurisdiction over that problem in 
a world of electronic commerce and international financial 
transactions and investments where the decisions we make may 
operate to settle somebody's concerns here in America, but also 
affect people outside of this country in a community defined by 
electronic commerce and global financial investment. How does 
that play? Give me some thoughts on it?
    You are on, Mr. Brickell.
    Mr. Brickell. Are you asking us whether hedge funds should 
be regulated or not in this country? Or are you asking whether 
we should make the pace of our reduction in trade barriers here 
contingent on the policies that other countries adopt for 
themselves?
    Mr. Tauzin. I use hedge funds as an example because it is 
an area that we are not regulating yet. We may be faced at the 
SEC or Congress to begin a regulatory policy. I am not taking a 
position, and I don't know if there is a problem yet. But I am 
beginning to hear the rumbles about engaging that issue at some 
point.
    When is it appropriate for nations to regulate in 
electronic commerce and international trade where hedge funds 
become important financial packages? When is it appropriate for 
us to regulate one way and some other country legitimately 
regulate differently? It is part and parcel of this whole 
question of what are the appropriate regulatory structures that 
each country imposes that are truly legitimate, not barriers 
and nontariff barriers to trade.
    Mr. Brickell. Two quick comments about it.
    First of all, I work for a regulated financial institution. 
J.P. Morgan is regulated. Hedge funds are not regulated and, to 
some extent, they compete with us for funds to manage.
    As a regulated financial institution, let me say I am glad 
that they are not regulated. I think they perform a useful 
social function, and it is useful internationally. They bring 
more market discipline to bear on the economic policies of 
countries that are making economic mistakes and on the 
countries that are introducing successful policies.
    For every Southeast Asian country that laments the fact 
that the electronic herd has deserted it because its policies 
are not attractive, there is an Italy where improvements in 
policy have resulted in attractive investment opportunities 
which bring the hedge funds in as investors. That makes stock 
prices rally, it brings interest rates down, and it lets 
Italian workers borrow money to buy homes at lower rates than 
they could before.
    We don't hear enough about the good results that come from 
that kind of market discipline, but it helps the man on the 
street who has some other force exerting useful pressure on his 
government to adopt desirable economic policy. So that is what 
I say about hedge funds.
    Now, is it good to have folks in government deciding which 
policies of other countries are useful regulations and which 
ones are hidden barriers to trade? I guess it is all right to 
have our folks thinking about that and pushing hard to reduce 
the trade barriers of other countries as much as they can. But 
we have got to remember that our own trade barriers, our own 
tariffs and quotas hurt us. And if we make our reduction in 
those trade barriers, our own trade barriers, contingent upon 
changes in other countries, we are going to in all likelihood 
slow the pace of improvement in our economy. So I would say----
    Mr. Tauzin. You say lead by example?
    Mr. Brickell. Lead by example, and it will help us most of 
all.
    Mr. Tauzin. So resist the temptation to unnecessarily 
regulate if to do so would be an invitation to other countries 
not only to not take their barriers down but perhaps even 
enlarge them. Is that your advice?
    Mr. Brickell. Let me add one thing. Don't use the engine of 
trade policy or try to have the engine of trade policy haul 
every other international and social issue over the mountain. 
Let's get that trade policy improvement as fast as we can.
    Mr. Tauzin. Mr. Regan.
    Mr. Regan. I would like to get back to your core question, 
which is what is legitimate.
    Mr. Tauzin. Yes.
    Mr. Regan. That is the question. And what is legitimate in 
Japan and what is legitimate here is very, very, very 
different.
    What we need to do is we need to have an ability here to be 
able to bring out where those differences begin to cause 
friction in creating an inability for us to be able to do 
commerce with those countries and try to resolve those 
problems. And, over time, ultimately what is going to happen if 
the process continues to work as it has over the past 30 years, 
we will begin to identify standards for behavior which are 
common.
    For example, in telecommunications, the referenced document 
takes the experience of the United States with competition, 
with interconnection, with deregulation, and extends that to 
the world with the adoption of four basic principles. Now that 
didn't seem like much at the time, but it has begun to move 
people in the direction toward adopting a model which, frankly, 
has worked very well. The rest of the world looks at us, gee 
whiz, how did you do it?
    We have come up with a model that others are beginning to 
follow, but it is not going to happen overnight. It is going to 
be gradual. And in this round we will take the next step. We 
will take those four principles and we will begin to flesh them 
out a little bit as to actually how they would apply in 
situations when, for example, an ISP wants to gain connection 
to a telephone switch to provide service to a consumer.
    We will say, in our view, that it is an enhanced service. 
It doesn't carry access fees, et cetera. And hopefully the rest 
of the world will follow our example, as they have with the 
basic question of whether long distance networks ought to be 
able to gain nondiscriminatory interconnections to local 
telephone systems. That is common around the world today. It 
wasn't 15 years ago.
    I guess the answer to your question is there is always 
going to be a difference as to what is legitimate. We need to 
identify those differences and then establish common standards 
for behavior and then improve those standards over time, 
realizing that there will always be friction.
    Mr. Tauzin. Mr. Regan, you were the most upfront in 
acknowledging the incredible nontrade barrier that value-added 
taxes, border-adjustable taxes are now playing on the GATT.
    Mr. Regan. Sure.
    Mr. Tauzin. I want to thank you for that. You helped make 
the point that I was trying to make.
    Do you other two have a disagreement with that? Services 
obviously have been treated differently, as you pointed out, 
Mr. Free, for a long time, and it is still evolving as an issue 
in trade. But let me see if I can make the point a different 
way.
    We went until 1913 in this country without income taxes 
except for a brief period during the war of aggression against 
the southern States when Lincoln imposed a small income tax 
that he later repealed when the war was over.
    When this country in 1913 adopted an income tax, we were a 
country that depended on tariffs, custom duties--the Coast 
Guard was our tax collector for most of our years. Tariffs or 
customs duties were the principal source of income, together 
with some excise taxes on domestic products. We went from a 
country that depended on external taxes to one that had a mixed 
dependency on internal and external taxes, income taxes and 
tariffs.
    And now we are entering a new phase where the country is 
almost totally dependent on internal taxes because we are 
dropping our tariffs income, our tariff barriers to trade but 
also tariff income simultaneously.
    The concern expressed earlier is that we are becoming a 
Nation dependent strictly on internal taxes, and those internal 
taxes are not boundary related, they have nothing to do with 
whether the goods are imported or exported, they are taxed on 
all production in America, there are taxes on the workers and 
taxes on the businesses which are paid again by the consumers 
as part of the cost of the products. As we enter this new 
global economy and the country no longer is dependent on tariff 
income, we are now faced with a situation where every 
competitor, whether it is in a real book or an electronic book 
service, will have a natural advantage over us if they have a 
border-adjustable tax.
    And if it is electronic books, insurance products, or 
financial services that are heavily taxed in America, on an 
income tax system that adds to the cost of those products 
overseas, or whether it is a piece of Corning glass that is 
made here and faces a value-added tax when it arrives at a 
country of destination, we are going to continue to have 
inequities that are going to drive manufacturing offshore.
    I ask a simple question in a lot of debates that we have on 
that issue. Why would someone want to locate in America and 
sell products in America that are going to carry this heavy 
load of income tax structure on its back when you can 
manufacture offshore and ship them into America value-added, 
tax free? And particularly if you can get cheaper labor and 
more liberal environmental regulations or litigation rules that 
lower the cost even further. Aren't we building a trap for 
ourselves if we continue down this path? Mr. Regan?
    Mr. Regan. First of all, I think that the trade deficit 
sort of speaks to the issue that you just pointed out. The fact 
of the matter is that trade deficits are supposed to move with 
changes in exchange rates, but ours has been around for 30 
years, 3 decades. One of the reasons that it has been around 
for 3 decades are because of structural imbalances like you 
just described.
    I can attest to the fact that for us today, you know, it is 
the barrier that we face everywhere in the world, and it 
inhibits our ability to be able to compete in a very 
significant way.
    Mr. Tauzin. Mr. Free.
    Mr. Free. I will have to give you, Mr. Chairman, a more 
personal view. Logically what you are saying is right; and as 
we begin to use electronic commerce, it is going to come right 
to the head. Insurance is an example. Products and services, 
software--software can be called a product if it is delivered 
in a box. My son is in an Internet startup firm. His firm 
delivers its software without ever putting it in a package. It 
is considered a service. What is going to happen to it when it 
is sent outside of the United States?
    Mr. Tauzin. Cisco Systems now does 87 percent of their 
business over the Internet. They deliver their products and 
services over the Internet.
    Mr. Free. Like Tim, I had a fairly long government career 
before I went into the private sector. And one of my first jobs 
was to work with the Treasury Department in drafting the 
domestic international sales provisions of the Tax Code which 
was an attempt to deal with this anomaly in the GATT where we 
can't rebate our taxes, but sales taxes, direct taxes can be 
rebated. Of course, ultimately, DISK was found to--and that 
would have cut--if you used it right, it would cut your taxes 
on your export products by 25 percent.
    So then we ended up with this convoluted thing called FISK. 
In 1 year I put on 115 seminars around the United States in 
every place you can imagine trying to explain to lawyers and 
accountants, much less businessmen, how we can offset this 
difference in our tax systems. At that point, I was in the 
Commerce Department. We even looked at using the value added 
tax. Richard Linholm at Oregon State University did a study on 
what the impact would be.
    So, again, speaking personally and based on my own previous 
experience and having gone through DISK and FISK, our system is 
out of whack with the rest of the world. Europe did not go to a 
VAT for protectionist reasons. It was part of developing the 
European Economic Community. Before it was even thought of as 
being a union, there was a decision to go the sales tax route. 
That is the cleanest way to do it. And, as you say, you add the 
Internet in here and increasing cross-border transactions and 
services if we get more liberalization, and we are going to 
have the same problem because we will be paying our domestic 
taxes and our VAT as those services are delivered.
    You will see in my paper that we have our own problem with 
subpart F. That is well described. It is in the extenders bill 
that hits financial companies particularly badly. But I agree 
with you.
    Mr. Tauzin. Here are the numbers that came out of the 
Harvard School of Economics. If you want to read an interesting 
paper, it is by the Dean of the Law School.
    Mr. Regan. Law school or economics?
    Mr. Tauzin. Economics.
    The paper is contained in a book entitled Rising Tides by 
Jerry Jasinowski, the President of the National Association of 
Manufacturers. He has a chapter on consumer taxes by the Dean 
at Harvard Economics School.
    Here are the numbers. He predicts if we got rid of the 
income tax and went to a border adjustable consumption tax, 
like a retail sales tax, just automatically border adjustable, 
no taxes on products going out, taxes on products purchased 
from overseas and consumed here, his numbers are that we would 
reduce the cost of production 25 percent for all products and 
services in this country on average; that exports would jump up 
29 percent sustained every year; and that there would be an 
investment shift of 80 percent back to America, as opposed to 
investments leaving the country.
    An 80 percent shift back to this country. Those are 
enormous numbers. It doesn't take an economist to look at those 
and understand that you would wipe out the trade deficit. We 
would probably have trade surpluses, and we could continue 
politically on the path of free trade because we would be 
restoring jobs back to the labor markets here in America, and 
we would be halting the tide of manufacturing export, that is 
manufacturing companies reinvesting elsewhere. That is worth 
thinking about.
    Mr. Regan. There is nothing that anybody is talking about 
in the Uruguay Round that could have these kinds of effects.
    Mr. Tauzin. There is nothing in these trade negotiations 
that we could get in the form of concessions that could have 
these kinds of numbers.
    And I guess what I am asking all of you to do, as I asked 
Joe to do this morning, is to focus on it and think about it in 
the councils and in the alliances that you represent and of 
which you are a part. Because if we don't soon have a 
recognition in this country that we are out of kilter with the 
rest of the world we are penalizing every worker and business 
in the country as we go to more and more extensive globalized 
trade. If we don't focus enough on it in the near-term future, 
it will get away from us and be too difficult to turn it back.
    Mr. Free. We used to go through exercises in export 
disincentives, and taxation was always up there, always up 
there.
    Mr. Regan. Let me suggest a way that this might be brought 
to the fore.
    One possibility would be for the Congress to--the Congress 
does have the constitutional authority to regulate 
international trade. It does not lie with the President, as you 
well know.
    One possibility would be for the Congress to--or for you to 
introduce a bill, and certainly Corning would be glad to help 
you, which gives the U.S. negotiators direction to deal with 
this balance in the context of these negotiations, and the 
failure to do so would result in some sort of an automatic 
procedure which would put Congress on the road toward dealing 
with it domestically.
    And I know there are lots of debates about this issue. Over 
the years I have followed them closely. I know that it is a 
sticky one, but that kind of leverage, that kind of a 
notification for the rest of the world of how serious the 
Congress feels about this would raise this issue to the top of 
the agenda.
    Mr. Tauzin. Let me not leave before we touch on one other 
final thing.
    You touched on it all in your discussions, and I want to 
try to maybe amplify it a bit, because it is a domestic problem 
as well as an international one. And the way in which you and 
those who help influence some of these trade negotiations are 
going to settle it may give us some guidance as to how we 
settle it domestically, because they are begging for settlement 
real soon.
    And that is, in e-commerce, what are the rules about what 
laws apply when a doctor in Louisiana treats a patient in the 
Gulf of Mexico on a rig that happens to be in Texas waters? Has 
he violated the laws in Texas against practicing without a 
license in Texas?
    It is a domestic version of what you have pointed to in 
terms of insurance problems. Because you can't sell an 
insurance product to a French citizen, for example. Where is 
the point of sale? What laws govern at what point in electronic 
commerce that occurs around the globe? Not just taxes, but what 
regulatory and licensing laws apply and what effect then do 
those decisions have on the fairness and freeness of trade?
    Perhaps you can touch on that a bit for me, because we are 
going to have to deal with that in the next several years 
thinking and talking about that in terms of contract law, and 
if we can't get Uniform Commercial Code agreements on that, how 
do they apply?
    Another good example, you know, a doctor in Louisiana on 
the Internet assists in an operation in California, and it goes 
badly, what medical malpractice law applies? Louisiana has a 
limit on damages. California may not. Do the limits protect the 
doctor in Louisiana? I don't know. Nobody knows.
    And in international law we are going to pump into this 
problem. It is part of WTO and GATT arrangements. They are 
going to apply in terms of financial services, they are going 
to apply in terms of fiberoptic sales and liability laws, 
insurance laws.
    I don't know that our negotiators are yet focused on all of 
those adequately, and can you give me some insight as to 
whether you are helping to focus them or are they keen on these 
notions? Do they need to be settled at some point and how fast 
are they going to be inhibitors to electronic commerce on a 
global scale?
    Mr. Regan. Well, I appreciate your concern about this, 
because it concerns us in a very fundamental way. The extent to 
which actions are taken which inhibit the use of the net, that 
will have all kinds of effects, worries us. But let me take a 
stab at your question.
    I think the message is getting through. I think, 
unfortunately, Joe--it is not in his portfolio, so it was hard 
for Joe to answer your questions. But the folks in the high-
tech community have pressed hard to establish a clear agenda 
for e-commerce. We are members of at least three groups that 
have made a message clear, and the message has been as follows:
    No. 1, the moratorium that you currently have that was 
agreed to back in March, 1998, needs to be extended at least 
through this round so we can begin to sort this out.
    No. 2--and these are not legal commitments, they are 
agreements in principle.
    No. 2, the ministers need to agree that, to the extent they 
feel compelled to take regulatory action that will effect e-
commerce, that they need to agree that those actions will be 
limited to those which do not have trade distorting effects.
    No. 3, we need to set up a process in which we can start to 
sort out all these issues, and we call this the International 
Framework for Electronic Commerce, and that framework would 
involve an effort to begin to identify each one of these issues 
and sort out how we are going to address them up front.
    Mr. Tauzin. Anybody doing that now?
    Mr. Regan. No one is doing it now. They are supposed to 
agree at the Seattle Ministerial to establishing this 
framework.
    Mr. Tauzin. Okay.
    Mr. Free. The issues are the same for us, and we are in the 
same organizations that are pushing this framework. My guess is 
it won't move quickly enough to deal with the real problems 
that will come up. Those issues will have to be resolved in 
different ways in different places, in our court system here to 
some extent and in the court systems of other countries and 
maybe by negotiation.
    The example that you gave of the doctor, think again of the 
MRI data that is sent real time to India to be analyzed by an 
Indian doctor who might have ended up in a U.S. institution but 
now India has a high-tech sector. They are not just 
manipulating this digital data, they are making a medical 
judgment about what it means and sending that back real time to 
a U.S. doctor. If something goes wrong, who is responsible? Who 
do you sue and where? Certainly we will sue in the U.S., but 
where is this Indian doctor or his institution going to fit in?
    On insurance or financial services, it is all of the 
questions. Where does the transaction take place? What law will 
have jurisdiction over it? You can go on and on. I don't see 
our supervisory authorities moving quickly enough.
    And at this World Services Congress actually someone from 
Australia pointed out that there are two trends. One is called 
globalization. She introduced the idea of internationalization. 
By that she meant our own regulators don't think beyond their 
own regulated territory. Yes, they worry about foreign 
financial institutions' activities that affect their operations 
domestically, but they don't think in terms of what you have to 
do to create an international framework to deal with regulatory 
issues that need to be dealt with.
    One of the reasons we have almost no cross-border 
agreements in the NAFTA on services, and particularly financial 
services, the U.S. didn't want it, Mexico didn't want it, is do 
you want somebody in Louisiana buying a policy from a Mexican 
insurance company that we have no idea if it is solvent or not?
    So you have to agree on a certain body of standards. At 
some level it remains local, but there is mutual recognition, 
and that is what Europe has done with its single integrated 
market and financial services. You get a license in France, you 
need just one license to operate anywhere in the European 
Union, but it is based on the concept that everyone in the 
Union has a certain minimal level of regulatory supervision 
that is mutually recognized.
    There are a lot of other areas and regulations that they 
have not agreed on yet. That is what you are going to end up 
needing, at least in our area, to have a regulatory framework.
    Mr. Tauzin. And we will all have our olive trees. We have 
our Buy America programs, too. We always bump into those.
    Mr. Brickell. We appreciate your holding this hearing and 
looking after the work of the administration as they go into 
this round. We are optimistic that there will be good results, 
and we thank you for it.
    Mr. Free. Again in the services area and financial services 
area in particular, the role of the Congress in helping us 
achieve our objectives has been critical. We look forward to 
working with you. As was pointed out earlier, Seattle is just 
the first step. And if we get this done in 3 years, I think we 
will all be pleased. But we will need help along the way.
    Mr. Tauzin. Thank you very much. The hearing stands 
adjourned.
    [Whereupon, at 4:25 p.m., the subcommittee was adjourned.]
    [Additional material submitted for the record follows:]
 Prepared Statement of Eric Koenig, Senior Federal Government Affairs 
      Manager and Senior Corporate Attorney, Microsoft Corporation
    Thank you, Mr. Chairman, for giving me the opportunity, on behalf 
of Microsoft Corporation and the member companies of the Business 
Software Alliance (BSA), to present our views on the opportunities the 
upcoming World Trade Organization Ministerial and New Round of WTO 
negotiations present for expanding electronic commerce.
    The World Trade Organization (WTO) will convene this Ministerial in 
late November, in Seattle, bringing together Trade Ministers from 
around the world. As an official co-chair of the Seattle Host Committee 
of the WTO Ministerial, along with Boeing Corporation, Microsoft is 
excited about the opportunity to contribute to the work of the WTO and 
the Seattle Round of negotiations. Microsoft and the member companies 
of the BSA believe that the upcoming Ministerial provides important 
opportunities to help ensure that electronic commerce continues to 
contribute to dynamic markets and worldwide economic growth.
    Since 1988, the BSA has been the voice of the world's leading 
software developers before governments and with consumers in the 
international marketplace. Our members represent the fastest growing 
industry in the world. BSA educates computer users on software 
copyrights; advocates public policy that fosters innovation and expands 
trade opportunities; and fights software piracy. BSA worldwide members 
include Adobe Systems Incorporated, Apple Computer Corporation, 
Attachmate Corporation, Autodesk, Inc., Bentley Systems, Inc., Corel 
Corporation, Lotus Development Corp., Macromedia Inc., Microsoft Corp., 
Network Associates Inc., Novell, Inc., Symantec Corporation and Visio 
Corporation. Additional members of BSA's Policy Council include Apple 
Computer, Inc., Compaq Computer Corporation, IBM, Intel Corporation, 
Intuit Inc., and Sybase. BSA can be found on the worldwide web at 
www.bsa.org and www.nopiracy.com. Mr. Chairman, for the record, I would 
like to submit a report released by the BSA CEOs on e-commerce. (See 
attached).
    The software industry depends on trade. More than 50 percent of the 
revenues of BSA member companies, and of Microsoft, are generated by 
overseas sales. With the establishment of on-line electronic commerce, 
we expect that even more of these sales will be to foreign customers. 
We are very grateful that you and your colleagues are holding this 
hearing to highlight the tremendous potential that exists to expand 
trade through electronic commerce, especially as the rules for 
electronic commerce become more liberalized and harmonized.
    It is critical that countries around the globe work together now to 
develop a workable framework for e-commerce. A framework that promotes 
e-commerce holds great benefit for businesses and consumers. Consumers 
benefit from e-commerce in many different ways--most obviously, broader 
choice and easier access to goods and services. According to a recent 
survey of Chief Financial Officers, the proportion of US companies that 
sell products over the Internet will jump from 24 percent in 1998 to 56 
percent by 2000. Consumer choice expands every time a new retailer goes 
online--provided regulatory or other barriers do not inhibit trade.
    Likewise, e-commerce is creating tremendous opportunities for 
businesses. Worldwide revenue from electronic commerce is expected to 
increase as much as $500 billion by 2002, accounting for 9.4 percent of 
total sales revenue worldwide. Revenue from e-commerce in Europe was in 
the range of one billion dollars in 1997, and is expected to grow to as 
much as $88 billion by 2001. These estimates may turn out to be 
conservative. Forrester Research has suggested that business-to-
business electronic commerce alone could reach $1.3 trillion by 2003.
    The software industry has been a consistent advocate of 
international trade liberalization. The Uruguay Round results have made 
a meaningful and lasting contribution to our ability to compete in the 
international marketplace. For example, when the Uruguay Round of 
negotiations was launched in 1986, most countries did not provide 
explicit legal protection for computer programs under their national 
laws. Piracy of software was rampant. The Trade-Related Intellectual 
Property Rights (TRIPs) Agreement, however, has brought about 
significant improvements. Today, most countries provide substantial and 
meaningful legal protection of software.
    Although today we are better able, unlike in the 1980s, to bring 
legal action against those who steal our products, the rise of Internet 
piracy is an ominous and potentially industry crippling phenomenon that 
must be addressed on a national and international basis. Despite an 
improved legal environment, piracy rates worldwide remain 
astronomically high. Mr. Chairman, worldwide the software piracy rate 
is 38% costing close to $11 billion. The rate in the US is 26%; Western 
Europe: 36%; Eastern Europe: 76%; Asia-Pacific: 49%; Latin America: 62% 
and the Middle East and Africa: 63%. Since the US software industry is 
principally headquartered in the United States, this means lost US jobs 
and tax revenues. It also has a serious impact on the world economy and 
countries attempting to take advantage of the high tech revolution.
    With the growth of the Internet, we see an unfortunate and 
substantial growth in electronic commerce piracy. Multilateral 
agreements that provide strong and effective protection online are 
critical to the continued expansion of e-commerce and the health of the 
software industry.
    As we look forward, three aspects of international policy stand out 
as having substantial implications for the software and computer 
industry. I would like to say a few words first about the TRIPs 
agreement and tariff liberalization.
    As I stated earlier, the establishment of the TRIPs Agreement was a 
watershed event in the development of the global software industry. 
TRIPs provides us with a solid framework upon which to build, promote, 
and defend copyrighted works against theft, including computer 
software. Of course, there are areas where TRIPs could be strengthened 
and improved, particularly with regard to the Agreement's obligations 
on enforcement of rights, and perhaps also in the area of domain names.
    We would certainly welcome such improvements, but we do not 
advocate specific negotiations at this time. We recognize that the 
TRIPs Agreement will be subject to review in 2002 and we urge all WTO 
members to press ahead with full implementation of TRIPs. Moreover, in 
the context of the 2002 TRIPs review, WTO Members may need to consider 
new provisions that will better adapt TRIPs to the digital environment.
    Perhaps the most significant recent international development in 
the area of intellectual property is the conclusion of the World 
Intellectual Property Organization's (WIPO) Copyright Treaty and 
Performances and Phonograms Treaty. Your Subcommittee passed the 
Digital Millennium Copyright Act last year, implementing these Treaties 
here in the U.S. These Treaties make substantial improvements in the 
legal rights afforded to software developers, especially in terms of 
improving their ability to attack on-line piracy. The United States 
implemented the Treaties last year through the enactment of the Digital 
Millennium Copyright Act, and the European Union has declared that, at 
the appropriate time, the results of the WIPO Treaties should be 
incorporated in TRIPs. We support this and believe that WTO Ministers 
should declare that national implementation of these Treaties is an 
urgent matter, with a substantial trade promoting impact.
    Turning now to broader electronic commerce issues, we believe that 
the most promising international commercial development since the 
conclusion of the Uruguay Round has been the emergence of network-based 
(Internet) trade. Today, BSA member companies sell software and other 
products on-line. These transactions benefit both consumers and 
software developers because they are faster and cheaper than 
traditional, over-the-counter retail sales. We expect these sales to 
more than double annually for the foreseeable future.
    Thus, we believe that a key priority for trade negotiations should 
be to ensure that impediments to e-commerce are not put in place, and 
that existing impediments are reduced or eliminated. We recognize that 
this goal may not be amenable to a single set of undertakings. Because 
the Internet continues to evolve as a business, the trade aspects of 
the Internet are not now fully apparent.
    But we do believe that Ministers can make a good start.
    An excellent fist step was taken in May 20, 1998, when the WTO[s 
Ministers agreed that WTO ``. . . Members will continue their current 
practice of not imposing customs duties on electronic transmissions.'' 
This commitment is not now permanent, and it applies only to electronic 
transmissions. We would support making permanent this commitment, as 
well as clarifying that it applies regardless of the form of 
transmission (wired or wireless) and that it applies both to the 
transmission and to its contents.
    In addition, the work over the past year by the TRIPs, GATS and 
GATT Councils on e-commerce constitutes an excellent foundation for the 
work program that should follow. It is our understanding that each 
Council has determined that the current WTO obligations apply to 
transactions conducted over networks. They have also concluded that 
certain areas of these Agreements need to be updated to more accurately 
reflect the nature of e-commerce. We agree with their conclusions that 
e-commerce constitutes an evolutionary step in trade regimes and does 
not require wholesale changes to existing obligations. Recognizing, 
however, that a single e-commerce transaction may implicate rules 
applicable to services, goods and intellectual property, we believe 
that a horizontal approach in the future work program of the WTO may be 
best--that is, work in each of the Councils at the direction of the 
General Council, while giving the General Council the discretion to 
establish additional work programs on issues which affect trade in 
goods, services and intellectual property.
    Forbearance of government action is the watchword for Seattle. We 
believe that the WTO Ministerial provides an opportunity that must not 
be missed to set the right parameters for future WTO work. Key among 
these, we believe, is a commitment by Ministers to refrain from 
enacting measures that could have an actual or potential trade 
distortive effect on e-commerce. Such a commitment would underscore 
that the goal of the future work program is to seize and ensure the 
possibilities of e-commerce by keeping it barrier-free. Recognizing 
that, in some rare instances, domestic imperatives may necessitate the 
enactment of measures that could have a negative effect on e-commerce, 
Ministers should further declare that they would seek to adopt only 
those measures that have the least trade restrictive effect.
    There is one area where we believe that improvement would go a long 
way to increasing the WTO's effectiveness and international standing. 
WTO could dramatically increase public trust by becoming more open, 
more transparent. WTO should seek to find ways to allow greater public 
scrutiny and to permit non-governmental organizations to express better 
their views in WTO dispute resolution and other processes. Such changes 
would help WTO reach its goals of trade liberalization worldwide.
    Finally, there is one aspect of the current WTO debate that is 
troublesome for the software industry. We are concerned that much of 
the discussion in Geneva has focused on whether e-commerce should be 
classified as simply a service, or whether it implicates goods as well 
as TRIPs obligations under the WTO. It is our view, as noted above, 
that e-commerce is much more than just a set of services.
    If e-commerce is treated as just a service, it could have serious 
implications for the software industry. Such an approach would have 
immediate and negative implications for software companies as well as 
other industries. Ninety-four percent of the world's exports in 
software is US sourced--reclassifying software as a service could alter 
the tax regime for these products and dramatically impact the sales of 
one of the US's most competitive exports. Currently, it is our 
understanding that the European Union takes the position that a 
computer program fixed on a disk ordered on-line and delivered in 
physical form (e.g., by postal service) is subject to WTO obligations 
as a ``good'' under the GATT. By sharp contrast, it is also our 
understanding that they believe that the very same software program 
ordered on-line and delivered on-line, should be classified as an 
``electronic delivery'' subject only to the GATS obligations on trade 
in services.
    The trade implications of such a view are potentially very serious. 
Software as such, other than repair and maintenance of software, does 
not seem to be explicitly covered under software services and is not 
now subject to GATS. Thus, the reclassification of software from a good 
to a service could deny software basic market access and national 
treatment benefits. Perhaps more importantly, in most countries, 
subject to a 1984 WTO/GATT understanding, duty on software is now 
assessed on the basis of the carrier medium (e.g., the value of the 
diskette), and not the value of its content (the intellectual property 
contained in the medium). The issue of reclassification could open the 
door to applying duties on the value of the software itself, rather 
than its physical medium. The consequences for traded software would be 
horrendous, as they would make the value of the product subject to a 
duty, in stark contrast to the situation in many (if not most) 
countries today. In addition, such reclassification would deprive trade 
in software of its current unqualified MFN and national treatment 
benefits.
    In essence, we believe that to treat e-commerce as merely a service 
would be to ignore the true nature of this form of trade. In addition, 
it could have a serious and immediate negative impact on the sale of 
computer programs by means of the Internet.
    Mr. Chairman, the WTO Seattle Ministerial and the subsequent New 
Round of negotiations offer not only the US and European economies, but 
indeed the global economy, tremendous opportunities as we head into the 
new millennium. The unparalleled growth of electronic commerce means 
economic possibilities that we could not even imagine just a few years 
ago. Your Subcommittee and the Committee on Commerce have an extremely 
important role to play in seizing these opportunities and making them a 
reality. The Business Software Alliance stands ready to assist you in 
this critical endeavor.
    We thank you again for this important hearing and for the 
opportunity to present our views.

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