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

                       TRADE AGENCY BUDGET AUTHORIZATIONS
                            AND OTHER CUSTOMS ISSUES

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

                                    HEARING

                                   before the

                             SUBCOMMITTEE ON TRADE

                                     of the

                          COMMITTEE ON WAYS AND MEANS
                            HOUSE OF REPRESENTATIVES

                           ONE HUNDRED SIXTH CONGRESS

                                 FIRST SESSION

                                   __________

                                 APRIL 13, 1999

                                   __________

                                 Serial 106-90

                                   __________

             Printed for the use of the Committee on Ways and Means

                                   __________

                        U.S. GOVERNMENT PRINTING OFFICE
    66-895                     WASHINGTON : 2001

    _______________________________________________________________________
                For sale by the U.S. Government Printing Office
    Superintendent of Documents, Congressional Sales Office, Washington, DC
                                     20402

                          COMMITTEE ON WAYS AND MEANS

                          BILL ARCHER, Texas, Chairman

    PHILIP M. CRANE, Illinois            CHARLES B. RANGEL, New York
    BILL THOMAS, California              FORTNEY PETE STARK, California
    E. CLAY SHAW, Jr., Florida           ROBERT T. MATSUI, California
    NANCY L. JOHNSON, Connecticut        WILLIAM J. COYNE, Pennsylvania
    AMO HOUGHTON, New York               SANDER M. LEVIN, Michigan
    WALLY HERGER, California             BENJAMIN L. CARDIN, Maryland
    JIM McCRERY, Louisiana               JIM McDERMOTT, Washington
    DAVE CAMP, Michigan                  GERALD D. KLECZKA, Wisconsin
    JIM RAMSTAD, Minnesota               JOHN LEWIS, Georgia
    JIM NUSSLE, Iowa                     RICHARD E. NEAL, Massachusetts
    SAM JOHNSON, Texas                   MICHAEL R. McNULTY, New York
    JENNIFER DUNN, Washington            WILLIAM J. JEFFERSON, Louisiana
    MAC COLLINS, Georgia                 JOHN S. TANNER, Tennessee
    ROB PORTMAN, Ohio                    XAVIER BECERRA, California
    PHILIP S. ENGLISH, Pennsylvania      KAREN L. THURMAN, Florida
    WES WATKINS, Oklahoma                LLOYD DOGGETT, Texas
    J.D. HAYWORTH, Arizona
    JERRY WELLER, Illinois
    KENNY HULSHOF, Missouri
    SCOTT McINNIS, Colorado
    RON LEWIS, Kentucky
    MARK FOLEY, Florida

                         A.L. Singleton, Chief of Staff

                      Janice Mays, Minority Chief Counsel

                                     ______

                             Subcommittee on Trade

                      PHILIP M. CRANE, Illinois, Chairman

    BILL THOMAS, California              SANDER M. LEVIN, Michigan
    E. CLAY SHAW, Jr., Florida           CHARLES B. RANGEL, New York
    AMO HOUGHTON, New York               RICHARD E. NEAL, Massachusetts
    DAVE CAMP, Michigan                  MICHAEL R. McNULTY, New York
    JIM RAMSTAD, Minnesota               WILLIAM J. JEFFERSON, Louisiana
    JENNIFER DUNN, Washington            XAVIER BECERRA, California
    WALLY HERGER, California
    JIM NUSSLE, Iowa

    Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public
    hearing records of the Committee on Ways and Means are also published
    in electronic form. The printed hearing record remains the official
    version. Because electronic submissions are used to prepare both
    printed and electronic versions of the hearing record, the process of
    converting between various electronic formats may introduce
    unintentional errors or omissions. Such occurrences are inherent in the
    current publication process and should diminish as the process is
    further refined.

                                C O N T E N T S

                                   __________

                                                                       Page

    Advisory of March 29, 1999, announcing the hearing...............     2

                                   WITNESSES

    Office of the U.S. Trade Representative, Hon. Richard Fisher,
      Deputy U.S. Trade Representative...............................    16
    U.S. Customs Service, Hon. Raymond W. Kelly, Commissioner........    31
    U.S. International Trade Commission, Hon. Lynn M. Bragg, Chairman    48
    U.S. Department of the Treasury:
        John P. Simpson, Deputy Assistant Secretary, Regulatory,
          Tariff, and Trade Enforcement..............................    64
        Dennis S. Schindel, Assistant Inspector General for Audit,
          Office of Inspector General................................    68
    U.S. General Accounting Office:
        Norman U. Rabkin, Director, Administration of Justice Issues,
          General Government Division................................    72
        Randolph C. Hite, Associate Director, Governmentwide and
          Defense Information Systems, Accounting and Information
          Management Division........................................    80

                                     ______

    Air Courier Conference of America, James A. Rogers...............   141
    Air Transport Association of America, Carol B. Hallett...........   131
    Border Trade Alliance, and S.K. Ross and Assoc., P.C., Susan Kohn
      Ross...........................................................   136
    American Association of Exporters and Importers, and BASF Corp.,
      Richard J. Salamone............................................   110
    GartnerGroup, J. Kurt Zimmer.....................................    96
    International Mass Retail Association, Coalition for Customs
      Automation Funding, and The Limited, Jane B. O'Dell............   115
    Joint Industry Group, and Caterpillar Inc., Ronald Schoof........   103
    National Customs Brokers and Forwarders Association of America,
      Inc., and C.H. Powell Company, Peter H. Powell, Sr.............   107
    National Treasury Employees Union, Robert M. Tobias..............   123
    Rodriguez, Hon. Ciro D., a Representative in Congress from the
      State of Texas.................................................     7

                           SUBMISSIONS FOR THE RECORD

    American Iron and Steel Institute, statement.....................   153
    American Textile Manufacturers Institute, statement..............   156
    Coalition for Customs Modernization, New York, NY, M. Brian
      Maher, and Stewart B. Hauser, statement........................   156
    KPMG LLP, James J. Havelka, statement............................   158
    Maritime Exchange for the Delaware River and Bay, Lewes, DE,
      statement......................................................   159
    National Association of Foreign-Trade Zones, Karen Sager,
      statement......................................................   162
    Science Applications International Corporation, Vienna, VA,
      statement......................................................   164

          TRADE AGENCY BUDGET AUTHORIZATIONS AND OTHER CUSTOMS ISSUES

                                  ----------

                            TUESDAY, APRIL 13, 1999

                      House of Representatives,
                           Committee on Ways and Means,
                                         Subcommittee on Trade,
                                                        Washington, DC.
        The Subcommittee met, pursuant to notice at 11:01 a.m., in
    room B-318, Rayburn House Office Building, Hon. Philip M. Crane
    (Chairman of the Subcommittee) presiding.
        [The advisory announcing the hearing follows:]

    ADVISORY FROM THE COMMITTEE ON WAYS AND MEANS

                             SUBCOMMITTEE ON TRADE

                                                    CONTACT: (202) 225-1721
    FOR IMMEDIATE RELEASE

    March 29, 1999

    No. TR-6

                        Crane Announces Hearing on Trade

                        Agency Budget Authorizations and

                              Other Customs Issues

        Congressman Philip M. Crane (R-IL), Chairman, Subcommittee on Trade
    of the Committee on Ways and Means, today announced that the
    Subcommittee will hold a hearing on budget authorizations for fiscal
    years (FY) 2000 and 2001 for the U.S. Customs Service (Customs), U.S.
    International Trade Commission (ITC), Office of the United States Trade
    Representative (USTR), and on other Customs issues. The hearing will
    take place on Tuesday, April 13, 1999, in room B-318 Rayburn House
    Office Building, beginning at 11 a.m.

        Oral testimony at this hearing will be heard from both invited and
    public witnesses. Witnesses are expected to include representatives
    from Customs, ITC and USTR. However, any individual or organization not
    scheduled for an oral appearance may submit a written statement for
    consideration by the Committee or for inclusion in the printed record
    of the hearing.

    BACKGROUND:

        Budget Authorizations

        On February 1, 1999, President Clinton submitted his FY 2000 budget
    to the Congress. The submitted budget included proposals for Customs,
    ITC, and USTR. The President requested an increase over FY 1999 of $2.7
    million for ITC, $2.3 million for USTR, and $95.5 million for Customs.
    Additional legislative proposals contained in the budget are described
    below.

        Other Customs Issues

        Customs Automation: The current Customs automation system, the
    Automated Commercial System (ACS), is an aging 14-year-old system which
    has experienced several ``brownouts'' since last fall. ACS is operating
    on the average at 90 percent to 95 percent of its capacity, which is
    above its design specifications, creating difficulties in accommodating
    surges in filing Customs entry documentation that may occur daily or
    seasonally. Many observers, including Customs, have said that ACS is
    headed for a major system crash which may have an adverse impact on
    trade. They also believe that any serious failure of ACS could have
    widespread economic effect on U.S. businesses all along the supply
    chain including manufacturers, suppliers, brokers, and retailers.

        Customs plans to replace ACS with the Customs Automated Environment
    (ACE) over the next four to seven years depending on funding. Some of
    the main differences between ACS and ACE are that ACE reportedly will
    use a single integrated system, modern standards, processes, techniques
    and language, and will be compatible with commercial software. By
    contrast, ACS does not have an integrated system, uses outdated
    techniques and languages, and cannot use commercially compatible
    software.

        There are several issues for the Subcommittee to consider relating
    to ACE: (1) the cost of ACE, projected to be over $1 billion, (2) the
    lack of funding for ACE in the President's FY 2000 budget proposal, (3)
    the access fee for the use of Customs automation in the President's FY
    2000 budget proposal, (4) the question of whether Customs' ACE design
    and architecture will meet future requirements, and (5) the role of the
    trade industry in building ACE.

        International Trade Data System (ITDS): The ITDS is a Federal
    Government information technology initiative to create an integrated
    Government-wide system for electronic collection and dissemination of
    data relating to international trade. The ITDS is designed to be a
    front-end collection point to submit data and make payments required by
    all Federal Government agencies that regulate international trade
    transactions. It is also designed to provide the public with a single
    point for accessing data on international trade. The ITDS initiative is
    led by a Board of Directors chaired by the U.S. Department of the
    Treasury and composed of representatives from Government agencies,
    including the Customs Service, that are the major participants in
    government international trade data process. The President's FY 2000
    budget proposes to appropriate $13 million to be available in FY 2001
    for the ITDS to be offset by the assessment of an access fee for the
    use of Customs automated systems.

        Customs COBRA User Fees: The Consolidated Omnibus Budget
    Reconciliation Act of 1985 (COBRA) (P.L. 99-272) established user fees
    for certain inspectional services. Under COBRA, passengers arriving in
    the United States by commercial airline or vessel from a foreign
    location other than Canada, Mexico, or the Caribbean paid a $5 fee
    prior to 1994. The North American Free Trade Agreement Implementation
    Act (P.L. 103-182) increased the air- and sea-passenger processing fee
    from $5 to $6.50 for fiscal years 1994 through 1997 and removed the
    exemption for passengers arriving from Canada, Mexico, and the
    Caribbean. As of September 30, 1997, the fee reverted to $5, and
    Canada, Mexico, and the Caribbean regained their exemption. The
    President's FY 2000 budget proposes an increase in the passenger
    processing fee from $5 to $6.40 and removes the exemption for
    passengers arriving from Canada, Mexico, and the Caribbean.

        Compensation System for Customs Officers: COBRA fees fund overtime
    and premium pay for Customs officers. The original overtime pay system
    for Customs inspectors was created by the Act of February 13, 1911,
    known as the ``1911 Act.'' Section 13811 of the Omnibus Budget
    Reconciliation Act of 1993 (P.L. 103-66), known as the Customs Officer
    Pay Reform amendments, amended the 1911 Act in an attempt to eliminate
    abuses and mismanagement of the prior system. The reforms were intended
    to limit overtime and premium pay for Customs inspectors and canine
    officers to hours of work actually performed. In order to ``make
    inspectors whole,'' the law also allowed overtime compensation to be
    counted as part of the basic pay for the Civil Service Retirement
    System up to 50 percent at the $30,000 statutory overtime cap, or
    $15,000. Due to arbitration decisions, Customs must now pay overtime
    plus interest to Customs officers for hours not actually worked under
    certain circumstances: (1) for hours requested but not granted because
    the officers reached a dollar limit set by port directors, (2) for
    officers who were inadvertently passed over for a specific overtime
    assignment, and (3) for officers whose overtime was inappropriately
    assigned to part-time employees. In the 105th Congress, Chairman Crane
    introduced H.R. 3809, the ``Drug Free Borders Act,'' which made reforms
    to overtime and premium pay, and devoted savings to pay for additional
    enforcement activities. H.R. 3809 was approved by the House on May 19,
    1998, by a vote of 320-86. It was approved by the Senate in a different
    form, and no further action was taken.

        In announcing the hearing, Chairman Crane stated: ``As we approach
    the next millennium, we must make sure that our trade agencies have the
    tools they need to get their job done and done right, and maintain the
    capability to vigorously enforce our anti-drug and trade laws. However,
    we must do this in the most cost-
    effective manner, and continue to pursue needed reforms at Customs and
    elsewhere to ensure that the taxpayers and others who pay for these
    services are getting their money's worth.''

    FOCUS OF THE HEARING:

        The hearing will focus on budget authorizations for fiscal years
    2000 and 2001 for Customs, ITC, and USTR. In addition, the hearing will
    focus on other Customs issues, including: Customs automation and
    modernization efforts and the mechanisms needed to fund them; the need
    and funding for ITDS; the President's proposed changes to Customs
    passenger user fees; and the compensation system for Customs officers
    and related drug enforcement issues.

    DETAILS FOR SUBMISSIONS OF REQUESTS TO BE HEARD:

        Requests to be heard at the hearing must be made by telephone to
    Traci Altman or Pete Davila at (202) 225-1721 no later than the close
    of business, Thursday, April 1, 1999. The telephone request should be
    followed by a formal written request to A.L. Singleton, Chief of Staff,
    Committee on Ways and Means, U.S. House of Representatives, 1102
    Longworth House Office Building, Washington, D.C. 20515. The staff of
    the Subcommittee on Trade will notify by telephone those scheduled to
    appear as soon as possible after the filing deadline. Any questions
    concerning a scheduled appearance should be directed to the
    Subcommittee on Trade staff at (202) 225-6649.

        In view of the limited time available to hear witnesses, the
    Subcommittee may not be able to accommodate all requests to be heard.
    Those persons and organizations not scheduled for an oral appearance
    are encouraged to submit written statements for the record of the
    hearing. All persons requesting to be heard, whether they are scheduled
    for oral testimony or not, will be notified as soon as possible after
    the filing deadline.

        Witnesses scheduled to present oral testimony are required to
    summarize briefly their written statements in no more than five
    minutes. THE FIVE-MINUTE RULE WILL BE STRICTLY ENFORCED. The full
    written statement of each witness will be included in the printed
    record, in accordance with House Rules.In order to assure the most
    productive use of the limited amount of time available to question
    witnesses, all witnesses scheduled to appear before the Subcommittee
    are required to submit 200 copies, along with an IBM compatible 3.5-
    inch diskette in WordPerfect 5.1 format, of their prepared statement
    for review by Members prior to the hearing. Testimony should arrive at
    the Subcommittee on Trade office, room 1104 Longworth House Office
    Building, no later than Friday, April 9, 1999. Failure to do so may
    result in the witness being denied the opportunity to testify in
    person.

    WRITTEN STATEMENTS IN LIEU OF PERSONAL APPEARANCE:

        Any person or organization wishing to submit a written statement
    for the printed record of the hearing should submit six (6) single-
    spaced copies of their statement, along with an IBM compatible 3.5-inch
    diskette in WordPerfect 5.1 format, with their name, address, and
    hearing date noted on a label, by the close of business, Tuesday, April
    27, 1999, to A.L. Singleton, Chief of Staff, Committee on Ways and
    Means, U.S. House of Representatives, 1102 Longworth House Office
    Building, Washington, D.C. 20515. If those filing written statements
    wish to have their statements distributed to the press and interested
    public at the hearing, they may deliver 200 additional copies for this
    purpose to the Subcommittee on Trade office, room 1104 Longworth House
    Office Building, by close of business the day before the hearing.

    FORMATTING REQUIREMENTS:

        Each statement presented for printing to the Committee by a
    witness, any written statement or exhibit submitted for the printed
    record or any written comments in response to a request for written
    comments must conform to the guidelines listed below. Any statement or
    exhibit not in compliance with these guidelines will not be printed,
    but will be maintained in the Committee files for review and use by the
    Committee.

        1. All statements and any accompanying exhibits for printing must
    be submitted on an IBM compatible 3.5-inch diskette in WordPerfect 5.1
    format, typed in single space and may not exceed a total of 10 pages
    including attachments. Witnesses are advised that the Committee will
    rely on electronic submissions for printing the official hearing
    record.

        2. Copies of whole documents submitted as exhibit material will not
    be accepted for printing. Instead, exhibit material should be
    referenced and quoted or paraphrased. All exhibit material not meeting
    these specifications will be maintained in the Committee files for
    review and use by the Committee.

        3. A witness appearing at a public hearing, or submitting a
    statement for the record of a public hearing, or submitting written
    comments in response to a published request for comments by the
    Committee, must include on his statement or submission a list of all
    clients, persons, or organizations on whose behalf the witness appears.

        4. A supplemental sheet must accompany each statement listing the
    name, company, address, telephone and fax numbers where the witness or
    the designated representative may be reached. This supplemental sheet
    will not be included in the printed record.

        The above restrictions and limitations apply only to material being
    submitted for printing. Statements and exhibits or supplementary
    material submitted solely for distribution to the Members, the press,
    and the public during the course of a public hearing may be submitted
    in other forms.

        Note: All Committee advisories and news releases are available on
    the World Wide Web at `HTTP://WWW.HOUSE.GOV/WAYS__MEANS/'.

        The Committee seeks to make its facilities accessible to persons
    with disabilities. If you are in need of special accommodations, please
    call 202-225-1721 or 202-226-3411 TTD/TTY in advance of the event (four
    business days notice is requested). Questions with regard to special
    accommodation needs in general (including availability of Committee
    materials in alternative formats) may be directed to the Committee as
    noted above.

        Chairman Crane. Will everyone please be seated, and we
    shall commence since we have a rather long hearing scheduled
    for today.
        And let me first pay tribute--we were a little delayed by a
    minute because Sandy was kind of slow getting here and Sam
    Gibbons forgot to come up here and just take that seat, or we
    would have started earlier.
        But Sam is our distinguished former chairman of the full
    Committee and of the Trade Subcommittee, and I enjoyed the many
    years we had a chance to work together.
        Let me welcome you to the Trade Subcommittee hearing on
    budget authorizations for fiscal years 2000 and 2001 for the
    U.S. Customs Service. The U.S. International Trade Commission
    and the Office of the U.S. Trade Representative and on other
    customs issues. The Office of the U.S. Trade Representative is
    responsible for developing, coordinating, and advising the
    President on U.S. international trade policy. USTR staff and
    consultants conduct our trade negotiations, seek new markets
    for U.S. goods and services, and defend our rights in the World
    Trade Organization. We should be impressed by the breadth and
    depth of USTR's work and accomplishments. We will also review
    the customs budget request during our hearing.
        As a multi-mission organization, Customs is expected to
    meet a variety of demands and responsibilities, some of which
    might be conflicting. Customs is expected to facilitate trade
    to meet the fast deadlines for goods and services delivery
    while playing a critical role in border inspection, anti-
    terrorism, and drug interdiction, which often results in
    delays.
        Also, with the explosion of information technology and
    trafficking on the Internet, illegal trade and child
    pornography have moved beyond our land borders and out into
    cyberspace. To meet these challenges, customs must not only
    protect our borders but must create conditions that make drug
    traffickers and child pornographers know that their efforts
    will be unprofitable and that they will be caught. We applaud
    Customs initiative of establishing the cybersmuggling center
    for enforcing laws against trading in child pornography and
    illegal goods.
        But at the same time, Customs must recognize the need to
    facilitate the movement of legitimate commerce. This is where
    technology, such as non-intrusive inspection technology or
    automated screening systems can assist customs efforts. This is
    also where modern technology for trade data can also assist
    Customs' data processing efforts. It is essential to update
    U.S. Customs automated systems for U.S. industry and the
    population at large. Any potential slowdown or brown-out in
    U.S. Customs' electronic entry process system can adversely
    affect critical imports of health care products. For example,
    Baxter International, formerly a constituent and now on the
    border of my district, imports many critical medical therapies
    which are temperature and time sensitive. Any delay, even a
    couple of hours, could impact the ability to provide life-
    saving medical products to U.S. patients who rely on these
    products.
        Today, we will hear views from Customs, the Treasury, the
    General Accounting Office, and the trade industry about
    modernizing and funding for automation to meet the increasing
    volume of trade data. Indeed, Customs faces enormous
    challenges, and everyday Customs officers rise to meet these
    challenges. We believe that Customs officers should be fairly
    compensated for their duties, including overtime duties. But
    the essential ingredient of fair overtime pay is pay for
    overtime hours actually worked. Today, we will hear from the
    Office of the Inspector General and the union on these Customs
    labor issues.
        In addition, Customs must take care that its integrity is
    intact and that its internal corruption tolerance rate is zero.
    Our ability to interdict drugs at our borders depends on
    maintaining sound integrity.
        Finally, I would like to recognize Inspector Virginia
    Rodriguez--Virginia, are you there? Virginia apprehended one of
    the FBI's Most Wanted Criminals, and we are all a little safer
    because of your efforts, and we thank you for your service,
    Virginia.
        [Applause.]
        But I do want to point out that Virginia made sure she had
    a cousin here as our first witness.
        We will also receive testimony from the International Trade
    Commission. The ITC has a unique role within the Federal
    Government as an independent non-partisan, quasi-judicial
    agency. The ITC conducts trade investigations, provides
    Congress with technical assistance in developing trade policy,
    maintains the harmonized tariffs schedule, and offers technical
    advise to businesses seeking remedies under the trade laws.
        The ITC and the Subcommittee have always enjoyed a close
    and supportive relationship. And now, I would like to recognize
    our Distinguished Ranking Member, Mr. Levin, for any statement
    he would like to make.
        Mr. Levin. Thank you, Mr. Chairman, and a special thank you
    to you, Ms. Rodriguez, and to you our colleague, Ciro
    Rodriguez.
        I am glad we are holding this hearing in that there are so
    many of us here in attendance. It shows the importance of this
    issue, the budget authorization for trade-related agencies. The
    international trade landscape is becoming increasingly complex.
    This fact was highlighted by last week's visit to Washington by
    Chinese Premier Zhu Rongji. The negotiation of a trade
    agreement that preceded his visit and that is continuing as we
    speak underscores the challenge of integrating into a single
    global trading system large economies that operate on different
    principles.
        The new challenges posed by the evolution of international
    trade translate into new demands on the agencies that
    administer U.S. trade laws. The U.S. Trade Representative is
    called upon to monitor and enforce U.S. rights under a growing
    number of trade agreements, as well as to negotiate new
    agreements that will further open markets. The greater volume
    of trade from diverse countries and over a wider range of
    product sectors requires the U.S. Customs Service to step up
    its efforts to protect the U.S. market from transshipment and
    shipment of contraband. And the potentially increased number of
    trade cases that comes with the greater volume trade is likely
    to place increased pressure on the U.S. International Trade
    Commission to monitor the effects of unfair trade practices.
    These trade-related agencies cannot perform the tasks assigned
    to them without the necessary resources.
        As we consider their budget requests for the coming 2
    years, we must bear in mind that while increased trade brings
    substantial benefits to the American economy, it also brings
    new responsibilities and costs to the agencies that administer
    the laws; and we must be prepared to meet those costs.
        Additionally, we will be hearing, as the chairman said
    today, about several important issues concerning the Customs
    Service, including its acquisition and development of new
    technology to enable more efficient processing of imports,
    Customs officers' pay, and increases in the fees charged to
    passengers arriving in the United States from overseas.
        I am hopeful that we will engage in a productive discussion
    on each of these issues. I expect that today's witnesses will
    enhance our understanding of the new and evolving demands on
    our agencies involved with trade, and I look forward to hearing
    from them on these important matters.
        Chairman Crane. Thank you, Sandy.
        Today, we will hear from a number of distinguished
    witnesses, and in the interest of time, I would ask you to try
    and keep your oral testimony to 5 minutes or less; and any
    longer statements, though, will be made a part of the permanent
    record.
        And our first witness, as I indicated before, will be
    Virginia's cousin, our distinguished colleague from Texas, Ciro
    Rodriguez. Welcome, Mr. Rodriguez.

       STATEMENT OF HON. CIRO D. RODRIGUEZ, A REPRESENTATIVE IN
                    CONGRESS FROM THE STATE OF TEXAS

        Mr. Rodriguez. Mr. Chairman, Ranking Members and Members of
    the Committee, thank you for allowing me this opportunity. I
    represent the 28th Congressional District in Texas, which
    reaches north from San Antonio, and south, 250 miles to the
    border. I represent two counties on the border, Zapata and
    Starr. Starr County has three in Rio Grande City, Roma, and
    Falcon Heights.
        I am here today to highlight trade needs along the U.S.
    Mexico border. Our Nation has seen significant increases in
    imports. In fact, we have seen nearly a 200 percent increase
    since the passage of NAFTA. Yet, since 1989, we have not seen
    an increase in Customs' budget, with the exception of increases
    on cost of living. I think it is important for us to recognize
    that this particular agency is on the forefront of our trade
    relations and makes a difference in the free flow of goods and
    services.
        I think one of the realities that we have to recognize is
    that we haven't kept our free trade promises. I would propose
    to you--that we hire an additional 2,000 people at the U.S.
    Customs Service. I would ask that you study some of the
    proposed Senate bills that suggest similar personel increases.
        As trade has increases--and I would hope it continues to
    increase U.S. Customs Service agency is going to be impacted.
    The agency's people are on the front line examining packages,
    and opening car trunks as people cross the border. It is the
    agency that shepards you through the airports and other ports
    of entry.
        U.S. Customs Service has seized more drugs than all of the
    other Federal agencies combined.
        Despite its success, we have failed to increase funding and
    modernize its technology capability.
        I want to stress the importance of equipping Customs with
    new technology that facilitates trade. Over the last 1\1/2\
    years--18 months--some of the existing technology experienced
    failures. Customs backup is paperwork which is just
    unbelievable. A country such as ours, where businesses are
    required to pay fees as they bring their products across our
    borders shouldn't have to wait 4 or 5 hours on paperwork while
    not being inspected--just waiting is ridiculous. Business
    should not carry the burden for our fight against drugs. We
    have a responsibility to facilitate the free flow of legal
    goods and services along our borders. It is important for us to
    provide them the necessary equipment.
        I serve on the Armed Services Committee, we do not have any
    major opponents, but there is a fear of terrorism. I fear the
    transshipment of weapons across our border, and if that
    happens, our first line of defense is U.S. Customs Service.
    Customs has been there for us, and we need to be there for
    them.
        As we study trade data and the statistics that are provided
    us on trade growth, it's obvious the Administration's budget
    proposal is not adequate. The Senate is considering it's own
    budget and trying to hire an additional 2,000 Customs
    employees. And I hope that you seriously consider the Senate
    proposal.
        In addition to that, Mr. Chairman, Customs needs $1.2
    billion for its Automated Commercial Environment. As we start
    looking into the future, we should fund automated systems to
    ensure that we are prepared for the global economy. That
    automated system needs to be funded now, because it takes a
    while to implement. We need to move now. We need funding for
    extra staff now, because it takes time to train qualified
    people. You mentioned Virginia Rodriguez--you know, back in
    Texas that next to the Smith's you will find more Rodriguez's
    in the telephone book than anybody else.
        But Virginia, and people like herself, have front line
    experience and just by asking, ``Are you citizen?'' or by
    asking, ``What is your purpose in Mexico?'' She is able to
    detect by just the response whether there is some problem. I
    worked with heroin addicts for 7 years, and I could detect
    whether someone was using or not. Like myself, Customs agents
    are able to detect because of the experience that they have had
    and be able to tell whether people might be hiding something
    questionable or not.
        And so, briefly, you have my testimony before you. I want
    to ask--No. 1, that you support adding 2,000 additional staff
    to Customs.
        No. 2, look at upgrading automation and technology. We need
    $1.2 billion just for the Automation Commercial Equipment. When
    you look at small ports, don't ignore their technology needs.
    The ports in my district, Roma, and Rio Grande City have few
    commercial trucks, yet a lot of drugs go through there. We need
    that technology at these ports. It does not make any sense for
    the business community to send trucks through Roma and Rio
    Grande City and then won't as the vehicles are driven all the
    way to Pharr, 60 miles away and back, to be examined by x-ray
    machines. That is not good for business. That is not good for
    trade. That is not good for the border. And that is not good
    for America.
        We expect the expansion of trade to continue to increase,
    so I ask your help and your support to increase our primary
    tool for trade facilitation. And as I see the light, I will
    stop.
        [The prepared statement follows:]

    Statement of Hon. Ciro D. Rodriguez, a Representative in Congress
    from Texas

        Good afternoon, Chairman Crane, Ranking Member Levin and Members of
    the Committee. I am Congressman Ciro D. Rodriguez representing the 28th
    Congressional District of Texas. It is a privilege to be here
    discussing the U.S. Customs Service and the important role this agency
    and its employees play along our nation's borders. On behalf of my
    constituents and the millions of people who live, work, and depend on a
    seamless flow of goods and services along the southwest border, thank
    you for this opportunity.
        The 28th Congressional District of Texas is a sprawling South Texas
    district anchored in the north by San Antonio and in the south by
    numerous communities along our international border with Mexico. Along
    the border, I represent Starr County, one of the poorest in our nation,
    which has three small land crossings at Rio Grande City, Roma, and
    Falcon Heights. These small ports of entry are sandwiched between two
    enormous ports of entry at Laredo and Hidalgo/Pharr. San Antonio has
    many trade resources, including the San Antonio International Airport
    and the closing Kelly Air Force Base, which the city is transforming in
    part into an inland port for international trade.
        I will put this as simply as I can: if we want to increase trade
    and stop more contraband at our border points of entry, then we must
    increase the number of Customs officers to meet the demand and equip
    them with the best technology we have. To ensure the best and most
    stable workforce for this critical work, we must support Customs
    employees with the pay and benefits they deserve. Anything less than
    this commitment will hamper the flow of goods and people while
    increasing the likelihood of drugs, weapons, and other illegal items
    entering our country.
        While each port of entry has unique needs, all share a common need
    for more Customs Service personnel and better enforcement and trade
    facilitation resources. Increased trade with Mexico is expanding
    economic growth along both sides of the southwest border. In addition
    to an explosion of a nearly 200 percent increase in imports over the
    past five years, the region has seen an expansion of trucking,
    warehousing, manufacturing, and transportation industries. Although
    many of the region's communities enjoy growth attributed to expanded
    trade, the growth is already straining the region's historically
    underdeveloped infrastructure. The growth in trade without a growth in
    resources causes delays and more for area residents and businesses.
        As people living and working on the border see it, the U.S. Customs
    Service is part of the underdeveloped infrastructure. Increasing the
    agency's budget should be natural in the face of booming trade.
    However, Customs' budget has not increased beyond the rate of inflation
    during the past ten years. This static budget is choking business and
    communities dependent on a seamless border. We need to increase U.S.
    Customs Service funding to create at least 2,000 new positions,
    including inspectors, canine enforcement officers, special agents and
    internal affairs officers. We also need to modernize trade facilitation
    by funding an Automated Commercial Environment and providing the agency
    with the most effective technology to ensure trade is not unduly
    burdened by our enforcement policies.
        The U.S. Customs Service is an outstanding agency. Its inspectors
    are the first line of defense for our nation's borders. They protect
    our citizens and businesses from smugglers attempting to put illegal
    narcotics, counterfeit goods, child pornography, and weapons of all
    kinds onto our streets. Under this enormous pressure to fulfill its
    enforcement goals, inspectors are also expected to be service-oriented
    and treat people with courtesy as they process forms, collect taxes and
    facilitate the speedy transaction of goods and services at every port
    of entry. This is not an easy task for anyone, let alone workers who
    face unprecedented growth in demand for their services.
        The U.S. Customs Service is the most successful and effective tool
    against drug trafficking. The agency seizes more drugs and contraband
    than all other federal agencies combined. Border communities do not
    want Customs' drug war efforts to relax or be stifled. The border
    population does want U.S. Customs to have the resources to employ the
    fastest and most effective means for inspecting cargo without
    compromising integrity.
        Along the southwestern land ports the agency has come under fire
    from community leaders for taking too long to process the free flow of
    good, services, and people. The complaint has extended beyond land
    ports to international airports and seaports. I have visited or
    contacted every land port between Brownsville, Texas and Eagle Pass,
    Texas. Nearly half of all commercial traffic from Mexico enters the
    United States through these ports of entry. At each entry the port
    director said they needed more personnel and equipment to process
    traffic more quickly and effectively capture more contraband.
        At small land ports such as Rio Grande City, which processes nearly
    16,000 commercial vehicles per year, and Roma, which processes nearly
    6,000 commercial vehicles per year, U.S. Customs thoroughly inspects 40
    percent to 75 percent of all commercial entries. Each inspection of a
    tractor trailer can take up to four hours if the vehicle is loaded with
    goods or is difficult to inspect due to hazardous materials. Legitimate
    businesses are forced to pay the cost of the drug war by having their
    vehicles sit still for hours at a port waiting to complete an
    inspection when its commercial cargo could be inspected effectively by
    X-ray machines in minutes. X-ray machines help inspectors determine
    wall density, detect false compartments where drugs are concealed, and
    highlight areas that could be hollow truck parts. The X-ray machines
    instantly reveal any concealed narcotics, laundered money or other
    contraband. U.S. Customs Service can streamline trade and strengthen
    its drugs and contraband interdiction efforts if it has more equipment
    such as X-ray machines, K-910 Busters, fiber optic scopes, radios,
    security cameras and more personnel to operate this equipment. This
    equipment is essential for the efficient movement of legitimate imports
    across the border.
        The lack of high-tech equipment plays havoc with the small
    communities along the border which are trying to attract businesses to
    their facilities. A 75 percent inspection rate for commercial cargo is
    ideal against the drug war but the likelihood that 3 out of 4
    commercial trucks will be held four hours is a poor economic selling
    point for a community. We need a high rate of inspections at a high
    rate of speed.
        Large ports along the southwestern border have the same needs for
    equipment and personnel as do smaller ports. The shear volume of
    vehicles and goods coming through our land ports strains resources and
    burdens businesses using the ports. Customs inspectors in Laredo
    somehow managed to inspect a whopping 20 percent of the nearly 600,000
    of the commercial vehicles entering the port in 1997. Traffic at Laredo
    is only going to increase.
        The math is simple. More traffic with less Customs employees and
    equipment to facilitate trade and seize drugs is irresponsible and
    severely hampers trade. Increasing resources for U.S. Customs Service
    as trade increases is good policy.
        In addition to asking Customs to fight the war on drugs more
    effectively, Congress should not lose site of Customs' service to the
    business community dependent on trade. We must broaden our view of the
    southwest border and bring trade facilitation into focus. Since the
    1980s, the U.S. Customs Service has committed to move from paper
    information flows to electronic information flows. Today, Customs
    processes more than 90 percent of all import entries electronically.
    However, the current Automated Commercial System is outdated and in
    danger of collapsing. System failure would halt the flow of $2.2
    trillion worth of goods at all ports of entry. Our nation would suffer
    a serious negative economic impact on U.S. businesses all along the
    supply chain from manufacturers, transportation suppliers, brokers to
    wholesalers and retailers.
        The U.S. Customs Service estimates it will cost about $1.2 billion
    to upgrade to a new Automated Commercial Environment while keeping the
    current system from failing. Congress should authorize and appropriate
    the money for the new system. Our current back-up system--to log
    entries by paper--is unrealistic. There is no time to waste. We must
    fund the solution before gridlock at the nation's ports chokes
    international commerce.
        Finally, I would like to praise the U.S. Customs Service inspectors
    who actually do the work each and every day. These folks are dedicated
    to their work. They take great risks at their jobs. Land ports are
    dangerous places to work. At our border with Mexico, inspectors run the
    risk of being run over by port runners who try to crash through to the
    United States. They inspect vehicles carrying hazardous materials for
    contraband.
        Customs employees also work long hours. Like most other Members, I
    complain about not seeing my family enough because of my busy schedule.
    But my schedule is not nearly as hectic and volatile as that of a
    Customs Inspector. They work shifting schedules plus long and odd
    hours. Today, a Customs inspector may work nine to five but tomorrow
    could work midnight to dawn the next day. Despite these grueling
    working conditions, the loyal inspectors stay on board for a salary
    ranging between $20,000 and $40,000 a year. If the committee decides to
    change the pay structure for Customs employees, I hope it is an effort
    to increase salaries. I could not support any Customs Authorization
    bill that attacks the employees doing the job.
        Mr. Chairman, thank you for the opportunity to share the views of
    my South Texas constituents with the committee. As the front line in
    our war against contraband and facilitation of trade, Congress must
    authorize and appropriate more funding to provide more personnel and
    better equipment without shortchanging the people who do this job for
    us day in and day out. Congress also needs to pull the U.S. Customs
    Service out of an electronic stone age by authorizing and later
    appropriating the $1.2 billion needed to reduce paper work and
    facilitate trade by building a new Automated Commercial Environment. I
    look forward to helping the subcommittee pass a Customs Service
    Authorization Bill that will meet these goals.

        Chairman Crane. Thank you, Ciro.
        Mr. Rodriguez. Thank you.
        Chairman Crane. We strongly believe that Customs employees
    should be well compensated for their tremendous services.
    However, under current law a Customs officer can receive
    overtime and premium pay under certain circumstances without
    working those hours or can receive premium pay while working
    daytime hours. Do you agree that these anomalies are
    inappropriate and that it is reasonable to expect that Customs
    officers should be paid and well paid but only when they work
    these special hours?
        Mr. Rodriguez. I will agree, Mr. Chairman, that if we hired
    an additional 2,000 people, we would not have overtime. And I
    think we could do that. Customs agents get paid $20,000 to
    $40,000, and I think that we really need to kind of look at
    increasing that. And if we hired additional people, we would
    not have the problems you are describing now with overtime.
        Chairman Crane. Mr. Levin.
        Mr. Levin. I thank you. We have lots of witnesses, and we
    can go into that issue and others with them and not burden you
    with it. I personally--we have come to know each other--know
    how hard you work, so when you say that your schedule is not
    nearly as hectic and volatile as that of a Customs inspector,
    that is saying a lot. So, thank you for your testimony. We
    will, indeed, take it very seriously, and I assume if we have
    further questions, we will be able to talk to you personally.
        Mr. Rodriguez. Thank you.
        Mr. Levin. Thank you for your excellent testimony.
        Mr. Rodriguez. Thank you very much.
        Chairman Crane. Mr. Houghton.
        Mr. Houghton. Thanks, Ciro. Great to see you. If I
    understand the Customs Service has 17,000 to 18,000 people, is
    that right? And you think there ought to be another 2,000?
        Mr. Rodriguez. Yes, Sir.
        Mr. Houghton. Could you break that down a little bit? Why
    another 2,000?
        Mr. Rodriguez. I think there is a big gap between Customs
    and other agencies. For example, right now, looking at the
    INS--Chairman Lamar Smith wants us to begin checking people
    leaving the country. There is no way that can be done unless
    you double staff at the ports.
        The other reality is that some of these ports could be kept
    open 24 hours. They are not kept open 24 hours because of the
    fact that we need additional resources. In addition, right now,
    there are a hang up in terms of processing. If you visited
    ports from Brownsville to Eagle Pass, which processes a
    significant amount of the traffic through Texas, if you go into
    any of those ports, you will see the number of 18-wheelers has
    increased. You will notice there is no way that all those 18-
    wheelers are being examined thoroughly. In Laredo--supposedly
    up to 20 percent of the vehicles are inspected. That is a high
    figure for just over 5,000 trucks a day, not to mention the
    cars and all the traffic.
        I think when we deal with drugs and traffic and counterfeit
    products, we need more staff. Customs is also the first line of
    defense against terrorism. We need more people that look you
    straight in the eye, and ask you, ``Are you a citizen?'' Or,
    ``What is the purpose of your visit?'' or, to open your car
    trunk. I think that this is where our thrust should be. And it
    has not been there. They have not seen an increase despite the
    increase in traffic. Other agencies have been some increases
    and they also deserve to be looked at a little more seriously,
    but Customs has not. I think that we need to look at this
    disparity.
        Mr. Houghton. Well, the other number I wanted to ask you
    about was the $1.2 billion to upgrade the automated commercial
    equipment. You know, the problem with the Government, of
    course, is that you do not use the basic philosophy called
    return on investment. Therefore, we do not have a capital
    budget; so, therefore, you have to superimpose that up--and I
    do not know what percent increase that would be, along with the
    2,000 people, but it would probably be----
        Mr. Rodriguez. This is a $300 million per year for the next
    4 years--in the $1.2 billion. One of the things that we are
    also doing by not funding, we are also charging a lot of fees
    to a lot of the industries and the business. And it hurts the
    businesses right now, and I can attest to you that there have
    probably been some that have gone abroad because of the fact
    that it gets tangled up in the border, and it makes more sense
    to go abroad and do some of that instead of waiting for some of
    those products to come through there, because of the fees and
    also because of the wait. And so, as we move forward, I think
    that we are hoping that trade is going to double and triple;
    and it is expected to.
        Mr. Houghton. So you are saying the $1.2 billion would be
    spread out over how many years?
        Mr. Rodriguez. A 4-year period. I think the proposal is
    over a 4-year period. And there is a need for some additional
    technology. I have some ports that do not have any of the
    updated technology that is needed to seize drugs and facilitate
    traffic. Instead of those x-rays where agents can take a whole
    pallet and just check the whole pallet, agents in my district
    try to examine things item by item. Those x-ray machines are
    needed and automated commercial technology is needed too.
        Mr. Houghton. Thank you very much. All right. Thanks, Mr.
    Chairman.
        Chairman Crane. Mr. Camp.
        Mr. Camp. No questions.
        Chairman Crane. Mr. Becerra.
        Mr. Becerra. Mr. Chairman, just one question for my friend
    and colleague from Texas. Congressman Rodriguez, gives us a
    better sense of how this all plays out in the local communities
    along the border when you have the backup of some of these
    vehicles and the products that are being inspected. What does
    this do to the local economies in your district?
        Mr. Rodriguez. I represent Starr County, one of the poorest
    counties in the State, and it is probably the poorest in the
    Nation. It has a high unemployment rate, usually over 20
    percent It is sandwiched between two counties that are doing
    extremely well. The poor infrastructure hampers the 18-wheelers
    crossing there. U.S. Customs is also part of that
    infrastructure. Their staff has also been hampered by the fact
    that trade has doubled and tripled, and it is expected to
    double again. Their staff has remained at the same level and
    has to work lots of overtime and has not been able to examine
    as many of the trucks as they would like. And I think that as
    we proceed on the war on drugs, we should strengthen the front
    line and faciliate trade which we have not done and need to
    move on. We have not done enough, especially when it comes to
    purchasing technology--that quickens flow of traffic. It really
    hurts tourism, for example, people think twice about going to
    Laredo, because of the long lines. So it hurts tourism.
        And I want to go back again to business. The business
    community should not suffer because of our war on drugs. We
    need to facilitate the process of trade. We need to help out in
    business effort.
        Chairman Crane. Mr. Nussle.
        Mr. Nussle. Thank you, Mr. Chairman. I thank our colleague
    for coming here today. I just--I was not sure that you answered
    the chairman's question, the first question that was asked on
    the--on overtime pay.
        Mr. Rodriguez. I tried to avoid it.
        Mr. Nussle. You tried to avoid it. Well, that is part of
    the concern that we have got is that we--you know, the war on
    drugs is something we cannot avoid. We have got a step up to
    the plate, and this is a decision that, while it may be
    uncomfortable, it is a decision we are going to have to try and
    make. In fact, last year, the chairman introduced a law to try
    and change this, and I am wondering so your position is
    undecided or is it--are you in favor of changing it so that we
    think----
        Mr. Rodriguez. I am in favor of overtime. But I am saying
    that if you really want to solve the overtime issue, then we
    need to hire additional people. If you are really sincere about
    fighting the war on crime, we need to add some additional
    resources and additional technology on the border. We do not
    have it. We talk about having one x-ray machine to check for
    drugs. Well, it only checks eight trucks per hour. We have
    5,000 trucks in just one port, so there is a real need for us
    to focus on trade. This is one issue, pay and overtime, that
    will only divide, in a partisan manner. I hope that we would
    come together and do the right things for Customs and for us as
    a nation, because these people are on the front line of defense
    against drugs and the possibility of terrorism. They are the
    ones that check the packages for our businesses. They are the
    ones that make sure the commercial products flow freely. They
    also have caught more drugs than everyone else combined. And
    so, we need to be there for them.
        When it comes to this specific issue--overtime--I think, it
    is something that hopefully can be worked out by the Treasury
    Department. Rather than pay issues, I think we should
    concentrate on our responsibility to upgrade the computer
    system and other technology. If it breaks down, Customs goes
    back to paperwork.
        There is no way you can allow that--I mean, this is the
    United States. We should not let International Trade be slowed
    by paperwork, truck by truck. We need to provide that
    technology to Customs and the business community. And
    hopefully, we can, come to grips on pay issues which turn out
    to be a partisan.
        Mr. Nussle. I am wondering--I am just wondering from my
    constituents' benefit back home in Iowa, why is it a partisan
    issue that a person is asked to work for the time that they are
    paid, or not be paid for the time that they do not work. I
    mean, I do not--you either work--I mean, back in Iowa, if you
    are going to get paid for something, you have got to work for
    it. And they are probably wondering why it is that we pay
    people overtime when they do not work--I mean, certainly
    everything you just said on this is highly appropriate. These
    are the people. They do a fine job. They are unsung heroes,
    because they do not get some of the attention that maybe some
    of the other law enforcement areas do, and that is why we are
    having this hearing, and that is why it is so good that so many
    people show up.
        But I think it is just as irresponsible--and I am wondering
    why is it--why do you think it is a partisan--why is this a
    partisan issue that if you do not work, you should not get
    paid. This does not seem to me to be partisan at all. Why is
    this partisan?
        Mr. Rodriguez. I think it is the way that it is
    interpreted. I want them to have a more livable wage. And
    Customs agents are, working out there at bizarre hours earning
    $20,000 to $40,000. And they are working----
        Mr. Nussle. Well, actually, there is a cap at $30,000, are
    you aware of that?
        Mr. Rodriguez. The cap on $30,000 that you talk about is
    for the pension in terms that they cannot make overtime. But--
    --
        Mr. Nussle. But the chairman's bill tried to increase the
    amount of money, and, in fact----
        Mr. Rodriguez. Well, that----
        Mr. Nussle. If I could finish--expand that cap, and then
    also allow for discretion from the Secretary to pay them more.
    And I--that is why I do not understand why this is a partisan
    issue.
        Mr. Rodriguez. Well, hopefully, it will not be a partisan
    issue. Hopefully, we can find a compromise on this issue
    without cutting pay. I hope you do not lose focus on the real
    issue. I hope that we focus on the need to upgrade technology
    and increase customs manpower. We might disagree on this one
    issue. But I hope that we can agree that something needs to be
    done to fight drugs and facilitate trade.
        Mr. Nussle. I guess I would--if I could just ask, you know,
    two things. First of all, I think you are exactly right in
    upgrading equipment, on technology. Certainly, technology from
    19--let us say 1989 or 1979 or 1969 is not appropriate in 1999.
    I think the same is true for a law that was written in 1911--
    probably not as appropriate in 1999. And I--so upgrading
    equipment, upgrading pay, upgrading the law, upgrading the way
    things are operating, I think is appropriate to deal with a
    drug war and with people who understand rotations at the border
    better than we do; understand the way that people are
    compensated and the way the game is played at the border better
    than we do. And that is the people that are trying to smuggle
    in drugs.
        So, I would hope that you would reconsider your position
    and not make it a partisan issue. I think it is not a--does not
    have to be partisan at all. And then I would just conclude by
    suggesting that if you--if--you know, the people that were
    trying to reform this law last year took into consideration
    some of those very things that you are talking about so that we
    can give more support to these folks on the front line. It is
    just as--it is just as demoralizing to have to work a shift,
    whether you get paid straight time or overtime for it, and find
    out that your buddy is at home not doing anything, getting paid
    overtime or straight time for it. That does not seem to make
    much sense to them, anymore than it makes sense to my Iowa
    constituents. So, I would hope that this does not digress to a
    partisan issue and that we can change a 88-year-old law the
    same way we want to change 88-year-old technology. Thank you.
        Chairman Crane. Mr. Herger.
        Mr. Herger. I do not have any further questions, Mr.
    Chairman.
        Chairman Crane. If not, I want to thank you, Ciro, for your
    testimony. And we look forward to working with you and
    continuing on this path toward the reforms that so many of us
    feel are in order given the circumstances.
        Mr. Rodriguez. Thank you, Mr. Chairman.
        Chairman Crane. And now, I would like to invite our first
    panel of witnesses and that includes Deputy U.S. Trade
    Representative, Richard Fisher; Customs Commissioner, Raymond
    Kelly; and ITC Chairman, Lynn Bragg. Welcome, Mr. Fisher, and I
    would personally like to thank you and your staff again for
    your efforts on trade relations with China. And, Commissioner
    Kelly, I am pleased to welcome you in your first appearance
    before the Subcommittee. And we look forward to working with
    you and helping you meet the demands and responsibilities of
    the Customs Service. And, Chairman Bragg, we also look forward
    to working with you to further develop the close working
    relationship between the Commission and the Committee on Ways
    and Means, and we took our first giant step by giving you our
    former Chief of Staff from the Committee here in Thelma Askey,
    who is with you today.
        So, if you will proceed in order, and, as I indicated
    before, try and keep oral presentations to 5 minutes or less.
    And all written statements will be made a part of the permanent
    record. Richard.

               STATEMENT OF HON. RICHARD FISHER, DEPUTY
                       U.S. TRADE REPRESENTATIVE

        Mr. Fisher. Thank you, Mr. Chairman. I welcome this
    opportunity to appear before your Subcommittee today to present
    our budget authorization request from the Office of the USTR.
    As I always do, I want to thank you and your colleagues for
    your consistent support for our mission, which is to open
    markets and expand trade and enforce trade laws and trade
    agreements. And we sincerely appreciate the close working
    relationship we have with this Committee.
        We are proposing a 2-year extension of USTR's authorization
    of appropriations for fiscal year 2000 and 2001. Our request
    recommends a fiscal year 2000 authorization level of
    $26,501,000, the amount requested in the President's budget for
    the fiscal year 2000. The authorization request for fiscal year
    2001 is for such sums as may be necessary.
        For each fiscal year, the representation fund authority
    would remain at $98,000, and the amount available to be carried
    over from one fiscal year to the next would remain at
    $1,000,000. In short, Mr. Chairman, the Administration is
    recommending straightforward extensions of existing
    authorizations for USTR.
        Now, Mr. Chairman, I regard it as a great privilege to work
    with the career employees of the Office of the USTR. We are one
    of the smallest agencies in the Government. Our budget request,
    as I mentioned, is just $26.5 million, and our staff request
    for next year is for 185 full-time employees, including support
    staff. I think you know, Mr. Chairman, I joined the
    Administration from the private sector a little more than a
    year ago, having run an investment firm for 20 years. And I can
    tell you, Mr. Chairman, I have found USTR to be as efficient
    and capable as any private sector business I have worked with
    or owned. And, Congressman Houghton, the Congress gets a superb
    return on investment in USTR.
        With our small staff, we address $2 trillion in trade
    volume. That is an increase of over $700 billion since 1992. We
    monitor and enforce our agreements, including over 270 trade
    agreements we have negotiated in this Administration. We
    navigate our way through the WTO, and we develop and execute
    our trade agenda. The budget authorization request reflects our
    need to upgrade security and add seven additional career, full-
    time employees to help us address this much larger volume of
    trade and network of agreements, as well as the level of work
    required in agriculture and our several regional offices.
        At the same time, the request protects USTR's tradition as
    a lean agency, in which each full-time employee has great
    responsibility, and in which we can act quickly to deliver
    tangible results that you expect from us.
        Over the past 6 years, we have negotiated 270 trade
    agreements. Our volume of bilateral trade has expanded by
    three-quarters of a trillion dollars. This is inevitably meant
    a heavier workload for the USTR. Our budget request will allow
    us to meet this workload while protecting our tradition as a
    small and efficient agency. Our request represents the right
    resource level for allowing USTR to implement the ambitious
    work agenda with which we are charged.
        For fiscal year 2000, the budget request proposes, as I
    mentioned, 185 full-time employees--$26,501,000 in new budget
    authority. This represents a net increase of $1.8 million and
    seven career full-time employees over the last fiscal year. We
    would use the $1.8 million increase in five targeted areas.
        First, $1.2 million to fund the expected cost of legislated
    employee pay raises as well as non-pay inflation areas like
    rents and utilities and travel.
        Second, $400,000 for seven new career positions in areas
    with growing workloads. Six of the seven new positions would be
    trade specialists. One would be a support position. Of these
    positions, two each are in our agriculture and Africa units;
    one each in Japan, China, and Western Hemisphere offices.
        Third, $400,000 for negotiator travel, to meet rising
    numbers of trips to China, as you referenced, Japan, Africa,
    and other distant and costly negotiating sites.
        We need $225,000 for security-related projects in our
    Geneva and Washington offices, to guard against the threat of
    terrorism and to protect sensitive and classified information.
        And last, six, we need $100,000 to meet a growing demand
    for interpretation and translation services for use in
    negotiations enforcement proceedings and in renewing country
    proposals.
        This represents a total budget increase of $2.225 million,
    which is partially offset in fiscal year 2000 by a reduction of
    $498,000 in funding for Y2K improvements made available in the
    fiscal year 1999, on a 1-year time basis.
        Mr. Chairman, USTR needs every penny of the $26.5 million
    that we are proposing in our budget request. We are keenly
    aware of our responsibilities. And yet, we have virtually no
    further capacity to absorb higher costs in fiscal year 2000.
    Two-thirds of the USTR appropriation supports the salaries and
    benefits of employees, and the remaining one-third pays for
    building rent, utilities, security, and travel. Unlike larger
    Federal agencies, we do not have the option of cutting back in
    categories like grants and contracts, nor do we have the option
    of trimming layers of management or administration.
        We have already accomplished an enormous amount of belt-
    tightening in the last 6 years, and any further budget savings
    would come at the expense of our core negotiating, policy
    coordinating, and enforcement programs.
        Let me give you some examples of the cutbacks that we have
    made internally.
        First, we rescinded authority for assistant USTRs to
    approve their own travel. We instituted a rigorous review
    process that requires the Chief of Staff to approve every
    single trip.
        Second, we mandated use of frequent flyer miles in order to
    increase the number of trips for the same amount of funds. In
    the last 5 years, we have funded a 126 trips with bonus
    coupons, saving the Government $275,000 in the cost of airplane
    tickets.
        We have also established policies that require all
    employees, including Ambassador Barshefsky and myself to fly in
    economy class unless the trip exceeds 12 hours of flying time.
    This is a more rigid rule than the governmentwide standard. We
    have reduced the amount of office space we used in the Geneva
    office, cutting rental costs by several hundred thousand
    dollars.
        And we have reduced our computer staff by more than half,
    saving more than a million dollars in payroll expenses while,
    at the same time, upgrading the computer network and installing
    an innovative system for receiving classified State Department
    cables.
        These are just some of the ways, Mr. Chairman, the USTR has
    economized over the past several years. These actions have
    resulted in an agency that is lean and mean, and without
    imparting any partisan sentiment, we are certainly not trying
    to be kinder and gentler. But we are one which has been quick
    to absorb our cuts, and for this reason, we need the support of
    this Committee and the full Congress in providing the full
    $26.5 million and the 185 full-time employees in fiscal year
    2000.
        I would just like to say one last point, Mr. Chairman. We
    are a small agency. I believe we have some of America's finest
    public servants. Our staff is talented. It is working very long
    hours, and I hope you will conclude, as we do, that it delivers
    results for the American people. I thank you for allowing me to
    testify before you.
        [The prepared statement follows:]

    Statement of Hon. Richard Fisher, Deputy U.S. Trade Representative

        Mr. Chairman, I welcome this opportunity to appear before the
    Subcommittee to present the budget authorization request for the Office
    of the United States Trade Representative. This morning, I will present
    our authorization request, describe our program priorities and respond
    to questions the Subcommittee may have.
        Let me begin by offering my thanks to the Subcommittee for your
    consistent support of our mission to open markets, expand trade, and
    enforce trade laws and trade agreements. We appreciate our close
    working relationship, and hope to continue it into the future.

                             Two-Year Authorization

        We are proposing a two-year extension of USTR's authorization of
    appropriations, for fiscal years 2000 and 2001. The Administration's
    request recommends an FY 2000 authorization level of $26,501,000, the
    amount requested in the President's budget for FY 2000. The
    authorization request for FY 2001 is for such sums as may be necessary.
        For each fiscal year, the Representation fund authority would
    remain at $98,000, and the amount available to be carried over from one
    fiscal year to the next would remain at $1,000,000.
        In short, Mr. Chairman, the Administration is recommending
    straightforward extensions of existing authorizations.

                                The Trade Agenda

        Mr. Chairman, I regard it as a great privilege to work with the
    career employees of the U.S. Trade Representative. We are among the
    smallest agencies in government: our budget request is $26.5 million,
    and our staff request for next year is just 185 full-time employees.
        As you know, I joined the Administration from the private sector a
    little more than a year ago, having run an investment firm for twenty
    years. I am here to tell you, Mr. Chairman, that I have found USTR to
    be as efficient and capable as any private secotr busienss I have
    worked with. The Congress gets a superb return on its investment in
    USTR.
        With this staff we address $2 trillion in trade volume (an increase
    of over $700 billion since 1992); monitor and enforce our agreements,
    including over 270 trade agreements negotiated since 1992; and develop
    and execute our trade agenda for the future. The budget authorization
    request reflects our need to upgrade security and add seven additional
    career full-time employees to help us address this much larger volume
    of trade and network of agreements and the level of work required in
    agriculture and several regional offices. At the same time, the request
    protects USTR's tradition as a lean agency in which each full-time
    employee has great responsibility, and which can act quickly to deliver
    tangible results for Americans through new job opportunities, higher
    farm incomes and rising standards of living.
        These capabilities are evident in the results we have achieved. The
    expansion of trade in the past six years has helped create the best
    economic environment our country has ever enjoyed. Since 1992:
         Our economy has prospered. Our economy has expanded from
    $7.1 trillion to $8.5 trillion in real terms (1998 dollars), and we
    have the benefit of the longest peacetime expansion in America's
    history.
         Our country has created jobs. Employment in America has
    risen from 109.5 to 127.7 million jobs, a net gain of over 18 million,
    as unemployment rates fell from 7.3% to 4.2%.
         And our families have enjoyed higher living standards.
    Since 1992, average wages have reversed a twenty-year decline and have
    grown by 6.0% in real terms, to $449 a week on average. This family
    prosperity is reflected, for example, in record rates of home ownership
    and unprecidented individual investment in mutual funds and other
    claims of ownership of America's thriving business sector.
        Against this background, I am very proud to present our budget
    authorization request to the Subcommittee today.
        Let me now turn to the agenda we have set, in close consultation
    with Congress, for the future. Generally speaking, our trade policy
    seeks the following goals:
         Address the trade effects of the financial crisis which
    now directly affects nearly 40% of the world.
         Continue our progress toward open and fair world markets
    through a new negotiating Round, as well as our role as host and Chair
    of the WTO's Third Ministerial Conference, regional negotiations and
    bilateral talks.
         Advance the rule of law and defend US rights by ensuring
    full compliance with trade agreements and strongly enforcing our trade
    laws.
         Encourage the full participation of all economies,
    including economies in transition and developing nations, in the world
    trading system on a commercially meaningful basis;
         Ensure that the trading system helps lay the foundation
    for the 21st-century economy by offering maximum incentives for
    scientific and technological progress.
         Ensure that trade policy complements our efforts to
    protect the world environment and promote core labor standards
    overseas; and
         Advance basic American values including transparency and
    accessibility to citizens and involvement of civil society in the
    institutions of international trade.

                           Trade Agreement Authority

        As we pursue this agenda, the Administration will consult with the
    Subcommittee and Congress on the renewal of traditional trade
    negotiating authority. The President, in his State of the Union
    address, called for a new consensus on trade. He said we must find the
    common ground on which business, workers, farmers, environmentalists
    and government can stand together.
        Consistent with that approach, we believe negotiating authority
    should bolster the traditional bipartisan support for trade policy and
    allow us to pursue an agenda that reflects consensus goals. It is a
    tool which can help us negotiate with greater credibility and
    effectiveness on behalf of American economic interests, and thus
    contribute to our goal of opening markets, increasing growth and
    raising living standards.

                       Trade Effects of Financial Crisis

        Let me now address our agenda in detail. I will begin with the
    trade effects of the financial crisis affecting Asia, Russia and parts
    of Latin America. This crisis has now lasted a year and a half, and its
    effects on our trade interests have been severe. Countries which have
    implemented IMF reform programs have seen a number of good results,
    including currency stability and returning investor confidence.
    However, economies continue to suffer. Six major economies--Hong Kong,
    Indonesia, Malaysia, South Korea, Russia and Thailand--are likely to
    have contracted by 6% or more last year.
        As a result of this crisis, the American trade imbalance has
    widened. This reflects largely a sharp drop of about $30 billion in
    American exports to the Pacific Rim, and a consequent break with the
    pattern of rapid U.S. export growth of the past few years. Our overall
    import growth last year (with the principal exception of the steel
    sector, in which imports rose very rapidly in the second half of 1998,
    affecting thousands of jobs) remained consistent with growth rates in
    previous years. Thus the larger deficit largely reflects predictable
    macroeconomic factors.
        Our trade policy response begins by ensuring that our trading
    partners continue to live by commitments at the WTO and in our regional
    and bilateral agreements. The strength of the trading system is an
    enormous advantage here--despite the worst financial crisis in fifty
    years, the world has resisted the temptation to relapse into
    protectionism. This has greatly reduced the potential damage to our
    economy, and particularly to American manufacturing exporters and
    agricultural producers. In addition, other markets--particularly our
    NAFTA partners Canada and Mexico, to whom U.S. goods exports grew by
    $13 billion last year--have in part compensated, thanks to the more
    open North American market NAFTA has created, for some but not all of
    these lost exports.
        We continue with a policy response covering several areas:
         IMF Recovery Packages--We have supported reform packages
    with the IMF at the center in affected countries. Several of these
    contain trade conditionalities which we vigorously monitor. These
    packages are showing results: especially in Korea and Thailand, there
    are early signs of recovery, including a fairly strong recovery in
    American exports to both countries in the last quarter of 1998.
         Restored Growth in Japan--A return to growth in Japan,
    Asia's largest economy, is essential for the economic health of the
    region. The Administration's view is that this will require fiscal
    stimulus, financial reform, and deregulation and market-opening. USTR's
    responsibilities lie in this last area. In addition to an aggressive
    bilateral agenda, the agreement we reached in Japan last May sets out
    concrete deregulatory measures in telecommunications, housing, medical
    devices, pharmaceuticals and financial services sectors, measures to
    strengthen competition policy enforcement, transparency and
    distribution. Fully implemented, these would create opportunities for
    exporters and workers in America, other Pacific economies and Japan. We
    are now discussing new measures in these areas and energy as well and
    are in the process of negotiating with the Japanese over a second
    tranche of deregulatory measures under the U.S.-Japan Enhanced
    Iniditaive on Deregulation in advance of Prime Minister Obuchi's state
    visit the first week in May.
         Steel--The President's January 7 Steel Report to the
    Congress laid out a comprehensive action plan on the 1998 steel import
    surge. The plan provided for a roll-back of imports from Japan--the key
    source of the import surge--to pre-crisis levels, by stating that the
    Administration is prepared, if necessary, to self-initiate trade cases
    to ensure that this roll-back takes place. The plan also outlines
    actions taken by the Commerce Department to expedite ongoing dumping
    investigations and apply dumping margins retroactively. In addition,
    the Administration expressed strong support for an effective safeguards
    mechanism, and affirmed our commitment to continue to assess the
    effectiveness of steps taken to date, and to work closely with the
    industry, labor, and members of Congress, to assess additional steps.
    To assist in this ongoing review, we also began to release preliminary
    steel import data which are available about a month earlier than the
    normally released final import statistics, thus enabling the industry
    to react to imports on a more timely basis.
        This program is being implemented fully. Steel imports began to
    decline sharply beginning in December 1998. Since the release of the
    President's Steel Action Plan, the Commerce Department has announced
    preliminary dumping margins with respect to Japan, Russia and Brazil.
    We have initialed two agreements with Russia--a suspension agreement on
    the carbon flat rolled dumping case and a broader agreement under the
    market disruption article of the 1992 U.S. bilateral trade agreement
    with Russia. These agreements would roll back and cap steel imports
    from Russia, the second largest source of our 1998 steel import surge.
    In Korea, we have expanded discussions on steel with the objectives of
    real and substantive progress toward permanently getting the Korean
    government out of the steel business.
        Import statistics over the past several months have been
    encouraging. Between November and February, steel imports of carbon
    flat rolled products from Japan, Russia and Brazil which the Commerce
    Department found to be ``dumped'' declined 99, 100 and 64 percent
    respectively. At 2 million metric tons, February steel imports were
    below the average monthly import levels for 1996 and 1997. Substantial
    progress in addressing unfair trade practices and injury to U.S. steel
    producers and workers was thus achieved in a manner which enabled us to
    remain faithful to our international commitments. By sticking to
    international trading rules in this time of crisis, we have done our
    share to forestall a protectionist response to the global crisis by our
    trading partners and retaliation against U.S. exports which could
    endanger American agricultural and steel-intensive producers and their
    work force.

                     I. Growth and Higher Living Standards

        Let me now turn to our negotiating agenda. In this agenda, we seek
    enduring goals--growth, higher living standards, the rule of law, a
    rising quality of life, better protection of health, safety and the
    environment, and the advance of basic values. As President Clinton said
    in the State of the Union address, we need to find new methods of
    negotiating and address a broader array of issues to secure these goals
    in the next century.

    1. New Round and WTO Ministerial Conference

        This is the basis of the President's call for a new, accelerated
    negotiating Round for the 21st century. The Round would begin at the
    WTO's Third Ministerial Conference, which Ambassador will chair and
    which will be held in Seattle from November 30th to December 3rd. This
    will be the largest trade event ever held in America, bringing
    government leaders, Trade Ministers, business leaders, non-governmental
    organizations and others interested in trade policy from around the
    world. It is an extraordinary opportunity for us to shape at least the
    next decade of multilateral trade negotiations and to highlight our
    economic dynamism to the world.
        At the outset, I would like to say a few things about funding for
    the WTO Ministerial. The Ministerial will be the largest international
    trade event ever held in the United States. Most of the funding for
    logistical preparations and on site Ministerial operations will be met
    by the Seattle community, including substantial in-kind contributions
    from major corporations from Washington State. Even with this local
    funding, the U.S. Government will bear some of the cost for managing
    the conference, and the President's FY 2000 Budget contains $2.0
    million in the State Department budget for that purpose. Over the next
    month, we will be discussing physical site requirements with the WTO,
    and appropriate financial contributions with the Seattle Host
    Committee.
        The Round President Clinton has called for would begin at this
    event. It would be somewhat different from previous Rounds, in that we
    should be able to pursue three dimensions simultaneously: first, a
    negotiating agenda to be completed on an accelerated timetable; second,
    institutional reforms and capacity-building at the WTO; and third,
    ongoing results in priority areas.
        To begin with, we would hope to advance a number of important
    initiatives in the months leading up to the Ministerial Conference and
    at the event itself. They may include:
          ``Information Technology Agreement II'' adding new
    products to the sectors already covered by the first ITA.
         Electronic Commerce--Extension of last May's multilateral
    declaration not to assess customs duties on electronic commerce, to
    make sure that the Internet remains an electronic duty-free zone.
          An agreement on transparency in procurement to create
    more predictable and competitive bidding, reducing the opportunity for
    bribery and corruption and helping ensure more effective allocation of
    resources.
         APEC Sectoral Liberalization--Building consensus on the
    sectoral liberalization initiative begun in the Asia-Pacific Economic
    Cooperation (APEC) forum. This would eliminate tariffs and in some
    cases liberalize services in chemicals; energy equipment and services;
    environmental goods and services; fish and fishery products; gems and
    jewelry; medical and scientific instruments; toys; and forest products.
    Meaningful participation by Japan in the fishery and forest products
    sectors would be essential to success.
        The second dimension of institutional reform would promote
    transparency, allow the WTO to facilitate trade and participation for
    less developed nations, help it coordinate more effectively with
    international bodies in other fields, and continue to strengthen public
    confidence in the WTO as an institution. Here we would hope to take up
    such issues as:
         Trade facilitation. Most of the world's regional trading
    arrangements--ASEAN, APEC, the European Union, Mercosur, NAFTA, the
    proposed FTAA--contain a critical element of trade facilitation, often
    beginning with customs reform to reduce transaction costs and make
    trade more efficient. The WTO can help accomplish this on a much
    broader scale.
         Capacity-building. We need to narrow the growing disparity
    between the rich countries and the poor countries. We have to ensure
    that the WTO can work effectively with member economies and other
    international institutions, particularly with respect to the least
    developed nations, to ensure that they have both access to markets and
    technical assistance to meet the kinds of obligations that will help
    them grow into reliable trading partners.
         Addressing the intersection between trade and
    environmental policies. As trade promotes growth overseas, we must at
    the same time ensure clean air, clean water and protection of our
    natural heritage, as well as effective approaches to broader questions
    like biodiversity and climate change.
         Addressing the intersection between trade and labor.
    Again, as in our domestic economy, growth can and should be accompanied
    by safer workplaces, elimination of exploitive child labor and respect
    for core labor standards. The WTO in particular can work in more
    coordination with the International Labor Organization on some of these
    issues. As the President has announced, the US will provide funds for a
    new multilateral program in the ILO to provide technical assistance for
    international labor rights initiatives, and through our own Department
    of Labor will help our trading partners strengthen labor law
    enforcement. These and other such efforts should be a focus of renewed
    cooperation with the ILO.
         Coordination with the international financial
    institutions, in a world where the separation of trade from financial
    policy has become entirely artificial. The WTO must work more
    effectively with the IMF and World Bank to achieve their common goals
    of a more stable, predictable and prosperous world.
         Transparency. We will also seek reform, openness and
    accountability in the WTO itself. Dispute settlement must be
    transparent and open to the public. Citizens must have access to panel
    reports and documents. Civil society must be able to contribute to the
    work of the WTO, to ensure both that the WTO can hear from many points
    of view including consumer, labor, business, environmental and other
    groups, and that its work will rest on the broadest possible consensus.
        With respect to the expedited negotiating agenda of this Round, we
    are now consulting with Congress, industry, and other interested
    parties on a detailed negotiating agenda for talks which would begin
    after the Ministerial. While the final scope of the agenda is yet to be
    determined, we believe that at a minimum they should include such
    issues as:
         Agriculture, where we envision broad reductions in
    tariffs, the elimination of export subsidies, and further reductions in
    trade-distorting domestic supports linked to production. We must seek
    transparency and improved disciplines on state trading enterprises,
    seek reform of the EU's Common Agricultural Policy, and ensure that the
    world's agricultural producers can use safe, scientifically proven
    biotechnology techniques without fear of trade discrimination.
         Services, in which we hope to see specific commitments for
    broad liberalization and market access in a range of sectors, including
    but not limited to audiovisual services, construction, express
    delivery, financial services, professional services,
    telecommunications, travel and tourism, and others.
         Government procurement, in which purchases are over $3.1
    trillion per year, much of it in sectors where America sets the world
    standard: high technology, telecommunications, construction,
    engineering, aerospace and so forth. At present, only 26 of the 133 WTO
    Members belong to the plurilateral WTO Government Procurement
    Agreement. We thus look to bring more countries under existing
    disciplines.
         Intellectual property, where our efforts to ensure full
    compliance with the existing provisions of the Uruguay Round will be
    combined with campaigns against piracy in newly developed optical media
    technologies such as CDs, CD-ROMs, digital video discs and others; and
    end-user piracy of software. This agenda item is particularly vital in
    the information age.
         Industrial tariff and non-tariff barriers, where we will
    seek to continue our progress in reducing bound and applied tariff
    levels, and continue to address non-tariff measures in industrials
    sectors.
         A forward work-program on newer issues for the
    multilateral system to consider, including how competition and
    investment policies help to assure fair and open trade, how the WTO can
    help create an international pro-competitive regulatory climate,
    particularly in services, and how it might further advance our efforts
    against bribery and corruption.
        We are also exploring ways to more fully integrate the least
    developed countries, particularly in sub-Saharan Africa, into the
    system. This includes both seeking deeper commitments, and technical
    assistance in fulfilling those commitments, and the African Opportunity
    and Growth Act now under consideration in the House.
        Finally, I am pleased to state that new market-opening provisions
    in financial services trade have entered into force, effective March 1,
    as a result of the 1997 WTO Financial Services Agreement. In the
    negotiations that concluded in December 1997, we obtained market access
    commitments in banking, insurance, and securities, from a wide range of
    countries including the key emerging markets of primary interest to
    U.S. industry. The agreement covers an overwhelming share of global
    trade in this sector, including the most important international
    financial services markets and encompassing $38 trillion in global
    domestic bank lending, $19.5 trillion in global securities trading, and
    $2.1 trillion in world wide insurance premiums, accounting for
    approximately 95% of bank lending, stock turnover, capitalization of
    stock markets and insurance premiums.
        Participating countries had until January 29, 1999, to complete any
    necessary domestic procedures and formally notify the WTO of their
    acceptance of the protocol for bringing their commitments into force.
    Fifty-two countries, including the United States, met the deadline. We
    are concerned that 18 countries did not meet the deadline. But, in
    consultation with this Committee's staff, staff of other relevant
    Committees, and our private sector, we concluded that a two-part
    strategy best served U.S. interests. First, we want our companies to be
    able to benefit from legally enforceable commitments in these 52
    countries, which account for the overwhelming share of international
    trade in banking, securities, and insurance. Second, we will work to
    ensure that the remaining countries recognize that we and other WTO
    Members expect them to ratify the agreement and bring their commitments
    into force as soon as possible. We have no information to date that
    would lead us to believe that they will do otherwise. With this
    strategy in mind, we have agreed to bring the agreement into force on
    March 1 with respect to the 52 countries that have ratified to date. We
    continue to press the remaining countries, in capitals and in Geneva,
    to follow through on their undertakings and ratify the agreement.

    2. Regional Trade Agenda

        At the same time, we are pursuing an active agenda in each region
    of the world. A brief review is as follows:
        Canada--With Canada, our largest trade partner, we have serious
    concerns on a range of agriculture matters. We took an important step
    last December by concluding a market access package opening
    opportunities for American grain farmers, cattle ranchers and other
    agricultural producers. We will continue our work in these areas this
    year. We will also address major market access impediments to our
    magazine publishers and other media and entertainment industries. We
    will also continue to enforce our bilateral sectoral agreements. At the
    same time, we intend to work with Canada on bilateral issues of mutual
    interest, and on negotiations toward the Free Trade Area of the
    Americas and at the WTO where we share many goals.
        Mexico--Trade with Mexico has expanded rapidly since passage of the
    North American Free Trade Agreement--Mexico is now our second largest
    goods export market after Canada. We will continue to monitor
    implementation of Mexico's NAFTA commitments, scheduled to be complete
    by 2008, and address bilateral issues including land transportation,
    corn syrup and sugar, and telecommunications barriers as well as piracy
    in intellectual property rights. We have also stepped up our efforts in
    the trilateral work program now underway in more than 25 Committees and
    Working Groups of the NAFTA signatories, with the intention of
    maximizing our gains under the NAFTA.
        Western Hemisphere--The Miami and Santiago Summits of the Americas
    have called on us to complete work on a Free Trade Area of the Americas
    no later than the year 2005. This year, in accordance with Summit
    directions, we intend to achieve ``concrete progress'' toward the FTAA
    in our nine Negotiating Groups and through business facilitation and
    other measures. At the same time, we will seek approval from Congress
    of an expanded and improved Caribbean Basin Initiative with benefits
    similar to those now accorded Mexico and Canada.
        Europe--We are working to remove barriers and strengthen trade
    relations with the EU through the Transatlantic Economic Partnership
    begun last year. This includes negotiations on seven separate agenda
    items: technical trade barriers, agriculture (including biotechnology
    and food safety), intellectual property, government procurement,
    services, electronic commerce and advancing shared values such as
    transparency and participation for civil society. We are also working
    to ensure the protection of American interests as the EU expands to
    include Central and Eastern European nations. At the same time, we are
    enforcing European compliance with dispute settlement decisions and
    will address problems in our trade relations both bilaterally and
    through the new negotiating Round President Clinton has proposed.
        Asia--Under the Asia-Pacific Economic Cooperation (APEC) forum we
    are looking long-term toward free and open trade in the region. This
    year, as I noted earlier, we will seek WTO consensus on the nine-sector
    liberalization package begun in APEC, and begin work on six additional
    sectors. We will also address bilateral issues with Korea, the ASEAN
    nations and other Asian trade partners. This will include seeking
    Normal Trade Relations with Kyrgyzstan, Mongolia and Laos, and possibly
    negotiating a broad trade and commercial agreement with Vietnam.
        Japan--In trade relations with Japan, our largest overseas trade
    partner, we will continue our intense and sustained effort to open and
    deregulate the Japanese market. We have concluded 35 bilateral trade
    agreements with Japan since 1993; we monitor their implementation
    closely and enforce them vigorously.
        We will also address sectoral issues in Japan including steel,
    insurance, glass, film and other sectors. For example, we will be
    addressing a wide range of primary and third sector issues in
    consultations with Japan on insurance scheduled for this week. And as I
    noted earlier, we are pursuing an ambitious set of goals under the
    Enhanced Initiative on Deregulation and Competition Policy, both in
    individual sectors and in broader structural issues. Building on
    discussions at recent Vice Ministerial-level talks in Tokyo, we are
    looking to compile a substantive package of measures to deregulate
    Japan's economy that our leaders can endorse when Prime Minister Obuchi
    visits the United States in May as well as to agree by then on concrete
    measures Japan will take to address outstanding bilateral issues. We
    are also working to eliminate specific market access barriers in Japan
    through WTO dispute settlement, as well as through APEC and WTO
    negotiations and other regional and multilateral fora.
        China--In our bilateral relationship with China, broadly speaking
    we will monitor and strictly enforce our agreements on intellectual
    property and market access with China, and address bilateral trade
    problems in agriculture, direct marketing and other areas. Most
    recently, this has included an advance of fundamental importance to
    American farmers and ranchers: the Agreement on Agricultural
    Cooperation concluded during Premier Zhu Rongji's visit last week. This
    will immediately lift unfair bans imposed due to unscientific sanitary
    and phytosanitary standards on Pacific Northwest wheat, American meats,
    and citrus. It has the potential to create significant new markets for
    these commodities. Citrus producers posit that our resolution of this
    issue last week will lead to $700 million in new exports per year to
    China.
        At the same time, we will continue to seek broad market-opening
    through our negotiations toward China's accession to the World Trade
    Organization, on which we have made significant progress last week in
    all areas of concern--agriculture, services, industrial goods and the
    rules issued addressed in the Protocol--and which I address more fully
    below.
        Africa--USTR is implementing the President's Partnership for
    Economic Growth and Opportunity in Africa by supporting economic
    reform, promoting expanded trade and investment ties, and encouraging
    Africa's full integration into the world trading system by negotiating
    bilateral agreements, technical assistance and other measures, in
    particular Congressional approval of the African Growth and Opportunity
    Act.
        A sound policy framework in African countries that opens economies
    to private sector trade and investment offers the greatest potential
    for growth and poverty alleviation as well as trade opportunities for
    the U.S.. Last month, for example, we signed a Bilateral Investment
    Treaty with Mozambique, and Trade and Investment Framework Agreements,
    or TIFAs, with South Africa and Ghana. We hope to complete a similar
    TIFA with the West African Economic and Monetary Union. Broader efforts
    to encourage full integration of developing countries into the trading
    system will also bolster our Africa policy. In this regard, we will
    seek renewal of the Generalized System of Preferences.
        Middle East--Building upon our Free Trade Agreement with Israel, we
    have inaugurated a program that aims to bolster the peace process,
    while advancing American interests. Starting with a framework of
    bilateral trade and investment consultations in the region and a newly
    inaugurated industrial zones program, we will help the Middle Eastern
    countries work toward a shared goal of increased intra-regional trade.
    Most recently, we expanded the first Jordan-Israel Qualifying
    Industrial Zone at Irbid, designated another, and completed a Trade and
    Investment Framework Agreement with Jordan.
        OECD--We strongly support passage of the OECD Convention on
    Shipbuilding Subsidies and will work with you to ensure its success.

                         II. Enforcing the Rule of Law

        Second, US trade policy will support and advance the rule of law
    internationally by ensuring the enforcement of trade agreements and
    U.S. rights in the trading system.
        Much of our enforcement work takes place at the World Trade
    Organization. We have filed more complaints in the WTO--44 cases to
    date--than any other WTO member, and our record of success is strong.
    We have prevailed on 22 of the 24 American complaints acted upon so
    far, either by successful settlement or panel victory. In almost all
    cases, the losing parties have acted rapidly to address the problems.
    We will insist that this remain the case in all our disputes, including
    those with the European Union on beef hormones and bananas, and with
    Canada on magazines. The WTO arbitration panel's recent decision in the
    bananas case, finding $191.4 million worth of damage from EU policies,
    is an important indication of the success and utility of this system.
        At the same time, the U.S. has complied fully with all panel
    rulings it has lost, although these are few in number. And we will, of
    course, use our rights under the NAFTA to ensure open markets to our
    goods and services in Canada and Mexico.
        We continually monitor implementation of WTO commitments. All WTO
    developing country members are scheduled to fully implement their
    intellectual property commitments, and all members are required to
    implement customs valuation commitments by January 1, 2000. We will
    insist on strict compliance with these deadlines.
        Likewise, we are vigilant to ensure enforcement of textile quotas
    and implementation of textile market access requirements overseas. A
    number of our trading partners clearly have further work to do in
    market access, including some of our largest and fastest growing
    textile suppliers. We have and will continue to aggressively pursue our
    rights, whether through the consultation process or ultimately through
    the WTO dispute settlement regime.
        U.S. trade laws are also a vitally important means of ensuring
    respect for U.S. rights and interests in trade. We will continue to
    challenge aggressively market access barriers abroad using laws such as
    Section 301, ``Special 301'' and Section 1377, to open foreign markets
    and ensure fair treatment for our goods and services, ensure
    nondiscrimination in foreign government procurement and ensure
    compliance with telecommunications agreements.
        To ensure that we have the maximum advantage of domestic trade
    laws, the Administration has extended by Executive Order the substance
    of two laws for which authority has lapsed: ``Super 301'' and Title
    VII. We will issue a report on these issues by April 30th.
        The Administration is also, of course, committed to full and
    vigorous enforcement of our laws addressing dumping and subsidies, and
    on injurious import surges.

                     III. Integrating Transition Economies

        Third, our trade policy will continue our progress toward
    integrating China, Russia and other economies in transition into the
    trading system. This will both advance specific American trade
    interests, and contribute to our larger goal of a more secure peace in
    the next century.
        This task is the last great step in the process which began with
    formation of the GATT and continued with the admission of Germany and
    Japan: the creation of a world-wide trading system which ensures
    respect for fairness, transparency and the rule of law. Specifically,
    we are pursuing the accession of 30 economies to the World Trade
    Organization: Latvia, whose accession is complete and awaiting
    ratification; and Albania, Algeria, Andorra, Armenia, Azerbaijan,
    Belarus, Cambodia, China, Croatia, Estonia, Former Yugoslav Republic of
    Macedonia, Georgia, Jordan, Kazakstan, Laos, Lithuania, Moldova, Nepal,
    Oman, Russia, Samoa, Saudi Arabia, Seychelles, Sudan, Taiwan, Tonga,
    Ukraine, Uzbekistan, Vanuatu and Vietnam. In all cases we seek a
    commercially meaningful accession with the greatest possible
    commitments to all WTO agreements.
        As you can see, two groups of economies make up the bulk of these
    accessions: a set of Middle Eastern nations on one hand, and China,
    Russia and 16 other nations in transition from communist planning
    systems to the market. Their entry will make membership in the trading
    system nearly universal; and the accession of the transition economies
    will be a fundamentally important step in their domestic reforms as
    well. This would remove large distortions in world markets,
    dramatically enhance market access for American producers, and bolster
    international stability by giving these nations a greater stake in
    world prosperity beyond their borders.
        Let me say a few words in particular about the transition
    economies, because these are the largest nations and largest traders
    outside the system today. To support rather than undermine both
    domestic reform in these economies and the rules of the trading system,
    these countries must be brought into the WTO on commercially meaningful
    terms. The result must be enforceable commitments to open markets in
    goods, services and agricultural products; transparent, non-
    discriminatory regulatory systems; and effective national treatment at
    the border and in the domestic economy.
        Central European countries like Poland, Hungary and the Czech
    Republic have succeeded, and their experience shows that WTO membership
    has assisted their domestic economic reform policies. The most recent
    successful WTO applicants, Latvia and Kyrgyzstan, have had the same
    experience.
        In the months to come, we will negotiate intensely with all
    acceding economies, including China--the largest prospective WTO
    member. We made significant progress with China in the months leading
    up to the visit of Premier Zhu Rongji in all our areas of concern. This
    includes:
         Agriculture--Agreement to apply scientific sanitary and
    phytosanitary standards; major tariff cuts in meats, dairy, fruits and
    nuts, and bulk commodities (examples include reducing the beef tariff
    from 45% to 12% by 2004, and reducing tariffs on soybeans to 3%); the
    establishment of liberal tariff-rate quotas in all commodities of
    importance to farm exporters, including wheat, rice, barley, soybeans,
    corn and others; agreement not to provide export subsidies; and rapid
    phase-ins of concessions, with significant benefits immediately on
    accession, all benefits phased in within five years, and all tariffs
    bound.
         Industrial Products--Provision of full trading rights and
    distribution rights; major tariff reductions in all areas, from 24.6%
    average in 1997 to 9.44%, with the average tariff for our priority
    products reaching 7.1% (for example, the tariff on autos will fall from
    80-100% to 25% within five years, and tariffs on construction equipment
    will fall by half); Commitment to meet Information Technology Agreement
    phaseouts of tariffs on high-tech goods by 2004; and abolition of all
    quotas by 2005.
         Services--Grandfathering of all current licenses,
    contracts and shareholder agreements; participation in the Basic
    Telecommunications Agreement and the Financial Services Agreement; very
    broad distribution commitments, significant liberalization of the
    insurance sector; opening of the telecommunications sector to foreign
    investment for the first time; and other significant commitments in
    these sectors along with banking, audiovisual, travel and tourism, the
    professions, and others.
         Protocol--China must also complete negotiations on a
    Protocol covering rules with respect to safeguards, dumping, investment
    restrictions and other matters. The commitments addressed in the
    Protocol must meet our concerns, and must also be acceptable to other
    WTO members. Here, we have secured agreement to continue use of ``non-
    market economy'' methodology for anti-dumping cases; bans on investment
    restrictions including offsets, technology transfer requirements, local
    content requirements and others; product-specific safeguards; measures
    to address unique features of the Chinese economy such as the high
    involvement of the government in state-owned enterprises and state-
    invested enterprises; and others.
        The negotiations are far from complete, however. Issues remain to
    be resolved in three service sectors (banking, securities and
    audiovisual), and we continue to discuss both substantive issues and
    duration periods on the Protocol. China must also conclude bilateral
    market access agreements with other trading partners, and complete
    significant multilateral work at Geneva before accession. We will not
    accept anything less than an accession which is commercially meaningful
    in all these areas, and will consult with Congress closely as
    negotiations proceed, building upon the 55 separate China briefing
    sessions we have held with Committees of jurisdiction since 1997 and
    the many individual meetings Ambassador Barshefsky and I have had with
    Members.
        Likewise, at the most recent summit with Russia (September 1998),
    President Yeltsin agreed to work to intensify Russia's WTO accession
    efforts. Russia's current economic difficulties clearly present
    challenges and Russian Cabinet reshuffling has slowed the process, but
    we will continue to consult with the Russians toward a commercially
    viable accession package.

                          IV. The 21st-Century Economy

        Fourth, trade policy will help lay the foundation for the 21st-
    century economy by ensuring that the trading system is compatible with
    rapid advances in civilian science and technology.
        In medicine, environmental protection, agriculture, entertainment,
    transportation, materials science, information and more, science is
    advancing at extraordinary speed. This offers the world tremendous
    potential to increase wealth, raise productivity, improve health care,
    reduce hunger, protect the environment and promote education. These are
    also areas in which the United States has a significant comparative
    advantage.
        Under President Clinton, our trade policy has made high technology
    a strategic priority. Consistent with national security, we have aimed
    to ease the development and commercialization of new technologies, and
    ensure strong incentives for scientific and technological progress. We
    have negotiated far-reaching new agreements in sectors like computers,
    semiconductors, information technologies and many other areas. This
    work continues in multilateral, sectoral and regional negotiations.
        In the multilateral system, the rapid advance of technology
    requires us to improve the trading system's institutions and
    negotiating methods. In a world where successive generations of new
    products arise in a matter of months, and both information and money
    move instantaneously, we can no longer take seven years to finish a
    negotiating Round, or let decades pass between identifying and acting
    on trade barriers. We will have to move faster and more efficiently,
    which is a significant reason for the President's call for an
    accelerated Round.
        We must also ensure that trade policy, both in the WTO and in our
    regional and bilateral negotiations, helps ensure that we can take
    advantage of our comparative advantage in knowledge industries and
    other new technologies. Three broad issues cut across many sectors:
        Intellectual Property Rights--Our success in this field over the
    past decade owes a great deal to the work of Congress, both in the
    Trade Act of 1988 with its creation of ``Special 301,'' and on the
    Uruguay Round. Today, the vast majority of our trading partners have
    passed modern intellectual property laws and are improving levels of
    enforcement. In this area, we will spend a great deal of time ensuring
    that all WTO members comply with their obligation to introduce full
    intellectual property protection by January 1, 2000. (For countries,
    like China, which are not WTO members, we will vigorously monitor
    compliance with bilateral agreements.)
        We have also launched campaigns against worldwide piracy of new
    optical media technologies, and against end-user piracy of software.
    These issues are integral parts of our regional negotiating agenda in
    Asia, Latin America, Europe, Africa and the Middle East. Looking ahead,
    we must extend protection of intellectual property rights beyond basic
    laws and enforcement to protect new technologies like genetically
    engineered plant varieties.
        Global Electronic Commerce--In accordance with the President's
    Global Electronic Commerce initiative, USTR seeks to preserve
    electronic trade over the Internet as duty-free. At the last WTO
    Ministerial Conference, in May of 1998, we won agreement to a
    ``standstill'' for tariffs on electronic transmissions. As I noted
    earlier, we will seek to extend that agreement this year. Likewise, in
    our negotiations toward the Free Trade Area of the Americas, at APEC
    and in the Transatlantic Economic Partnership, we have created special
    committees to advise us on ways to ensure all participants can take
    maximum advantage of electronic commerce.
        Biotechnology--A third top priority for us in this area is
    biotechnology. Among the chief sources of innovation in this field are
    American agriculture and medicine. USTR will seek to ensure that
    pharmaceutical companies, farmers and ranchers can use safe,
    scientifically proven techniques like biotechnology to make agriculture
    both more productive and friendly to the environment, without fear of
    encountering trade discrimination. This is a priority for us in the
    Transatlantic Economic Partnership negotiations and in developing our
    agenda for future WTO negotiations.
        Sectoral--We also have an active sectoral high-tech agenda. This
    includes, for example, the ITA II agreement I discussed earlier. We are
    also working closely with our civil aircraft industry to ensure its
    future and combat foreign, particularly European, subsidies and other
    unfair practices; and with the semiconductor industry on the
    appropriate next steps for the international semiconductor agreement.
    This work extends into many other fields.

                           V. Rising Quality of Life

        Fifth, U.S. trade policy seeks to ensure that worldwide as in the
    United States, trade and growth go together with a rising quality of
    life, including setting high standards of environmental protection, the
    observance of core labor standards, and high levels of consumer
    protection.
        As in our domestic economy, we regard environmental quality and
    protections for workers as essential parts of economic policy. Trade
    policy has an important role to play, in coordination with our efforts
    in other fora, to ensure growing respect for internationally recognized
    core labor standards and sustainable development worldwide.

    1. Trade and the Environment

        Our Administration believes that prosperity through open trade and
    the protection of health, safety and the environment need not conflict,
    and should be mutually supportive. This is the case in our domestic
    economy, where in the past three decades our GDP has risen in real
    terms from $3.7 to $8.5 trillion--while our percentage of fishable and
    swimmable rivers and streams doubled, the number of citizens living in
    cities with unhealthy air fell by half, and many endangered or
    threatened species, including the bald eagle, the symbol of American
    pride, are recovering.
        The Preamble of the WTO recognizes this in the international
    setting, stating that sustainable development is a central objective of
    its work. Where there are potential conflicts, we should strengthen our
    ability to resolve them in a manner that protects the environment,
    health and safety and does not undermine the trading system. This
    includes working to ensure that the proper expertise is brought to bear
    on complex technical and scientific issues, particularly those with
    environmental, health and safety dimensions.
        In many cases elimination of trade barriers will also contribute to
    a cleaner environment and the conservation of natural resources. For
    example, this can help countries gain access to cost-effective
    equipment and technology. APEC's work toward an agreement to liberalize
    trade in environmental goods and services, part of which has now moved
    to the WTO, can help countries monitor, clean up and prevent pollution,
    and ensure clean air and water. Likewise, the APEC initiative on energy
    equipment and services can promote rapid dissemination of efficient
    power technologies, thus allowing production of power with reduced
    carbon emissions and contributing to international efforts to address
    climate change.
        At the same time, as the trading system ensures that members avoid
    using environmental standards as disguised trade barriers, in
    eliminating barriers to trade we must not compromise on the achievement
    and maintenance of high levels of environmental, health and safety
    protection. And the system must work together with multilateral
    environmental institutions.
        We continue to support the effective implementation of the North
    American Agreement on Environmental Cooperation in conjunction with the
    NAFTA. Cooperative activities that have occurred as a result of this
    agreement have improved environmental protection in a number of
    different areas--for example, an agreement on the conservation of North
    American birds; the creation of a North American Pollutant Release
    Inventory; an agreement on regional action plans for the phase-out or
    sound management of toxic substances, including DDT, chlordane, PCBs
    and mercury; and the creation of a trilateral working group that has
    improved the enforcement of environmental protection laws. Benefits
    have also resulted from the implementation of the Border Environment
    Cooperative Commission (BECC) which was also entered into in
    conjunction with the NAFTA. The BECC has fifteen environmental
    infrastructure projects under construction today, funded in part by the
    North American Development Bank, including the first wastewater
    treatment plants in Juarez.

    2. Trade and Core Labor Standards

        Likewise, the trade system must help to assure the dignity and
    safety of workers. Here again, we can draw lessons from our experience
    at home, where since 1970, as manufacturing production doubled, the
    number of workplace deaths fell 60%. Our efforts here include seeking
    closer cooperation between the WTO and the International Labor
    Organization, bolstering ILO capabilities to address exploitative child
    labor and other violations of internationally recognized labor rights
    as well as ensuring safe and healthy workplaces, and working with
    individual trade partners to advance our goals.
        At the Singapore WTO Ministerial Conference in 1996, the WTO for
    the first time recognized the importance of labor standards and
    cooperative work with the International Labor Organization, while
    clearly separating advocacy of labor rights from protectionist trade
    policies. We wish to build on this to ensure that the trading system
    works more effectively with the International Labor Organization, with
    businesses and with citizen activists to ensure observance of
    internationally agreed core labor standards--banning forced labor and
    exploitive child labor, guaranteeing the freedom to associate and
    bargain collectively and eliminating discrimination in the workplace.
        We have thus proposed in Geneva that the WTO establish a forward
    work-program to address trade issues related to labor. We also have
    raised labor standards in country policy reviews under the Trade Policy
    Review Mechanism. In these reviews each WTO member's trade regime is
    examined, and other members are provided an opportunity to raise
    questions. We have used this opportunity, for example in the recent
    Swaziland review, to seek clarifications about labor practices that we
    believe are inadequate.
        To bolster these efforts, the President recently announced a $25
    million program to help the ILO work with developing countries to put
    in place basic labor protections, safe workplaces and guarantee worker
    rights and enforce their own laws so that workers everywhere can enjoy
    the benefits of a strong social safety net. (The U.S. has already
    funded ILO child labor programs in Bangladesh, Thailand, the
    Philippines, Africa, and Brazil.) These are fundamental human rights
    and common concerns, and trade policy has a place in addressing them.
        We are also taking steps in a number of other areas directly
    related to trade policy. The Administration has directed the Customs
    Service to step up its efforts to ensure that items made by forced or
    indentured child labor are not imported into the United States. USTR is
    enforcing provisions of existing law that impose penalties for clear
    violations of worker rights. For example, we partially removed GSP
    trade preferences from Pakistan over child labor concerns. At the same
    time, however, the Administration has worked through the Labor
    Department to develop long-term solutions to the problem, by addressing
    specific Pakistani industries. As a result, 7,000 children have been
    removed from jobs stitching soccer balls and 30,000 children from jobs
    knotting carpets.
        Likewise, we are finding ways to address core labor standards as we
    advance our trade policy goals. The North American Agreement on Labor
    Cooperation under NAFTA is one example. Another is our recent textile
    agreement with Cambodia, which includes provisions requiring Cambodia
    to improve the enforcement of its labor laws in the garments sector.

                         VI. Advancing American Values

        We will seek to advance basic American values and concepts of good
    governance, by making the institutions of trade more transparent,
    accessible and responsive to citizens.
        The President has said that, as trade grows, the rules of trade do
    more to ensure that markets are open to our goods and services. The
    trading system coordinates more fully with environmental, labor and
    financial institutions, and the need for transparency, accessibility
    and responsiveness grow. This is natural and a development we both
    support and promote.
        One principal forum here is the WTO, where we are seeking
    agreements on more rapid release of documents, ensuring that citizens
    and citizen organizations can file amicus briefs in dispute settlement
    proceedings, and that dispute settlement proceedings be open to public
    observers. In the interim, President Clinton has made a standing offer
    to open any dispute panel involving the United States to the public, if
    our dispute partner agrees.
        A second forum is the FTAA negotiations, in which--for the first
    time in any trade negotiation--we have created a Civil Society
    Committee to give business associations, labor unions, environmental
    groups, student associations, consumer representatives and others a
    formal means of conveying concerns and ideas to all of the governments
    involved in the talks.
        A third is our encouragement of new Transatlantic Dialogues with
    the European Union for consumers, labor and environment as part of the
    Transatlantic Economic Partnership. Through this effort we are
    promoting our shared values with Europe in the activities and
    negotiations we are undertaking as part of the TEP and multilaterally.

    FY 2000 Budget Level

        Over the past six years, as I noted earlier, we have negotiated
    over 270 trade agreements since 1992, and our volume of bilateral trade
    has expanded by nearly three quarters of a trillion dollars. This has
    inevitably meant a heavier workload for the USTR. Our budget request
    will allow us to meet this workload while protecting our tradition as a
    small and efficient agency. The FY 2000 budget authorization request
    will support USTR's FY 2000 work agenda. This request represents the
    right resource level for allowing USTR to implement the ambitious work
    agenda I have outlined today.
        For FY 2000, the budget request proposes 185 FTEs and $26,501,000
    in new budget authority to support this trade agenda. This represents a
    net increase of $1.8 million and 7 career FTEs over FY 1999. We would
    use the $1.8 million increase in five targeted areas:
         $1.2 million to fund the expected cost of legislated
    employee pay raises, as well as non-pay inflation in areas like rents,
    utilities and travel;
         $400,000 for 7 new career positions in areas with growing
    workloads. Six of the seven new positions would be Trade Specialists
    and one would be a support position. Of these positions: 2 each are in
    USTR's Agriculture and Africa units; and one each are in Japan, China,
    and Western Hemisphere offices;
         $400,000 for negotiator travel to meet rising number of
    trips to China, Japan, Africa and other distant and costly negotiating
    sites;
         $225,000 for security-related projects in USTR's Geneva
    and Washington offices to guard against the threat of terrorism, and to
    protect sensitive and classified information from unauthorized access;
    and $100,000 is to meet a growing demand for interpretation and
    translation services for use in negotiations, enforcement proceedings
    and reviewing country proposals.
        This represents a total budget increase of $2.225 million, which is
    partially offset in FY 2000 by a reduction of $498,000 in funding for
    Y2K improvements made available in FY 1999 on a one-time basis under
    the Omnibus Consolidated and Emergency Supplemental Appropriations Act
    (P.L. 105-277). Thus the net increase is $1.8 million.
        Mr. Chairman, USTR needs every penny of the $26.5 million we are
    proposing in the FY 2000 budget authorization request. We are keenly
    aware of our responsibilities for first attempting to absorb the
    requested cost increases by reordering work priorities, cutting
    administrative overhead, improving management or otherwise economizing.
        Yet, USTR has virtually no capacity to absorb higher costs in FY
    2000. Two-thirds of the USTR appropriation supports the salaries and
    benefits of employees, and the remaining one-third pays for building
    rent, utilities, security, travel to negotiating sites and other direct
    day-to-day operating expenses. Unlike larger Federal agencies, we do
    not have the option of cutting back in categories like grants and
    contracts, nor do we have the option of trimming layers of management
    or administration. We have already accomplished an enormous amount of
    ``belt-tightening'' in the last 6 years, and any further budget savings
    will come at the expense of our core negotiation, policy coordination
    and enforcement programs.
        In fact, between FY 1991 and FY 1997, USTR's appropriations for
    basic operations rose by less than $1 million, roughly 4.4 percent over
    the 6-year period, or about seven-tenths of one percent annually. Over
    the 6 years, we had to absorb about $400,000 a year, just to meet the
    cost of legislated employee pay raises and rising costs in non-pay
    categories like utilities, office rent, airfares and per diem charges.
    We absorbed a cumulative total of nearly $2.5 million through a series
    of financial management improvements and cuts in administrative
    overhead. Let me give you some examples:
         We rescinded authority for Assistant USTRs to approve
    their own travel, and instituted a rigorous review process that
    requires that the Chief of Staff approve every single trip. Such
    individual attention has not only reduced the number of trips, but the
    number of persons going on the same trip;
         We mandated use of frequent flyer coupons in order to
    increase the number of trips with the same amount of funds. In the last
    five years, we have funded 126 trips with bonus coupons, saving the
    Government $275,000 in the cost of airplane tickets;
         We also established policies that required all employees
    to fly in economy class, unless the trip exceeds 12 hours of flying
    time--a more rigid rule than the government wide standard;
         We reduced the amount of office space we used in the
    Geneva Office, cutting rental costs by several hundred thousand
    dollars;
         We reduced our computer staff by more than half, saving
    more than $1 million in payroll expenses, while at the same time
    upgrading the computer network and installing an innovative system for
    receiving classified State Department cables, which reduced the time it
    takes our negotiators to read cables and the expense of transporting
    and coping hard copy versions of the cables.
        These are just some of the ways that USTR has economized over the
    past several years. These actions have not only resulted in an agency
    that is ``lean and mean'' by any measure, but one that has been cut to
    the quick, which finds itself unable to absorb the kind of budget needs
    presented in the USTR's FY 2000 budget request. For this reason, we
    need the support of the Committee, and the Congress, in providing the
    full $26.5 million and 185 FTEs in FY 2000.
        One last point. USTR is a small agency. But I believe we have some
    of America's finest public servants. Our staff is talented, talented,
    works long hours, and delivers results for the America people. On their
    behalf, I am proud to present this budget to the Subcommittee today.

                                   Conclusion

        In conclusion, Mr. Chairman, much has changed in the international
    economy in the fifty-one years since the United States led 23 countries
    in creation of the GATT. Our national interest in economic events
    beyond our borders has grown, our people have found new opportunities
    and new challenges in trade, and many new nations have become active in
    trade.
        We have developed an agenda that will cement the progress we have
    made, and take it forward into a new century. I am very proud to be
    associated with the staff of the Office of the U.S. Trade
    Representative in this effort. The work ahead is challenging. But I can
    assure you and the members of the Subcommittee that we are ready for
    these challenges. With the approval of our appropriation request and
    the continued support of the Subcommittee, I am confident that we can
    continue successfully to carry out our mission and meet the challenges
    before us.
        This concludes my formal statement. I would be pleased to answer
    any questions you may have.
        Thank you very much, Mr. Chairman and Members of the Subcommittee.

        Chairman Crane. Thank you, Mr. Fisher.
        Mr. Kelly.

           STATEMENT OF HON. RAYMOND W. KELLY, COMMISSIONER,
                          U.S. CUSTOMS SERVICE

        Mr. Kelly. Thank you, Mr. Chairman, Mr. Levin, other
    Members of the Committee.
        It is a privilege to appear before the Subcommittee today
    to present the U.S. Customs Services recent accomplishments,
    future plans, and fiscal year 2000 budget request. I have a
    prepared statement, which I asked to be included in the record
    in its entirety.
        Chairman Crane. Without objection, so ordered.
        Mr. Kelly. Before I begin, I want to thank the Members
    gathered here for the strong support you have given to customs,
    trade, and enforcement activities.
        Customs is the oldest U.S. law enforcement agency, one with
    a proud history and an extraordinary record of achievement. Our
    mission is not an easy one, serving, as we do, as the front
    line of defense at our Nation's borders and as the guardian of
    our systems of lawful international trade, the lifeblood of our
    economy. But we continue to find ways to rise to the challenges
    we face every day, using the resources that we have been given
    to the best of our ability.
        Nineteen ninety-eight was an outstanding year for Customs.
    We seized more heroin, cocaine, and marijuana than any other
    law enforcement agency--over 1.1 million pounds. That is more
    than a million pounds of drugs that won't find its way onto our
    streets or into our schools and communities.
        Our trade activity was no less prolific. Customs processed
    19.7 million trade entries, 1.8 million more than in 1997, and
    a total of $955 billion in goods. We maintained the total trade
    compliance rate of 81 percent and a compliance rate for imports
    in primary focus industries of 84 percent. And we are
    continuing to try to improve this rate. Customs processed
    almost 460 million passengers and pedestrians, 13.1 million
    more than 1997. We also moved 135 million conveyances through
    our borders and port of entry, 4.4 million more than the
    previous year.
        While 1998 was an extraordinary year for Customs, we are by
    no means resting on our many positive results. As we look
    toward the future, Customs has laid out an ambitious agenda to
    meet the challenges of global trade. One of our most critical
    issues in this regard is trade automation. Investments in
    systems modernization remain a top priority for Customs.
        On the enforcement side, our successes last year ranged
    from high-profile narcotics seizures to major money laundering
    stings, to the successful dismantling of Internet child
    pornography ring. We continue to build on the success of
    Operation Brass Ring, our major counter-smuggling initiative of
    1998.
        Customs set a new precedent for interdiction efforts with
    this operation, which utilized the many innovative tactics
    devised by our field personnel to catch drug smugglers. Thanks
    to our success with Brass Ring, we are headed for another
    record year for narcotics seizures in 1999. In May 1998,
    Customs concluded Operation Casablanca, the largest, most
    comprehensive drug money laundering case in the history of U.S.
    law enforcement. The investigation spanned 5 years, involved
    the work and dedication of more than 200 Federal agents,
    resulted in the arrest of more than 168 individuals, the
    indictment of three Mexican banks, and the seizure of large
    quantities of drugs and laundered money.
        Customs has also extended its crime fighting expertise into
    the world of cybercrime. Operation Cheshire Cat led Customs
    agents via the World Wide Web into the diabolical world of
    international child pornography and sexual exploitation. What
    we uncovered in Cheshire Cat was an international alliance of
    approximately 200 sexual predators operating in 47 countries.
    Thirty-five search warrants were executed, resulting in 13
    arrests in the United States, and more arrests are currently
    pending.
        I mentioned just a few of the many tough, challenging, and
    successful investigations our agents carried out last year. To
    describe them would take weeks of hearing.
        I provide these examples to highlight the danger diversity
    and complexity involved in the investigations Customs personnel
    handle day in and day out. As proud as we are of these
    accomplishments, we continue to work on areas within our
    organization that need to be strengthened.
        We have developed a document referred to as Action Plan
    1999. It identifies the actions under way to improve Customs
    management and procedures in areas ranging from integrity to
    training, to automation.
        I know many of you may already have copies of the plan, but
    I certainly can make new versions available for anyone who
    needs them.
        One of the key priorities in our action plan is the
    intensive review of our passenger processing services. As many
    of you know, Customs carries out personal searches on a small
    percentage of the over 70-million airline passengers we process
    each year. When allegations arose that Customs was engaged in
    racial bias in the selection of travelers for personal
    searches, we responded rapidly. Just last week, we announced
    the formation of an independent commission to review our
    passenger search procedures. The Customs Personnel Search
    Review Commission, made up of prominent public leaders in race
    relations and government affairs, will have unfettered access
    to Customs personnel and facilities. My sincere hope that the
    Commission will air this issue completely. There is simply no
    place for bias or even a perception of bias in the Customs
    service.
        I have offered you a sense of Customs' recent past and what
    is happening in our present. Now, let me share with you a sense
    of our future. One of the most important issues for the Customs
    Service, as I mentioned, is the movement toward modernization
    of our automated system. Continued reliance on a 16-year-old
    automated commercial system, or ACS as we call it, poses great
    risks for Customs and for the U.S. trade. ACS simply cannot
    support the business of the future. Recognizing this early on,
    Congress passed the Customs Modernization Act in December 1993.
    The Mod Act compelled U.S. Customs to redesign its trade
    compliance process and the automation that supports it. We
    responded with the development of the concept of ACE, our
    commercial system for the 21st century, that is the Automated
    Commercial Environment.
        ACE will help us manage the dynamic growth in global trade.
    It will allow us to do business the way business does business.
    It will also support our enforcement efforts by enhancing
    compliance. Customs will have better intelligence on shipments
    arriving in our ports, allowing for more focus on high-risk
    groups and less time spent on costly time-consuming
    inspections. Customs wants to calm whatever doubts remain as to
    our ability to manage and maintain this system.
        We hired a Chief Information Officer with extensive
    experience in enterprise architecture and major systems
    acquisition. We reorganized the Office of Information
    Technology to improve accountability and program control. And
    we are seeking the funding to hire a prime contractor to help
    plan, implement and manage our information technology
    modernization efforts.
        The contractor will be responsible for developing the
    software programs that customs will adopt. We will also assume
    the risks involved in delivering ACE components and related
    software projects. Following the successful path of other
    agencies, we have also hired a congressionally-chartered,
    federally-funded research and development center, MITRE, as it
    is called. The center will help guide every phase of systems
    acquisition from management of the prime contractor to systems
    implementation and performance review. We should have this
    center on board in May. All of these actions reinforce the
    commitment Customs has made to getting ACE done and getting it
    done right.
        Our biggest challenge now is to keep our current ACS system
    operational until ACE comes on line. Nothing less than the
    unimpeded flow of trade is at stake. I am confident that
    Customs has the support, the experience, and the safeguards in
    place that we would need to now move forward with ACE. With the
    continued assistance of the Congress, Customs and the Trade
    will get the system we both want and the system we both need.
        That concludes my remarks, Mr. Chairman.
        [The prepared statement follows:]

    Statement of Hon. Raymond W. Kelly, Commissioner, U.S. Customs Service

        Good morning, Mr. Chairman and Members of the Subcommittee. It is a
    privilege to appear before the Subcommittee today to present to you our
    recent accomplishments, future plans, and the fiscal year 2000 budget
    request. Before I begin though, I would like to personally thank you
    for the strong support you have continued to provide to Customs. It has
    been a challenging year for us and I am proud to play a part in the
    effort we share to protect the Nation's borders and ensure the Nation's
    prosperity.
        Customs is an agency with a long and rich history, many proud
    traditions, and an extraordinary record of achievement. We recognize
    that our mission is not an easy one-standing as the front line of
    defense at the Nation's borders--but we continue to find ways to rise
    to the challenges that we face every day.

                                Accomplishments

    Operation Casablanca

        In May 1998, Customs concluded Operation Casablanca, the largest,
    most comprehensive drug money laundering case in the history of U.S.
    law enforcement. This 3-year investigation conducted by our Los Angeles
    office exposed a relationship between a large number of Mexican banks
    and the Cali and Juarez drug cartels. This relationship allowed the
    drug cartels to launder their U.S. drug proceeds through accounts
    opened by corrupt bankers.
        The case was made possible because of the extraordinary undercover
    work performed by Customs special agents. They posed as money couriers
    and Cali Cartel operatives. They were so convincing that members of the
    Juarez and Cali Cartels introduced them to corrupt Mexican and
    Venezuelan bankers, who, in turn, introduced the undercover agents to
    other corrupt bankers. Members of the Juarez Cartel were so confident
    in the undercover special agents that they introduced the agents to
    high level members of the Juarez Cartel.
        When it was over, 26 Mexican banking officials from 12 commercial
    Mexican banks were indicted on charges of money laundering. Three
    Mexican banks, Confia, Banca Serfin, and Bancomer, and five associates
    of Venezuelan banks, were also indicted on money laundering charges.
    Through the course of the investigation, Customs special agents
    arrested 168 people and seized over $100 million. In addition, Customs
    special agents seized over four tons of marijuana and two tons of
    cocaine from both cartels.

    Operation Cheshire Cat

        Operation Cheshire Cat, a Customs-initiated worldwide investigation
    into the diabolical world of international child pornography and child
    sexual exploitation, exposed to the world the dark side of the
    Internet--a side that is invasive, insidious and incalculable. This one
    investigative action uncovered an international alliance of
    approximately 200 sexual predators in 47 countries including Australia,
    Great Britain and the United States.
        Before Operation Cheshire Cat, many people in the U.S. had a
    tendency to think of child pornography and child sexual exploitation as
    random acts involving nameless victims in some places far away from
    where they live. Operation Cheshire Cat proved those thoughts to be
    false. Forty-one search warrants were executed in big cities and small
    towns throughout the U.S. To date, 16 suspects have been arrested and
    more are anticipated. Four suspects committed suicide prior to arrest.
    One of the most gratifying results of this operation was that 18
    children who had been sexually molested by strangers, neighbors and
    even their own relatives, were located and referred to social services
    for counseling. The ring of sexual predators identified during
    Operation Cheshire Cat is indicative of the level of computer expertise
    possessed by criminals encountered by Customs in cyberspace. This
    particular ring utilized advanced communication methods and even an
    encryption technology, developed by the KGB for use during the Cold
    War, to distribute its morally abhorrent smut. Such expertise and
    technology have greatly complicated law enforcement's activity in this
    area.

    Operation Brass Ring

        Operation Brass Ring was a 180-day enforcement effort
    intended to dramatically increase drug seizures and the
    outbound illicit proceeds generated from the narcotics business
    at high-risk ports of entry. Enforcement action focused on the
    use of innovative, unpredictable and random enforcement
    operations at air, sea and land border ports of entry. It was a
    multi-faceted partnership effort that included inspectors,
    special agents, and union representatives. Unique in Customs
    enforcement history, Operation Brass Ring was field-based and
    field-driven, with emphasis on local solutions to local
    problems and sharing of best practices nationwide. Although 42
    high-risk ports were initially required to participate in
    Operation Brass Ring, ultimately 129 ports of entry submitted
    and carried out action plans as part of this historic
    operation.
        As a result of Operation Brass Ring, total amounts of
    cocaine, marijuana and heroin seized from February 1 to July
    31, 1998, increased by 45 percent over the same time period as
    the last year. The amount of marijuana seized increased by 47
    percent, the amount of cocaine increased by 32 percent and the
    amount of heroin increased by 13 percent. Controlled deliveries
    skyrocketed by an incredible 100 percent during the same time
    period. The controlled deliveries resulted in an 82 percent
    increase in arrests. Outbound currency seizures experienced a
    59 percent increase in the amount of currency seized compared
    to the same time period in FY 1997.
        Operation Brass Ring seizures totaled 548,262 pounds of
    marijuana, 72,535 pounds of cocaine, and 1,280 pounds of
    heroin. Customs also seized $40.6 million in outbound
    undeclared currency and conducted 220 controlled deliveries,
    resulting in 414 arrests. Customs will continue to build upon
    the success of this operation by capitalizing on the creativity
    and innovation that Operation Brass Ring engendered.
        Building upon the success of Operation Brass Ring, Customs
    established the Joint Narcotics Interdiction Plan (JNIP). The
    goal of JNIP is to maintain the momentum of Operation Brass
    Ring and to continue the increase of narcotics and currency
    seized and controlled deliveries conducted. The long term goal
    of this initiative is to achieve a 20 percent increase in these
    areas over the next 4 years. This approach supports the Office
    of National Drug Control Policy drug interdiction plan.
        The JNIP requires each Special-Agent-in-Charge (SAIC) and
    Customs Management Center (CMC) to submit a comprehensive
    narcotics interdiction plan and will include a plan for each
    Resident-Agent-in-Charge and Port Director in their area of
    responsibility. The JNIP will be agreed to and signed by each
    SAIC and CMC Director and will have included the National
    Treasury Employees Union (NTEU) in the formulation of all plans
    within their respective areas. Field visits and quarterly
    reports will be used to review the progress of the JNIP.

    Financial Management

        The General Accounting Office (GAO) removed Customs from
    its list of high-risk federal government programs this year
    because of the significant improvements made in our financial
    management. Customs, in fact, was the only agency to be removed
    from the list this year.
        Customs demonstrated that it had addressed the weaknesses
    that originally contributed to its designation as a high-risk
    organization. These weaknesses involved revenue and trade
    compliance issues; asset management and control issues; core
    financial system issues; and computer security, access, and
    development issues.
        The corrective actions which influenced the decision to
    remove the high-risk designation include: (1) receiving
    unqualified opinions on financial statements for the past two
    fiscal years; (2) statistically sampling commercial
    importations at ports of entry to better focus our enforcement
    efforts by projecting the level of the trade community's
    compliance with trade laws and associated loss of revenue; (3)
    improving the ability to detect and prevent duplicate or
    excessive drawback claims by enhancing the Automated Commercial
    System to identify those drawback claims exceeding the total
    amount of duty and tax paid on related import entries; and (4)
    aggressively pursuing collection of delinquent receivables,
    resulting in collections of over $37 million. Customs currently
    has several ongoing initiatives which will continue to improve
    Customs financial management.

    Performance Goals Met or Exceeded

        Customs had an outstanding year in narcotics enforcement
    results and in currency and monetary instrument seizures. It
    also continued to make progress in some key trade areas. This
    is even more significant since the results achieved were made
    while processing 19.7 million entries, worth an estimated $955
    billion. This is more than 1.8 million entries above last
    fiscal year. Customs also processed almost 460 million
    passengers and pedestrians, 13.1 million more than last fiscal
    year, and 135 million conveyances, 4.4 million more than last
    fiscal year.
        Seizures of heroin, cocaine, and marijuana were above
    expectations. We seized approximately 1.12 million pounds of
    these three narcotics which exceeded our goal by 167,000
    pounds. These impressive results were, in part, the result of
    Operation Brass Ring. Overall, Customs accounted for a record
    number of seizures--more than 1.3 million pounds of all
    narcotics or controlled substances. As in past years, Customs
    continues to seize more illegal drugs than any other federal,
    state, or local law enforcement agency.
        Customs also exceeded its goal for seizures of currency,
    bank accounts, and other monetary instruments involving
    financial investigations. It ended the year with seizures
    totaling $362.9 million or 166 percent above projections. The
    culmination of Operation Casablanca contributed to this
    significant total with the seizure of over $100 million from
    Mexican and U.S. bank accounts. Overall, Customs seized or
    participated in the seizure of $426 million in currency and
    other monetary instruments. Of that amount, $68.4 million was
    outbound undeclared currency seized at ports as it was being
    smuggled out of the U.S. in passenger baggage, vehicles, and
    cargo.
        In the area of Trade Compliance, Customs successfully
    maintained a high compliance rate, and refined the analysis by
    which noncompliance is detected and addressed. Recognizing that
    all discrepancies are not equal, Customs convened two task
    forces, one internal and one in cooperation with the trade
    community. These groups determined the types of discrepancies
    to be considered materially significant, as opposed to
    ``letter-of-the-law'' discrepancies. The overall import
    compliance rate was maintained at 81 percent, while the
    compliance rate for imports in primary focus industries
    increased from 83 percent to 84 percent. Considering only the
    materially significant discrepancies, the compliance rate was
    89 percent overall, and 90 percent for imports in the primary
    focus industries.
        Customs has also undertaken a new initiative called ``Focus
    On Non-Compliance'' (FONC). This initiative analyzes resource
    expenditures as compared to discrepancies found, and has
    allowed Customs to see which efforts are paying off and which
    are not. This improved focus and other improvements have
    resulted in Customs detecting more noncompliance. Becoming more
    effective at finding noncompliance has the effect of lowering
    measured compliance levels, but results in improved compliance
    in the long term. These refinements make year-to-year
    comparisons of performance difficult at this time, but the
    targeted improvements in compliance achieved by Customs are
    significant and well-supported.
        Finally, the air passengers' compliance rate increased
    slightly over last year to 97.7 percent. The rate of
    participation in the Advance Passenger Information System by
    the airlines improved to 75 percent, which is 10 percent above
    projected results.
        Customs attained these accomplishments with a remarkably
    high level of support from the trade community and the public.
    Operation Brass Ring had the support of the trade community,
    even though they knew that it would mean more intensive
    examinations of imported goods. In addition, customer surveys
    from the trade and the public reflect satisfaction with Customs
    performance.

                                Ambitious Agenda

        Despite all the areas in which Customs is achieving unprecedented
    success, we recognize there are areas of our organization which need to
    be strengthened. The following are some of the areas of responsibility
    we will be changing in order to produce a more disciplined and
    effective Customs Service.

    Integrity

        The Office of Internal Affairs (IA) currently has changes underway
    to protect and enhance the integrity of Customs through various
    initiatives, programs, and processes. Most recently, Customs as a
    whole, with IA as pivotal participants, commenced a ``strategy for
    action'' to reshape our capability to swiftly and effectively address
    integrity violations and other allegations of misconduct. Specifically,
    the process for reporting allegations of misconduct has been
    standardized and streamlined. In addition, the manner in which IA
    intakes, evaluates, and processes cases has been centralized at
    Headquarters. Specialized training for investigators and fact-finders
    has been developed and is currently being conducted. Further, we have
    established a servicewide Discipline Review Board to ensure fair and
    consistent imposition of discipline in misconduct cases. Finally, we
    are raising to an appropriate level in the Customs organization, the
    authority to propose, decide, and settle disciplinary actions; thus,
    increasing decision-making consistency and accountability.
        IA is also working to enhance an automated case management system
    and integration with the Disciplinary and Adverse Action Tracking
    System (DAATS). Systems improvements will enhance Customs efficiency in
    reporting and monitoring investigations and administrative inquiries.
    Moreover, systems enhancements will permit useful analysis of trends
    and timeliness and improve identification of corrective actions. The
    Office of Human Resources Management is making comparable changes in
    its DAATS, in tandem with IA. When completed, these changes will allow
    Customs to track all identified allegations against Customs employees,
    from initial allegation through investigation, resolution, and the
    appeals process, if invoked. These changes are a measured step to
    insure that aspects of timeliness and equity of treatment are
    components of both the public and employee view of the Customs
    discipline process. Design work is commencing on a replacement for the
    IA and Human Resources systems.
        Finally, we have recently announced the selection of a new
    Assistant Commissioner for IA who has proven expertise as a career
    prosecutor and strong credentials working in the Department of
    Justice's Public Integrity Sector. This new AC will give Customs the
    leadership and credibility necessary to ensure the most effective
    function of our IA operations.

    Self Inspection

        One of our highest priorities is to build management accountability
    and strengthen management oversight throughout Customs. We are
    redesigning our Management Inspection Program to establish a self-
    inspection framework for our managers and to increase the frequency of
    on-site inspections by our Management Inspections Division.
        Customs has redirected the efforts of our current Management
    Inspection Program from conducting comprehensive inspections primarily
    of our ports and Special-Agents-in-Charge offices every 5 to 6 years to
    the development of a self inspection program. We want managers at all
    levels to evaluate their success in managing, assessing, reporting, and
    certifying the state of their operations every six months. Our
    Management Inspections Division will conduct inspections every 18-24
    months to verify and validate the self-inspection results of every
    unit. The redesign is well underway. The first full self inspection by
    all units began in late March; inspections by our Management
    Inspections Division will begin in July.

    Management Accountability Model

        To ensure that the service Customs provides to the trade and the
    traveling public is delivered in a consistent and uniform manner, we
    have implemented a Management Accountability Model which strengthens
    the Headquarters and field organizations by establishing greater
    management accountability and oversight within the organization. As
    such, we have created clear and specific service standards for which we
    intend to hold our employees and managers accountable.
        Our initial goal in implementing this model was to clarify
    managers' roles and responsibilities, improve effectiveness, achieve
    operational uniformity and enhance levels of service. We have
    accomplished this by clearly defining roles and responsibilities for
    Headquarters, Customs Management Centers (CMC) and Port managers;
    strengthening the Headquarters and CMC organizations in order to
    clarify lines of authority and provide greater operational oversight;
    holding managers accountable for their actions and operations;
    establishing a national Management Inspection Program; and establishing
    uniformity in policy dissemination, implementation, execution and
    oversight.

    Realigning organizational authorities

        Because Customs aviation and marine programs have such
    complementary missions, it is critical that the activities of these two
    interdiction components be coordinated. This is essential to ensure the
    employment of a cohesive interdiction strategy necessary to fulfill the
    Customs mission in support of the National Drug Control Strategy. In
    recognition of this, Customs is consolidating its Aviation and Marine
    Programs. The intent of this consolidation is to provide a better
    integrated, more efficient, and robust interdiction capability.
    Beginning in calendar year 1999, the Aviation and Marine Program began
    implementing an ambitious strategy to improve its efforts to combat
    marine smuggling through the creation of a unified Air and Marine
    Interdiction Division. Currently comprised of 114 operational aircraft
    and 87 vessels, the mandate of Customs Air and Marine Interdiction
    Program is to disrupt the flow of drugs and other contraband into the
    United States by vessel and/or aircraft.
        This mission will be accomplished through implementation of a
    three-pronged, intelligence, interdiction and investigative approach.
    This approach is already in use for aviation interdiction and will now
    encompass the marine threat as well, which is complemented by our
    ongoing coordination with the U.S. Coast Guard.
        Customs aviation assets and personnel will continue to support the
    President's International Drug Control Strategy, Ambassadors and
    Country Teams by providing detection and monitoring, interceptor
    support and training for employment in Mexico, Central and South
    America, and the Caribbean.
        In order to enhance the effectiveness and efficiency of the Office
    of Investigations (OI), three new SES Headquarters positions (Executive
    Directors, East, Central and West) were recently created.
    Responsibilities include overseeing and directing the investigative
    activities of all domestic field offices (Special Agent in Charge
    Offices). Another recent change included the creation of another SES
    Headquarters position: Executive Director for Investigative Programs
    whose responsibilities will include overseeing all Headquarters
    functions (Fraud, Strategic, Cybersmuggling, Financial, Smuggling and
    Investigative Programs). OI realigned organizational authority by
    having these four positions, along with the Executive Director, Foreign
    Operations Division, report directly to the Deputy Assistant
    Commissioner, OI. This change in itself has strengthened oversight of
    and coordination between foreign and domestic offices.
        Recent changes within the Office of Intelligence and Communications
    include creating a new Communications Branch to administer and manage
    the Customs Wireless Communications Program from the Headquarters
    level; adding line authority over the Area Intelligence Units (AIUs),
    which currently report to SAIC Offices, and adding functional authority
    over the Intelligence Collection and Analysis Teams (ICATS).

    Training/professionalism

        Professionalism means knowing your job, performing it well, and
    with courtesy. Customs regularly reviews its operations and training
    programs to ensure that our officers maintain a high level of
    professionalism. We have developed Passenger Interview and Vehicle
    Inspection Technique training for our land border inspectors. This
    program reviews the skills necessary to identify high-risk vehicles and
    passengers, and officer safety issues. It also provides training on how
    to prevent search inquiries from becoming confrontational.
        Passenger Enforcement Rover Training is conducted for inspectors
    from all over the country at Miami and JFK Airports to improve
    observational analysis and interview skills. The training has been
    developed and is delivered by our most successful enforcement
    inspectors. This training has generated a number of significant
    seizures by the inspectors within days of returning to their home
    ports.
        National Outbound Airport Currency Interdiction Training is being
    conducted to improve outbound inspectors' exam and interview skills.
    The training was developed and is delivered by the outbound inspectors
    at JFK. Inspectors attending the training have subsequently been
    involved in significant seizures upon return to their home ports. One
    example is the seizure of more than $1.6 million in outbound currency
    at Chicago O'Hare Airport. In addition, land border inspectors from
    Ports of Entry across the country travel to the Port of Nogales, AZ, to
    receive training that will improve their targeting, examination, and
    interview skills.
        To draw upon outside expertise, Customs has contracted with the
    International Association of Chiefs of Police (IACP) to provide two
    major programs to our workforce. The IACP is presenting cultural
    awareness training to inspectors at the top 15 airports, where 84% of
    our passengers are processed. IACP has also begun training in decision-
    making for inspectors along the Southwest Border. This training
    enhances their ability to respond appropriately to violent, potentially
    life-threatening situations.
        In addition, Customs is establishing an Assistant Commissioner for
    Training and Development to provide leadership and direction to all
    Customs training programs and personnel engaged in training activities.
    All training and development activities, including technical training
    and support, specialty training, and supervisory and managerial
    development, will report to the Assistant Commissioner. The office will
    continue to rely on operating functions to ensure that mission-related
    training is provided, and on expertise outside of Customs to adapt the
    best practices for Customs use.

    Focus on the Recruitment of the Best

        Quality Recruitment provides an effective process for hiring the
    best qualified candidates. It includes utilizing multiple screening
    stages which rely upon objective, quantifiable data; using an
    electronic rather than paper process, and targeting an applicant pool
    with reasoning skills needed for the new millennium. The process, which
    is currently being used for entry level inspector, canine enforcement
    officer and pilot positions, will be implemented for agents in the near
    future.
        Quality Recruitment will result in the availability of a diverse
    applicant pool of highly qualified candidates for entry level
    inspector, canine enforcement positions, agent and pilot positions. As
    a result, the quality of the Customs workforce will increase, thereby
    better enabling Customs to accomplish its mission.
    Customer Service

        Customs has begun a number of activities to improve the public's
    understanding of our processes and authorities. We are developing
    improved informational outlets and working with airport authorities to
    put up signs that will better explain our authorities and travelers'
    rights. We will post instructions for registering complaints at the
    time of the incident or by mail or phone, and we have made comment
    cards available in the inspection area. These improvements will also be
    incorporated at our land border facilities.
        As part of the Border Coordination Initiative (BCI) to address our
    southern land border, Customs and the Immigration and Naturalization
    Service are working to establish queue time standards that give
    inspectors sufficient time to accomplish their respective enforcement
    missions while providing predictable service to the traveling public.
    We are establishing partnerships with the communities to foster a
    better appreciation of our enforcement responsibilities and agreement
    on how the wait times are measured.
        At international airports we continue to meet the goal of releasing
    95% of compliant travelers within 5 minutes of baggage claim. We
    continue to enhance the Passenger Service Representative program to
    ensure that traveler complaints can be handled on-the-spot.
        A Customer Satisfaction Unit has been established at Customs
    Headquarters to monitor all complaint and complimentary correspondence
    and phone calls. We will track and analyze complaints and ensure that
    corrective actions are taken if there is a recurring problem or a
    disproportionate number from a given location. We are also in the
    process of implementing a 1-800 number for people to call with any
    questions about Customs matters. The personnel assigned to this unit
    will have broad knowledge of our processes and will ensure the
    appropriate routing of a call that they cannot personally answer.
        Customs has conducted 356 formal workshops around the country for
    exporters and shippers (over 11,000 participants) to make them aware of
    export laws, rules, regulations, and port procedures. Individual
    contacts are also made with freight forwarders and consolidators,
    exporters, carriers, etc., to discuss specific and general export
    issues.
        Our responsiveness to information requests from the public will be
    reflected by the ``Contact Us'' feature of the Customs Web site, which
    will permit Web visitors to comment, ask questions, or request
    information by means of electronic mail. This service will be
    established in the next few months. Also, the Customs Electronic
    Bulletin Board (CEBB), long utilized by the trade as an information
    resource, has been linked to the Customs Web site to make access even
    easier by more persons.
        On the local level, a test program is underway in five ports
    (Champlain, NY; Charleston, SC; Nogales, AZ; Orlando, FL; and San
    Francisco, CA) in which Internet electronic mailboxes have been
    established for port directors at these locations, and these e-mail
    addresses published on the Customs Web site. The public and the trade
    are being encouraged to communicate with these port directors on issues
    of local concern and for requests for locally specific information. If
    successful, this program will be expanded to all service ports.

                                  Partnerships

        Customs has established important partnerships with groups both in
    the private and public sectors. We continue to work in partnership with
    the National Treasury Employees Union (NTEU) on a number of issues
    facing Customs. While there are always issues on which union and
    management disagree, we have found the partnership to be a productive
    effort. We have gained invaluable employee input into our decision
    making process, allowing us to tap into the wealth of firsthand
    experience our people on the front line have. This input has resulted
    in better decisions on our part, and improved operations.
        One of the most successful examples of partnership was Operation
    Brass Ring which focused on aggressive, unpredictable, multi functional
    action plans proposed, designed, and implemented at the field level in
    cooperation with the NTEU. These plans were developed by Port
    Partnership Councils in conjunction with field offices of the Office of
    Investigations. Partnerships, such as Operation Brass Ring and the ones
    discussed below, are critical to the success of Customs mission in
    securing our borders without impeding the flow of legitimate trade.

    Border Coordination Initiative

        The Border Coordination Initiative (BCI) is a tactical plan
    developed by the Immigration and Naturalization Service (INS) and
    Customs in partnership to increase cooperation on the Southwest Border
    and to enhance the interdiction of drugs, illegal aliens, and other
    contraband. The purpose of the BCI is to create a seamless process at
    and between land border ports of entry by building a comprehensive,
    integrated border management system that effectively achieves the
    mission of each agency.
        During the past year, INS and Customs have built a strong platform
    of cooperation based on eight core initiatives: Port Management,
    Investigations, Intelligence, Technology, Communications and Aviation/
    Marine, Integrity and Performance/Budget. BCI will give direction to
    those efforts over the next five years.
        The drug and illegal immigration threat on the Southwest Border is
    the initial focus. However, as the BCI builds momentum and generates
    the anticipated results, we will expand it to other locations. A joint
    Office of Border Coordination has been established with both INS and
    Customs. Two Border Coordinators are responsible for overseeing border
    operations and ensuring the implementation of the BCI Action Plans. The
    unions at both agencies have also been involved, in partnership, in
    these activities.

    Industry

        In addition, Customs continued to expand its ``Industry
    Partnership'' programs with the development of the Americas Counter
    Smuggling Initiative (ACSI). Building upon the successes of the Carrier
    Initiative Program (CIP) and the Business Anti-Smuggling Coalition
    (BASC), ACSI will strengthen and expand Customs anti-narcotic security
    programs throughout Central and South America. These programs allow
    Customs to work with the trade community, both domestic and foreign, to
    reduce the ability of drug smugglers to compromise legitimate
    commercial shipments and conveyances. During FY 1998, information from
    these programs resulted in 136 domestic and foreign seizures and
    interceptions totaling 63,882 pounds of narcotics.

          Long-Term Commitment to the Automated Commercial Environment

        Investments in trade modernization remain a priority for Customs.
    Continued reliance on the sixteen year old Automated Commercial System
    (ACS) will subject both Customs and the trade to risks of degraded
    service. ACS relies on old technology that is costly to maintain and is
    not conducive to supporting the requirements of the re-engineered trade
    compliance process. In the period from mid-September 1998 through
    early-March 1999, ACS experienced significant processing slow downs
    that adversely affected the trade's ability to process entries quickly
    and cost-effectively. Recent investments at the Customs data center
    will alleviate the problems in the short term. However, we can
    anticipate reoccurrences of these problems without additional and
    substantial investments at our data center; in a modernized data
    network technology; and in personal computers and desktop software to
    support our field personnel.
        Customs remains committed to the development of the Automated
    Commercial Environment (ACE) as the commercial system for the 21st
    century. ACE is necessary to: cope with 10 percent annual growth in
    international trade; meet legislative requirements for informed
    compliance and for improved financial controls over the nearly $20
    billion in duties collected annually; and meet the requirements
    articulated by the trade and Customs field personnel as part of the
    trade process re-engineering effort.
        Given the size of the investment that ACE represents, it has
    received substantial scrutiny. As a result, a number of issues have
    been raised about Customs ability to justify such a large project and
    to manage it successfully.
        Customs takes these concerns seriously and has taken or commits to
    take a series of actions to strengthen its ability to manage ACE and
    all other information technology projects and to improve the
    justification for the large investment that is required.
        To improve project management, Customs:
         Hired a Chief Information Officer (CIO) with extensive
    experience in enterprise architecture and major systems acquisition.
         Reorganized the Office of Information Technology to
    provide for improved accountability and program control. An important
    element of the reorganization was the establishment of staff offices
    for Technology and Architecture, Strategic Planning, Program
    Monitoring, and Resource Management that are responsible to the CIO
    for: improved investment management; further progress on the enterprise
    architecture; enhanced controls over software development; and the
    development and implementation of software process improvement plans.
         Entered into negotiations with a Federally Funded Research
    and Development Center (FFRDC) to acquire critical support in the areas
    of strategic management, acquisition support, program management,
    technical management, and evaluation and audit. Customs expects to be
    able to have the FFRDC on-board in May.
         Plans to acquire the services of a prime contractor to
    help plan, implement, and manage its information technology
    modernization efforts. The contractor will be responsible for
    implementing mature software development processes which Customs will
    adopt, and will assume the risks associated with delivering functional
    components of ACE and other software projects. Modeled after the
    experience of the Internal Revenue Service in addressing concerns about
    its tax modernization efforts, Customs will utilize the experience of
    the FFRDC from initial acquisition strategy development through
    solicitation development and source selection, award and contract
    management, to include support to Customs in overseeing prime
    contractor performance. Customs intends to give this the highest
    priority with the goal of having a contract in place within 12 months
    from the time of initiation. However, before the contract process
    begins, Customs needs a commitment on a reliable source of funding.
        To improve the justification for the investment in ACE, Customs:
         Engaged a contractor to update and improve the Automated
    Commercial Environment (ACE) cost-benefit analysis (CBA) which will be
    available for external review in the coming weeks. This CBA will
    incorporate analytical approaches responsive to direction previously
    provided by General Accounting Office staff, including reflecting use
    of the International Trade Data System as the trade interface for ACE.
    However, Customs recognizes that still more work is required beyond the
    current effort and commits to follow-on work that will (a) analyze the
    costs and benefits of ACE functional increments; and (b) rigorously
    analyze alternative approaches to building ACE.
         Engaged Klynveld Peat Marwick Goerdeler Limited Liability
    Partnership (KPMG) to provide an independent review of Customs
    methodology and assumptions for software development and infrastructure
    costs. KPMG's preliminary review found our approaches for cost
    estimation to be sound and appropriate. KPMG is now reviewing the
    completed CBA referenced above and advising on the follow-on work.
         Will complete the enterprise architecture work regarding
    its trade compliance process in May 1999. As part of its investment
    management process, Customs has initiated a documented review process
    that ensures that all proposed investments comply with its architecture
    standards and are not redundant of other information technology
    projects.
        Before leaving the issue of justifying the investment in ACE, an
    important point should be made. The continuing controversy surrounding
    ACE is masking the issue of making the necessary investments in
    infrastructure modernization that are required to meet Customs mission
    responsibilities. Approximately 54 percent of estimated costs
    associated with ACE are for software development and maintenance over
    an eight year period. The rest of the investment is required to replace
    an outdated and problem plagued data network, to acquire additional
    computing capacity at the Customs data center, and to provide for
    regular updating of desktop computing capabilities necessary to stay
    abreast of rapidly changing technology. Almost all of these
    infrastructure investments are necessary even if Customs is forced to
    continue to rely on the outdated ACS.
        Customs inability to invest in infrastructure modernization is also
    adversely affecting its ability to implement targeting systems to
    better combat narcotics smuggling, better screen international
    travelers, and provide automated mission support to achieve improved
    management controls and operational efficiencies.
        The actions listed above are in progress and demonstrate Customs
    commitment to improve its management of information technology. These
    actions reflect Customs recognition of the concerns and we are working
    vigorously to correct them.

                             Narcotics Enforcement

        The demand for illegal drugs in the U.S. remains strong. In
    response, drug smuggling organizations continue to introduce their
    contraband into our country using every conceivable route and method.
    Drugs entering the country through the Southwest Border, South Florida,
    and Puerto Rico are transported to distribution and control centers in
    major cities like New York, Chicago, Miami, and Los Angeles. Unchecked
    and allowed to flourish, drug trafficking organizations bring with them
    violent crime, public corruption, money laundering, and the socially
    crippling effects of drug abuse.
        Drug smuggling organizations are as resilient as they are
    insidious. Successful dismantling of such criminal enterprises requires
    a balanced and comprehensive strategy, one that interfaces the
    functions of all Customs enforcement disciplines: investigations,
    intelligence, air and marine operations, and interdiction. Our strategy
    exploits the interrelationship of drug transportation and distribution
    by building an ``Investigative Bridge'' between border smuggling
    activity and criminal organizations located inland. We build this
    bridge each time the seizure of illegal drugs at the border leads to
    the identification of the controlling criminal organization hundreds of
    miles inland. We build it again when investigation of a trafficking
    group in an inland city leads to a drug seizure on the border.
    Controlled deliveries, undercover operations, and Title III
    investigations are our primary inroads into drug smuggling
    organizations. These tools complement and solidify the Investigative
    Bridge.
        It sounds simple and it really is. Customs recognizes that neither
    interdiction nor investigations individually add up to effective drug
    enforcement. Only by integrating the two processes can we put forth our
    best efforts in stemming the flow of drugs across our borders.
        Between our regular appropriations and the emergency supplemental,
    Customs received substantial additional funding in FY 1999 to enhance
    our counterdrug operations. In the investigative area, this money will
    enable us to fill 27 new agent positions and to purchase radios,
    firearms, protective vests and vehicles for these new positions. The
    funding we received for our Marine Program will allow us to repair and
    outfit two Bluewater Vessels in inventory in South Florida, outfit one
    47' Bluewater Vessel in New Orleans that was acquired from the Coast
    Guard and develop and construct a NightCat 40' Interceptor Vessel. The
    $80 million received for Non-Intrusive Inspection Technology enabled
    Customs to accelerate its Five Year Technology Acquisition Plan for the
    Southern Tier. In addition, the $10 million provided for Port Integrity
    will be used to not only stop the flow of drugs, but combat internal
    cargo conspiracies and cargo theft.
        The 1999 emergency supplemental provided $186 million for Air
    Program enhancements; $153 million of which is to fund the procurement
    of 6 additional P-3 aircraft. The current schedule calls for an October
    and December 2000 delivery of the two P-3 AEW aircraft. Delivery of the
    4 new P-3 ``Slicks'' is scheduled to begin in early-to mid-FY 2001 at a
    rate of one every four months.

                                  Child Labor

        Addressing the illegal importation of merchandise manufactured or
    produced with forced or bonded child labor is one of the most difficult
    tasks faced by Customs. Customs is pursuing a thorough, impartial and
    aggressive policy towards imports suspected of being produced with
    forced child labor.
        In recent months, special agents have visited Indonesia, Nepal,
    India, and Pakistan to meet with foreign government officials, non-
    government organizations and industry representatives on this very
    sensitive issue. Foreign law enforcement and other government agencies
    have stated their desire to work with Customs.
        Our public outreach program thus far has included mass mailings to
    U.S. importers of merchandise, often associated with forced child
    labor, advertisements in trade publications, participation in trade
    shows, presentations on the Customs Webpage and various press releases
    in print and television in the U.S. and several other countries.
    Additionally, our forced child labor special agents are meeting
    regularly with various non-government agencies that monitor child labor
    and other human rights violations in an effort to address issues as
    they arise.
        Our actions are beginning to bear fruit. Customs has identified
    some manufacturers of hand-knotted carpets who are believed to have
    produced carpets with forced child labor. Detention orders are in place
    to stop imports from those manufacturers at our borders. Should an
    importation from one of these manufacturers be attempted, Customs will
    require a certificate from the manufacturer stating that the goods were
    not produced with forced child labor. Customs will investigate the
    validity of the certificate submitted by the manufacturer. If the
    investigation substantiates the certificate, the goods will be allowed
    into the U.S. If the certificate proves to be false, we will not allow
    the goods to enter the U.S and will continue our investigation for any
    potential criminal or civil violations.
        Increased staffing will soon be in place in several of our foreign
    offices. Special agents have been added to our Bangkok, Hong Kong and
    Montevideo offices. These additional special agents will be dedicated
    to investigating allegations, and training and working jointly with
    foreign law enforcement agencies to address the child labor issue.

                                Money Laundering

        Customs has a broad grant of authority to conduct international
    financial crime and money laundering investigations. Jurisdiction is
    triggered by the illegal movement of criminal funds, services, or
    merchandise across our national borders and is applied pursuant to the
    authority under the Bank Secrecy Act, the Money Laundering Control Act
    and other Customs laws. Combined with our border search authority,
    Customs formidable enforcement efforts focus on the most significant
    international criminal organizations, whose corrupt influence often
    impacts global trade, economic and financial systems. Customs
    enforcement efforts are not limited to drug related money laundering;
    they extend to the proceeds of all crime.
        Customs has implemented an aggressive strategy to combat money
    laundering. Our approach involves interdiction efforts by Customs
    inspectors, criminal investigations by Customs special agents, and in
    partnership with Treasury, FinCEN, and others, the design and
    implementation of innovative regulatory interventions, unique to
    Treasury, that dismantle and disrupt systems, organizations and
    industries that launder ill gotten gains. Applying these techniques,
    New York's El Dorado Task Force, led by Customs, had tremendous success
    in removing and preventing the wire remitter industry from being
    exploited by drug kingpins to launder money.
        Customs also continues to pursue an aggressive program of
    undercover investigations directed at money launderers. The two largest
    single seizures of cash in the history of Federal law enforcement were
    made as a result of Operation Casacam in Miami and Operation Omega in
    Los Angeles. Together, these two seizures totaled over $41 million in
    cash. Moreover, it was Customs undercover operations that first exposed
    the criminal laundering activities of both Bank of Credit and Commerce
    International and American Express Bank International. And last May,
    Customs concluded Operation Casablanca, the largest, most significant
    drug money laundering investigation in the history of U.S. law
    enforcement.
        Customs operates the Money Laundering Coordination Center (MLCC)
    which has gone on-line this year. Physically located at FinCEN, and
    staffed by special agents and intelligence analysts, the MLCC is
    designed to coordinate intelligence between all U.S. Customs undercover
    money laundering investigations. It will be opened up to other agencies
    in the future. The MLCC will also be instrumental in developing a
    strategy to combat the black market peso exchange which has been
    described as the single most efficient and extensive money laundering
    system in the Western hemisphere.
        With funding approved by the Treasury Executive Office of Asset
    Forfeiture, Customs has trained and equipped 19 highly specialized
    Asset Identification and Removal groups consisting of special agents,
    auditors and data analysts. These groups, established throughout the
    United States, are designed to identify, track, and seize the assets of
    criminals and their organizations. They are responsible for the seizure
    of over $172 million in the past three years and have been integral to
    high profile investigations such as the Ruiz Masseiu case and Operation
    Casablanca.
        As we look toward the future, Customs plans on continuing to work
    in concert with other Treasury and federal agencies to dismantle and
    disrupt the systems used by international criminal organizations.

                                 Anti-Terrorism

        Equally challenging is our responsibility to protect the American
    public from the threat of international terrorism. Easier access to
    sophisticated technologies, including weapons of mass destruction,
    means that the destructive power available to terrorists is greater
    than ever. Customs is the first line of defense at our Nation's borders
    to prevent the introduction of weapons of mass destruction and other
    instruments of terror into the U.S. from abroad, and to prevent
    international terrorists from obtaining weapons of mass destruction
    technologies and materials, funds, and other support from sources in
    the U.S.
        Customs is active on a number of fronts to combat this threat. We
    are developing and deploying examination technologies, such as
    radiation detection equipment, to our ports for use in detecting and
    interdicting nuclear, chemical and biological materials in
    international shipments. We work in partnership with the Federal
    Aviation Administration and the airline industry to enhance security on
    international flights originating in the United States. We aggressively
    enforce U.S. export laws to prevent the illegal export of arms,
    military equipment and dual use technologies to proliferous countries
    and terrorist groups, and enforce U.S. economic sanctions to deny funds
    and other support to international terrorists. We actively participate
    in Department of Justice-sponsored Joint Terrorism Task Forces.
        Among the results of our strategic investigations this year, were
    the convictions of two weapons traffickers who not only had negotiated
    the sale of Russian-produced, shoulder fired surface to air missiles to
    undercover Customs special agents, but who had indicated they could
    also supply tactical nuclear weapons stolen from the Former Soviet
    Union. Also, indictments were handed down against seven individuals for
    weapons smuggling charges after members of the group were intercepted
    en route to South America in an attempt to assassinate Cuban president
    Fidel Castro.
        Customs also has a leadership role in working in partnership with
    our counterparts in foreign customs and law enforcement agencies in
    strengthening export control and law enforcement programs to deny
    weapons of mass destruction and other support to international
    terrorists. We provide training and technical assistance to the
    countries of the Former Soviet Union and South East Europe under the
    U.S. Customs/Department of Defense Counter Proliferation Program. And
    we co-chair joint U.S./Russian working groups coordinating customs and
    law enforcement matters related to non-proliferation and export
    control.
        The threat of international terrorism is perhaps one of the most
    serious national security threats emerging as we enter the 21st
    century. Customs is at the forefront of our Nation's efforts to address
    this threat. We are committed to providing the tools and the training
    necessary to our Customs inspectors and special agents to enable them
    to meet these challenges.

                          Cybercrime/Child Pornography

        As we are all aware, technology, particularly in the realm of
    electronic information and communication technology, continues to
    advance at an astonishing rate. We see the results of such advancements
    in everything we do. We can talk to virtually anyone anywhere via
    e:mail; we can research any topic via the Internet from the warmth and
    comfort of our living rooms; and we can even order groceries from the
    neighborhood food market without ever leaving our homes. The same
    technology that provides us with the seeming sense of security that we
    get from being able to do so much over our home-based personal
    computers is the very same technology that allows the criminal element
    to penetrate even the most secure of our homes. Cyberspace recognizes
    no borders, no sovereignty, and no walls or doors. Neither does
    cybercrime.
        Without exception, violations of all of the over 400 laws enforced
    by Customs can, in some way, be abetted through the use of cyberspace.
    Indeed, three violations investigated by Customs, money laundering,
    Intellectual Property Rights violations, and child pornography/child
    sexual exploitation, can actually be committed via the Internet.
    Although money laundering and Intellectual Property Rights violations
    impact greatly the economic fabric of our Nation, it is child
    pornography and child sexual exploitation that tear at the moral fabric
    of our Nation and our future.
        For this reason, Customs has established the Customs CyberSmuggling
    Center in Fairfax, Virginia. The Customs CyberSmuggling Center is
    tasked with conducting all cyberspace-based investigations on behalf of
    Customs. In addition, the Cyber-Smuggling Center is providing training
    to thousands of Federal, state, local, and foreign law enforcement
    officers annually. In FY 1998 alone, the CyberSmuggling Center trained
    over 3,000 law enforcement officers from four continents.
        Cybercrime is the newest challenge for law enforcement. Hardest hit
    by cybercrime are the holders of trademarks and copyrights. The actual
    losses attributed to counterfeiting and piracy can severely impact our
    economic stability if the problem is not adequately addressed. Customs
    and FBI co-chair the National Security Counsel (NSC), Special
    Coordinating Subgroup on Intellectual Property Rights and Trade Related
    Crime. As a result of the work being conducted by the subgroup, the NSC
    has requested a proposal for a single agency to be responsible for the
    coordination of all U.S. government activities in this area.
        Customs has proposed, through the NSC, to take the lead and
    responsibility for coordinating these efforts. We are proposing a
    multiagency effort to address law enforcement, training, intelligence
    and policy for the U.S., both domestically and internationally. This
    coordination effort will also include representatives from industry and
    trade groups as appropriate.

                Technology for Better Enforcement and Targeting

        In implementing our Five-Year Technology Acquisition Plan for the
    Southern Tier, we have sought to steadily increase the risk of
    detection across the Southern Tier from San Diego to San Juan. Without
    this across-the-frontier approach, our enforcement efforts in one area
    will be mitigated by the smugglers' ability to rapidly shift operations
    to an area where the threat of detection is lower. What remains
    however, is to begin installing this technology at high-risk ports
    elsewhere in the country, ports like Charleston, SC, where last fiscal
    year we had a seizure of almost 3,100 pounds of cocaine; and Newark,
    NJ, where we have historically seen commercial quantities of both
    marijuana and cocaine. We have started to look beyond the Southern
    Tier, to install automated targeting systems and other technology.
        With the increased funding we received in FY 1999, Customs is
    aggressively pursuing a mix of technologies designed to complement one
    another and present a layered defense to smuggling attempts. Some of
    the technologies we are currently testing and evaluating include a
    mobile truck x-ray which has the same or better capabilities as our
    fixed-site truck x-rays and has the added benefit of over-the-road
    mobility allowing us to use it at several ports. This introduces more
    unpredictability into our operations since the smuggler can never be
    sure where the x-ray will show up next. In addition, a gamma-ray
    inspection system has been developed for trucks, other vehicles and
    railcars.
        Customs has been a good steward of the funding provided by the
    Congress. We are nearing completion of the truck x-ray system
    installation program. Seven of the nine systems are installed and have
    proven to be an effective law enforcement tool for the interdiction of
    smuggled drugs. In fact, the top five seizures made using these truck
    x-ray systems amount to almost 13,000 pounds of drugs. Customs is also
    seeing a decrease in the number of inspections per seizure giving us a
    preliminary indication that the x-rays are becoming the force
    multiplier we envisioned them to be. We have also fielded two mobile
    truck x-rays with two more prototypes in development.

    Land Border Automation

        We are working with our counterparts in the Immigration and
    Naturalization Service to install license plate readers (LPRs) and
    automated permit ports (APPs) and replace the terminals used by the
    inspectors to query the Interagency Border Inspection System (IBIS)
    database. Southwest Border ports and the major crossings on the
    Northern Border will also receive this LPR equipment. LPRs have the
    capability to count the number of vehicles, identify stolen vehicles,
    and identify vehicles which are positive IBIS hits. LPRs will allow
    Customs to gather intelligence from the data, plus data mining will
    enhance inbound and outbound targeting.
        One type of APP being tested at several locations along the
    Northern Border is the Remote Video Inspection System. This combination
    of card reader, video and audio technology allows travelers to cross at
    small, remote locations when there is no inspector on duty. Canada is
    installing a similar system at the adjacent ports to our test sites.
        Inspectors have at their disposal a wide range of technology and
    tools including the large truck x-rays, pallet x-rays, optical
    fiberscopes, laser rangefinders, and portable contraband detectors
    (a.k.a. busters) to name a few. What must be remembered is that without
    the consistent funding to operate and maintain these technologies in
    Customs base, the benefits will be short-lived.

    Compliance Measurement Examination Data Collection Process
    (COMPEX)

        Customs uses the Compliance Measurement Examination data collection
    process (COMPEX), a random selection program in operation at major
    airports and nearly all land border ports to determine the overall
    compliance rate of arriving passengers and the threat at each location.
    We continue to work with the ports to reduce the burden of collecting
    the information and improve the data quality. We will be working to
    develop COMPEX for passengers arriving at small airports and by vessel,
    train, or bus, as well as COMPEX for outbound airport passengers.

    Anti-proliferation/Anti-terrorism

        Using the Nunn-Lugar anti-proliferation funding, and working
    jointly with the Department of Defense, Customs is evaluating
    technology to provide our inspectors with a device that not only
    quantifies the presence of radiation, but can classify the source of
    the radiation against a database to tell the inspector if the source is
    medical, industrial, or weapon-related material.
        We have also fielded approximately 1,500 personnel radiation
    detectors (a.k.a. radiation pagers) with the eventual goal of deploying
    3,800 around the country. We are installing radiation detector
    equipment in all Customs x-ray systems thereby providing a simultaneous
    screening for contraband and drugs as well as undeclared radioactive
    material.
        Better technology will allow Customs to maximize the efforts of the
    limited number of outbound inspectors. Better technology will allow
    inspectors to ``target smarter'' and with less wait-time for the
    traveling public and trade. Technology can be utilized to target
    undeclared outbound currency, stolen vehicles, munitions, and items
    which may pose a risk to aviation safety and security.
        To support antiterrorism and aviation safety and security efforts
    at 17 of the largest international airports, Customs has spent
    approximately $18 million of the $ 35.2 million authorized under the
    1996 Omnibus Appropriation to purchase and so far deploy the following
    equipment: 24 mobile x-ray vans equipped with explosive and radiation
    technology; 18 mobile support system airport tool trucks that provide
    inspectors the necessary tools to inspect cargo; 11 portable x-ray
    systems and 12 particle detectors capable of detecting trace amounts of
    explosives for mail/courier facilities; and 675 radiation pagers to
    address the threat of nuclear smuggling. Customs is currently working
    toward identifying additional non-intrusive inspection systems that can
    be purchased with the approximately $17 million remaining in ``no
    year'' funds to support aviation safety and security.

    Automated Targeting Systems

        The Automated Targeting System for Anti-Terrorism (ATS-AT) is a
    rule-based expert system designed to facilitate the targeting of high-
    risk outbound cargo. This could include terrorist devices, weapons,
    undeclared hazardous material and other contraband. The system was
    prototyped at John F. Kennedy International Airport and will be
    deployed to 14 additional airports in FY 1999. ATS-AT allows inspectors
    to review more outbound documentation for potentially high-risk
    shipments, in less time.
        ATS is also being used in the air passenger environment. Customs is
    in the process of migrating a data base which will enhance the
    capability of the Passenger Analysis Units and line inspectors in the
    targeting of suspect travelers. The enhanced capability will ultimately
    result in more effective interdictive measures and passenger processing
    and will increase the opportunity of locating and positively
    identifying high-risk travelers involved in drug smuggling, terrorism
    and other transnational criminal activity. However, failure to provide
    funding to this project, which is funded out of base resources, will
    result in decreased connectivity to the first line inspectors in the
    field.

                             FY 2000 Budget Request

        Customs proposed funding level for FY 2000 totals $1,929,735,000
    and 17,389 Full Time Equivalents (FTE), of which $1,617,335,000 will be
    directly appropriated, and $312,400,000 will be derived from a proposed
    increase to the passenger processing fee. Also, $35,000,000 is
    requested from the Treasury Forfeiture Fund Super Surplus Fund.

    Integrity (6 million, 0 FTE)

        Corruption and unethical behavior results in serious repercussions
    to law enforcement, including an erosion or destruction of public
    confidence, which is difficult to restore. While there is no systemic
    problem of corruption in the Customs Service, this initiative is
    required to increase the likelihood that new hires to Customs will
    possess honesty and ethical principles, ensure that Customs complies
    with statutory provisions concerning periodic reinvestigations, and
    reinforce the awareness of all agency employees to possible integrity
    threats, e.g., bribery attempts and unethical behavior. Specifically,
    the funding is required to conduct polygraph examinations, upon Office
    of Personnel Management approval, for candidates applying for positions
    which are most susceptible to corruption (criminal investigators,
    Customs inspectors, canine enforcement officers, and contractors). This
    request will also fund the contracting out of the required periodic
    investigations, as well as fund the corruption prevention awareness
    efforts of the agency.

    Training ($5 million, 8 FTE)

        In order to attain the highest level of training, integrity and
    professionalism, Customs is requesting additional resources to
    establish a new office at the Assistant Commissioner level. This office
    will manage and direct the establishment of a comprehensive education,
    training, and workforce development program which covers the entire
    career of Customs personnel with an emphasis on law enforcement
    positions. In-service training and development will be provided on a
    regular and recurring basis, and programs will be implemented to
    maintain and improve on-the-job effectiveness. Special attention will
    be given to continuous training for law enforcement personnel on the
    day-to-day application of the unique border search authorities granted
    to Customs officers (including, but not limited to: 19 U.S.C.
    Sec. Sec. 482, 1461, 1467, 1496, 1581, 1582, and 1646b, 22 U.S.C.
    Sec. 401, and 31 U.S.C. Sec. 5316).

    Non-intrusive Mobile Personal Inspection Technology (9 million,
    0 FTE)

        International commercial air travel is increasing each year and the
    numbers of narcotics couriers who ingest or conceal narcotics on or
    within their body are increasing dramatically. Detection of internal
    carriers can only be accomplished through the use of x-ray. Current
    procedures require that the suspected courier be transported from the
    international arrivals area of the airport, accompanied by two Customs
    officers, to a medical facility where the x-ray is administered. This
    procedure is time consuming and an inefficient use of staffing due to
    the time required and the safety precautions which must be observed
    (i.e., handcuffing the suspect for transport), and the procedure is
    exceedingly unpleasant for those suspects whose x-rays are negative.
        Therefore, as the fight to deter drugs and other contraband from
    coming into the United States continues, so does the development of new
    non-intrusive detection technology. Customs has developed a way to
    examine a suspected courier, with less embarrassment (in the likelihood
    of a pat-down and/or strip search), by using a facility staffed with an
    x-ray technician and equipped to digitally transmit the x-ray to a
    radiologist at a medical facility who will determine whether the x-ray
    indicates the presence of a foreign substance in the body. The facility
    will either be a fixed building in, or immediately adjacent to, the
    international arrivals area of the airport or a bus which is designed
    to fit into a custom docking facility built as an extension to Federal
    Inspection Services (FIS). Thus, the suspected courier could be
    transferred without handcuff restraints and through U.S. Customs
    Service corridors to avoid loss of control of the subject as well as
    public exposure. Customs is seeking a contractor who will provide a
    ``turn key'' operation.

    Land Border Blitzes ($1.4 million, 0 FTE)

        The additional funding requested would allow Customs to conduct
    ``blitz'' type operations at land border ports. This initiative
    implements some of the lessons learned from last year's successful
    Operation Brass Ring. Blitz operations are characterized by the rapid,
    unpublicized deployment of a team of Customs Inspectors, Canine
    Enforcement Officers, and Special Agents into a targeted port or base
    port for varied durations (a day to several weeks) to conduct intensive
    inspectional and investigative operations. The size of the port being
    blitzed, the duration of the operation, and the objectives of the
    operation would determine the actual makeup of each team. The teams
    would perform the blitzes at unscheduled times moving from border
    crossing to border crossing, from one port to another, and within a
    port among passenger primary, secondary inspection, cargo inspection,
    and outbound areas. This flexibility will maximize the unpredictability
    of the operations to Drug Smuggling Organizations (DSOs).
    Unpredictability is a corruption deterrent as well. Use of non-
    intrusive technology would also be maximized. Mobile or transportable
    systems would be utilized at ports which do not have fixed NII
    technology. In other instances, suspect conveyances would be convoyed
    to other ports which have fixed NII technology.
        Customs Air Operations Support is vital to the rapid, fluid
    deployment of the teams. The use of air assets will allow the teams to
    maintain the element of surprise and maximize their time in the port
    instead of in lengthy transits between geographically dispersed border
    crossings. During Operation Brass Ring, the use of aircraft was shown
    to disrupt the normal activities of Drug Smuggling Organizations (DSOs)
    at the ports of entry. In addition, air assets provide enhanced
    security measures for ground personnel in the event of any escalated
    incidents.

    Forced Child Labor ($2 million, 3 FTE)

        The Customs Service is continuing its efforts to address the issue
    of forced child labor. Customs intention is to establish regional
    offices in Asia and increase staffing in foreign countries where there
    is significant potential for goods to be produced by forced child
    labor. This funding would provide for the hiring of special agents/
    representatives and a staff assistant.
        The need for foreign-based agents rather than domestic agents is
    crucial to the success of this initiative. Regular interaction with
    foreign governments and non-government organizations (NGOs) ensure that
    Customs can maintain an enforcement presence and exert pressure because
    ultimately verification of the use of child labor will require
    inspection of the suspect foreign facility and its records.

    Money Laundering (Outbound) Technology ($2 million, 0 FTE)

        The majority of undeclared currency going out of the U.S. involves
    proceeds from narcotic trafficking activities. The ever-increasing
    volume of cross-border traffic means that Customs should conduct more
    examinations more effectively, in order to keep up with the activities
    of the drug cartels. Outbound enforcement examinations are currently
    conducted on a very limited basis. In FY 1998, although outbound exams
    were conducted only intermittently and with minimal resources, Customs
    seized more than $68.4 million in outbound currency. In order to
    maximize Customs enforcement efforts, non-intrusive technology and
    equipment (and infrastructure) are necessary to efficiently interdict
    undeclared currency.
        Technology will strengthen outbound enforcement efforts, while
    facilitating the public and legitimate trade. Due to the vast amount of
    cargo being exported out of the United States, Customs can only examine
    a percentage of these shipments. The procurement of mobile x-ray vans,
    tool trucks, and contraband detection kits will assist Customs in the
    examination of more cargo and conveyances at seaports, courier hubs,
    and on the Southern land border.

                                   User Fees

        The FY 2000 budget request includes two new user fee proposals.
    They are:

    Passenger Processing Fee

        The Administration proposes to increase an existing fee paid by
    travelers arriving by commercial aircraft and commercial vessel from a
    place outside of the United States, and to remove certain exemptions
    from this fee. Proceeds of the fee increase would partially offset
    Customs costs associated with air and sea passenger processing.
    Subsequent to the budget, authorization legislation will be transmitted
    to allow the Secretary to increase the fee paid by air and sea
    passengers and to remove existing exemptions from this fee. In order
    for Customs to be able to collect $312.4 million for FY 2000,
    collections would have to begin on July 1, 1999.

    Automation Modernization Fee

        The Administration proposes to establish a fee for the use of
    Customs automated systems. The fee will be charged to users of Customs
    automated systems. Proceeds of the fee will offset the costs of
    modernizing Customs automated commercial operations and an
    international trade data system, and will be available for obligation
    after FY 2000. Subsequent to the budget, authorization legislation will
    be transmitted to allow the Secretary to establish a fee for the use of
    Customs automated systems.
        This concludes my statement for the record. I appreciate the
    opportunity to appear before you today. I particularly want to express
    my appreciation to this Subcommittee for its tremendous support in
    providing Customs with increased funding in FY 1999. This funding will
    provide Customs with the much needed tools to accomplish our mission,
    and I assure you that we will use these resources in the manner in
    which Congress intended them to be utilized, in the furtherance of
    international counterdrug efforts and our critical mission to protect
    the Nation's borders and to reduce the flow of drugs into the United
    States.

        Chairman Crane. Thank you, Mr. Kelly.
        And now Ms. Bragg.

              STATEMENT OF HON. LYNN M. BRAGG, CHAIRMAN,
                  U.S. INTERNATIONAL TRADE COMMISSION

        Ms. Bragg. Mr. Chairman, Mr. Levin, and Members of the
    Subcommittee, I am pleased to have this opportunity to discuss
    the budget request of the U.S. International Trade Commission
    for fiscal year 2000 and fiscal year 2001. I also would like to
    recognize Commissioner Askey and thank her for accompanying me
    here today. She has been extremely supportive of my
    chairmanship and I guess I could say your loss is definitely
    the Commission's gain.
        I would like to express my appreciation also to both the
    leadership and individual Members of the Committee for their
    support regarding the agency's appropriations last year. Those
    letters of support on our behalf were extremely helpful.
    Hopefully, our work continues to merit your interest and
    confidence and that you will be inclined to provide similar
    support this year. I believe my written testimony submitted
    earlier presents a persuasive complete picture of our needs
    which corresponds to our increased responsibilities in
    administering the trade laws of the United States.
        The agency's budget request represents a consensus proposal
    and has the unanimous support of all members of the Commission.
    For fiscal year 2000, we are submitting a request for
    $47,200,000, which represents a 6.1 percent increase over the
    fiscal year 1999 appropriation of $44,495,000. At the request
    of the Subcommittee, the Commission has also estimated its
    funding needs for fiscal year 2001. We propose a fiscal year
    2001 authorization level of $49,750,000, an increase of
    $2,550,000 or 5.2 percent over our fiscal year 2000 request.
        This budget request reflects that the Commission has
    undertaken substantial belt-tightening and streamlining in the
    past. It continues the Commission's commitment to doing more
    with less. But on balance, it is a conservative request for a
    modest increase which basically allows us to maintain our
    personnel status quo and fulfill our commitment to producing a
    quality and timely work product, but, at the same time, take on
    significant workload increases.
        We continue to be conservative in our staffing practices.
    First, our personnel levels now stand at about 365 full-time
    personnel, much lower than in fiscal year 1993 when the agency
    employed almost 100 more employees. Put another way, over the
    past 6 years, the agency has reduced its employees by almost 25
    percent, an important downsizing accomplishment for a small
    agency.
        Furthermore, the agency has consistently sought to avoid
    adding career employees to meet peak workloads. For that
    reason, we actively pursued the option of hiring limited-term
    employees because of the anticipated short-term nature of the
    increase in our workload due to the Sunset Review
    investigations. As part of this policy, we have also reassigned
    or detailed a number of employees to other offices facing the
    heaviest workload demands.
        My prepared testimony provides important details regarding
    our current caseload, which emphasizes our increased resource
    needs related to the additional 324 Sunset Reviews mandated by
    the Uruguay Round Amendments Act which we started this fiscal
    year and must finish by June 2001. Also, I note that our
    caseload in other areas, such as section 201 and section 337
    intellectual property investigations continues to increase or
    hold steady. We also have more anti-dumping petitions being
    filed than expected as well as additional 332 studies being
    prepared for the executive branch and our congressional
    oversight committees.
        Since so much of our current situation reflects the impact
    of Sunset Reviews, I thought you might be interested in a brief
    snapshot of the progress in reviewing the outstanding orders
    and what the results of the initial reviews are. To date, we
    have instituted a total of 154 Sunset Review investigations,
    which are now in different procedural stages. Of this total, 78
    have been fully processed through the initial phase which
    determines whether there should be an expedited investigation
    or a full investigation. Of those 78 cases, 33 have been
    revoked by the Department of Commerce because of no domestic
    response or interest. Of the remaining 45, 33 have been
    continued by the Commission and will receive a full
    investigation. Twelve will be, or have been, expedited without
    a hearing. The Commission has made its determination in seven
    of these expedited reviews, voting to revoke the order in one
    and not revoke the order in six.
        As you know from my written testimony and the testimony of
    past chairmen, historically personnel costs account for almost
    75 percent of the Commission's budget, with building rent
    accounting for another 12 percent. Therefore, only about 12
    percent remains to be allocated for administrative needs such
    as computers, travel, and training. We have few other options
    in adjusting to diminished funding except to reduce personnel
    levels.
        Finally, we continue to take important initiatives to make
    information resources available more widely to our key
    customers,
    Congress, and the executive branch, the public we serve, and
    our employees. In particular, I want to mention two pilot
    projects underway on electronic initiatives discussed in
    further detail in my prepared remarks.
        The first is our electronic document imaging system. All of
    our filings are scanned electronically to provide self-service
    public access to submissions in trade cases in our onsite
    meeting room. The second pilot is our trade and tariff data
    web. This system enables the user to custom design retrievals
    of the trade information about specific products and countries.
        Thank you again for the opportunity to appear this morning.
    Business is brisk, but we are meeting the challenge at the
    Commission. We continue to pursue innovative, cost-effective
    strategies in administering our statutory responsibilities. I
    am prepared to address any questions you may have.
        [The prepared statement follows:]

    Statement of Hon. Lynn M. Bragg, Chairman, U.S. International
    Trade Commission

        Mr. Chairman and Members of the Subcommittee, I am pleased to have
    this opportunity to be here today to discuss the budget request of the
    United States International Trade Commission for fiscal year (FY) 2000
    and FY 2001.
        The U.S. International Trade Commission is an independent,
    nonpartisan agency with a wide range of trade-related mandates. Because
    of its independence and bipartisanship, the Commission acts as a focal
    point in government for receiving views of the public and private
    sectors on international trade issues. The trade laws administered by
    the Commission encompass quasi-judicial investigations of import injury
    and unfair practices in import trade; major trade studies, research,
    and economic analysis; trade monitoring; data collection; development
    of uniform statistical data; and issues concerning the Harmonized
    Tariff Schedule of the United States. While the Commission is not a
    policy-making entity, through information and analysis provided to the
    President and the Congress, the agency contributes objective trade
    advice and policy support to the Congress, the President, the Office of
    the U.S. Trade Representative, and other interagency groups.

                                 Budget Request

        The Commission's FY 2000 budget request is $47,200,000, which
    represents a 6.1% increase over the FY 1999 appropriation of
    $44,495,000. At the request of the Subcommittee, the Commission has
    also estimated its funding needs for FY 2001. We propose an FY 2001
    authorization level of $49,750,000--an increase of $2,550,000 or 5.2
    percent over our FY 2000 request.
        Before addressing the details of our request, please let me begin
    by briefly reviewing the Commission's five major operations as
    identified in our strategic plan. First, are the import injury
    investigations which include antidumping and countervailing duty (AD/
    CVD) cases, conducted under Title VII of the Tariff Act of 1930. These
    investigations involve products that are unfairly traded in that they
    are either sold at less than fair value, or are subsidized in their
    production, manufacture, or export. Further, beginning in July 1998, we
    began five-year sunset reviews of all outstanding AD/CVD orders, as
    mandated by the Uruguay Round Agreements Act of 1994, to determine
    whether to retain or revoke the old orders if no longer necessary. As I
    will detail later, our FY 2000 budget request is considerably impacted
    by our resource needs related to these new review investigations.
        In addition, there are several other types of import injury
    investigations we administer. Chief among these are Section 201 (of the
    Trade Act of 1974) or so-called ``escape clause'' or global safeguards
    investigations. Such cases are generally initiated by a petition from a
    domestic industry which alleges injury as a result of increased
    imports. The Commission conducts a six-month investigation--four months
    for the injury phase, followed by a two-month remedy phase (if injury
    is determined)--in which remedy recommendations are proposed to the
    President. It is then up to the President to determine what action, if
    any, will be taken.
        The second Commission operation is the conduct of intellectual
    property-based investigations, more commonly referred to as Section 337
    (of the Tariff Act of 1930) investigations. These investigations
    address allegations of infringement of intellectual property rights by
    imported items. The Commission has three administrative law judges
    (ALJs) who consider these cases; their initial determinations are
    subsequently reviewed by the Commission. Generally these cases
    encompass very technical issues, and most involve products having
    multiple patents. Many cases involve the high tech sectors of computer
    hardware and software.
        The third operation is the Commission's research program. The most
    important element of this activity is Section 332 (of the Tariff Act of
    1930) investigations which we prepare at the request of Congress and
    the President; the probable economic effects studies (pursuant to
    Section 131 of the Tariff Act of 1930); and the overall function as a
    resource for the gathering and analysis of international trade data.
    For these activities, the Commission draws on its economic and industry
    sector expertise which covers the spectrum of these disciplines.
    Another component of this function is to provide ``quick response''
    research, technical advice, and analysis for policy makers in the
    executive branch and Congress.
        The fourth Commission operation is trade information services. This
    comprises trade remedy assistance to small businesses; legislative
    reports; library services; maintenance of the Harmonized Tariff
    Schedule; Schedule XX; U.S. Schedule of Services Commitments under the
    General Agreement on Tariffs and Trade/World Trade Organization;
    preparations to the Integrated Database of the World Trade
    Organization; preparation of Presidential proclamations; and certain
    other information gathering, processing, and dissemination activities.
    The Commission is a member of an interagency committee, the
    International Trade Data System, established to coordinate and
    streamline trade data collection and dissemination. In addition, the
    ITC actively participates in interagency measures to streamline data
    preparation for international forums.
        Trade policy support is the final agency operation. Although the
    Commission itself is not a policy-making body, it plays an active role
    in providing objective expertise to the executive branch and Congress
    for the formulation of trade policy. The trade policy community draws
    on the Commission's technical proficiency and factual advice in a
    variety of trade issues, ranging from commodity-specific matters and
    industry sectors, to the impact of international trade agreements.

                          Conservative Budget Request

        We believe that our budget request is very conservative--especially
    given the sizeable expansion in the Commission's workload. The
    International Trade Commission has entered one of the most challenging
    eras in our 83-year history. Chief among the challenges is to address a
    considerable expansion in the agency's workload within a very modest
    increase in resources. The increase in our budget request this year is
    modest by any standard. It reinforces past belt-tightening,
    streamlining, and refocusing of priorities. The Commission is now
    operating with a smaller budget and less staff than in FY 1993.
        The FY 2000 increase is attributable solely to the new sunset
    review requirements and the mandatory cost-of-living adjustment for
    salaries. Since we are a personnel-intensive agency, there is little
    margin. Personnel costs account for 74% of our budget, and rent for
    12%. No programs, loans or grants are administered by the agency.
    Therefore, there is virtually no discretionary spending in the
    Commission's budget. With only a 6.1% increase, we plan to manage a
    more than twofold increase in our AD/CVD workload--as well as absorb a
    COLA for our personnel-intensive operation.
        Similarly, our estimate for FY 2001 reflects our continuing
    conservative approach to resource needs. The estimate basically funds
    anticipated increases in salaries and benefits due to mandated Federal
    pay raises and the usual grade and step increases that occur in the
    course of any year. This figure assumes no net increase in Commission
    personnel or total funded permanent positions. In fact, we anticipate
    some easing of staffing levels and workload towards the end of FY 2001
    as the term appointments start to expire and the transition sunset
    cases diminish. This requested funding level assumes that funds
    available for operating needs in FY 2001 will not change from FY 2000
    levels, and that non-personnel expenditures will be funded from savings
    and reallocations from existing resources.

                      New Sunset Reviews--Budgetary Impact

        As with last year, the entire increase in this year's Commission
    budget request is related to the Congressionally-mandated five-year
    sunset reviews of all (AD/CVD) investigations, as well as mandatory
    cost-of living adjustments for personnel.
        The 1994 Uruguay Round Agreements Act requires that five-year
    sunset reviews be conducted for all outstanding AD/CVD investigations--
    past, present, and future. That provision of law, which became
    effective as of July 1998, instructs the Commission to review all the
    outstanding AD/CVD orders (324 past cases) to determine whether those
    orders should remain or be revoked. A 3-year ``transition'' period
    calls for reviews of all orders in place before 1995 to be completed by
    June 2001. Beginning in FY 2000, the Commission must initiate five-year
    reviews on all orders put in place after 1995. Further, all future
    orders must be reviewed every five years to determine whether they
    should be maintained or repealed.
        This new review requirement also has substantially increased the
    Commission's workload--particularly during the 3-year transition phase.
    This enhanced authority means more than a doubling of the workload for
    AD/CVD cases during this 3-year time frame, as well as a tripling of
    the litigation workload related to these cases. Over the long term, the
    net result is a permanent increase in the Commission's workload (by an
    anticipated 30%), as new orders are put in place and reviewed every
    five years thereafter.

            Efforts to Conserve and Wisely Use Commission Resources

        Ever-cognizant of budget constraints, the Commission consistently
    makes a concerted effort to safeguard and wisely utilize Commission
    resources--particularly in an era of diminishing appropriations and
    rising workloads.
        The Commission has undertaken substantial belt-tightening and
    streamlining in the past. Both voluntary downsizing of personnel and
    other cost-saving measures were undertaken, beginning in 1995.
    Reductions in personnel and rental space, as well as consolidation of
    offices and elimination of management layers were implemented. Paring
    administrative directives by more than 50% has also helped to simplify
    agency procedures and operations. All of these measures have
    contributed to streamlining and greater efficiency of the Commission's
    operations.
        Streamlining, along with re-prioritizing of activities, has enabled
    the Commission to creatively refocus energies and resources to the most
    critical needs. As a result, the Commission is better prepared to
    address our own internal resource requirements and also improve the
    delivery of services to our key customers and the public. We regularly
    review all our activities to ensure that the most efficient and
    effective processes are in place.
        Importantly, however, not all of our resource needs are focussed on
    the demands of sunset review investigations. We are also mindful of the
    need to attend to the resource demands posed by section 332 fact-
    finding investigations, which have been rising significantly over the
    past few years. There are now more requests for investigations on
    increasingly more complex and difficult topics, to be completed in
    shorter time-frames, often 6 months or less, instead of the more
    customary 9-12 months.
        So far in FY 1999, we have 30 section 332 reports underway, of
    which 17 are requests concerning new, previously unaddressed subject
    matter by us, up from the average of 13 at this time of the year. Among
    the studies currently underway are China's WTO accession, India/
    Pakistan sanctions as a follow-on to the previous sanctions overview,
    Africa trade flows, and APEC tariff and non-tariff barriers. In
    connection with WTO and FTAA negotiations, the Commission is conducting
    a comprehensive probable economic effects study of possible tariff
    modifications on U.S. industries and consumers under multiple
    scenarios.
        In terms of resource allocation, this 332 probable economic effects
    study is likely to be one of the largest we have undertaken; it is an
    eight-month study crossing all areas of the Commission's expertise,
    involving economists, attorneys, and nearly all of our industry
    analysts. Staff anticipates that this will be a three-volume study, in
    excess of 3,000 pages total, requiring more than 10 work years to
    complete, at an estimated cost in excess of $660,000.
        Similarly, our section 201 global safeguard investigations have
    increased. Usually, we anticipate one, or perhaps no petitions in a
    year for section 201 investigations. In FY 1998, we conducted two
    safeguard-related investigations. In the first 6 months of FY 1999, we
    have already received two petitions, with the prospect of more. These
    cases are handled by our Office of Investigations, which also conducts
    all Title VII cases and sunset reviews.

                          Limiting the Budget Increase

        As was the case last year, the Commission has continued to work
    hard to restrict the size of our budget request for FY 2000 and our FY
    2001 estimate, despite the impact of sunset review investigations and
    other case load demands I have just described. First, we established a
    policy of hiring fixed-term employees in targeted offices most affected
    by review-related activities; this avoids committing future valuable
    resources to fund career Federal employees for whom there may be
    insufficient work to perform, as our workload surge runs its course.
    Next, in lieu of hiring a larger number of people, we shifted a number
    of permanent personnel internally to those offices in order to meet the
    heaviest workload demands of the agency. However, that means that those
    employees, largely from the Office of Industries, are not available to
    perform their normal trade monitoring, policy support functions, and
    other work on trade studies, in particular 332 studies. The Commission
    will continue to reassess and reorder its priorities to ensure that the
    most important needs are met first.
        As a measure of the past and current efforts to limit our resource
    needs, our overall personnel levels are down considerably from the FY
    1993 level of 461. At the end of February 1999, the Commission had
    365.5 full-time personnel on board. Even with the contemplated
    additional employees to address the increasing sunset review caseload,
    the Commission's staff will remain well below prior levels during the
    rest of FY 1999 and FY 2000. And, most of the new employees will not be
    career employees, but instead one- to two-year fixed-term employees to
    handle the short-term upsurge in workload. Therefore, we expect the
    staff level to peak in FY 2000 and early FY 2001, then to decrease as
    the AD/CVD workload trends subside.

               Enhanced Computerization and Electronic Activities

        The Commission has explored important new technological ways of
    doing business; in doing so, we have helped our employees to do more
    with less, and have improved our outreach to our customers and to the
    public we serve. At the same time, we hope that we have enhanced the
    transparency of our administration of the trade laws and the decision-
    making process.
        We are continually working to make information resources available
    more widely to our own staff, our key customers, and the public. The
    main ITC website posts many Commission publications, general trade law
    and investigative information, press releases, trade resource
    information and links to other relevant sites. Use of the website has
    enabled broader dissemination of publications, and reduced some
    production and mailing costs. Efforts are underway to enable greater
    public access to information produced and compiled by the ITC. The
    Commission has operated under a fundamental philosophy that information
    collected at public expense should, to the extent feasible, be made
    publicly available.
        Specifically, pilot projects are underway on two electronic
    initiatives to determine the best means of providing the public with
    helpful information. The pilot projects will explore and assess various
    aspects of these initiatives, including costs, benefits, resource
    demands, and user fees.
         EDIS (and EDIS Online, its web companion)--the electronic
    document imaging system of our Dockets Section currently provides self-
    service public access in our on-site Reading Room to filings and
    submissions in trade cases. Over the next two years (FY 1999 and FY
    2000), we are pilot testing the costs and benefits of providing access
    to these public documents from anywhere, via the Internet through our
    general website [www.usitc.gov]. This web-based version of EDIS is EDIS
    Online. Preliminary feedback from the main users of this information in
    the international trade bar has been very positive. Longer term, we
    will explore the possibility of providing Internet access to
    confidential case information to eligible parties to the
    investigations. We will proceed carefully to ensure confidentiality of
    sensitive proprietary business information.
         Trade and Tariff DataWeb--this system is unique in
    combining trade and tariff information. It enables the user to custom-
    design retrievals of trade information about specific products and
    countries. The password feature enables users to save and update their
    tailor-made product lists for future sessions. Information is available
    to both government agencies and the public. This month, the public
    access pilot project became operational. In response to a letter from
    the International Trade Data System (ITDS), which is the interagency
    trade data coordinating entity chaired by the Department of the
    Treasury, the ITC's DataWeb link was officially established for public
    availability. Our trade and tariff DataWeb can now be accessed directly
    from its own website [http://dataweb.usitc.gov], the ITC homepage, and
    from a link on the ITDS website.
        To date, all of these initiatives have been internally funded,
    within existing resources, and with no additional budget requests.
    Depending on the results of our two pilot projects, we may request
    funds in the future if resources appear inadequate to support public
    expansion of these endeavors.
        I also would like to address one remaining important element
    regarding our technological status. The Commission is aggressively
    preparing to meet the Year 2000 computer issue. We believe we have
    successfully anticipated our agency needs and are prepared to meet this
    challenge. The agency has no customized software, nor do we have any
    mission-critical functions which could result in harm to national
    security, public safety, health, or income maintenance. The Commission
    expects to receive vendor fixes or upgrades to software affecting our
    internal operations. Now underway is an agency-wide hardware upgrade to
    Y2K compliancy for all client PCs and network servers which should be
    completed this spring. The Inspector General has reviewed the agency's
    actions and continues to monitor our response to Y2K needs. No specific
    funding for Y2K remediation has been requested, and as of now none is
    anticipated. We will have contingency plans in place to address
    unanticipated problems which may arise.

                        Strategic and Performance Plans

        I understand that the Committee is interested in the agency's work
    on our Strategic and Performance Plans. In October, the Commission
    issued the third edition of its Strategic Plan, which covers the five-
    year period ending September 30, 2003. It is accompanied by a two-year
    Performance Plan which identifies performance goals to meet the
    strategic goals, and describes performance indicators to measure them.
        Efforts to correlate the agency's strategic and performance plans
    with the budget are underway. The first two of the five key agency
    operations correspond with the budget justification (import injury and
    intellectual property-based investigations). For the next budget cycle,
    the Commission expects to have the same correlation with the strategic
    and performance plans and the budget for the other three agency lines
    of business (research, trade information services, and trade policy
    support).
        In concluding my comments today, I would like to highlight a phrase
    from the agency's strategic plan which states ``. . . The Commission
    recognizes the importance of striving for excellence in all aspects of
    its mission.'' These are words that the agency takes to heart.
        This concludes my prepared comments for today's hearing. Thank you
    again for the opportunity to present them, and I am prepared to address
    any questions or concerns you might have.

        Chairman Crane. Thank you, Ms. Bragg.
        Mr. Fisher, why hasn't Canada lived up to its WTO
    obligations to admit U.S. magazines into their market on the
    same basis as domestically produced magazines, as called for in
    the WTO's decision in 1997 and what is the USTR going to do
    about?
        Mr. Fisher. Congressman, this is the darndest issue. As you
    just mentioned, in 1997 a WTO panel found their magazine regime
    to be in violation of their international trade commitments.
    They have put forward a bill known as Bill C-55. It has passed
    the lower house in Canada. This bill would impose criminal
    fines on foreign publishers if they run advertisements aimed at
    Canadian customers. In other words, they would criminalize this
    activity.
        We are in the midst of negotiations with Canada on this
    subject and, by the way, they are proceeding with good faith
    and we are making progress. Their insistence that the purpose
    of this bill is to protect Canadian culture, if it were to be
    passed, would trigger the terms of the cultural industries
    provision agreed by Canada in its 1988 Free Trade Agreement
    with the United States which was subsequently incorporated into
    the NAFTA under annex 2106 of the NAFTA. This allows the United
    States, if they were to pass this bill by insisting that it was
    for the purposes it now ostensibly is for, to receive
    compensation by taking what are known as measures of equivalent
    commercial affects in retaliation without their having recourse
    to dispute settlement.
        Now this is an example of enforcement. Here is one of our
    duties. Another country was found to be in violation of their
    obligations. We are pursuing this case aggressively. They have
    instead tried to substitute a different regime, ostensibly, as
    it means in this case, preserving Canadian culture. But,
    clearly, it is unacceptable if it were to proceed.
        I say all that against the back drop of the fact that we
    are in negotiations with the Canadians. It is good faith
    negotiations. I believe that we will be able to negotiate a
    proper solution here and we are working very hard to do so, Mr.
    Chairman.
        Chairman Crane. Hopefully.
        Now, Commissioner Kelly, the President's budget includes a
    legislative proposal for an automation user fee to generate
    funding as an offset for automated commercial environment, ACE,
    and the international trade data system. But these funds would
    not be available until fiscal year 2001. If I understand your
    testimony, the Administration proposes to fund ACE from
    resources jointed provided by the trade community and
    appropriated resources. Yet there are no appropriated resources
    in the fiscal year 2000 budget request. Can you explain that,
    first of all, and is it the Administration's intent to put ACE
    development on hold for fiscal year 2000?
        Mr. Kelly. The budget calls for the collection of fees, Mr.
    Chairman, in the fiscal year 2000, for ACE, not to be expended
    until fiscal year 2001. It is an area of concern to me, quite
    frankly. I think ACE is vitally important. We want to move
    forward with it as quickly as possible. As you know, there is a
    negotiation process that goes on within the Administration.
    Customs argued for funds upfront, immediately, and certainly in
    the fiscal year 2000 budget, to move forward with ACE and that
    was not forthcoming. The more quickly we can get underway with
    ACE, I think the better off the country will be, the trade
    community will be, the Customs Service will be.
        Chairman Crane. There are many figures circulating as to
    what building ACE will cost. What, in your estimation, will it
    cost?
        Mr. Kelly. The latest estimate is $1.4 billion. Obviously,
    this is dependent on bids that are put out and responses on the
    part of many contractors. But we brought in Peat Marwick to
    take a look at our estimate procedures, the way we were going
    about it and they said that they were reasonable and they
    thought that the process that we used to estimate the cost was
    a good one. So, as I say, now it is $1.4 billion. Certainly it
    is possible that it may change up and down. As technology
    develops, in fact, the cost may go down.
        Chairman Crane. Can you please update us on the ongoing
    dispute with the labor union over the use of a very successful
    drug interdiction approach called pre-primary roving in El
    Paso? In addition, when we examined the issue last year, less
    than 25 percent of JFK's work force was available to work
    Saturday and Sunday as regular workdays when those days made a
    part of that officer's regular work week, despite the statutory
    requirement that these days be deemed regular workdays under
    those circumstances. And has there been any resolution of this
    issue with the union?
        Mr. Kelly. Well, the pre-primary in El Paso, in essence,
    what it means is that inspectors go out before vehicles reach
    the booth and they will open trunks.
        Chairman Crane. That is with the dogs, right?
        Mr. Kelly. That is with the dogs or it can be done without
    dogs, just having people pop trunks. There was some dispute as
    to whether or not that was an appropriate activity for the
    inspectors to do. To the best of my knowledge, that has not
    been resolved, although we are doing pre-primary inspections in
    other locations along the border. We do local bargaining. I
    believe that is still an outstanding issue, but I could be
    wrong.
        As far as the staffing at JFK, if I understand that
    question?
        Chairman Crane. And workdays, regular workdays. When we
    checked this last year, less than 25 percent of the work force
    at JFK was available to work Saturday and Sunday as regular
    workdays when those days make up part of that officers regular
    work week, despite the statutory requirement that these days be
    deemed regular workdays under those circumstances. And has that
    issue been resolved with them?
        Mr. Kelly. We have embarked on a project called port
    certification which takes a look at staffing levels for all of
    our ports to see if they are adequate, to see how overtime is
    being distributed. In addition, we are in the final stages of
    receiving a resource allocation model from Price Waterhouse, an
    independent contractor that has to look at the entire agency to
    give us a clean sheet of paper view. I think that will go a
    long way to telling management how we should have people
    distributed. Right now, distribution is, to a large extent, the
    function of local bargaining with the union and we need a
    better view as to how we should have our people distributed.
    Both the port certification project and the Price Waterhouse
    model that we should be obtaining in the next couple of weeks
    will be helpful in telling management where people should be
    assigned.
        Chairman Crane. Thank you. And, Chairman Bragg, the ITC is
    being faced with a more than doubling of its title VII workload
    due to the Uruguay Round Agreements Act that mandated 5-year
    Sunset Reviews of all past and future anti-dumping
    countervailing duty investigations. How are you managing that
    increase?
        Ms. Bragg. I guess a short answer would be--very carefully.
    We primarily have responded to the increase through the use of
    internal transfers within the Commission, reassigning employees
    from one office to another, as well as, with the fixed-term
    hires. These fixed-term hires would be for 1- or 2-year
    periods. We anticipate internal transfers to be approximate--up
    to 19 people and then a total Sunset hire of possibly 34,
    depending on need. And that would include, also, the
    reassignments of 19 internally. It would depend on how our work
    is progressing and how many reviews actually go into full
    investigations and have full-blown hearings (as opposed to
    simpler expedited reviews).
        Chairman Crane. Very good. Mr. Levin.
        Mr. Levin. Thank you, Mr. Chairman. First of all, I want to
    indicate how much I agree with Mr. Fisher's characterization of
    the professionalism of USTR and that very much applies to the
    other agencies that are here today and to the four of you who
    are here to represent them. I think we should all listen when
    there are plaudits for efforts of government employees.
        Second, I think I will resist asking you about substance.
    It is tempting. Ms. Bragg and Ms. Askey, to talk to you about
    section 201. Your increased workload, as you know, Mr. Houghton
    and I, working on a bipartisan basis, we hope both with the
    House and Senate, feel the need to take a further look at
    section 201, but I think, perhaps, we should focus on the
    staffing issues, authorization levels, and not get into
    substance. Because, Mr. Fisher, I would like, otherwise, to
    talk to you about a number of issues: Section 301; your report
    of a few weeks ago and the forthcoming report; Japan, the visit
    of the Prime Minister; talk about China. That could take us a
    few hours.
        I do urge everybody to look at your testimony on page 14
    where you do talk about the negotiations, ongoing negotiations
    with China and your characterization that there are outstanding
    issues to be resolved, sectoral issues as well as what have
    been called protocol issues. Your characterization that the
    negotiations have moved ahead, but they are far from complete
    and that you will consult with Congress closely. I hope you
    will do that. My own view is that that accession needs to be
    done and it needs to be done right.
        Mr. Kelly, I think I will kind of focus on you, if I might.
    [Laughter.]
        In terms of authorization levels and personnel issues and
    the like. So let me just ask you two questions. I think you are
    under some limitations as to what you can say in terms of
    authorization levels. You are part of the Administration. Any
    views on authorization levels? And let me combine it with
    asking you to comment about authorization personnel levels and
    I am asking you to comment on the relations with your
    employees.
        On page--actually, I guess it is not numbered, but you say,
    ``We continue to work in partnership with the NTEU.'' And I
    think it might be helpful to us, before we get into specific
    issues--we will probably do that later on with other
    witnesses--any thoughts you have about the State of employer-
    employee relationships within your agency?
        And then, last, if I might just ask you, you know there is
    going to be later testimony about your automation. And there
    have been some criticisms of your work to date. So if you could
    comment on personnel levels, general labor-management relations
    within the service, and, also, the last issue, how you are
    coming on automation.
        Mr. Kelly. As far as authorized strength levels are
    concerned, I believe that the Customs Service needs more
    resources, needs more personnel. I think Congressman Rodriguez
    mentioned that there are many ports, for instance, along the
    border that want to operate on a 24-hour basis that simply
    can't because you don't have the personnel to do it.
        The resource allocation model that is coming on board here
    from Price Waterhouse, holds great promise. It will, for the
    first time, take a look at a total agency. We have asked them,
    tell us what do you think we need to do? Our mission? It has
    been before for parts of agencies. Now, for the first time, we
    are going to have kind of a clean sheet of paper view on what
    the Customs Service needs to do its mission. And, at the very
    least, it will give us a sense of proportionality as to where
    people will be assigned.
        Mr. Levin. And that is due, again, when?
        Mr. Kelly. Actually we should have a draft in the next few
    days. We have to look at it and it is a model. It has in it
    formulas that you can adjust for workload. If the workload goes
    up or down, it will tell you how many people you need to do a
    particular function.
        Mr. Levin. Will that give us some idea of their
    recommendations on overall personnel levels as well as
    proportionality?
        Mr. Kelly. Yes, it will. Yes, Sir.
        Mr. Levin. And when do you think we will know about that?
        Mr. Kelly. Well, we have to take a look at it ourselves and
    look at it and play with it, you might say, to see how it
    works. And then we will certainly, obviously, make it available
    to the Committee. I would say probably within a month we will
    be able to do that.
        Mr. Levin. So we ought to have that input before we are
    very much further along in the budget and appropriation
    process?
        Mr. Kelly. Hopefully, we will have it within the next
    month.
        Mr. Levin. And if that has some major recommendations of
    increased personnel levels, we will need to take that into
    account?
        Mr. Kelly. Yes, Sir. It sounds to me that that is the way
    to go. We have had a, a systematic examination of the functions
    of the agency that will result in not only port-specific and
    unit-specific recommendations, but also for the agency as a
    whole.
        Mr. Levin. You wouldn't be totally surprised if they came
    forth with a recommendation for increased personnel levels?
        Mr. Kelly. I would not be surprised because I know the work
    that the Customs Service is doing and the strains that are on
    the Customs Service now with our present manning levels so,
    yes, I have reason to anticipate that there is going to be a
    recommended increase. How much I have no idea.
        Mr. Levin. And, quickly, on the other two issues.
        Mr. Kelly. I think our relations with our employees are
    good. Clearly, the relationship with the union and unionized
    employees, I am told, is much better than it was, say, 10 years
    ago, pre-partnership. The partnership is the Administration's
    concept of working more closely with its unionized employees.
    We have done organizational assessment surveys. The employees
    are generally happy to work in the Customs Service. Like any
    big organization, almost 20,000 employees, there are some
    pockets, there are some issues that, that create some tension,
    but, overall, I think our relations are good.
        As far as the union is concerned, I meet with Mr. Tobias. I
    try to meet on a weekly basis. I am not certain he does that
    with any other agency head, but we try to communicate as much
    as possible. So I would characterize our relationship as good,
    not perfect.
        Mr. Levin. And technology, quickly, the criticisms of ACE?
        Mr. Kelly. Right. We have had some criticism as to our
    ability to manage a big information technology project such as
    ACE and I think the things we have done--I have outlined in my
    oral presentation. We have gotten a first-rate chief
    information officer, Woody Hall, who is here now. We have done
    some reorganization in our IT shop.
        We are now moving toward a prime contractor. We have
    learned from the lessons of other governmental agencies. I
    believe we need a prime contractor to lead us down the path to
    develop ACE. And to do that, we have contracted--again, as I
    said in my oral comments--with Mitre, which is a government-
    sponsored research firm that will kind of develop an RFP
    process for us, the acquisition process.
        GAO has made some sound recommendations and we are doing
    everything that we can to adopt those recommendations. We have
    made significant changes. And we are not looking for the pride
    of authorship or ownership here. We want ACE to go forward and
    the prime contractor, to me, is the way to go. So we are
    adopting that notion. We do need money to do that, though,
    quite frankly.
        Mr. Levin. Thank you.
        Chairman Crane. Mr. Houghton.
        Mr. Houghton. Thank you, Mr. Chairman. I only have one
    question and that is to Fisher.
        This is a competitive game, as you know from your
    negotiations on manufactured goods and things like that with
    China. How do we stack up in terms of our budget with--although
    it is difficult to compare exactly the numbers--with other
    countries? I mean, do you have the research? Do you have the
    resources? When you go into negotiations, do you feel that you
    have the back up and the people that are necessary to do the
    job? Compared to any of the other nations that you are dealing
    with?
        Mr. Fisher. Well, first, Congressman, it is very hard to
    sort out our competitors in terms of the number of personnel
    they have, their budgets. I had dinner last night with the
    Minister of another country and their representatives, much
    smaller than we are by a small fraction. They had 400 people
    and a budget that dramatically exceeds ours. But when you look
    it and you break it down and analyze it, it is actually
    combining what we have in our Commerce Department, large
    sections of it, and what we have at USTR. So it is very
    difficult to compare, run a comparison.
        Do we feel that we have adequate back up? We have an
    unusual structure at USTR. We push decisionmaking down to the
    lowest possible level. It is a good business practice, as you
    know. We have very able negotiators at the assistant level and
    then, hopefully, at the deputy level and so on. And we work in
    a very thin organization. We have very little bureaucracy at
    USTR. I know that is hard to believe coming from someone that
    works in a bureau of the U.S. Government, but the fact is that
    anybody can walk into my office that needs to at any time. They
    don't abuse that privilege. Similarly, we can do that with
    Charlene Barshefsky. And I think we survive significantly on
    our wits, to be frank. But, at the same time, having taken the
    bureaucracy out of our little bureaucracy, I think we are able
    to be much more efficient than we would otherwise be if we had
    rigid formulae.
        We are happy with the budget request that we have made.
    Frankly, we are making up for some lost time. We went through a
    very dry period for quite a while. But we have the
    responsibility to cut costs. I mentioned including using
    frequent flier miles and cutting out a lot of the stuff. And it
    makes it harder on our negotiators, but we have this duty to
    the taxpayer. And I would say, Congressman Houghton, we are
    very satisfied with what we have. Obviously, everybody would
    like more in their wallets.
        And if I just may say one other thing here. We are very,
    very fortunate--forgive me for saying this in this hearing. We
    have a USTR that has been on the job 6 years. She is very
    unique. Usually there is rapid turnover. She went from my
    position to acting and then to USTR. There is a tremendous
    repository of knowledge in that woman's brain. And that allows
    us to gear ourselves much more efficiently than we would
    otherwise be able to.
        Mr. Houghton. Not only knowledge, but energy. My lord. I
    don't know that she ever sleeps. Thank you, Mr. Chairman. That
    is it.
        Chairman Crane. Mr. Becerra.
        Mr. Becerra. Thank you, Mr. Chairman. If I could ask
    Commissioner Kelly a question regarding a followup of sorts on
    the question that Congressman Levin asked regarding management
    and employee relations. Is there anything, Commissioner, that
    you are aware of with regard to the collective bargaining
    agreement that you have with the employee union that has
    affected or impeded the ability of Customs to interdict drugs
    or interfered with that process at all?
        Mr. Kelly. No, I have no indication that, as a result of
    the collective bargaining agreements, we are unable to do our
    job.
        Mr. Becerra. And, at this stage, you mentioned that you
    were in the process of sitting down with representatives from
    the employees union to try to straighten out any differences
    the agency has with its employees in regards to work place and
    benefits and so forth.
        Mr. Kelly. We have ongoing negotiations, both national
    level, local level, on a myriad of issues, yes, Sir.
        Mr. Becerra. And that goes on even with the current
    collective bargaining agreement in place. Is that correct?
        Mr. Kelly. That is correct. Yes, Sir.
        Mr. Becerra. Thank you. That is it, Mr. Kelly. If I could
    ask a question to you, Mr. Fisher. The question of whether or
    not we are going to get into this whole debate with China's
    accession to WTO, there is a great concern that, at the end of
    the day, if they come in--and, Ms. Bragg, this is probably
    something I should address to you as well--that we will not
    have a way to enforce the agreements.
        Is there anything you can tell us that will give us
    confidence that you all will be equipped, should we get to the
    stage of seeing China enter into the WTO, that we can be sure
    to enforce the new provisions under which China would operate
    in this new trade setting? You have got very small budgets and
    your enforcement capabilities are probably stretched to begin
    with, but is there anything that you could tell us to lead us
    to believe that, with your current budgets, that you would be
    able to address the enforcement needs of this country to ensure
    that China is fulfilling its obligations under WTO?
        Mr. Fisher. Well, Congressman, first, we haven't completed
    our negotiations. I think that is an important marker. Second,
    we will be discussing a lot of the specifics of what we have
    achieved later this week with you and your fellow members of
    this Committee. Generally speaking, let me say this: Assuming
    that we are able to complete this negotiation, the purpose of
    the negotiation is for China to accede to membership of the
    WTO. Presently, we invoke our own trade laws because they are
    not members of the WTO and we are endeavoring in this
    negotiation--and thus far we have--to secure the right for us
    to use our trade laws.
        As regards other enforcement, though, we believe that there
    is a benefit for them to be accountable to the 133 other
    nations that are members of the WTO. Any temptation, whether it
    is on intellectual property rights or any other aspect of the
    keeping of their commitments to us and to the WTO, forces
    within China or others in that economy to say, well, you know,
    we can play hardball here. It is much easier for their leaders
    to say, wait a minute, we have now a commitment to the rest of
    the world. It is not just a bilateral commitment to the United
    States.
        This allows us, then, to use the monitoring and the
    enforcement mechanisms of the WTO. This is where USTR spends a
    great deal of time as litigants, when necessary. And it
    strengthens our hand to be able to have that additional layer
    of requirements for meeting their obligations to the
    international community.
        Mr. Becerra. So you are not asking for additional monies
    for your general counsel office, are you?
        Mr. Fisher. No, Sir, we are not. I must tell you, though,
    we did fill 10 new positions in fiscal year 1998. We
    substantially extended our own enforcement mechanism in terms
    of the role we play. And we are now digesting those new
    employees. We are not asking for any more this year. Seven of
    those were litigants or lawyers, rather, and then additional
    staff on top of that.
        And the short answer, Congressman, is that, again, this
    would expand in terms of comfort--assuming it is done right,
    assuming we complete this package--the ability to bring the
    laws of the international community to the enforcement table in
    addition to our own bilateral trade laws. And we would be happy
    to give you a detailed briefing on that whenever you wish.
        Mr. Becerra. I would appreciate that.
        Ms. Bragg. Congressman, as far as the International Trade
    Commission is concerned, I think the framework is already in
    existence as far as any unfair trade practices that any Chinese
    company may engage in in the United States. And those are
    through the existing anti-dumping and countervailing duty laws,
    as well as any other practice that would be subsumed within the
    section 201 escape clause mechanism. And, also, our section 337
    intellectual property framework.
        Mr. Becerra. Ambassador, I should probably follow up with
    you on that opportunity.
        Mr. Fisher. Please do. Please call me.
        Mr. Becerra. Thank you, Mr. Chairman.
        Chairman Crane. Just a followup on the question to you, Mr.
    Kelly. My understanding is you told me that the union prevents
    you from using pre-primary in El Paso. Right?
        Mr. Kelly. I am not certain if that issue was resolved or
    not. It was an issue. I am not certain. It was an issue that
    was under discussion and I don't know how that was resolved or
    if it is still under discussion. But pre-primary roving, as it
    is called, is going on in other ports on the border.
        Chairman Crane. And everywhere except there, right?
        Mr. Kelly. Well, yes.
        Chairman Crane. Well, is it that the policy isn't effective
    in interdiction?
        Mr. Kelly. The policy is, I think, an effective one.
        Chairman Crane. Effective.
        Mr. Kelly. Yes, Sir.
        Chairman Crane. Not ineffective.
        Mr. Kelly. Yes, Sir.
        Chairman Crane. And, yet, you don't know the answer to the
    question about El Paso?
        Mr. Kelly. I don't know the status of the negotiation in El
    Paso. I don't know if that dispute has been resolved.
        Chairman Crane. Well, is it not fair to say that the union
    has had an adverse effect, then, on drug interdiction because
    of holding up that resolution of that question?
        Mr. Kelly. Well, it is something that is in negotiation. I
    mean, if something were permanently----
        Chairman Crane. But how long has this been going on?
        Mr. Kelly. I don't have the answer to that question.
        Chairman Crane. Because I heard it was several years.
        Mr. Kelly. No, no. It is certainly not several years. It is
    a fairly recent issue that surfaced. I was in El Paso when I
    was Under Secretary, which was less than a year ago and, to the
    best of my recollection, pre-primary examinations were ongoing.
        Chairman Crane. I was just handed the notification here.
    Since early 1995, Customs and the National Treasury employees
    union local in El Paso have been negotiating over work
    conditions there involving that pre-primary provision.
        Mr. Kelly. Well, I will have to get back to you on that,
    Mr. Chairman. I just simply don't know.
        [The following information was subsequently received:]
        [GRAPHIC] [TIFF OMITTED] T6895.001

        Chairman Crane. Well, thank you all for your testimony.
    And, with that, you are excused.
        And I would like to invite our next panel of witnesses.
    John P. Simpson, Deputy Assistant Secretary for Regulatory,
    Tariff, and Trade Enforcement; Dennis Schindel, Assistant
    Inspector General for Audit, Office of Inspector General;
    Norman J. Rabkin, Director, Administration of Justice Issues;
    and Randolph Hite, Associate Director, Governmentwide and
    Defense Information Systems.
        And if you will all take your seats, we will proceed after
    the transition is concluded. If you folks can hold on for a
    second here. We have got a major flow going out that door.
        And now I think we can commence with Mr. Simpson first.

       STATEMENT OF JOHN P. SIMPSON, DEPUTY ASSISTANT SECRETARY,
     REGULATORY, TARIFF, AND TRADE ENFORCEMENT, U.S. DEPARTMENT OF
                              THE TREASURY

        Mr. Simpson. Thank you, Mr. Chairman. I am here this
    morning representing the many agencies of the U.S. Government
    that have joined together to build an international trade data
    system. But we are not as well known as we would like, so
    perhaps I could take a moment to tell you what the
    international trade data system is and why we are building it.
        Over the years, as Congress has enacted laws to protect
    public health and safety, to protect animal and plant health,
    to protect the environment, to protect endangered species, to
    help protect intellectual property, to extend great benefits to
    countries with whom we have trade agreements, to impose
    sanctions on countries that threaten our national security, the
    agencies of the executive branch that are responsible for
    administering these laws have imposed reporting requirements on
    the international trade community. Over the years, these
    reporting requirements have accumulated to the point where
    there are now 40 different agencies administering 400 different
    laws at the border.
        We are conscious of the fact that not all of these laws
    necessarily applies to any single transaction. But it is
    actually possible for several of them to apply to one
    importation of goods. Just to give you a simple example. If
    this morning a shipment of strawberries crosses the border in
    Nogales, Arizona, Customs Service would get information about
    that shipment; Immigration and Naturalization Service will get
    information about the driver; the Federal Highway
    Administration will increasingly want information about the
    truck and the driver's status as a commercially licensed
    operator.
        But then, in addition to that, the Food Safety Inspection
    Service will be concerned that the strawberries have been
    rinsed in dirty water, handled by workers with dirty hands.
    They are concerned about hepatitis and they will want
    information on that. The Animal Plant Health Inspection Service
    will be concerned that the strawberries may be infected with
    some sort of a fruit pest or that the wood cartons in which the
    strawberries are imported are infected with some sort of a
    pest. EPA is concerned about pesticide residues. And, of
    course, the Census Bureau, the Farm Agriculture Service, the
    Agriculture Marketing Service, and State agriculture
    authorities all want information for statistical purposes.
        So, for a fairly simple transaction such as that, there is
    the potential for the international trade community to be
    burdened with very heavy reporting requirements. We don't know
    exactly what the cost is in the United States for parties
    importing into the United States. But about 4 years ago, the
    United Nations Council on Trade and Development estimated that
    worldwide, the cost of reporting or preparing documents for
    governments and doing the record keeping to support those
    documents averages about 4 to 6 percent of the value of the
    goods. In other words, it is an indirect tax of about 4 to 6
    percent on international trade. We have some reason to think,
    because of some work done by one American company, that that
    figure is probably in the ballpark for the United States.
        So, with the international trade data system, we are trying
    to do something about that cost. There are several objectives
    that we want to accomplish with the international trade data
    system. We want a single window for dealing with the government
    for the international trade community. Over the last few years,
    we have taken--the last 2 years, we have taken hundreds of
    government forms and thousands of data items and we have
    compressed them into a single electronic message. We don't want
    separate front ends. As Federal Government agencies move from
    paper reporting processes to electronic reporting, we don't
    want the government to incur the expense of investing in
    duplicative systems or duplicative interfaces with trade.
        We want to be sure that there is Internet access to the
    government to accommodate the needs of small businesses.
    Currently, many of the systems for reporting to government use
    what are called bands, value-added networks or dedicated lines
    that are simply beyond the resources of small businesses to
    use.
        We want to use transponder technology at the border to
    speed up the movement of trucks. Right now, when a truck
    approaches the border, an inspector takes several seconds to
    key in information about that truck. When the inspector is
    doing that, not only is the truck delayed, but the inspector is
    not doing what we train them to do. He is being used as a data
    input operator rather than as someone who is there to look at
    the crop, look at the driver, make sure that everything is in
    order before the truck moves on. So that is a key objective for
    us.
        On what we call the back end, we want the public to have a
    single point of access for international trade data maintained
    by a wide variety of U.S. Government agencies. Today, if you
    are a researcher at the University of Illinois and you want to
    know about the impact of international trade on the economy of
    Illinois, you have to go to many sources. We would like the
    international trade data system to be a single window, not only
    for academic researchers, but also for policymakers in the
    government, such as Members of Congress, USTR, the U.S.
    International Trade Commission to get better data and more
    timely data.
        We also want to be prepared to outsource the operation and
    maintenance of the system. One of the things we have learned is
    that Federal Government agencies do not do a good job of
    maintaining and upgrading sophisticated automation systems. So
    we want to be prepared to arrange for this to be done in the
    private sector.
        We are starting on some pilots this year, Mr. Chairman, in
    three different locations and we hope to be able to report to
    the Committee soon. Thank you.
        [The prepared statement follows:]

    Statement of John P. Simpson, Deputy Assistant Secretary, Regulatory,
    Traiff, and Trade Enforcement, U.S. Department of the Treasury

        Mr. Chairman, on behalf of the Treasury Department and all of the
    agencies of the federal government who are working together to create
    an international trade data system I want to thank you and the members
    of the Subcommittee for giving us the opportunity to appear here today.

                                The Environment

        Let me begin by describing to you the environment in which we are
    working. The United States is the world's largest exporter and its
    largest importer. On the export side, the U.S. economy depends heavily
    on world markets to support a higher rate of growth. Although exports
    in 1998 were down slightly from the previous year, largely because of
    the Asian financial crisis, they were up by a little over 70 percent
    from 1990. About one of every ten U.S. jobs, and one of every five
    manufacturing jobs, is supported by exports.
        The U.S. economy is also heavily dependent on imports. The
    competitiveness of U.S. manufacturers and the quality of life for U.S.
    consumers depend on having access to materials and goods from around
    the world. Indicative of this, the value of imports into the United
    States in 1998 was up by about 85 percent over 1990.
        Because international trade is so important to the U.S. economy,
    the cost of government procedural requirements affecting international
    trade, and specifically information reporting requirements imposed on
    import and export transactions, is a burden on the performance of the
    economy as a whole.
        This burden is not imposed as a matter of conscious policy. Rather,
    as laws have been enacted to implement trade agreements; prevent unfair
    trade practices; protect the environment, consumers, animal and plant
    health, and endangered species; ensure highway, rail, and air safety;
    better regulate immigration; impose economic sanctions on hostile
    regimes; and prevent export of sensitive technologies to inappropriate
    destinations, new requirements for reporting have been superimposed one
    on top of another, despite efforts to limit the cumulative burden.
        Although there are no reliable cost figures for the United States
    alone, the United Nations Council on Trade and Development estimates
    that worldwide the cost of documentation requirements for international
    trade accounts for 4 to 6 percent of the cost of goods traded. In other
    words, the cost of preparing documentation is equivalent to a tax of 4
    to 6 percent on the value of goods.
        Today, separate reporting and data systems are maintained by U.S.
    federal government agencies involved in all aspects of the
    international trade process, including regulation of goods,
    transportation, and immigration. Exporters and importers deal with
    numerous paper and electronic systems, and are confronted with
    duplicative, incompatible, and non-uniform data reporting and record-
    keeping requirements.
        These multiple information collection systems are not only costly
    and burdensome for both government and the trade community, they also
    limit the effectiveness of individual agencies in carrying our their
    enforcement and regulatory responsibilities at the border. Agencies
    generally do not have access to information that other agencies
    collect, or have the benefit of knowing what enforcement or regulatory
    actions other agencies have taken in response to that information. They
    act in isolation rather than in concert with each other.
        Finally, those who need access to statistical data on international
    trade, including Congressional committees that enact trade policy into
    law, must often research several potentially incompatible sources
    because the systems do not use standard data or technology.
        The International Trade Data System (ITDS) is intended to
    rationalize the federal government's collection and use of
    international trade data. ITDS is aimed at:
        (1) reducing the cost and burden of processing international trade
    transactions and transport for both government and the private trade
    community by substituting standard electronic messages for the multiple
    and redundant reporting--often on paper forms--that occurs today;
        (2) improving enforcement of and compliance with laws and
    regulations that apply at the border to carriers (for example, highway
    safety and vessel clearance), people (drivers and crews of commercial
    conveyances), and goods (several hundred laws including those
    addressing public health and safety, animal and plant health, consumer
    protection, enforcement of trade agreements, etc.); and
        (3) providing convenient access for Congress, Executive Branch
    agencies, and the public to international trade data that are more
    accurate, complete, and timely.
        The ITDS will serve many agency automated systems, including
    Customs' Automated Commercial Environment (ACE), by distributing to
    those systems information collected electronically from importers,
    exporters, carriers, and other parties to international trade. The
    information collected will consist of a standard set of data that meets
    the needs of all U.S. Government agencies.
        ITDS will also serve as a common payment point for taxes and fees
    paid to multiple government agencies, much as American Express or VISA
    provides a single billing and collection point for a variety of charges
    incurred by its customers.
        Finally, ITDS will serve as a custodian of records for information
    it collects, and as a convenient, single point of access to all Federal
    government data international trade bases for persons--who will have
    different levels of access--seeking information about U.S.
    international trade.
        The International Trade Data System (ITDS) Project Office has been
    established at the Department of the Treasury in accordance with the
    Vice President's memorandum of September 15, 1995. The need for the
    implementation of the ITDS to be managed by an inter-agency board was
    the recommendation of a government-wide task force representing fifty-
    three of those agencies. The board was to be given the authority to
    ``recommend and, if necessary, direct individual agencies to modify
    their processes and systems to conform with the principles for an
    integrated International Trade Data System.'' The task force report
    concludes that ``authority to make cross-agency decisions that would be
    vested in this Board is the only way possible to obtain the multi-
    agency re-engineering of the international trade processes that will be
    required to make the International Trade Data System a reality.''
    Agencies represented on the Board include Treasury, the Customs
    Service, the Food and Drug Administration, the Immigration and
    Naturalization Service, the Transportation Department, the Agriculture
    Department, the Commerce Department, the U.S. Trade Representative, and
    the U.S. International Trade Commission.

    ITDS Development

        Initially, it was envisioned that there would be three principal
    tasks to construction of an ITDS: (1) creation of a standard set of
    data to satisfy the needs of all users without redundancy, (2) design
    of a single point of collection from which data would be distributed to
    all agencies requiring them, (3) and design of a single point for
    accessing all data collected by the system, regardless of where they
    are stored.
        However, as the project developed, participants have taken
    advantage of opportunities created by the project to address other
    objectives. For example, a module for data on trade in services will be
    included in the ITDS, certain processes for clearing trucks and trains
    entering the U.S. will be re-engineered to take advantage of dedicated
    short-range communications technology (transponder readers) being
    deployed by the Department of Transportation, and data definitions will
    be developed with an eye toward the possibility of future harmonization
    of U.S. trade data with data collected by our major trading partners,
    particularly the G7 countries and Mexico.
        Much of the ground work has been accomplished. With the
    participation of all the involved agencies, an effort to identify their
    international trade data requirements was completed in 1997. Those data
    requirements are being converged with harmonized data sets being
    developed by the G7 countries so that we will be closer to the vision
    of having a ``passport'' for goods that will be universally accepted
    for both export and import purposes.
        The ITDS information architecture, or design report, was completed
    in September 1998 and presented for public review and comment on the
    Internet through
    http://www.itds.treas.gov, and at a public hearing on November 5, 1998.
    Key sections of the report are the Project Summary, the Concept of
    Operations, the Project Implementation and Transition Plan, and the
    Cost/Benefit Analysis. These can be found at the above Internet
    address.

    Pilot Projects

        ITDS pilots are being deployed this year at the Ambassador Bridge
    in Detroit, the Peace Bridge in Buffalo, and at the rail crossing at
    Laredo, Texas. The current plan is for the Customs Service, the
    Immigration and Naturalization Service, the Federal Highway
    Administration, and the Food and Drug Administration to be the initial
    participating federal agencies. However, in order for the pilot to
    succeed, the Customs Service must agree to process the electronic
    message received from ITDS through Customs' border cargo selectivity
    system. We are hopeful that we can complete arrangements with Customs
    in time to keep to the schedule for beginning the pilots this year.

    The Way Forward

        At this time, no decision has been made to advance the ITDS beyond
    completion of the Design Report, although the project is funded at the
    level of $5.4 million in FY 1999, with a similar amount proposed in FY
    2000, in order to conduct pilots and to continue testing. If a decision
    is made to deploy the ITDS, full system functionality could be achieved
    in three years, and full deployment to all ports and all agencies could
    be achieved in a fourth year (although major ports and major users
    would be served at an earlier time). The full four-year cost for
    deploying the system would be $268 million. This cost projection
    assumes that all ports of entry will be provided with equal
    capabilities. However, alternative deployment strategies are being
    analyzed that may significantly reduce this cost estimate.
        There are a number of actions that are needed for the ITDS to
    proceed. These include providing for the long-term interagency
    management of the ITDS, removing any statutory or regulatory obstacles
    to sharing of a single collection of data among the agencies that need
    them, and working on outsourcing of operation of the system to the
    private sector under government ownership and supervision.
        Allow me again to thank you and your colleagues, Mr. Chairman, for
    your interest in the International Trade Data System Project, and for
    giving us an opportunity to appear here today. I shall be happy to
    answer any questions you may have and to provide any written material
    you may want.
        Thank you.

        Chairman Crane. Thank you.
        And our next witness is Mr. Schindel.

     STATEMENT OF DENNIS S. SCHINDEL, ASSISTANT INSPECTOR GENERAL
    FOR AUDIT, OFFICE OF INSPECTOR GENERAL, U.S. DEPARTMENT OF THE
                                TREASURY

        Mr. Schindel. Thank you, Mr. Chairman, Mr. Levin, Members
    of the Subcommittee. I am pleased to appear before you today.
        A year ago I testified before this Subcommittee on the
    results of an audit that we conducted on the impact of U.S.
    Customs Service officers pay reform amendments, otherwise known
    as COPRA. Our audit, which was completed in September 1996,
    found that, while the COPRA legislation was expected to reduce
    Customs overtime costs for inspectional services, it, in fact,
    resulted in an increase in total overtime and premium pay
    costs. In a moment, I will explain why that occurred.
        When I testified last April, this Subcommittee had a bill,
    H.R. 2262, under consideration that would have revised a number
    of provisions in COPRA which contributed to the increased costs
    in overtime and premium pay. However, H.R. 2252 was not passed
    into law and the provisions of COPRA that contributed to the
    increase are still in existence today.
        COPRA became law as part of the Omnibus Budget
    Reconciliation Act of 1993 that took effect January 1, 1994.
    COPRA created a new and exclusive overtime compensation premium
    pay system for Customs Officers performing inspectional
    services. The intent behind COPRA legislation was to more
    closely match earnings to hours worked. The House report dated
    May 25, 1993 estimated that COPRA changes would result in
    overtime savings of $12 million in fiscal years 1994 and 1995
    with total savings through fiscal year 1998 of $52 million.
        After we initiated our audit what we found, however, was
    that premium pay expenses for Customs, specifically the night
    differential pay, substantially increased. So much so, that
    instead of a significant reduction in Customs overtime costs as
    COPRA was anticipated to provide, costs increased when both
    overtime and premium pay were added up. Clearly this was not
    the expected result when COPRA was passed in 1993.
        I would like to direct your attention to the bar chart
    which graphically depicts the Customs' overtime costs before
    and after COPRA.
        If I can get a little high-tech here. Actually, I had to
    wrestle this away from my 10-year-old daughter this morning.
    They are very popular with the kids. This first bar shows the
    cost to Customs' overtime in fiscal year 1993. This was the
    last full year under the prior pay legislation commonly known
    as 1911 Act overtime. As you can see, the costs for total
    overtime were $99.2 million. Of this amount, the small amount
    there, $51,000 represents the cost of night differential
    premium pay.
        Now, in the next year, fiscal year 1995 we have up here,
    that is the first full year, first full fiscal year, under the
    new COPRA legislation. And in that year, the total overtime
    costs went up to $106.1 million and the night differential
    portion of that went to $8.9 million from $51,000.
        Now Customs has continued to experience higher costs each
    year. The remaining two bars show the costs for fiscal years
    1997 and 1998. In fiscal year 1997, total overtime pay,
    including the premium pay, was $106.8 million with $9.3 million
    attributable to night differential. In fiscal year 1998, you
    can see that the costs went up to $136.9 million with $11.9
    million attributable to night differential.
        Now let me discuss the reasons why COPRA contributed to the
    increase in Customs' overtime costs and, more specifically, the
    night differential premium pay. One of the major reasons is
    that the enactment of COPRA greatly increased the number of
    available hours in which a Customs' officer could earn night
    differential. Also, COPRA increased the night differential
    amount from 10 percent of basic pay to 15 and 20 percent,
    depending on the time of day.
        Now this next chart here will graphically depict, I hope,
    exactly how this works.
        It is a little busy, so let me walk you through it. First,
    you will need to change your orientation slightly because this
    is a 24-hour clock. So, going down the righthand side, we have
    the 12 hours of the day that run from midnight to 12 noon. And
    then going up the left side, we have the 12 hours of the day
    that run from 12 noon to midnight. Now the time period that
    qualifies for night differential premium pay is represented by
    this black band here. That covers the period from 3 p.m. to 8
    a.m. or 17 out of the 24 hours in a day. The two thin blue
    arrows here represent the two periods of that night
    differential period that qualify for the premium pay rate, 15
    percent. On the left side, 20 percent. On the right side. So,
    so far we see, then, that COPRA has established a night
    differential period that covers all but 7 hours of the day and
    2 higher premium pay amounts, 15 and 20 percent.
        Now the night differential provision in COPRA legislation
    also provides that if the majority of a shift falls within a
    night differential period, then the entire shift qualifies for
    night differential premium. Now, to illustrate the impact of
    this, we have three sample shifts, which are represented in the
    color bands in the inner circle here. In these three shifts,
    the entire shift would qualify for night differential. For
    example, looking at the blue band, a Customs' officer can earn
    a 15 percent night differential for the entire 8 hours of a
    shift that starts at 12 noon and ends at 8 p.m. In addition,
    that officer can earn a 20 percent night differential for an
    entire 9-hour shift that starts at 3 a.m. and continues to 12
    noon, as represented by this green band here. Likewise, in the
    red band, we have a shift that runs from 8 p.m. to 4 a.m.,
    which would also qualify for 8 hours of night differential pay
    at the 20 percent rate.
        What this all means is that, essentially, all 24 hours of
    the day can qualify for night differential, premium pay and a
    tour of duty, such as 12 noon to 8 p.m., which most of us would
    consider primarily day-time hours, qualifies for 8 hours of
    night differential, premium pay.
        Another factor increasing Customs night differential
    expenses was an arbitration ruling which was issued toward the
    conclusion of our audit. On December 9, 1995, a panel
    arbitrator ruled in favor of the National Treasury Employees
    Union which had protested Customs' refusal to pay night
    differential to Customs' officers who were on leave for periods
    of 8 hours or longer. The ruling essentially required Customs
    to pay officers COPRA night differential even when they are on
    leave if those leave days would normally qualify for night
    differential had the officers been at work. This created a
    situation where officers received night differential premium
    pay even if they were on vacation.
        The bottom line is that the overall cost to Customs for
    overtime has shown an increase rather than a decrease after the
    passage of COPRA. It has steadily increased every year since
    1995. The night differential portion of that total cost has
    steadily increased from $51,000 in fiscal year 1993 to now
    $11.9 million in fiscal year 1998. That substantial increase
    will remain a part of Customs' total overtime costs and
    continue its upward trend unless the provisions of COPRA that I
    have outlined in this testimony are eliminated or modified
    through new legislation.
        Mr. Chairman, this concludes my remarks. I will be happy to
    answer any questions you or others may have.
        [The prepared statement follows:]

    Statement of Dennis S. Schindel, Assistant Inspector General for Audit,
    Office of Inspector General, U.S. Department of the Treasury

        Mr. Chairman, members of the Subcommittee, I am pleased to appear
    before you today. Last April, I testified on the results of an audit we
    conducted on the impact of the United States Customs Service Officers
    Pay Reform Amendments (COPRA). Our audit which was completed in
    September 1996, found that while the COPRA legislation was expected to
    reduce the United States Customs Service (Customs) overtime costs for
    inspectional services, it in fact resulted in an increase to total
    overtime and premium pay costs.
        When I testified last April this Committee had a bill H.R. 2262,
    under consideration that would have revised a number of provisions in
    COPRA that contributed to the increased costs of overtime and premium
    pay. However, H.R. 2262 was not passed into law and the provisions of
    COPRA that contributed to these increases are still in existence today.
        COPRA became law as part of the Omnibus Budget Reconciliation Act
    of 1993. It took effect January 1, 1994. COPRA created a new and
    exclusive overtime compensation and premium pay system for Customs
    officers performing inspectional services. The intent of the COPRA
    legislation was to more closely match earnings to hours worked. House
    Report 103-111, dated May 25, 1993, estimated that COPRA changes would
    result in overtime savings of $12 million in both Fiscal Year (FY) 1994
    and 1995 with total savings through FY 1998 of $52 million.
        After we initiated our audit, we found that premium pay expenses
    for Customs, specifically, the night work differential, substantially
    increased under COPRA. Instead of the significant reduction in Customs
    overtime costs that COPRA was anticipated to provide, costs increased
    due to the use of both overtime and premium pay. Clearly, this was not
    the expected result when COPRA was passed in 1993.
        According to data available from Customs budget account summaries,
    we determined that in FY 1993, the last full year under the prior pay
    legislation, commonly known as ``1911 Act overtime,'' Customs' total
    overtime costs including shift differentials were $99.2 million. Of
    this, $51,000 was due to night differentials. Looking at FY 1995, the
    first full year under COPRA, we found that total overtime costs
    increased to approximately $106.1 million. Of this, $8.9 million was
    specifically attributable to night shift differentials. Therefore,
    COPRA substantially increased Customs costs for night differential pay
    from $51,000 in 1993 to $8.9 million in 1995.
        Customs has continued to experience higher costs each year. In FY
    1997 total overtime pay, including premium pay was $126.8 million of
    which $9.3 million was due to night differentials. In FY 1998 the costs
    were $136.9 million and $11.9 million respectively.
        One of the major reasons for the increase in Customs premium pay
    costs, and more specifically the night differential is that the
    enactment of COPRA greatly increased the number of available hours in
    which a Customs Officer could earn night differential. Also, COPRA
    increased the night differential amount from 10 percent of basic pay to
    15 percent or 20 percent depending on the time of day.
        Specifically, the time period that qualifies for night differential
    premium pay extends from 3 p.m. to 8 a.m. or 17 out of the 24 hours in
    the day. The period from 3 p.m. to 12 a.m. qualifies for the 15 percent
    differential and the period from 11 p.m. to 8 a.m. qualifies for the 20
    percent differential. The night differential provision in the COPRA
    legislation also provides that if the majority of a shift falls within
    the night differential period, then the entire shift qualifies for the
    night differential premium. For example, a Customs officer can earn a
    15 percent night differential for the entire 8 hours of a shift that
    starts at 12 noon and ends at 8 p.m. In addition, that officer can earn
    a 20 percent night differential for an entire 9 hour shift that starts
    at 3 a.m. and continues through 12 noon. Likewise, a shift that runs
    from 8:00 p.m. until 4:00 a.m. would also qualify for night
    differential pay, at the 20 percent rate. Essentially, all 24 hours of
    the day can qualify for night differential premium pay and a tour of
    duty such as 12 noon to 8 p.m., which most of us would consider
    primarily daytime hours, qualifies for 8 hours of night differential
    premium pay.
        Another factor increasing Customs night differential expenses was
    an arbitration ruling which was issued toward the conclusion of our
    audit. On December 9, 1995, a panel arbitrator ruled in favor of the
    National Treasury Employees Union which protested Customs refusal to
    pay night differential to Customs officers who were on leave for
    periods of 8 hours or longer. The ruling required Customs to pay
    officers COPRA night differential even when they are on leave, if those
    leave days would normally qualify for night differential had the
    officers been at work. This created a situation where officers received
    night differential premium pay even if they were on vacation. While
    this situation was addressed temporarily in FY 1997 and again in FY
    1998 through language in the Customs appropriation, a permanent
    correction is needed through a revision to the COPRA pay legislation.
        In summary, the overall cost to Customs for overtime has shown an
    increase rather than a decrease after the passage of COPRA and has
    steadily increased every year since 1995.
        The night differential portion of that total cost has steadily
    increased from $51,000 in FY 1993 to $11.9 million in FY 1998. That
    substantial increase will remain a part of Customs' total overtime
    costs and continue its upward trend unless the provisions of COPRA
    outlined in this testimony are eliminated or modified through new
    legislation.

        Chairman Crane. Thank you, Mr. Schindel.
        Mr. Rabkin.

      STATEMENT OF NORMAN J. RABKIN, DIRECTOR, ADMINISTRATION OF
       JUSTICE ISSUES, GENERAL GOVERNMENT DIVISION, U.S. GENERAL
                           ACCOUNTING OFFICE

        Mr. Rabkin. Thank you, Mr. Chairman, Mr. Levin, Members of
    the Subcommittee. I am pleased to be here today to discuss the
    work that GAO has done, mostly for this Subcommittee,
    addressing the Customs Service's effort to interdict drugs, to
    combat corruption, and to comply with the Government
    Performance and Results Act. My testimony on these subjects is
    based on reports that we have issued since 1997.
        You also asked me to discuss the basis for the $163 million
    estimate of revenues to be produced by a fee to be charged to
    nongovernment organizations for the use of Customs automation
    systems. My statement contains a thorough discussion of these
    issues and it has references to our issued reports for more
    details. I will just summarize the key points for you.
        First, on interdiction of drugs. We reported on four
    different areas. The first relates to Customs' efforts to
    interdict drugs being smuggled through the ports while it moves
    legitimate traffic through the ports as quickly as possible. We
    reported on several ways Customs tries to identify and
    segregate low-risk traffic, that is, repeat shipments from
    known manufacturers or known truckers or with known importers.
    Then Customs tries to devote most of its inspectional activity
    to higher risk traffic. We pointed out some of the problems
    Customs was having with those programs and made recommendations
    to improve them.
        Second, in the area of drug interdiction, we reported on
    the Custom's aviation program. The program has three
    interdiction-related missions. The main point of our report was
    that, over the past 3 years, Customs has spent about half of
    its aviation resources helping on investigations; about 25
    percent conducting surveillance operations in Central and South
    America; and the remaining 25 percent on interdiction
    activities along the Southwest border.
        Third, we are issuing a report today to the Senate
    Appropriations Committee on the status of field testing of a
    technology designed to help Customs determine whether specific
    illegal drugs are in sea or truck containers. Although Customs
    has not been very supportive of this new technology, it is
    working with the Pentagon and the Federal Aviation
    Administration to support further testing, which is scheduled
    to begin later this year.
        And, finally, in the area of drug interdiction, we reported
    last year on the missions and funding of Federal agencies that
    collect or produce drug intelligence. Customs has a sizable
    intelligence function and focuses on drug smuggling
    individuals, organizations, transportation networks, and
    patterns.
        Next, on the issue of drug-related corruption, we recently
    reported that Customs and the Immigration and Naturalization
    Service could be doing more to prevent corruption. Our work
    focused on drug-related corruption along the Southwest border.
    Although there have been only a relatively few cases of
    documented drug-related corruption, we found that Customs
    wasn't conducting reinvestigations of key personnel as often as
    it had planned. We also recommended that Customs follow up on
    cases where employees are convicted of corruption, determine
    how it happened, and then make the appropriate changes so it
    wouldn't happen again.
        The next area I would like to comment on is strategic
    planning and resource allocation. Customs' strategic planning
    generally meets the requirements and intents of the Results
    Act. It covers the major missions and has result-oriented
    goals. Customs annual performance plans should also be helpful
    to decisionmakers such as this committee in reviewing how well
    Customs has been achieving its goals and setting priorities for
    coming years.
        Regarding the allocation of resources, specifically
    personnel, among Customs' 301 ports, as Commissioner Kelly
    mentioned this morning, the agency has begun to develop a more
    rigorous data based system, as we had recommended in reports
    issued last year.
        Finally, you asked us about the proposed automation fee,
    user fee for the automation systems. The President's budget
    proposes this fee and it shows a $163 million revenue that is
    to be generated by it. The collection of the fee is tentatively
    scheduled to start in fiscal year 2000 and continue for at
    least the following 4 years.
        According to Treasury and OMB and Customs officials, the
    estimate was based on the following three assumptions. First,
    Customs will develop and implement ACE over a 4-year period at
    a cost of about $1 billion. The second assumption was the
    Treasury would develop and implement the new international
    trade data system over the same period at a cost of about $250
    million. And the third assumption was that the Federal
    Government and the trade community would share these costs
    equally. Therefore, the first year's costs, which, in this
    case, would be a quarter of the total amount, about $325
    million, would be shared equally, $162.5 million each, $163
    million by the trade community to be represented by the user
    fee and by the Government.
        Mr. Chairman, this completes my summary and I will be glad
    to answer your questions.
        [The prepared statement follows:]

    Statement of Norman J. Rabkin, Director, Administration of Justice
    Issues, General Government Division, U.S. General Accounting Office

               U.S. Customs Service: Budget Authorization Issues

        Mr. Chairman and Members of the Subcommittee: I am pleased to be
    here today at this Customs oversight hearing to discuss work we have
    done, mostly for this Subcommittee, addressing Customs' efforts to
    interdict drugs, combat corruption, and comply with the Results Act.\1\
    For the most part, our testimony is based on products we have issued on
    each of these subjects since 1997. You also asked us to discuss the
    basis for the $163 million access fee to be charged to nongovernment
    organizations for the use of Customs' automation systems as included in
    the President's fiscal year 2000 budget. Our discussion of the user fee
    is based on interviews with the Office of Management and Budget (OMB),
    the Department of the Treasury, and Customs officials and a review of
    sections of the President's fiscal year 2000 budget.
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        \1\ Government Performance and Results Act of 1993, P.L. 103-62.
    ---------------------------------------------------------------------------
        Created in 1789, the U.S. Customs Service is one of the federal
    government's oldest agencies. Customs is responsible for collecting
    revenue from imports and enforcing customs and related laws. Customs
    collects revenues of about $22 billion annually while processing an
    estimated 15 million import entries and 450 million people who enter
    the country. A major goal of Customs is to prevent the smuggling of
    drugs into the country by creating an effective drug interdiction,
    intelligence, and investigation capability to disrupt and dismantle
    smuggling organizations. Customs' workforce totals almost 20,000
    employees at its headquarters, 20 Customs Management Centers, 20
    Special Agent-in-Charge (SAC) offices, and 301 ports of entry around
    the country.

                               Drug Interdiction

        Our work on Customs' efforts to interdict drugs has focused on four
    distinct areas: (1) internal controls over Customs' low-risk cargo
    entry programs; (2) the missions, resources, and performance measures
    for Customs' aviation program; (3) the development of a specific
    technology for detecting drugs; and (4) Customs drug intelligence
    capabilities.

    Low-Risk Cargo Entry Programs

        In July 1998, at the request of Senator Dianne Feinstein,
    we reported on Customs' drug-enforcement operations along the
    Southwest border of the United States.\2\ Our review focused on
    low-risk, cargo entry programs in use at three ports--Otay
    Mesa, California; Laredo, Texas; and Nogales, Arizona. To
    balance the facilitation of trade through ports and the
    interdiction of illegal drugs being smuggled into the United
    States, Customs initiated and encouraged its ports to use
    several programs to identify and separate low-risk shipments
    from those with apparently higher smuggling risk. The Line
    Release Program was designed to expedite cargo shipments that
    Customs determined to be repetitive, high volume, and low risk
    for narcotics smuggling. In 1996, Customs implemented the Land
    Border Carrier Initiative Program, which required that the Line
    Release shipments across the Southwest border be transported by
    Customs-approved carriers and driven by Customs-approved
    drivers. After the Carrier Initiative Program was implemented,
    the number of Southwest Border Line Release shipments dropped
    significantly. We identified internal control weaknesses in one
    or more of the processes used at each of the three ports we
    visited to screen Line Release applicants for entry into the
    program. These weaknesses included (1) an absence of specific
    criteria for determining applicant eligibility at two of the
    three ports, (2) incomplete documentation of the screening and
    review of applicants at two of the three ports, and (3) lack of
    documentation of supervisory review and approval of decisions.
    During our review, Customs representatives from northern and
    southern land-border cargo ports approved draft Line Release
    volume and compliance eligibility criteria for program
    applicants and draft recertification standards for program
    participants.
    ---------------------------------------------------------------------------
        \2\ Customs Service Drug Interdiction: Internal Control Weaknesses
    and Other Concerns With Low-Risk Cargo Entry Programs (GAO/GGD-98-175,
    July 31, 1998).
    ---------------------------------------------------------------------------
        The Three Tier Targeting Program--a method of targeting
    high-risk shipments for narcotics inspection--was used at the
    three Southwest border ports that we visited. According to
    officials at the three ports, the Three Tier program had two
    operational problems that contributed to their loss of
    confidence in the program's ability to distinguish high-from
    low-risk shipments. First, there was little information
    available in any database for researching foreign
    manufacturers. Second, local officials doubted the reliability
    of the designations. They cited examples of narcotics seizures
    from shipments designated as ``low-risk'' and the lack of a
    significant number of seizures from shipments designated as
    ``high-risk.'' Customs suspended this program until more
    reliable information is developed for classifying low-risk
    importations.
        One low-risk entry program--the Automated Targeting
    System--was being pilot tested at Laredo. It was designed to
    enable port officials to identify and direct inspectional
    attention to high-risk shipments. The Automated Targeting
    System is designed to assess shipment entry information for
    known smuggling indicators and thus enable inspectors to target
    high-risk shipments more efficiently. Customs is evaluating the
    Automated Targeting System for expansion to other land-border
    cargo ports.
    Aviation Program

        In September 1998, we reported on Customs' aviation program
    missions, resources, and performance measures.\3\ Since the
    establishment of the Customs Aviation Program in 1969, its basic
    mandate to use air assets to counter the drug smuggling threat has not
    changed. Originally, the program had two principle missions:
    ---------------------------------------------------------------------------
        \3\ Customs Service: Aviation Program Missions, Resources, and
    Performance Measures (GAO/GGD-98-186, Sept. 9, 1998).
    ---------------------------------------------------------------------------
         border interdiction of drugs being smuggled by plane into
    the United States and
         law enforcement support to other Customs offices as well
    as other federal, state, and local law enforcement agencies.
        In 1993, the Administration instituted a new policy to control
    drugs coming from South and Central America. Because Customs aircraft
    were to be used to help carry out this policy, foreign counterdrug
    operations became a third principal mission for the aviation program.
    Since then, the program has devoted about 25 percent of its resources
    to the border interdiction mission, 25 percent to foreign counterdrug
    operations, and 50 percent to other law enforcement support.
        Customs Aviation Program funding decreased from about $195 million
    in fiscal year 1992, to about $135 million in fiscal year 1997--that
    is, about 31 percent in constant or inflation-adjusted dollars. While
    available funds decreased, operations and maintenance costs per
    aircraft flight hour increased. Customs Aviation Program officials said
    that this increase in costs was one of the reasons they were flying
    fewer hours each year. From fiscal year 1993 to fiscal year 1997, the
    total number of flight hours for all missions decreased by over one-
    third, from about 45,000 hours to about 29,000 hours.
        The size of Customs' fleet dropped in fiscal year 1994, when
    Customs took 19 surveillance aircraft out of service because of funding
    reductions. The fleet has remained at about 115 since then.\4\ The
    number of Customs Aviation Program onboard personnel dropped steadily,
    from a high of 956 in fiscal year 1992 to 745 by the end of fiscal year
    1997.\5\
    ---------------------------------------------------------------------------
        \4\ Customs' fleet will increase because additional aircraft were
    funded in the fiscal year 1999 Omnibus Consolidated and Emergency
    Supplemental Appropriations Act, P.L. 105-277, 112 Stat 2681-553, 2681-
    583.
        \5\ Staffing for the Aviation program is expected to grow to 817 in
    fiscal year 2000, according to Customs' latest budget justification.
    ---------------------------------------------------------------------------
        Customs has been using traditional law enforcement measures to
    evaluate the aviation program (e.g., number of seizures, weight of
    drugs seized, number of arrests). These measures, however, are used to
    track activity, not measure results or effectiveness. Until 1997,
    Customs also used an air threat index as an indicator of its
    effectiveness in detecting illegal air traffic.\6\ However, Customs has
    discontinued use of this indicator, as well as selected other
    performance measures, because Customs determined that they were not
    good measures of results and effectiveness. Having recognized that
    these measures were not providing adequate insights into whether the
    program was producing desired results, Customs says it is developing
    new performance measures in order to better measure results. However,
    its budget submission for fiscal year 2000 contained no new performance
    measures.
    ---------------------------------------------------------------------------
        \6\ The air threat index used various indicators, such as the
    number of stolen and/or seized aircraft, to determine the potential
    threat of air drug smuggling.

    ---------------------------------------------------------------------------
    Pulsed Fast Neutron Analysis Inspection System

        The pulsed fast neutron analysis (PFNA) inspection system is
    designed to directly and automatically detect and measure the presence
    of specific materials (e.g., cocaine) by exposing their constituent
    chemical elements to short bursts of subatomic particles called
    neutrons. Customs and other federal agencies are considering whether to
    continue to invest in the development and fielding of this technology.
        The Chairman and the Ranking Minority Member of the Subcommittee on
    Treasury and General Government, Senate Committee on Appropriations,
    asked us to provide information about (1) the status of plans for field
    testing a PFNA system and (2) federal agency and vendor views on the
    operational viability of such a system. We are issuing our report on
    that work today.\7\
    ---------------------------------------------------------------------------
        \7\ Terrorism and Drug Trafficking: Testing Status And Views on
    Operational Viability of Pulsed Fast Neutron Analysis Technology (GAO/
    GGD-99-54, Apr. 13, 1999).
    ---------------------------------------------------------------------------
        Customs, the Department of Defense (DOD), the Federal Aviation
    Administration (FAA), and Ancore Corporation--the inspection system
    inventor--recently began planning to field test PFNA. Because they are
    in the early stage of planning, they do not expect the actual field
    test to begin until mid to late 1999 at the earliest. Generally
    speaking, agency and vendor officials estimated that a field test
    covering Customs' and DOD's requirements will cost at least $5 million
    and that the cost could reach $8 million if FAA's requirements are
    included in the joint test. Customs officials told us that they are
    working closely with the appropriate applicable congressional
    committees and subcommittees to decide whether Customs can help fund
    the field test, particularly given the no-federal-cost language of
    Senate Report 105-251.\8\ In general, a complete field test would
    include (1) preparing a test site and constructing an appropriate
    facility; (2) making any needed modifications to the only existing PFNA
    system and its components; \9\ (3) disassembling, shipping, and
    reassembling the system at the test site; and (4) conducting an
    operational test for about 4 months. According to agency and Ancore
    officials, the test site candidates are two seaports in California
    (Long Beach and Oakland) and two land ports in El Paso, Texas.
    ---------------------------------------------------------------------------
        \8\ Senate Report 105-251 (July 1998) on the fiscal year 1999
    Treasury and General Government Appropriations bill directs the
    Commissioner of Customs to enter into negotiations with the private
    sector to conduct a field test of the PFNA technology at no cost to the
    federal government.
        \9\ The existing (prototype) PFNA system is located at the vendor's
    plant in Santa Clara, CA.
    ---------------------------------------------------------------------------
        Federal agency and vendor views on the operational viability of
    PFNA vary. While Customs, DOD, and FAA officials acknowledge that
    laboratory testing has proven the technical feasibility of PFNA, they
    told us that the current Ancore inspection system would not meet their
    operational requirements. Among their other concerns, Customs, DOD, and
    FAA officials said that a PFNA system not only is too expensive (about
    $10 million to acquire per system), but also is too large for
    operational use in most ports of entry or other sites. Accordingly,
    these agencies question the value of further testing. Ancore disputes
    these arguments, believes it can produce an operationally cost-
    effective system, and is proposing that a PFNA system be tested at a
    port of entry. The Office of National Drug Control Policy has
    characterized neutron interrogation as an ``emerging'' or future
    technology that has shown promise in laboratory testing and thus
    warrants field testing to provide a more informed basis for deciding
    whether PFNA has operational merit.

    Federal Counterdrug Intelligence Coordination Efforts

        At the request of the Subcommittee on National Security,
    International Affairs, and Criminal Justice, House Committee on
    Government Reform and Oversight,\10\ in June 1998 we identified the
    organizations that collect and/or produce counterdrug intelligence, the
    role of these organizations, the federal funding they receive, and the
    number of personnel that support this function.\11\ We noted that more
    than 20 federal or federally funded organizations, including Customs,
    spread across 5 cabinet-level departments and 2 cabinet-level
    organizations, have a principal role in collecting or producing
    counterdrug intelligence. Together, these organizations collect
    domestic and foreign counterdrug intelligence information using human,
    electronic, photographic, and other technical means.
    ---------------------------------------------------------------------------
        \10\ This is now the Subcommittee on National Security, Veterans'
    Affairs, and International Relations of the House Committee on
    Government Reform.
        \11\ Drug Control: An Overview of U.S. Counterdrug Intelligence
    Activities (GAO/NSIAD-98-142, June 25, 1998).
    ---------------------------------------------------------------------------
        Unclassified information reported to us by counterdrug intelligence
    organizations shows that over $295 million was spent for counterdrug
    intelligence activities during fiscal year 1997 and that more than
    1,400 federal personnel were engaged in these activities. The
    Departments of Justice, the Treasury, and Defense accounted for over 90
    percent of the money spent and personnel involved.
        Among its many missions, Customs is the lead agency for
    interdicting drugs being smuggled into the United States and its
    territories by land, sea, or air. Customs' primary counterdrug
    intelligence mission is to support its own drug enforcement elements
    (i.e., inspectors and investigators) in their interdiction and
    investigation efforts. Customs is responsible for producing tactical,
    operational, and strategic intelligence concerning drug-smuggling
    individuals, organizations, transportation networks, and patterns and
    trends. In addition to providing these products to its own drug
    enforcement elements, Customs is to provide this information to other
    agencies with drug enforcement or intelligence responsibilities.
    Customs is also responsible for analyzing the intelligence community's
    reports and integrating them with its own intelligence. Customs' in-
    house collection capability is heavily weighted toward human
    intelligence, which comes largely from inspectors and investigators who
    obtain information during their normal interdiction and investigation
    activities.

                                   Corruption

        On March 30, 1999, we issued a report to the Chairman of the Senate
    Caucus on International Narcotics Control on the efforts of Customs and
    the Immigration and Naturalization Service to address employee
    corruption on the Southwest border.\12\ We said that both agencies
    could do more to prevent drug-related employee corruption. The
    following reflects our findings and recommendations relative to Customs
    and Customs' response to our report.
    ---------------------------------------------------------------------------
        \12\ Drug Control: INS and Customs Can Do More to Prevent Drug-
    Related Employee Corruption (GAO/GGD-99-31, Mar. 30, 1999).
    ---------------------------------------------------------------------------
        Customs has policies and procedures designed to ensure the
    integrity of its employees. These policies and procedures consist
    mainly of mandatory background investigations for new staff and 5-year
    reinvestigations of employees, as well as basic integrity training. As
    required, Customs generally had completed background investigations for
    new hires by the end of their first year on the job. However,
    reinvestigations were typically overdue, in some instances by as many
    as 3 years. Customs officials said that the basic training that new
    employees are to receive includes integrity training. Agency records
    for 88 of 100 randomly selected Customs employees on the Southwest
    border showed that they received several hours of integrity training as
    part of their basic training. According to Customs officials, the
    remaining employees likely received basic training, but it was not
    documented in their records.
        However, Customs was not taking full advantage of these policies
    and procedures, as well as the lessons it should have learned from
    closed corruption cases, to address fully the increased threat of
    employee corruption on the Southwest border. Some Customs employees on
    the Southwest border have engaged in a variety of illegal drug-related
    activities, including waving drug loads through ports of entry,
    coordinating the movement of drugs across the Southwest border,
    transporting drugs past Border Patrol checkpoints, selling drugs, and
    disclosing drug intelligence information. Customs' Office of Internal
    Affairs is required to formally report internal control weaknesses
    identified from closed corruption cases, but has not done so. Our
    review of nine cases involving Customs employees assigned to the
    Southwest border who were convicted of drug-related crimes between
    fiscal years 1992 and 1997, revealed internal control weaknesses that
    were not formally reported and/or corrected.\13\ These weaknesses
    included instances where:
    ---------------------------------------------------------------------------
        \13\ If employees entered guilty pleas, we considered them to have
    been convicted of the crime.
    ---------------------------------------------------------------------------
         drug smugglers chose the inspection lane at a port of
    entry,
         employees did not recuse themselves from inspecting
    individuals with whom they had close personal relationships, and
         employees disclosed drug intelligence information.
        Also, Customs had not formally evaluated its integrity procedures
    to determine their effectiveness. For example, we determined that
    financial information required for background investigations and
    reinvestigations was not fully reviewed.\14\
    ---------------------------------------------------------------------------
        \14\ The Department of the Treasury's Office of Professional
    Responsibility published a report on corruption with findings that are
    consistent with ours. See An Assessment of Vulnerabilities to
    Corruption and Effectiveness of the Office of Internal Affairs, U.S.
    Customs Service (Feb. 1999).
    ---------------------------------------------------------------------------
        We recommended that Customs:
         evaluate the effectiveness of integrity assurance efforts,
    including training, background investigations, and reinvestigations;
         comply with policies that require employment
    reinvestigations to be completed when they are due;
         document that policies and procedures were reviewed to
    identify internal control weaknesses in cases where an employee is
    determined to have engaged in drug-related criminal activities;
         strengthen internal controls at Southwest border ports of
    entry; and
         fully review financial disclosure statements to identify
    financial issues, such as cases in which employees appear to be living
    beyond their means.
        Customs generally concurred with our recommendations and indicated
    that it is taking steps to implement them. However, Customs requested
    that we reconsider our recommendation that it fully review the
    financial disclosure statements provided by employees as part of the
    background and reinvestigation process. Customs indicated that
    implementing this recommendation may violate the provisions of the
    Computer Matching Act.\15\ Our recommendation expects Customs to make a
    more thorough examination of the financial information it collects to
    determine whether employees appear to be living beyond their means. We
    leave it to Customs' discretion to determine the type of examination to
    be performed. Since implementing the recommendation does not require
    electronically matching financial disclosure information with other
    data, the Computer Matching Act would not apply.
    ---------------------------------------------------------------------------
        \15\ The Computer Matching and Privacy Protection Act of 1988, P.L.
    100-503, generally requires that agencies engaging in computer matching
    must do so pursuant to written matching agreements that state such
    things as the purpose and legal authority of the match, the
    justification for the matching program, its anticipated results, a
    description of the records to be matched, as well as other information
    on the program.
    ---------------------------------------------------------------------------

                               Strategic Planning

        In the past 18 months, we have reported on Customs' compliance with
    provisions of the Government Performance and Results Act. We have also
    reported on how it has determined its need for inspectors and how it
    has allocated inspectional positions to ports around the country.

    Performance Planning

        Under the Results Act, executive agencies are to develop
    strategic plans in which they, among other things, define their
    missions, establish results-oriented goals, and identify
    strategies they plan to use to achieve those goals. In
    addition, agencies are to submit annual performance plans
    covering the program activities set out in the agencies'
    budgets (which began with plans for fiscal year 1999); and the
    plans are to describe the results the agencies expect to
    achieve with the requested resources and indicate the progress
    the agency expects to make during the year in achieving its
    strategic goals.
        The strategic plan developed by the Customs Service
    addressed the six requirements of the Results Act. Concerning
    the elements required, the mission statement was results
    oriented and covered Customs' principal statutory mission--
    ensuring that all goods and persons entering and exiting the
    United States do so in compliance with all U.S. laws and
    regulations. The plan's goals and objectives covered Customs'
    major functions--processing cargo and passengers entering and
    cargo leaving the United States. The plan discussed the
    strategies by which Customs hopes to achieve its goals. The
    strategic plan discussed, in very general terms, how it related
    to annual performance plans. The plan discussed some key
    factors, external to Customs and beyond its control, that could
    significantly affect achievement of the strategic goals, such
    as the level of cooperation of other countries in reducing the
    supply of narcotics. Customs' strategic plan also contained a
    listing of program evaluations used to prepare the plan and
    provided a schedule of evaluations to be conducted in each of
    the functional areas.
        In addition to the required elements, Customs' plan
    discussed the management challenges it was facing in carrying
    out its core functions, including information and technology,
    finance, and human resources management. However, the plan did
    not adequately recognize Customs' need to improve:
         financial management and internal control systems,
         controls over seized assets,
         plans to alleviate Year 2000 problems,\16\ and
    ---------------------------------------------------------------------------
        \16\ Customs has established effective Year 2000 program management
    controls, including structures and processes for Year 2000 testing,
    contingency planning, and Year 2000 status reporting. See Year 2000
    Computing Crisis: Customs Has Established Effective Year 2000 Program
    Controls (GAO/AIMD-99-37, Mar. 29, 1999).
    ---------------------------------------------------------------------------
         plans to improve computer security.\17\
    ---------------------------------------------------------------------------
        \17\ See Customs Service: Comments on Strategic Plan and Resource
    Allocation Process (GAO/T-GGD-98-15, Oct. 16, 1997) and Results Act:
    Observations on Treasury's Fiscal Year 1999 Annual Performance Plan
    (GAO/GGD-98-149, June 30, 1998).
    ---------------------------------------------------------------------------
        We reported that these weaknesses could affect the
    reliability of Customs' performance data.
        Further, our initial review of Customs' fiscal year 2000
    performance plan showed that it is substantially unchanged in
    format from the one presented for 1999. Although the plan is a
    very useful document for decisionmakers, it still does not
    recognize Customs' need to improve its internal control
    systems, control over seized assets, or plans to improve
    computer security.

    Resource Allocation

        Regarding Customs' resource allocation process, in April 1998 we
    reported on selected aspects of the Customs Service's process for
    determining its need for inspectional personnel--such as inspectors and
    canine enforcement officers--for its commercial cargo or land and sea
    passengers at all of its 301 ports.\18\
    ---------------------------------------------------------------------------
        \18\ Customs Service: Process for Estimating and Allocating
    Inspectional Personnel (GAO/GGD-98-107, Apr. 30, 1998); Customs
    Service: Inspectional Personnel and Workloads (GAO/GGD-98-170, Aug. 14,
    1998); and Customs Service: Inspectional Personnel and Workloads (GAO/
    T-GGD-98-195, Aug. 14, 1998).
    ---------------------------------------------------------------------------
        Customs officials were not aware of any formal agencywide efforts
    prior to 1995 to determine the need for additional cargo or passenger
    inspectional personnel for its 301 ports. However, in preparation for
    its fiscal year 1997 budget request and a new drug enforcement
    operation called Hard Line,\19\ Customs conducted a formal needs
    assessment. The needs assessment considered (1) fully staffing all
    inspectional booths and (2) balancing enforcement efforts with the need
    to move complying cargo and passengers quickly through the ports.
    Customs conducted two subsequent assessments for fiscal years 1998 and
    1999. These assessments considered the number and location of drug
    seizures and the perceived threat of drug smuggling, including the use
    of rail cars to smuggle drugs. However, all these assessments were
    ---------------------------------------------------------------------------
        \19\ Operation Hard Line was Customs' effort to address border
    violence and drug smuggling through intensified inspections, improved
    facilities, and advances in technology.
    ---------------------------------------------------------------------------
         focused exclusively on the need for additional personnel
    to implement Hard Line and similar initiatives,
         limited to land ports along the southwest border and
    certain sea and air ports considered to be at risk from drug smuggling,
         conducted each year using generally different assessment
    factors, and
         conducted with varying degrees of involvement by Customs'
    headquarters and field units.
        We concluded that these limitations could prevent Customs from
    accurately estimating the need for inspectional personnel and then
    allocating them to ports. We further concluded that, for Customs to
    implement the Results Act successfully, it had to determine its needs
    for inspectional personnel for all of its operations and ensure that
    available personnel are allocated where they are needed most.
        We recommended that Customs establish an inspectional personnel
    needs assessment and allocation process, and it is in the process of
    responding to that April 1998 recommendation. Customs awarded a
    contract for the development of a resource allocation model. Customs
    officials told us that the model was delivered in March 1999 and that
    they are in the early stages of deciding how to use the model and
    implement a formal needs assessment system.

                      Proposed Automated Systems User Fee

        Customs plans to spend more than $1 billion over the next few years
    to modernize its systems environment for certain core missions,
    including facilitating international trade, enforcing laws governing
    the flow of goods across the borders, and assessing and collecting
    about $22 billion annually on imported merchandise. To pay for the
    development and implementation of new automated systems, the
    President's budget for fiscal year 2000 proposes a Customs automation
    systems access fee to be charged to nongovernment organizations using
    the system--generally, importers or their brokers. As currently
    proposed by the administration, the fee will amount to $1.80 per 1,000
    bytes of information processed by Customs for commercial users and
    should generate an estimated $163 million in revenue per year.
    Collection of this fee is tentatively scheduled to start in fiscal year
    2000 and to continue for at least the following 4 or 5 years.
        You asked us to discuss the basis for the $163 million estimate.
    According to Treasury officials, the estimate is based on the following
    three assumptions:
         Customs will develop and implement the Automated
    Commercial Environment (ACE) over a 4-year period (from fiscal year
    2001 to fiscal year 2004) at a total cost of over $1 billion.\20\
    ---------------------------------------------------------------------------
        \20\ In 1997, Customs developed a $1.05 billion estimate to
    develop, operate, and maintain ACE over the 15-year period from 1994 to
    2008, and it is still Customs' current official life cycle cost
    estimate.
    ---------------------------------------------------------------------------
         Treasury will develop and implement its new International
    Trade Data System (ITDS) over the same period at a cost of about $256
    million.
         The federal government and the trade community will share
    the cost of these systems. Therefore, the $325 million annual cost
    ($1.3 billion/4 years, the period to develop and implement the two
    systems) would be split--$162.5 million each.
        In addition to the $163 million generated by the user fee,
    additional funds would be needed from other sources, including direct
    appropriations, in each of the four fiscal years beginning in 2001. OMB
    and Treasury officials told us that additional appropriated funds
    already in the budget base will be directed to the development and
    implementation of the systems. These officials also said that current
    estimates are preliminary and are likely to change when a contract to
    develop the systems is awarded.
        Customs projected that it will process about 90.5 billion bytes of
    data annually for commercial users of its system. Dividing the $163
    million annual cost proposed to be borne by the trade community by the
    expected volume yields a charge of $1.80 per 1,000 bytes of
    information.
        Mr. Chairman, this completes my statement. I would be pleased to
    answer any questions.

        Chairman Crane. Thank you, Mr. Rabkin.
        And, finally, Mr. Hite.

          STATEMENT OF RANDOLPH C. HITE, ASSOCIATE DIRECTOR,
    GOVERNMENTWIDE AND DEFENSE INFORMATION SYSTEMS, ACCOUNTING AND
    INFORMATION MANAGEMENT DIVISION, U.S. GENERAL ACCOUNTING OFFICE

        Mr. Hite. Chairman Crane, Mr. Levin, thank you for inviting
    me to participate in today's hearing. My testimony will focus
    on Customs' management of ACE is based on a recent report in
    which we identified a number of management and technical
    weaknesses facing Customs on ACE that jeopardize the successful
    delivery of needed system capabilities on time and within
    budget.
        Mr. Chairman, before I summarize the ACE weaknesses, I
    would like to make two points. First, the need to leverage
    information technology to improve the way that Customs
    approaches import processing is undeniable. I have seen
    firsthand the outdated import processes that Customs currently
    uses. These processes are paper-laden and they are time-
    consuming and they are out of step with the just-in-time
    inventory processes of the trade. Moreover, Customs import
    processes are transaction based rather than account based. That
    is analogous to you and I receiving a separate bill and making
    a separate payment on our credit cards for each transaction
    that we make.
        Second, as the Commissioner outlined earlier, Customs
    concurs with our findings and is committed to implementing
    them. And, as the Commissioner outlined, they have already
    taken some steps to begin implementing them. We are very
    encouraged by this and wish to commend the Commissioner for his
    commitment and personal involvement in ACE.
        I would now like to briefly discuss the three categories of
    ACE weaknesses that we found and the steps that Customs has
    begun taking to implement our recommendations. First, we found
    that Customs has not been building ACE within the context of a
    complete and enforced enterprise systems architecture. In lay
    terms, an architecture is a blueprint of an organization's
    future systems environment. Its purpose is basically the same
    as that of any construction blueprint, to provide a standards
    based and analytically derived framework within which to
    construct interrelated and interdependent components. Without
    enterprise architectures, our work has shown that incompatible
    systems are produced that require additional time and resources
    to interconnect and maintain and that suboptimize overall
    organizational performance.
        In response to recommendations that we made last year on
    this matter, Customs reports that it plans to complete its
    architecture next month and that it has already modified its
    procedures to provide for effective enforcement of the
    architecture.
        Second, we found that Customs did not have a firm basis for
    knowing whether its proposed system solution was the right
    thing, meaning that it is the most cost-effective alternative
    to pursue. When investing in information systems, organizations
    should do three things: (1) identify and analyze alternative
    system solutions; (2) reliably forecast system return on
    investment, as Mr. Houghton mentioned, and invest in the
    alternative providing the highest return on investment; and (3)
    manage large investments by breaking them into a series of
    smaller increments and forecasting expected and validating
    actual return on investment from one increment at a time.
        In the case of ACE, we found that Customs did not satisfy
    any of these requirements. For example, Customs forecasts of
    return on investment was based on unreliable estimates of cost
    and benefits; did not consider alternative system solutions and
    approaches; and was predicated on an all-or-nothing investment
    approach that has proven to be ineffective in managing large
    modernization investments.
        In response to our recommendations in this area, as the
    Commissioner mentioned, they are now analyzing alternative
    approaches to ACE and they are developing the capability to
    perform cost-
    benefit analyses and post-implementation analyses on system
    increments. Customs also plans to have these analyses
    independently validated.
        Third, we found that Customs processes for developing and
    acquiring ACE software lacked engineering rigor and discipline.
    One measure of such rigor and discipline is the Software
    Engineering Institute's capability maturity models. We
    evaluated ACE software processes against SEI's criteria for a
    repeatable level of software maturity, which is the second
    level on a five-level maturity scale. Customs did not fully
    satisfy any of these criterion and, thus, its capability to
    either develop or acquire software is, by definition, ad hoc,
    at times chaotic, and not effective.
        In response to our recommendations, Customs reports that it
    is developing plans to achieve SEI level two maturity and then
    level three maturity; that it is preparing a directive to
    require level two capabilities of all software contractors; and
    that is exploring engaging a systems integration contractor
    with at least a level three capability to assist it.
        In conclusion, successful systems modernization is critical
    to Customs ability to function in the 21st century. Success,
    however, depends on doing the right thing and doing it the
    right way. To be right, Customs must invest in and build
    systems within the context of an enterprise systems
    architecture; make informed, data-driven decisions about
    investment options based on reliable analyses of expected and
    actual return on investment for system increments; and it must
    build its system increments using mature software processes.
    Our work on other challenged modernization programs has shown
    that to do less increases the risk of delivering less-than-
    promised capabilities late and for more than projected cost.
        Fortunately, Customs acknowledges its weaknesses and is
    committed to correcting them. We are equally committed to
    working with Customs in this endeavor and working with the
    Congress in overseeing Customs' efforts. This concludes my
    statement. I will be happy to answer any questions you may have
    at this time.
        [The prepared statement follows:]

    Statement of Randolph C. Hite, Associate Director, Governmentwide and
    Defense Information Systems, Accounting and Information Management
    Division, U.S. General Accounting Office

        Mr. Chairman and Members of the Subcommittee: Thank you for
    inviting me to participate in today's Customs Service oversight
    hearing. My statement will focus on Customs' Automated Commercial
    Environment, better known as ACE. Through ACE, Customs intends to
    implement much needed improvements in the way it currently enforces
    import trade laws and regulations, and assesses and collects import
    duties, taxes, and fees, which total $22 billion annually.
        The need to leverage information technology to improve the way that
    Customs does business in the import arena is undeniable. Customs'
    existing import processes and supporting systems are simply not
    responsive to the business needs of either Customs or the trade
    community, whose members collectively import about $1 trillion in goods
    annually. These existing processes and systems are paper-intensive,
    error-prone, and transaction-based, and they are out of step with the
    just-in-time inventory practices used by the trade. Recognizing this,
    Congress enacted the Customs Modernization and Informed Compliance Act,
    or ``Mod'' Act, to define legislative requirements for improving import
    processing through an automated system.\1\
    ---------------------------------------------------------------------------
        \1\ Customs refers to Title VI of the North American Free Trade
    Agreement Implementation Act (Public Law 103-182, 19 U.S.C. 1411 et
    seq) as the Customs Modernization and Informed Compliance Act or
    ``Mod'' Act.
    ---------------------------------------------------------------------------
        Customs fully recognizes the severity of the problems with its
    approach to managing import trade and is modernizing its import
    processes and undertaking ACE as its import system solution. Begun in
    1994, Customs' estimate of the system's 15-year life cycle cost is
    about $1.05 billion, although this estimate is being revised upwards.
    In light of ACE's enormous mission importance and price tag, Customs'
    approach to investing in and engineering ACE demands disciplined and
    rigorous management practices. Such practices are embodied in the
    Clinger-Cohen Act of 1996 \2\ and other legislative and regulatory
    requirements, as well as accepted industry system/software engineering
    models, such as those published by the Software Engineering Institute
    (SEI).\3\
    ---------------------------------------------------------------------------
        \2\ Although the Clinger-Cohen Act (Public Law 104-106) was passed
    after Customs began developing ACE, its principles are based on
    practices that are widely considered to be integral to successful IT
    investments. For an analysis of the management practices of several
    leading private and public sector organizations on which the Clinger-
    Cohen Act is based see Executive Guide: Improving Mission Performance
    Through Strategic Information Management and Technology, (GAO/AIMD-94-
    115, May 1994). For an overview of the IT management process envisioned
    by Clinger-Cohen see Assessing Risk and Returns: A Guide for Evaluating
    Federal Agencies' IT Investment Decision-making (GAO/AIMD-10.1.13,
    February 1997).
        \3\ Software Development Capability Maturity ModelSM
    (SW-CMM) and Software Acquisition Capability Maturity
    ModelSM (SA-CMM). Capability Maturity
    ModelSM is a service mark of Carnegie Mellon University, and
    CMM is registered in the U.S. Patent and Trademark Office.
    ---------------------------------------------------------------------------
        Unfortunately, Customs has not employed such practices to date on
    ACE. Our February 1999 report on ACE,\4\ upon which my testimony today
    is based, describes serious management and technical weaknesses in
    Customs' management of ACE. The ACE weaknesses are: (1) building ACE
    without a complete and enforced enterprise systems architecture, (2)
    investing in ACE without a firm basis for knowing that it is a cost
    effective system solution, and (3) building ACE without employing
    engineering rigor and discipline. My testimony will address each of
    these points as well as our recommendations for correcting them.
    Customs agrees with our findings, and it is committed to implementing
    our recommendations.
    ---------------------------------------------------------------------------
        \4\ Customs Service Modernization: Serious Management and Technical
    Weaknesses Must Be Corrected (GAO/AIMD-99-41, February 26, 1999).
    ---------------------------------------------------------------------------

                              ACE: A Brief History

        Customs began ACE in 1994, and its early estimate of the cost and
    time to develop the system was $150 million over 10 years. At this
    time, Customs also decided to first develop a prototype of ACE,
    referred to as NCAP (National Customs Automation Program prototype),
    and then to complete the system. In May 1997,\5\ we reported that
    Customs' original schedule for completing the prototype was January
    1997, and that Customs did not have a schedule for completing ACE. At
    that time, Customs agreed to develop a comprehensive project plan for
    ACE.
    ---------------------------------------------------------------------------
        \5\ Customs Service Modernization: ACE Poses Risks and Challenges
    (GAO/T-AIMD-97-96, May 15, 1997).
    ---------------------------------------------------------------------------
        In November 1997, Customs estimated that the system would cost
    $1.05 billion to develop, operate, and maintain throughout its life
    cycle. Customs plans to develop and deploy the system in 21 increments
    from 1998 through 2005, the first four of which would constitute NCAP.
        Currently, Customs is well over 2 years behind its original NCAP
    schedule. Because Customs experienced problems in developing NCAP
    software in-house, the first NCAP release was not deployed until May
    1998--16 months late. In view of the problems it experienced with the
    first release, Customs contracted out for the second NCAP release, and
    deployed this release in October 1998--21 months later than originally
    planned. Customs' most recent dates for deploying the final two NCAP
    releases (0.3 and 0.4) are March 1999 and September 1999, which are 26
    and 32 months later than the original deployment estimates,
    respectively. According to Customs, these dates will slip farther
    because of funding delays.
        Additionally, Customs officials told us that a new ACE life cycle
    cost estimate is being developed, but that it was not ready to be
    shared with us. At the time of our review, Customs' $1.05 billion
    estimate developed in 1997 was the official ACE life cycle cost
    estimate. However, a January 1998 ACE business plan specifies a $1.48
    billion life cycle cost estimate.

            Customs Is Developing ACE Without A Complete Enterprise
                              Systems Architecture

        Customs is not building ACE within the context of an enterprise
    systems architecture, or ``blueprint'' of its agency-wide future
    systems environment. Such an architecture is a fundamental component of
    any rationale and logical strategic plan for modernizing an
    organization's systems environment. As such, the Clinger-Cohen Act
    requires agency Chief Information Officers (CIO) to develop, maintain,
    and implement an information technology architecture. Also, the Office
    of Management and Budget (OMB) issued guidance in 1996 that requires
    agency IT investments to be architecturally compliant. These
    requirements are consistent with, and in fact based on, information
    technology management practices of leading private and public sector
    organizations.
        Simply stated, an enterprise systems architecture specifies the
    system (e.g., software, hardware, communications, security, and data)
    characteristics that the organization's target systems environment is
    to possess. Its purpose is to define, through careful analysis of the
    organization's strategic business needs and operations, the future
    systems configuration that supports not only the strategic business
    vision and concept of operations, but also defines the optimal set of
    technical standards that should be met to produce homogeneous systems
    that can interoperate effectively and be maintained efficiently. Our
    work has shown that in the absence of an enterprise systems
    architecture, incompatible systems are produced that require additional
    time and resources to interconnect and to maintain, and that
    suboptimize the organization's ability to perform its mission.\6\
    ---------------------------------------------------------------------------
        \6\ Air Traffic Control: Complete and Enforced Architecture Needed
    for FAA Systems Modernization (GAO/AIMD-97-30, February 3, 1997).
    ---------------------------------------------------------------------------
        We first reported on Customs' need for a systems architecture in
    May 1996 and May 1997.\7\ In response, Customs developed and published
    an architecture in July and August 1997. We reviewed this architecture
    and reported in May 1998 that it was not effective because it was
    neither complete nor enforced.\8\ For example, the architecture did not
    ---------------------------------------------------------------------------
        \7\ Customs Service Modernization: Strategic Information Management
    Must Be Improved for National Automation Program To Succeed (GAO/AIMD-
    96-57, May 9, 1996) and Customs Service Modernization: ACE Poses Risks
    and Challenges (GAO/T-AIMD-97-96, May 15, 1997).
        \8\ Customs Service Modernization: Architecture Must Be Complete
    and Enforced to Effectively Build and Maintain Systems (GAO/AIMD-98-70,
    May 5, 1998).
    ---------------------------------------------------------------------------
        (1) fully describe Customs' business functions and their
    relationships,
        (2) define the information needs and flows among these functions,
    and
        (3) establish the technical standards, products, and services that
    would be characteristic of its target systems environment on the basis
    of these business specifications.
        Accordingly, we recommended that Customs complete its enterprise
    information systems architecture and establish compliance with the
    architecture as a requirement of Customs' information technology
    investment management process. In response, Customs agreed to develop a
    complete architecture and establish a process to ensure compliance.
    Customs is in the process of developing the architecture, and reports
    that it will be completed in May 1999. Also, in January 1999, Customs
    reported that it changed its internal procedures to provide for
    effective enforcement of its architecture, once it is completed. Until
    the architecture is completed and enforced, Customs risks spending
    millions of dollars to develop, acquire, and maintain information
    systems, including ACE, that do not effectively and efficiently support
    the agency's mission needs.

           Customs Is Not Managing Its Investment In ACE Effectively

        Effective IT investment management is predicated on answering one
    basic question: is the organization doing the ``right thing'' by
    investing specified time and resources in a given project or system.
    The Clinger-Cohen Act and OMB guidance together provide an effective IT
    investment management framework for answering this question. Among
    other things, they set requirements for
        (1) identifying and analyzing alternative system solutions,
        (2) developing reliable estimates of the alternatives' respective
    costs and benefits and investing in the most cost-beneficial
    alternative, and
        (3) to the maximum extent practical, structuring major projects
    into a series of increments to ensure that each increment constitutes a
    wise investment.
        Customs did not satisfy any of these requirements for ACE. First,
    Customs did not identify and evaluate a full range of alternatives to
    its defined ACE solution before commencing development activities. For
    example, Customs did not consider how ACE would relate to another
    Treasury proposed system for processing import trade data, known as the
    International Trade Data System (ITDS), including considering the
    extent to which ITDS should be used to satisfy needed import processing
    functionality. Initiated in 1995 as a project to develop a coordinated,
    governmentwide system for the collection, use, and dissemination of
    trade data, the ITDS project is headed by the Treasury Deputy Assistant
    Secretary for Regulatory, Tariff and Trade Enforcement. The system is
    expected to reduce the burden federal agencies place on organizations
    by requiring that they respond to duplicative data requests. Treasury
    intends for the system to serve as the single point for collecting,
    editing, and validating trade data as well as collecting and accounting
    for trade revenue. At the time of our review of ACE, these functions
    were also planned for ACE.
        Similarly, Customs did not evaluate different ACE architectural
    designs, such as the use of a mainframe-based versus client server-
    based hardware architecture. Also, Customs did not evaluate alternative
    development approaches, such as acquisition versus in-house
    development. In short, Customs committed to and began building ACE
    without knowing whether it had chosen the most cost-effective
    alternative and approach.
        Second, Customs did not develop a reliable life-cycle cost estimate
    for the approach it selected. SEI has developed a method for project
    managers to use to determine the reliability of project cost estimates.
    Using SEI's method, we found that Customs' $1.05 billion ACE life-cycle
    cost estimate was not reliable, and that it did not provide a sound
    basis for Customs' decision to invest in ACE. For example, in
    developing the cost estimate, (1) Customs did not use a cost model, (2)
    did not account for changes in its approach to building different ACE
    increments, (3) did not account for changes to ACE software and
    hardware architecture, and (4) did not have historical project cost
    data upon which to compare its ACE estimate.
        Moreover, the $1.05 billion cost estimate used to economically
    justify ACE omitted relevant costs. For instance, the costs of
    technology refreshment and system requirements definition were not
    included (see table 1). Exacerbating this problem, Customs represented
    its ACE cost estimate as a precise point estimate rather than
    explicitly disclosing to investment decisionmakers in Treasury, OMB,
    and the Congress the estimate's inherent uncertainty.

        Table 1.--Estimated Costs Omitted From Customs' ACE Cost-Benefit
                                    Analysis
    ------------------------------------------------------------------------
             Excluded Cost Description             Excluded Cost Estimate
    ------------------------------------------------------------------------
    Hardware and software upgrades at each      $73 to $172 million
     port office (e.g., desktop workstations,
     and operating systems, application and
     data servers, database management
     systems)..
    Security analysis, project planning and     $23 million
     management, and independent verification
     and validation..
    Requirements definition, component          No estimate available
     integration, regression testing, and
     training..
    ------------------------------------------------------------------------

        Customs' projections of ACE benefits were also unreliable because
    they were either overstated or unsupported. For example, the analysis
    includes $203.5 million in savings attributable to 10 years of avoided
    maintenance and support costs on the Automated Commercial System
    (ACS)--the system ACE is to replace. However, Customs would not have
    avoided maintenance and support costs for 10 years. At the time of
    Customs' analysis, it planned to run both systems in parallel for 4
    years, and thus planned to spend about $53 million on ACS maintenance
    and support during this period. As another example, $650 million in
    savings was not supported by verifiable data or analysis, and $644
    million was based on assumptions that were analytically sensitive to
    slight changes, making this $644 million a ``best case'' scenario.
        Third, Customs is not making its investment decisions incrementally
    as required by the Clinger-Cohen Act and OMB. Although Customs has
    decided to implement ACE as a series of 21 increments, it is not
    justifying investing in each increment on the basis of defined costs
    and benefits, and a positive return on investment for each increment.
    Further, once it has deployed an increment at a pilot site for
    evaluation, it is not validating the benefits that the increment
    actually provides, and it is not accounting for costs on each increment
    so that it can demonstrate that a positive return on investment was
    actually achieved. Instead, Customs estimated the costs and benefits
    for the entire system--all 21 increments, and used this as economic
    justification for ACE.
        Mr. Chairman, our work has shown that such estimates of many system
    increments to be delivered over many years are impossible to make
    accurately because later increments are not well understood or defined.
    Also, these estimates are subject to change in light of experiences on
    nearer term increments and changing business needs. By using an
    inaccurate, aggregated estimate that is not refined as increments are
    developed, Customs is committing enormous resources with no assurance
    that it will achieve a reasonable return on its investment. This
    ``grand design'' approach to managing large system modernization
    projects has repeatedly proven to be ineffective across the Federal
    Government, resulting in huge sums invested in systems that do not
    provide expected benefits. Failure of the grand design approach was a
    major impetus for the IT management reforms contained in the Clinger-
    Cohen Act.

         Customs Is Not Managing ACE Software Development/Acquisition
                                  Effectively

        Software process maturity is one important and recognized measure
    of determining whether an organization is managing a system or project
    the ``right way,'' and thus whether or not the system will be completed
    on time, within budget, and deliver promised capabilities. The Clinger-
    Cohen Act requires agencies to implement effective IT management
    processes, such as processes for managing software development and
    acquisition. SEI has developed criteria for determining an
    organization's software development and acquisition effectiveness or
    maturity.
        Customs lacks the capability to effectively develop or acquire ACE
    software. Using SEI criteria for process maturity at the ``repeatable''
    level, which is the second level on SEI's five-level scale and means
    that an organization has the software development/acquisition rigor and
    discipline to repeat project successes, we evaluated ACE software
    processes. In February 1999,\9\ we reported that the software
    development processes that Customs was employing on NCAP 0.1, the first
    release of ACE, were not effective. For example, we reported that
    Customs lacked effective software configuration management, which is
    important for establishing and maintaining the integrity of the
    software products during development. Also, we reported that Customs
    lacked a software quality assurance program, which greatly increased
    the risk of ACE software not meeting process and product standards.
    Further, we reported that Customs lacked a software process improvement
    program to effectively address these and other software process
    weaknesses. Our findings concerning ACE software development maturity
    are summarized in table 2.
    ---------------------------------------------------------------------------
        \9\ Customs Service Modernization: Ineffective Software Development
    Processes Increase Customs System Development Risks (GAO/AIMD-99-35,
    February 11, 1999).

             Table 2.--Summary of ACE Software Development Maturity
    ------------------------------------------------------------------------
                                                                     Not
                  Key Process Areas                 Satisfied     Satisfied
    ------------------------------------------------------------------------
    Requirements management......................  ...........            X
    Software project planning....................  ...........            X
    Software project tracking and oversight......  ...........            X
    Software quality assurance...................  ...........            X
    Software configuration management............  ...........            X
    ------------------------------------------------------------------------
    Note: These represent five of six level 2 key process areas in SEI's
      Software Development Capability Maturity Model. We did not evaluate
      ACE in the sixth level 2 key process area--software subcontract
      management--because Customs did not use subcontractors on ACE.

        As discussed in our brief history of ACE, after Customs developed
    NCAP 0.1 in-house, it decided to contract out for the development of
    NCAP 0.2, thus changing its role on ACE from being a software developer
    to being a software acquirer. According to SEI, the capabilities needed
    to effectively acquire software are different than the capabilities
    needed to effectively develop software. Regardless, we reported later
    in February 1999\10\ that the software acquisition processes that
    Customs was employing on NCAP 0.2 were not effective. For example,
    Customs did not have an effective software acquisition planning process
    and, as such, could not effectively establish reasonable plans for
    performing software engineering and for managing the software project.
    Also, Customs did not have an effective evaluation process, meaning
    that it lacked the capability for ensuring that contractor-developed
    software satisfied defined requirements. Our findings concerning ACE
    software acquisition maturity are summarized in table 3.
    ---------------------------------------------------------------------------
        \10\ GAO/AIMD-99-41, February 26, 1999.

             Table 3.--Summary of ACE Software Acquisition Maturity
    ------------------------------------------------------------------------
                                                                     Not
                  Key Process Areas                  Satisfied    Satisfied
    ------------------------------------------------------------------------
    Software acquisition planning................  ...........            X
    Solicitation.................................  ...........            X
    Requirements development and management......  ...........            X
    Project office management....................  ...........            X
    Contract tracking and oversight..............  ...........            X
    Evaluation...................................  ...........            X
    Transition and support.......................  ...........            X
    Acquisition risk management..................  ...........            X
    ------------------------------------------------------------------------
    Note: These represent seven level 2 key process areas in SEI's Software
      Acquisition Capability Maturity Model. We also evaluated one key
      process area associated with the ``defined'' level of process maturity
      (level 3)--acquisition risk management.

         Customs Has Committed to Implementing Our Recommendations for
                          Strengthening ACE Management

        To address ACE management weaknesses, we recommended that Customs:
        (1) analyze alternative approaches to satisfying its import
    automation needs, including addressing the ITDS/ACE relationship;
        (2) invest in its defined ACE solution incrementally, meaning for
    each system increment (a) rigorously estimate and analyze costs and
    benefits, (b) require a favorable return-on-investment and compliance
    with Customs' enterprise systems architecture, and (c) validate actual
    costs and benefits once an increment is piloted, compare actuals to
    estimates, use the results in deciding on future increments, and report
    the results to congressional authorizers and appropriators;
        (3) establish an effective software process improvement program and
    correct the software process weaknesses in our report, thereby bringing
    ACE software process maturity to a least an SEI level 2; and
        (4) require at least SEI level 2 processes of all ACE software
    contractors.
        In his February 16, 1999, comments on a draft of our report, the
    Commissioner of Customs agreed with our findings, and committed to
    implementing our recommendations. On April 1, 1999, the Commissioner
    provided us a status report on Customs efforts to do so. In brief, the
    Commissioner stated that Customs:
        (1) is conducting and will conduct additional analyses to consider
    alternative approaches to ACE, and will base these analyses on the
    assumption that Customs will use and not duplicate ITDS functionality;
        (2) is developing the capability to perform cost/benefit analyses
    of ACE increments, and is and will conduct post-implementation reviews
    of ACE increments;
        (3) has retained an audit firm to independently validate cost/
    benefit analyses;
        (4) is developing software process improvement plans to achieve
    software process maturity of level 2 and then level 3, and;
        (5) is preparing a directive to require at least level 2 processes
    of all Customs software contractors.
        Additionally, the Commissioner stated that Customs is developing a
    plan for engaging a prime integration contractor that is at least SEI
    level 3 certified. Under this approach, the prime would assist Customs
    in implementing effective system/software engineering processes, and
    would engage subcontractors to meet specified system development and
    maintenance needs.

                                  Conclusions

        Successful systems modernization is absolutely critical to Customs'
    ability to perform its trade import mission efficiently and effectively
    in the 21st century. Systems modernization success, however, depends on
    doing the ``right thing, the right way.'' To be ``right,''
    organizations must (1) invest in and build systems within the context
    of a complete and enforced enterprise systems architecture, (2) make
    informed, data-driven decisions about investment options based on
    expected and actual return-on-investment for system increments, and (3)
    build system increments using mature software engineering practices.
    Our reviews of agency system modernization efforts over the last 5
    years point to weaknesses in these three areas as the root causes of
    their not delivering promised system capabilities on time and within
    budget.\11\
    ---------------------------------------------------------------------------
        \11\ Tax System Modernization: Management and Technical Weaknesses
    Must Be Corrected If Modernization Is to Succeed (GAO/AIMD-95-156, July
    26, 1995); Tax Systems Modernization: Actions Underway but IRS Has Not
    Yet Corrected Management and Technical Weaknesses (GAO/ AIMD-96-106,
    June 7, 1996); Tax Systems Modernization: Blueprint Is a Good Start but
    Not Yet Sufficiently Complete to Build or Acquire Systems (GAO/AIMD/
    GGD-98-54, February 24, 1998); Air Traffic Control: Immature Software
    Acquisition Processes Increase FAA System Acquisition Risks (GAO/AIMD-
    97-47, March 21, 1997; Air Traffic Control: Complete and Enforced
    Architecture Needed for FAA Systems Modernization (GAO/AIMD-97-30,
    February 3, 1997); and Air Traffic Control: Improved Cost Information
    Needed to Make Billion Dollar Modernization Investment Decisions (GAO/
    AIMD-97-20, January 22, 1997).
    ---------------------------------------------------------------------------
        Until Customs corrects its ACE management and technical weaknesses,
    the federal government's troubled experience on other modernization
    efforts is a good indicator for ACE. In fact, although Customs does not
    collect data to know whether the first two ACE releases are already
    falling short of cost and performance expectations, the data it does
    collect on meeting milestones show that the first two releases have
    taken about 2 years longer than originally planned. This is precisely
    the type of unaffordable outcome that can be avoided by making the
    management and technical improvements we recommended.
        Fortunately, Customs fully recognizes the seriousness of the
    situation and has committed to correcting its ACE management and
    technical weaknesses. We are equally committed to working with Customs
    as it strives to do so and with the Congress as it oversees this
    important initiative.
        This concludes my statement. I would be glad to respond to any
    questions that you or other Members of the Subcommittee may have at
    this time.

        Chairman Crane. Thank you, Mr. Hite. Before we get to
    questions, can somebody find out what is going on over there? I
    mean, are we in recess right now? I mean, the six bells.
    Breaking 20 minutes for lunch, I guess.
        All right, Mr. Simpson, would you clarify the proposed
    interrelationship between ACE and ITDS? And some trade industry
    members are concerned because they are uncertain of how ACE
    will interface with ITDS and, specifically, have you worked out
    these logistics and issues with Customs and have all
    differences been resolved?
        Mr. Simpson. Yes, Sir. The concept of the international
    trade data system is simply that it is a common mechanism for
    many components of the international trade community to
    communicate with many components of the Government. In simple
    terms, it is like one of these telephones that allows you to
    make a conference call and talk to several people
    simultaneously.
        ITDS will not have any effect on the businesses processes
    of the various agencies with which it communicates. It is
    simply a utility that allows the Federal Government to
    communicate with the public and the public to communicate with
    the Federal Government more efficiently.
        Now, to some extent, we face the problem of having to deal
    with legacy systems that are in place and will be affected by
    what we do because we need to use standard messages in order to
    make it convenient for the private sector to deal with the
    Government. In at least one case, the Customs Service had
    worked out standard messages for a pilot of its NCAP program.
    We have agreed that we will not disrupt that pilot, that we
    will accept exactly the messages that are currently being used
    by pilot participants, who happen to be the big three auto
    companies. We will accept exactly that message and we will
    grandfather them in. We will pay for software to translate what
    they send to us into the format that we need in order to have a
    standard message for the Government.
        So we are doing everything that we can to minimize the
    inflexibility of a new system by filling in, at our cost, the
    capability to translate different kinds of messages that come
    to us from the private sector into a standard format that many
    agencies of the Federal Government can use in common.
        Chairman Crane. Mr. Schindel, you showed in your graphs up
    there that that night differential portion of total overtime
    cost has jumped from $51,000 to $11.9 million between 1993 and
    1998. That is a 240 time increase, which is a little mind
    boggling to behold. Are you familiar with H.R. 3809, introduced
    in the 105th Congress? There is a provision in title II
    relating to overtime and premium pay for Customs officers to
    help reduce the differential costs for Customs and I am--let us
    see, these provisions are similar, also, to H.R. 2262. What is
    your assessment? I mean, are they sound ways of addressing the
    problem?
        Mr. Schindel. I have not had an opportunity to thoroughly
    analyze H.R. 3809, but if it is similar to H.R. 2262, I think
    it does go a long way to resolving the problem. COPRA actually
    did have some of the intended impact on regular overtime. It
    reduced regular overtime, I think, from 1993 to 1995 by about
    $7 million. But, because of the tremendous increase in night
    differential premium pay, because of some of those provisions
    that I outlined and that the bill addresses, the total premium
    pay and overtime did not go down, it went up. So it should have
    the intended impact of producing some savings.
        Chairman Crane. Mr. Rabkin, in your testimony, you said
    that Customs could do more to prevent drug-related employee
    corruption. And, specifically, what are the first things that
    Customs should do to combat this problem?
        Mr. Rabkin. We made a number of recommendations. Probably
    the two most important are, where there have been identified
    cases of employee corruption, where there have been
    convictions, Customs needs to analyze what went wrong with its
    systems that it has in place, its policies and procedures, to
    find out if there was anything it could have done differently
    to have prevented it and then go back and make those changes.
        Second, as part of its internal procedures, Customs is
    supposed to do reinvestigations of employees in critical
    positions routinely every three or 4 years. And, because of
    funding and other problems, it has fallen way behind. It has a
    large backlog. So another thing it can and it should do is to
    reduce that backlog by reinvestigating these employees to make
    sure that they still meet the integrity standards.
        Chairman Crane. Thank you. Mr. Hite, some believe that ACE
    is desperately needed and that building ACE should proceed
    while developing functionality is along the way. What is your
    assessment on that evaluation?
        Mr. Hite. My assessment would be that a modernized import
    system is definitely needed and that, before entering into the
    actual building of the software and the acquisition of hardware
    for that system, that Customs needs to do certain things to put
    itself in the position of being able to effectively do that.
    And building that management capacity is something that, in my
    correspondence with the Commissioner, I understand he intends
    to do during the fiscal year 2000 timeframe. So that when they
    do engage in building ACE, they are in a position to do so
    effectively.
        Chairman Crane. Thank you. Mr. Levin.
        Mr. Levin. Thanks. Well, Mr. Simpson, we are glad you are
    here and I think the development of an international trade data
    system, at a first glance, makes a lot of sense with the growth
    in international trade and all the various agencies and
    departments. You say, at the end of your testimony, that the
    full cost of development and deployment would be $268 million.
    So you are developing a model. Are you charging for the--do you
    contemplate charging for the system? I mean, how--just tell me,
    how does it work?
        Mr. Simpson. Let me give you a two-part answer. Let me
    answer the second part first. We have no plan to charge for
    access to the system. That does not preclude either Congress or
    the executive branch from considering some sort of user fee in
    the future. But we have no intention, at this point, of
    proposing a charge for accessing the system in the future.
        In terms of the cost, we have been very mindful of the
    points that GAO has made with respect to Customs' ACE system
    and the need to look at cost-benefit returns based on different
    options for deployment. So, instead of looking at deploying the
    international trade data system to all 330-some ports of entry
    in exactly the same way with the same capabilities, which is
    what the estimate that you referred to is based on, we are
    looking at the fact that the top 41 ports account for 80
    percent of the trade. And we are making some judgments about
    how we could deploy ITDS at the remaining ports in a way that
    would still assure that trade moves efficiently there, but
    would not be as costly to the Government. We believe we can
    significantly reduce the cost of deploying ITDS by looking at
    other options.
        Mr. Levin. All right. Well, keep in touch. I think there is
    a lot of interest. What its effect would be on ACE, I think you
    have to--you know, which comes first, where the resources are
    placed. But, also, how it would evolve over time. All of these
    things have interest to us.
        Mr. Schindel, let me just ask you a few questions because
    your testimony seemed to focus on the night differentials, but,
    as I understand your chart, overtime has grown anyway, right?
        Mr. Schindel. That is correct.
        Mr. Levin. And the issue that you focused on--and, again,
    forgetting the merits of it for just a second so we understand
    it--represents a small portion of the overtime.
        Mr. Schindel. That is correct, but the night differential,
    prior to COPRA, again, was $51,000 and, immediately after COPRA
    in 1995, went up to $8.9 million. The other overtime increases
    are likely a result of normal pay increases that also affected
    the overtime piece. So I think that that would have gone up in
    any event. But the dramatic increase was from the night
    differential prior to COPRA and then after COPRA. And that more
    than offset--there was some, as I mentioned, there was some
    overtime savings between 1993 and 1995 in straight overtime,
    but that was more than offset by that significant increase from
    $51,000 to $8.9 million in night differential.
        Mr. Levin. It represented, in the last fiscal year, in
    1998, the $11.9 million is added to the $125, right? I don't
    have the chart right in front of me, so----
        Mr. Schindel. Yes, correct.
        Mr. Levin. OK, it's $136. So it is about 8 percent, right,
    of the overall, overtime costs?
        Mr. Schindel. Correct.
        Mr. Levin. Do you have any notion--maybe it is a little too
    complicated--what the average pay is--I suppose you would have
    to go by grade--including overtime for people in the Customs
    Service?
        Mr. Schindel. No, Sir, I don't have that information.
        Mr. Levin. Do you have any idea of the average pay ranges?
        Mr. Schindel. I don't have that information. I could try to
    get that and provide it to you.
        Mr. Levin. Does anybody here know that?
        Mr. Rabkin. I think the $20,000 to $40,000 figure that was
    thrown around earlier is the range for the regular inspectors.
    And then there is a $25,000 cap on the amount of overtime that
    they can earn.
        Mr. Levin. So these are all GS employees?
        Mr. Rabkin. Yes, grades 5 through 11.
        Mr. Levin. OK. So, $20,000 to $40,000 is the average pay
    for, I take it, those, obviously, in certain ranges. They are
    not the top-level employees. They are the vast majority of the
    employees of the Custom Service?
        Mr. Rabkin. Well, these are the inspectors at the ports.
        Mr. Levin. So these are the vast majority of people related
    to the inspection at the ports?
        Mr. Rabkin. Yes.
        Mr. Levin. They are not the top management but the typical
    employee. Do you have any idea what the average overtime is? I
    know what the cap is, but do you have any guess?
        Mr. Rabkin. If I had to guess, I would guess it would be
    close to $25,000, but I don't know.
        Mr. Levin. So that would place people working in those
    capacities between $45,000 and $65,000 a year?
        Mr. Rabkin. It is probably the more senior people that work
    the overtime, that get to get it.
        Mr. Levin. Oh, so a lot of people don't work the overtime.
        Mr. Rabkin. Not all of it, as I understand it.
        Mr. Levin. Are those figures available?
        Mr. Rabkin. They should be from the Customs Service, yes.
        Mr. Levin. OK. Maybe we should look at them.
        [No information had been received at the time of printing.]
        Mr. Levin. My time is up, Mr. Chairman. I would hope--I
    guess there will be more testimony on this that we can take a
    look at this, at the issues that relate to pay. By the way, the
    increases in the night, in the differentials, do they include
    inflation increases and the like?
        Mr. Schindel. Yes, they would.
        Mr. Levin. They take it into account.
        Mr. Schindel. They are a percentage of basic pay, so if
    basic pay goes up, then they would go up, too.
        Mr. Levin. We took a look at this before. I think we ought
    to take a look at it again. I think it would be effective if we
    could look at the overall picture and try to take an objective
    look at what the dynamics are. I have no idea, for example,
    overtime. I assume the amount of overtime in the Customs
    Service is beyond the average for Federal employees?
        Mr. Schindel. I think that is probably correct.
        Mr. Levin. And, I take it, that is a reflection of some
    reality within the Customs Service? It has been going on a long
    time, I take it?
        Mr. Schindel. I think it is a reflection of, perhaps, where
    the additional staffing is needed or, because of the way the
    traffic flows, you know, that there are certain periods when
    flights come in or cargo that they have to be there.
        Mr. Levin. So it may be a reflection of the greater
    difficulty of planning shifts and of people planning for shifts
    within the Service, right?
        Mr. Rabkin. Yes, I think it varies by port, too. I think
    each port is unique and to look at the issue of whether
    overtime makes sense to the Custom Service, you have to take
    into consideration the conditions at the port at a given period
    of time, you know, over a couple-month period. Because the
    alternative, if you want to provide the same level of service,
    is hiring more people. And, at a certain point, it is
    beneficial to the Custom Service to pay the overtime. There is
    less of a learning curve; you don't have other people you are
    paying benefits to. There is a model you can develop to analyze
    that, but it has to be applied port by port.
        Mr. Levin. So just to complete this, there may be an impact
    on the employee in terms of their ability to plan their work
    week, which is a tradeoff for the Customs Service, relative to
    hiring more personnel. So it works, in other words, there is an
    impact on both the employer and the employee from this kind of
    a system.
        Mr. Rabkin. Correct.
        Mr. Levin. OK, thank you.
        Chairman Crane. Mr. Becerra.
        Mr. Becerra. Thank you, Mr. Chairman. Mr. Schindel, let me
    ask you a question with regard to the chart that we have here.
    Does the shift differential increase reflect increases above
    and beyond what might have been earned through regular overtime
    if shift differential pay had not been available or does it
    simply represent pay provided as a result of qualifying for the
    shift differential pay? I am referring to that green portion of
    each bar.
        Mr. Schindel. Right.
        Mr. Becerra. Does it represent what an employee would have
    earned above and beyond what overtime would have paid the
    employee?
        Mr. Schindel. Correct. That is the premium portion that is
    attributable to night differential.
        Mr. Becerra. The night differential, right. But, now, if
    you didn't provide someone with night differential, you would
    probably be paying them for night work, probably overtime?
        Mr. Schindel. That could be.
        Mr. Becerra. OK, now is that reflected in this chart? In
    other words, if we didn't have the night differential pay,
    would the red bar be larger than it is for either of those
    years?
        Mr. Schindel. I think, logically, you might be able to
    conclude that.
        Mr. Becerra. So, the red bar might be larger if you didn't
    have the night differential pay, which is reflected by the
    green portion of the bar?
        Mr. Schindel. That may be.
        Mr. Becerra. So the amount that is attributable to night
    differential in terms of increasing pay for Customs employees
    would look differently if you accounted for the intersection
    between what otherwise might be straight overtime pay versus
    what is, right now, under the way it is structured, considered
    night differential pay.
        Mr. Schindel. To some degree, but, then again, some of
    these shifts, these are their normal 8-hour shifts, but,
    because of the way the night differential is structured and the
    majority of shift rule, they get paid premium when, if that
    rule was not there, they would just get straight salary.
        Mr. Becerra. Obviously, if it is a straight, regular shift,
    8 or 9 hours, and it happens to hit the night-time hours, the
    majority hits the night-time hours of that workday. Under a
    system that had no night differential pay, they wouldn't get
    any overtime?
        Mr. Schindel. Right.
        Mr. Becerra. OK, got it. But there may be, mixed into the
    green portion of each bar, a portion that might have otherwise
    have gotten compensated through overtime pay.
        Mr. Schindel. Right.
        Mr. Becerra. Officer, do we know how many more employees
    Custom has in 1998 versus what it had, say, in 1993?
        Mr. Schindel. I don't have those figures myself, no.
        Mr. Becerra. What about the increase in workload that
    Customs--in its entirety, not by employee, but in its
    entirety--the increase in workload that the department saw in
    those 5 years? Do we have any way to assess how much more work
    they have?
        Mr. Schindel. I don't have that information, but certainly
    the trade, everyone knows, has exploded so there has been a
    tremendous increase in workload.
        Mr. Becerra. So would that lead you to assume that night-
    time shifts and swing shifts have probably increased the number
    of people assuming those shifts?
        Mr. Schindel. I don't have that information, but it might
    be a safe assumption.
        Mr. Becerra. Chances are, then, with the implementation of
    COPRA and the increasing workloads, especially after some of
    these free trade agreements, we are probably seeing more people
    working with a larger workload and the need for more people to
    work the swing or night shifts, which helps them receive that
    extra compensation.
        Mr. Schindel. Right. Unless there were staffing increases
    to offset that.
        Mr. Becerra. Now, if you were to have straight staff
    increases to undo the need for overtime and some of the night
    differential issues to compensate employees better, would that
    save you money or cost you money?
        Mr. Schindel. That would have to be analyzed, I think. For
    instance, some of these shifts, like the one sample shift from
    12 noon to 8 p.m. is a regular shift I know at a couple of
    airports, like O'Hare, because that is the way their air
    traffic patterns work. So employees would be working that
    shift----
        Mr. Becerra. Does Customs set the shifts?
        Mr. Schindel. Yes.
        Mr. Becerra. So if Customs wanted, you could say, have
    someone start at 11 a.m. and run until 7 p.m., which would
    leave them at less than the majority of their time in a night
    differential shift?
        Mr. Schindel. That is correct.
        Mr. Becerra. So Customs does have some latitude about that?
        Mr. Schindel. I believe so, yes, Sir.
        Mr. Becerra. But, of course, we would have to find out if
    that would be logical for Customs to do.
        Mr. Schindel. Right.
        Mr. Becerra.Thank you. But, obviously, I think we need to--
    --
        Mr. Schindel. And some of that may depend on the local
    union, too.
        Mr. Becerra. And we need to look into that to see exactly
    how that actually translates into real numbers. If I could ask
    Mr. Simpson a question regarding the ITDS. I know that there
    are some folks in the industries out there that would have to
    comply with ITDS and also with the new system we are trying to
    implement within--the ACE system we are trying to implement
    within Customs. They are concerned that if you don't quickly
    incorporate ITDS, you are going to have folks out there, like
    air couriers, who are going to have to both respond to
    reporting requirements under ACE and reporting requirements
    under ITDS and that is going to be pretty burdensome for them.
    What is your response to that?
        And then, second, what is the hold up in trying to
    incorporate ITDS?
        Mr. Simpson. Mr. Becerra, they would never have to respond
    both to ITDS and to ACE. ITDS would simply be a front end
    communication link that would provide to ACE whatever
    information the Custom Service says it wants. ITDS would never
    dictate information requirements. We are simply a service to
    our clients, who are Federal agencies.
        The reason that we are concerned about moving ITDS ahead as
    quickly as we can is that several Federal agencies are in the
    process of building new automated systems, such as the Customs
    Service, which is building ACE; Immigration, which is building
    SENTRI; FDA, the Food and Drug Administration, which is
    building OASIS II; Federal Highway, which is building its SAFER
    system. They are all expecting that the International Trade
    Data System will be there as the common front end for their new
    automated systems. If that expectation doesn't materialize
    fairly quickly, they are going to have to make tough decisions
    to invest in building communications links of their own, stand-
    alone communications links.
        Now there are a couple of big downsides to that. One is
    that it is much more costly for the Federal Government to have
    to build separate stand-alone front ends. The other downside is
    that it still leaves the trade community with the need to
    communicate separately with multiple Federal agencies. They
    will be able to communicate electronically, rather than on
    paper forms, as they have in the past, but it is still multiple
    reporting. So, from our point of view, it is important for us
    to move forward quickly enough that we can convince Federal
    agencies that they will not need to invest in their own
    communications links with the public, that we will be there to
    do it for them. But that is all we are doing for them. We are
    not trying to alter what they do with the information or the
    way they discharge their responsibilities.
        Mr. Becerra. And, Mr. Hite, I think you make the point in
    your report that Customs has moved forward with its program,
    the ACE system, without fully reviewing it and seeing if it
    will actually be efficient and do everything Customs is hoping
    that it will do. What happens if, in fact, they move forward
    with ACE and it doesn't meet their needs and we still don't
    have the intersection or the proper working relationship with
    the ITDS?
        Mr. Hite. Yes, Sir, that is precisely why we recommended as
    one of the actions that Customs needed to take was to resolve
    this issue of its interrelationship with ITDS and to ensure
    that it will be interoperable with and not duplicative of ITDS.
    I mean, the two have to merge. They can't proceed in isolation
    from one another. We became aware of ITDS during the course of
    our review of ACE and we began raising this question to try to
    get this issue resolved.
        Mr. Becerra. Have you seen anything to better satisfy you
    that Customs will move quickly enough to respond to your
    concerns or at least to merge ACE and ITDS?
        Mr. Hite. Yes, I have seen, through my discussions,
    progress in the merger of the two. The Commissioner, in a
    letter to me dated April 1, indicated that ACE will not
    duplicate ITDS functionality and that ITDS will be the front
    end interface.
        Mr. Becerra. Thank you, Mr. Chairman.
        Chairman Crane. Folks, I want to express appreciation to
    you for your testimony thus far. Because we are going to start
    voting in about 2 minutes, we will stand in recess until 2 p.m.
        [Recess.]
        [Questions submitted by Chairman Crane, and Mr. Simpson's
    responses, are as follows:]

        Question 1. Some members of the trade industry believe that every
    dollar spent building the International Trade Data System (ITDS) is a
    dollar taken from the Customs Automated Commercial Environment (ACE).
    Given the scarcity of resources and the general consensus that ACE is
    urgently needed, please explain how the two programs interface, to what
    extent they are complementary, to what extent they compete for funds,
    and what criteria the Administration use to determine funding levels
    for ACE and ITDS in its FY 2000 budget?
        Response. How the two programs interface and are complementary--Any
    government automated system, such as ACE, that collects information
    from the public needs an interface with the public, or ``front end.''
    The front end provides the conduit for information to flow back and
    forth between the public and a government agency, and it provides
    certain checks and edits to assist public filers in submitting
    information. ITDS is being designed as the front end for ACE and for
    several other federal agency automated systems. By having ITDS serve as
    a common front end for multiple agencies, the information reporting
    burden on the public can be reduced (by eliminating redundant
    reporting), and government can avoid the cost of building a separate
    front end for each agency's automated system. However, ITDS is only a
    front end. All of the new functionality (i.e., what is done with the
    information filed) that the trade community wants from a Customs
    automated system will be provided by ACE.
        Why the two systems are not competing for funds--By providing a
    front end for Customs' ACE system, ITDS performs a function that would
    otherwise have to be built into ACE and funded out of the budget for
    ACE. In other words, if ITDS is not built the cost of ACE will
    increase, as will the cost of other new automated systems being
    developed by other federal agencies. The budgets for each of those
    systems would need to be increased to cover the cost of building and
    operating front end functions that ITDS offers to perform in common for
    all of them. ITDS is not competing with ACE for funds, since ITDS
    relieves ACE of the need to pay for a separate front end. However,
    without ITDS the ACE project would be competing with other government
    automation projects for the additional funds that each of them would
    need to build separate front ends.
        Criteria used to determine funding levels for ACE and ITDS in the
    FY 2000 budget--Because of concerns about ACE management raised by the
    Congressional appropriations committees, which have resulted in
    significant restrictions being placed on use of FY 1999 ACE funds, the
    FY 2000 budget does not request funds for ACE. During FY 2000, Customs
    and Treasury will work together to identify a prime contractor for ACE
    so that system development can go forward in FY 2001 in a manner
    satisfactory to Congress. The FY 2000 budget request includes $5.4
    million for the ITDS. This amount is requested to enable the project
    team to stay in existence and to operate three limited pilots.

        Question 2. Will ITDS officials use data collected for enforcement
    purposes? What effect will ITDS have on the movement of imports and
    exports?
        Response. The ITDS has no enforcement authority, responsibility, or
    capability. It is simply a communications utility that will enable
    multiple government agencies, some of which do have enforcement and
    regulatory responsibilities, to collect information more efficiently
    and cheaply. The information collected will be distributed to each
    government agency with a need for it, and those agencies with border
    enforcement or regulatory responsibilities--including Customs, INS,
    FDA, and USDA--will determine what action to recommend. The
    recommendations will be consolidated by ITDS and forwarded through
    Customs' information systems to a Customs inspector at the port of
    entry.
        The availability of better, more timely information is expected to
    enable agencies to be more effective in carrying out their enforcement
    and regulatory responsibilities. This has raised concern that shipments
    will be stopped more frequently for inspection, imposing additional
    burdens on the trade and on Customs. Obviously, neither the trade nor
    Customs would want to ignore a request from, for example, FDA or USDA
    that their officers be allowed to inspect a shipment for reasons
    related to food safety. However, it is not necessarily the case that
    better enforcement will mean additional inspections. The expectation is
    that greater enforcement effectiveness will result from improved
    targeting of inspections as a result of having better, more timely
    information, not necessarily from an increase in the number of
    inspections.
        Finally, the great majority of shipments detained by Customs are
    held because of missing documents, not because they have actually been
    targeted as likely violations of law. By providing importers with a
    fully electronic means for dealing with multiple agencies, and by
    providing on-line help, including checks and edits on messages sent,
    ITDS is expected to reduce significantly delays attributable to missing
    documents and missing or incorrect data.

        Question 3. In your testimony you stated that ITDS will serve a
    custodian of records for the information it collects. Does that mean,
    for example, that ITDS will be the custodian of Customs records it
    collects rather than Customs?
        Response. In the current environment there are both multiple
    reporting requirements and multiple systems of records. ITDS seeks to
    consolidate both, and ITDS will be the official system of records for
    import and export transaction. However, although agencies will not be
    permitted to impose reporting requirements on the public outside the
    ITDS, they will be allowed to maintain duplicate, unofficial systems of
    records if they so choose. It is hoped that the economy offered by a
    single records system will persuade agencies not to choose to maintain
    duplicate systems of records.

        Chairman Crane. The Committee will reconvene.
        Now I would like to invite our next panel, Mr. Kurt Zimmer,
    vice president of GartnerGroup; Ronald Schoof, customs and
    export regulation administrator, with Caterpillar; Peter
    Powell, chief executive officer of C.H. Powell Co., in
    Massachusetts.
        I think George Weiss is with you. Right, Mr. Powell?
        Mr. Powell. No, Sir.
        Chairman Crane. Oh.
        Mr. Weiss. I am just sitting in the audience.
        Chairman Crane. I thought you were with one of the
    witnesses that was coming on board. OK.
        Richard Salamone, manager, customs and international
    regulatory compliance; and Jane B. O'Dell, vice president,
    international trade and customs compliance, Limited
    Distribution Services.
        If you will all please take seats and please try and keep
    your oral presentations to 5 minutes or less. Any printed
    statements will be made a part of the permanent record. With
    that, we will proceed with Mr. Zimmer.

      STATEMENT OF J. KURT ZIMMER, VICE PRESIDENT, GARTNERGROUP,
                         STAMFORD, CONNECTICUT

        Mr. Zimmer. Thank you, Mr. Chairman. First, let me say a
    few words about my organization. I represent GartnerGroup.
    Gartner is the world's leading provider of research analysis on
    the IT industry. We serve over 11,000 client organizations
    worldwide.
        Our reputation is premised on objectivity, in-depth
    analysis of the IT industry, and a very deep knowledge of that
    industry. We have a very clear understanding of best practices,
    and more importantly, most importantly, how to put those best
    practices into context. This is never about perfect world
    scenarios. It is always about the real world.
        The IT organization in Customs has faced a very difficult
    scenario over the years, declining real IT spending, increased
    delivery requirements, and increased external scrutiny. That
    would be a challenge for any organization that we would
    represent or have seen in the industry today.
        I have a number of goals today. One is to present pragmatic
    real-world opinions, ones that can be substantiated based on my
    experience, my organization's experience and knowledge, ones
    that are based on industry best practices, which I think are
    very important.
        Another goal is to put into context the challenges facing
    Customs, because they are very real and very pertinent to
    today's discussion. I also want to establish that much really
    has been accomplished by Customs to date. They are very
    successful in terms of IT, as much as we would like to think
    differently at times.
        GartnerGroup and myself have served Customs for
    approximately 4 years. I have been the key resource over that
    period. I have worked with Customs on a wide variety of
    initiatives. I won't go through those in detail, but they range
    from direct assistance to then Acting Commissioner Sam Banks,
    to ACE, to multiple technology initiatives, reviews of many
    programs. We have been with Customs in-depth for that period of
    time.
        We have worked extensively with all aspects of Customs and
    all levels of Customs. We work with Treasury, GAO, OMB, and the
    trade in conjunction with these activities. The bottom line is
    we know IT and we know Customs. We know the environment they
    are in.
        A few of the historical realities. Our approach is very
    pragmatic. Pragmatism is required in this situation. We find
    their organizations are not driven from academic and best case
    scenarios. They are really required to do what is best given a
    moving target. There is a real world that organizations have to
    deal with.
        Customs' IT has faced a unique set of realities or
    constraints. Funding is on the decline. Funding is insufficient
    for even their core requirements, IT requirements. Additional
    and continuous funding is unpredictable, at best. Legislative
    mandates do not ensure funding. There is insufficient technical
    infrastructure, which is a fun issue in and of itself. The core
    trade system, ACS, is in fact aging and is of considerable
    concern. They are continuously responding to external
    criticism, which causes the organization to thrash quite a bit.
    Simply put, the demands exceed, far exceed the ability to
    Customs IT to optimally address. So what do they do? They
    address them as best as they can, as any organization would.
        Our observations. Customs has performed admirably, in our
    view, given those circumstances. They have done a very good
    job. No organization is perfect. Customs is far from it. But
    they have done an excellent job, given the scenario that they
    are in. They have made mistakes. They will continue to make
    mistakes. However, in its current reality, we have been quite
    impressed with what they have been able to accomplish.
        Instead of focusing on what they have done wrong, I would
    like to spend just a couple of minutes focusing on what they
    have done right, and what they have done well. Their program to
    remediate Y2K was outstanding by anybody's standards, not only
    the Government. They were well ahead of most of private
    industry. They did an outstanding job. To me, this proves a
    number of things. One of which is that they can manage large,
    complex projects. We have been told they can't. They in fact
    can, if given the resources and the capability to do that.
        ACE. Initial implementations have received excellent
    response. The cost estimates, while large, have proven to be
    fairly accurate with KPMG and others looking over their
    shoulder. In our view, amazing progress has been made with
    virtually no predictable direct funding. It is amazing to us
    that they have been asked to do 20-year projections without
    knowing what they are going to be able to spend, and when they
    are going to be able to spend it. It is difficult to do that
    for 1 year, let alone 20 years. Customs has done what it's had
    to. It has made the best progress possible under what I would
    consider almost impossible conditions.
        ACS, a system you have heard about, and other core systems,
    are immense by anybody's standards in the industry. They
    maintain one of the largest data bases on the planet. Their
    systems have to keep pace with the growing trade requirements.
    They demonstrate a very impressive ability to maintain these
    systems in the face of their current reality and constraints.
        One quick note on ACS. It is aging. But the IT organization
    deserves some credit for maintaining it and keeping it going,
    which is required for the Government.
        In terms of enterprise IT architecture, they have done an
    excellent effort. They are well ahead of many private sector
    firms. They are beginning to be viewed as a best practice
    within the Government. Their investment management process is
    coming on-line, and is showing some excellent results.
        In terms of their application development process, which
    you heard about, CMM, they do have a process, it's just not
    CMM. It is extensive. They have tried to follow it. There is no
    perfect model, even CMM. A good model does not ensure success.
    They have been criticized for not having a model, but they do
    have a model and are using it.
        It is important to understand that software has been
    successfully written for 20 years in the absence of this model,
    and will continue to be delivered. It helps, it's not the
    answer.
        In general, process improvements are not free. These
    improvements come with repetition and rigor. Repetition takes
    time, and rigor takes resources. Customs has neither, yet it
    has accomplished a tremendous amount under these difficult
    circumstances.
        Our opinions are about reality. They have been asked to do
    much more with less. They have the resources. They are doing a
    good job. They have so many things on their plate right now
    that it is virtually impossible to take them all on: Y2K, ACE,
    CMM, infrastructure updates. Yet they have made incredible
    progress against these tremendous conditions, and they will
    continue to do so. They face very limiting conditions. Yes,
    they pass our reasonability tests over and over. They listen to
    advice, and they act. They respond professionally. When put
    into the real world context, they have accomplished much. They
    deserve to be supported in accomplishing even more.
        Thank you. That concludes my remarks. Thank you.
        [The prepared statement follows:]

    Statement of J. Kurt Zimmer, Vice President GartnerGroup,
    Stamford, Connecticut

        My organization and I have had the unique opportunity to assist the
    U.S. Customs Service (Customs) over the course of the last four years.
    During this time, I have worked closely with virtually all of the key
    staff within both the information technology (IT) organization and the
    core business areas. My tenure with Customs has afforded me the chance
    to gain clear insight into its IT challenges, opportunities and
    successes. This tenure, in conjunction with my organization's respected
    capabilities in the IT arena, allows me to present you with as
    independent and objective a view as possible into the realities of the
    Customs IT history and current situation.
        Thank you for the opportunity to present this testimony. It
    presents the collective opinion of myself and others within my
    organization, GartnerGroup.

                                    Overview

        The U.S. Customs Office of Information and Technology (Customs IT)
    organization has faced a difficult scenario over the years, a decline
    in real spending coupled with significantly increased requirements
    across a broad spectrum of areas. This, coupled with increased scrutiny
    both internally and externally, has forced the IT organization to
    operate in an environment which would be a challenge for any
    organization, public or private sector.
        My goal today is to present the committee with a pragmatic, real-
    world set of opinions on the Customs IT situation, opinions which can
    be substantiated based on unparalleled industry experience and
    knowledge, coupled with a clear understanding of industry best
    practices. I am not here to spout platitudes but to fairly put into
    context the challenges facing the Customs IT organization and establish
    that it has, in fact, accomplished significant achievements, even in
    the face of obstacles that most organizations never encounter.

                       The GartnerGroup Industry Position

        GartnerGroup is the world's leading provider of information and
    analysis on the IT industry. We advise over 11,000 client organizations
    worldwide. These clients represent most major organizations, both
    private and public sector, in this country and around the world. You
    would be hard-pressed to find an IT professional who does not recognize
    our name and the knowledge, experience, independence and objectiveness
    for which that name stands.
        Our reputation is premised on our ability to present the business
    and IT communities with impartial, accurate information and
    recommendations with respect to the direction, use and value of IT. Not
    only do we provide industry with a clear picture of IT directions, but
    we also have a deep understanding of the best practices that drive
    excellence. Our view into our vast client base allows us to accurately
    present a picture of what is happening in the IT arena and to put it in
    context.
        I personally have 18 years of experience in IT, the last four with
    GartnerGroup. Prior to GartnerGroup, I served as the chief distributed
    technical architect at DuPont (E.I. duPont de Nemours Company). I have
    extensive experience in enterprise architecture and a wide variety of
    other IT disciplines. I have provided senior-level consulting services
    to a number of the largest companies in the United States and around
    the world, and have served other Federal clients as well (GSA, DISA,
    U.S. Navy).

                     The GartnerGroup Experience in Customs

        As I mentioned, GartnerGroup (specifically, the GartnerConsulting
    organization) has served Customs for just over four years. I have been
    the key resource over that period. We have provided a wide variety of
    advisory (research), measurement and consultative services. However, I
    will focus primarily on the consultative side, as it is the most
    relevant to the current situation.
        The following represents a synopsis of the activities that we have
    executed on behalf of Customs. These are listed to provide the
    Committee with a general understanding of the depth and breadth of our
    experience with Customs. These will not be presented in detail;
    however, we can provide further clarification and content upon request.
         Assessment of the CDC2000 Architecture
         Development of a High-Level ACE Business Case
         Assistance in the Establishment of an Initial ACE
    Application Architecture
         Assessment of CTP/TAP Technical Architectures
         Assistance in the Development of a Business Plan for ACE
         Review and Assessment of the Electronic Data Warehouse
    (EDW) Effort
         CIO Selection and Transitional Support
         Direct and Continuous Consultation with the Acting
    Commissioner on IT Issues
         Independent Assessment of the Y2K Effort
         Assessment of ACS Viability
         Development of an TISAF-Compliant Enterprise Architecture
         Assessment of Targeting Systems, including CABINET/WANTS
    and the Pilot Land Border Targeting System
         Review and Recommendations around Organizational
    Realignment
         Assessment and Scoring of Customs Strategic Plan
         IV&V of EDS and CTP Architectural Efforts
         Development of an Improved Investment Management Process
    (IMP).
        In executing these efforts, GartnerConsulting worked extensively
    with the Customs IT organization (technicians, developers, planners and
    management) at all levels. We also worked with the ``business'' side of
    Customs, from the Acting Commissioner down to those in the field.
    During the course of our ACE efforts, we also spent time with the Trade
    community. Additionally, our activity at times required us to interact
    extensively with other Federal bodies such as Treasury, GAO and OMB. In
    short, we have worked with Customs in the broadest possible context
    over a continuous time line and against the backdrop of our objectivity
    and experience across the entire IT industry. As such, we trust that
    our comments will be viewed as material and expert.

              The Historical Realities of the Customs IT Situation

        GartnerConsulting approaches any situation from the perspective of
    pragmatism. Real-world organizations are rarely driven from highly
    academic or best-case scenarios, but are usually trying to do what is
    best given a moving and uncertain target. Customs is not different in
    this regard. Our analysis and recommendations are almost always done in
    the context of incremental realism. The bottom line is: Given a
    specific set of circumstances or requirements, how does an organization
    make real improvement given its current environment? It is almost never
    about reaching the IT nirvana that some would suggest Customs attempt
    to reach.
        Over the years, we have come to gain a deep appreciation for the
    realities of the Customs IT situation. These realities are critical,
    for they establish the context that bounds our analysis, comments and
    recommendations. We believe that the following realities are key:
         Customs IT funding in real terms has been and continues to
    be on the decline.
         The current Customs IT funding level is insufficient to
    meet core IT requirements, let alone enough to make significant
    organizational, process and functional capability improvements.
         Additional and continuous funding is unpredictable at best
    and subject to the influence of many outside forces. Some sources of
    funding have very specific restrictions and cannot always be optimally
    allocated.
         Legislative mandates do not ensure a funding stream to
    complete.
         Customs IT technical infrastructure is insufficient to
    meet the demands of current initiatives. This alone is a huge
    investment challenge, ACE not withstanding.
         The core Trade system (ACS) is in fact aging and is of
    increasing concern. This is not conjecture or posturing. Those who
    would suggest this clearly do not understand the facts and are placing
    in jeopardy the ability of Customs to provide continuity of operations
    to the Trade community.
         Customs IT has needed to respond continuously to
    criticism, much of it we believe unwarranted or overstated, from a
    variety of sources and of changing form as issues are addressed. We
    have never encountered an organization that spends as much time as
    Customs responding to these types of actions. It is debilitating at
    best and clearly diffuses the ability of the organization to maintain
    focus.
        The above minimally define the realities and constraints facing
    Customs IT. They are critical because they establish a scenario that
    cannot resolve itself without immediate intervention or acceptance of
    degraded service levels and overall capability. In extremely simple
    terms, the demands on Customs (Y2K remediation, ACE development,
    maintaining a stable ACS, suggested process improvements, enterprise
    architecture completion and all normal day-to-day activities) far
    exceed the ability of Customs--or for that matter any organization with
    which I have worked--to optimally address. This speaks volumes in terms
    of evaluating Customs' actions and capabilities against this backdrop
    and not against one of unrealistic expectations.

                           Observations and Opinions

        I would start by categorically stating that Customs IT has
    performed admirably in the face of the noted realities. No organization
    is perfect; most are far from it. We base an assessment of an
    organization's character and capability not only on what it has
    accomplished but also on the circumstances facing the organization in
    trying to accomplish its mission. Let me be clear. Customs IT has made
    mistakes and has many opportunities for improvement. But when placed in
    the context of its current situation, we are very impressed by what
    Customs has and continues to accomplish.
        Instead of focusing on what Customs could do to improve (enough has
    already been pointed out by other bodies), I would like to take some
    time to point out what Customs does well. This is not based on
    conjecture but on the GartnerConsulting view into the IT industry as a
    whole and on the extensive real-world experience which our consultants
    bring to the table. This is also based on in-depth efforts that we have
    performed on behalf of Customs.

    Initiatiaves

        Y2K--The Customs Y2K program is outstanding. The program has
    received excellent reviews internally. The combination of a well-run
    program office, dedicated staff and continuous review was key. When
    others would have you believe that Customs suffers from weak project
    management and planning, remember that this Y2K effort was clearly one
    of the best executed in the Federal or private sector. Customs can
    manage large, complex projects.
        ACE--In many respects ACE has demonstrated success. There have been
    strong positive responses to early NCAP releases. Earlier project cost
    estimates and benefits are proving to be reasonably accurate based on a
    new and complete analysis done by an outside party. What is important
    to remember is that ACE has received virtually no significant direct
    funding. Over the years, Customs has been asked to provide many
    different estimates--estimates that are supposed to be accurate.
    However, at the same time it has never had the benefit of a reliable
    and continuous funding mechanism to use as a planning assumption. It is
    remarkable that Customs has made the progress it has given the
    circumstances. Again, consider the backdrop--no funding, a legislative
    mandate, aging existing system, no infrastructure and heavy oversight
    requiring best practices. Customs did what it had to do under the
    circumstances; it made the best progress possible under impossible
    conditions.
        Existing Application Base including ACS--The existing base of
    Customs applications supports a wide array of functions: trade,
    enforcement, administrative and financial. The systems are immense by
    any measure. Customs supports one of the largest databases anywhere.
    The amount of funding required to maintain and operate these systems is
    very low. These systems must support the fairly rapid growth in Trade
    and the associated areas. We continue to be very impressed with the
    ability of Customs to maintain continuity of operations in the face of
    growth, declining budget and overall system age. While we have not done
    an in-depth analysis of the overall capability, we believe that the
    Customs staff has done an outstanding job in this area. Again, this
    speaks to the ability of Customs to plan, manage and execute
    significant efforts in the face of trying circumstances.
        Specifically with respect to ACS, it should be noted again that it
    is increasingly difficult to maintain the integrity and continuity of
    the system. This is due to the historical lack of documentation,
    application complexity, volume growth, physical characteristics of the
    technology in use and other issues. While many would focus on the
    challenge Customs has had in keeping ACS functioning, we feel that
    given the situation, Customs should be viewed in a very positive light.
    It has managed to maintain operations in the face of an almost worst-
    case scenario. It has used limited resources very effectively.
        Enterprise IT Architecture--After a slow start four years ago,
    Customs has responded with one of the most thorough efforts we have
    seen to date. The effort is especially laudable given the fact that the
    conceptual model upon which Customs was directed to base its approach
    had never actually been built out and tended to reflect too academic a
    view of the requirement. The Customs approach and deliverables are now
    beginning to be viewed by a broad cut of its peers as a best practice.
        ATS--Targeting has always been a key component of the Customs
    approach. While not a large initiative by ACE standards, the effort
    around targeting continues to show astounding success. Not only has
    Customs developed a leading-edge targeting delivery system, but it has
    also directly attacked the challenge of a common approach to many
    different types of targeting.
        Cabinet/Wants--This targeting effort is singled out as an example
    of the positive and pragmatic way in which Customs has applied
    architecture and standards to its day-to-day approach. In short, this
    non-standard technical environment required an upgrade. Customs IT
    viewed this as an opportunity to evaluate the system not only in terms
    of the use of standard technology, but also in terms of a common
    approach to targeting. Customs IT took the time and has to date
    expended the effort to upgrade this capability technically,
    operationally and functionally. Most organizations would not have made
    this type of forward-looking investment, especially given the severe
    resource constraints. Even in the absence of all the formal planning,
    process and architectural artifacts demanded by some, Customs continues
    to demonstrate an ability to do the right things and to do them as
    effectively as possible.

    Organization

        Reorganization--Based on new IT leadership vision and the proven
    success of the Y2K program office, Customs IT has executed a
    reorganization to ensure a proper balance of accountability and
    responsibility. This reorganization maximizes the use of a very limited
    resource--people. Over the four years that I have been associated with
    Customs there has been a notable shift toward the creation of an
    accountable IT organization. While subtle, this shift is very positive.
    When coupled with a number of simple core process improvements (IRB,
    architecture, project/program management), we would expect to see a
    structure capable of supporting the intent of recent oversight
    recommendations but in an effective and pragmatic manner.

    Processes

        IMP--Customs has been refining its Investment Management Process
    (IMP) over the last few years. The most recent refinement fundamentally
    shifts the IMP from being an explicit, standalone process to one that
    over-arches a number of related processes--a best practice. While too
    detailed a discussion for this forum, the shift to pragmatic and
    layered roles in conjunction with focused informational requirements
    and decision criteria combine to establish a very fluid approach.
    Recent experience with the use of this new approach has been very
    successful. Our experience is that this approach will reap true
    benefits, and will rapidly become as good, if not better, than that of
    most organizations with which we work.
        Enterprise Architecture--While the core IT architecture is
    increasingly well established, the underlying architectural processes
    which support and interconnect the overall architecture with associated
    processes (such as IMP) are currently in development. Very shortly they
    are expected to duplicate the successes of the IMP. Clearly,
    architectural processes are key to the continued success of the IMP
    over the long term. What is evident is that Customs IT is open and
    moving to a very collaborative and accountable model. We have extensive
    experience in enterprise architecture and the associated processes.
    This experience leads us to believe that when institutionalized the
    planned Customs IT architectural process will be a best practice and
    pragmatic and usable as well. What is absolutely critical is that these
    processes are not ``paper'' processes, but are processes that virtually
    disappear into the background and become a part of everyday decision-
    making and activity. From our experience, it is this type of approach
    that separates effective processes from ones that look good on paper
    but never become part of the culture.
        Application Development and Acquisition--Customs has made a
    significant investment in the development of a system-development life
    cycle (SDLC). The SDLC is a mechanism to help ensure that a rigorous
    process is used to develop new application functionality. The Customs
    SDLC is extensive, perhaps overly so, given the nature of the role of
    application development within the organization. However, the fact that
    is does have one in place is positive. What is somewhat perplexing is
    the requirement to now shift to a ``new'' model, CMM (SEI's Capability
    Maturity Model), and the fact that Customs is now being held to a new
    standard. In the end, all of these approaches are designed to help
    ensure success for application development and/or software acquisition.
    There is no perfect model or process, nor does the existence of a
    process ensure success. They are all frameworks that help traverse the
    complexity of the application development/acquisition life cycle. Given
    the fact that Customs IT fundamentally is not an application
    development organization, that it had an extensive SDLC is very
    positive.
        While CMM is an extremely thorough and excellent approach, it must
    be put into a context, which it has not to date. Customs does have a
    process; it just is not CMM. Customs has had significant successes in
    the absence of CMM, as has every organization that does application
    development. And as noted, CMM does not ensure success. CMM is, to a
    large extent, more appropriate for commercial organizations that
    develop applications as a core competency, and less appropriate for
    organizations like Customs, which on the whole develop very few new
    applications and do not have application development teams internally
    as a core competency. Customs should be applauded for its efforts
    around an SDLC and given recognition for its stated direction toward
    CMM compliance.
        General--It is important to note that many types of process
    improvement are not free. Implicit in the comments of the critics of
    Customs is the requirement that significant process frameworks can and
    must be established prior to moving forward. This is impractical.
    Improvement comes from repetition and rigor. Repetition takes time and
    rigor takes resources. Customs has been given neither the resources nor
    the ability to gain experience with a development process. These are
    the facts. Customs IT has done a reasonable job under the
    circumstances. It has done what it has had to do to make demonstrable
    progress.

                                    Summary

        The reality of the Customs IT world is very basic--do much more
    with less. The GartnerConsulting basic analysis is that Customs has the
    resources to just deal with the day-to-day issues, at best. The reality
    is that Y2K, ACE, CMM compliance and technical infrastructure
    improvements all require resources in excess of what is available.
    Customs has done a very good job of balancing these issues. Not
    perfectly, but reasonably. Our experience tells us that Customs asks
    for advice and then listens. It has accomplished many very positive
    initiatives and on the whole is very successful. To be responsible, we
    all have to look at Customs IT and put its difficult history in
    perspective.
        As an external consultant, the easiest thing to do is to find
    fault; the hardest is to find a realistic and truly executable approach
    given some set of limiting circumstances. When put into this context
    many, if not most, of Customs IT decisions pass the reasonability test
    easily. Customs IT has shown what it can do when positively challenged
    and when given the ability to respond in a professional manner. We
    firmly believe that this ethic and capability to function under extreme
    circumstances is core to Customs culture. It is something to leverage,
    build upon and actively support, and not to replace.
        This concludes my remarks before the committee. Thank you for the
    opportunity to address you today.

        Chairman Crane. Thank you.
        Mr. Schoof, do you live in Peoria?
        Mr. Schoof. I do.
        Chairman Crane. I taught down at Bradley for years. Three
    of our eight children were born there, yes, indeed.
        Mr. Schoof. Welcome back sometime.
        Chairman Crane. Of our eight, we had only one boy and he
    was born in Peoria, which proves it plays in Peoria.
    [Laughter.]
        Mr. Schoof. That's right. It still does, too.

       STATEMENT OF RONALD SCHOOF, CUSTOMS AND EXPORT REGULATION
      ADMINISTRATOR, CATERPILLAR INC., PEORIA, ILLINOIS, AND VICE-
                     CHAIRMAN JOINT INDUSTRY GROUP

        Mr. Schoof. Thank you, Mr. Chairman, and Representative
    Levin. I am responsible for the customs and export compliance
    at Caterpillar in Peoria, and happy to be here again. I am also
    vice chairman of the Joint Industry Group (JIG), that is a
    coalition of 150 Fortune 500 companies, brokers, trade
    associations, and law firms actively involved in international
    trade, and one of the founding Members of the Coalition for
    Customs Automation Funding.
        I have been asked today to relate to you the position of
    the JIG regarding the President's proposed fiscal year 2000
    Treasury budget, and the needed funding for automation systems.
    Briefly stated, we find the President's Treasury budget on
    automation funding to be poorly crafted. We are disappointed in
    the Administration's inability to assume a leadership role in
    the development of a mission-critical Customs system.
        The proposed new tax, termed a user fee by the
    Administration, is illegal under the NAFTA agreement with
    Canada and Mexico. Furthermore, the President's budget proposes
    to fund automation at half the level that is needed. The tax
    would place an additional burden on industry, that already
    contributes $800 million a year to the merchandise processing
    fee.
        For this reason, it is now time for Congress to fill the
    leadership void by establishing adequate funding for Customs
    automation. In fact, it should be noted that it was the Ways
    and Means Committee leadership that approved the Customs Mod
    Act, which required among other things, an enhanced Customs
    automation system. While industry has fulfilled its side of the
    Mod Act at the cost of tremendous additional resources and
    expenditures, Customs Service has been unable to provide the
    most important component of its side of the agreement,
    automation.
        The current Customs ACS system is experiencing brownouts
    and delays and declining service with increased frequency. A
    major blackout or a crash of the system will have major effects
    on companies, the environment, and the economy. For
    Caterpillar, a 1-day shutdown of ACS will cause disruptions. A
    prolonged ACS blackout of more than a day could halt our
    production lines and cause serious delays in shipping needed
    replacement parts to our customers.
        The automotive industry will be forced to shut down
    production lines at a much earlier date than Caterpillar
    because of the high volume, just in time delivery procedures.
    Many of these shutdowns would occur within the first few hours
    of an ACS failure. Setting aside the environmental impact of
    thousands of vehicles frozen with engines running along our
    borders, imagine the impact to the U.S. economy and U.S. labor
    if production comes to a halt in our major U.S. manufacturing
    companies.
        Further adding to our concern is the low level of funding
    available for ACS maintenance. For fiscal year 1999, Customs
    has a deficit of $8.5 million for ACS life support. We urge the
    Committee to authorize the emergency funding in the amount of
    $8.5 million before the end of April. For fiscal year 2000
    budget, a similar shortfall of $32 million exists.
        The replacement system, ACE, which we have heard a lot
    about today, has been scrutinized for years. JIG members have
    taken an active role in the ACE planning since the passage of
    the Mod Act. Many members are currently participating in the
    various ACE prototype programs. Our organization has
    participated in the Customs Trade Support Network, TSNs, that
    have given industry an opportunity to ensure that each business
    sectors' automation needs are addressed. Overall, we have been
    very pleased with the Customs' approach to this point.
        International Trade Data Systems, ITDS. We support the
    Treasury Department's mission of reduced amount of data
    required by the Government prior to importation. JIG supports
    the concept of front-end interface to serve as a single data
    collection point between the Government and industry. However,
    as we have come to understand the design and enforcement
    natures of ITDS system, we have concerns with its true role in
    the clearance process.
        In conclusion, Mr. Chairman, the Administration has failed
    to develop an adequate method to fund ACE and support ACS. We
    turn to Congress to provide the solution. In order to develop
    ACE over a 4-year period, a funding level of at least $300
    million per year in each of the next 4 years is required.
    Because industry has and continues to contribute more than $800
    million a year in merchandise processing fee, we urge that a
    portion of these funds be appropriated to Customs for ACE
    development. In doing so, we recommend that Congress treat the
    Customs Service as though it was a business: conduct hearings,
    require deadlines to be met, hold Customs responsible for its
    management in the process.
        For its part, we pledge to continue to participate in the
    TSNs and insist upon regular updates and informative meetings
    with the Customs Service. Indeed, with all that industry has
    invested in the Mod Act to this point, ACE development will not
    proceed without industry scrutiny. Thank you.
        [The prepared statement follows:]

    Statement of Ronald Schoof, Customs and Export Regulation
    Administrator, Caterpillar Inc., Peoria, Illinois, and Vice-Chairman,
    Joint Industry Group

                                  Introduction

        Mr. Chairman and distinguished Members of the House Ways & Means
    Subcommittee on Trade. My name is Ronald Schoof and I am responsible
    for customs and export regulation administration with Caterpillar Inc.,
    in Peoria, Illinois. I am also Vice-Chairman of the Joint Industry
    Group (JIG), a coalition of more than one hundred and fifty members
    representing Fortune 500 companies, brokers, importers, exporters,
    trade associations, and law firms actively involved in international
    trade. The Joint Industry Group enjoys a close and cooperative
    relationship with the U.S. Customs Service and frequently engages
    Customs on trade-related issues that affect the growth and strength of
    American imports and exports. The Joint Industry Group is also one of
    the founding members of the Coalition for Customs Automation Funding.
        I have been asked today to relate to you the position of the Joint
    Industry Group regarding the President's Proposed Fiscal Year 2000
    Treasury budget and needed funding for development of Treasury and
    Customs automated data processing systems.

                                 Current Budget

        Briefly stated, we find the President's Treasury budget on
    automation funding to be very poorly crafted. The proposed new tax,
    termed a ``user fee'' by the Administration, is illegal under the NAFTA
    agreement with Canada and Mexico. It conflicts with the Treasury
    Department's own mission of reducing the amount of data required for
    imports under the International Trade Data System (ITDS). ITDS seeks to
    reduce the amount of data required, while the proposed budget taxes the
    amount of data sent. The two objectives are contradictory. The tax
    would place an additional burden on an industry that has already
    contributed $800 million a year for the last ten years in Merchandise
    Processing Fees (MPF). A portion of the MPF should have been used to
    build and implement Customs automated systems. Furthermore, the
    President's budget proposes to fund automation at a level that is less
    than half of what is genuinely needed. We are disappointed in the
    Administration's inability to assume a leadership role in the
    development of mission critical Customs systems.
        For this reason it is now time for Congress to fill that leadership
    void. In fact it should be noted that it was the Ways & Means Committee
    leadership that approved the Customs Modernization Act (Mod Act) that
    required, among other things, an enhanced Customs automated system.

                           Customs Modernization Act

        Passed in 1993, the Mod Act placed added compliance responsibility
    on industry. This included industry accepting the responsibility for
    classifying goods, exercising reasonable care, developing corporate
    account based systems, assigning merchandise value, determining the
    country of origin, and determining duties of imported products. As its
    part of the agreement, the Administration, through the Customs Service,
    was to provide methods to facilitate the process by enhancing
    automation systems to accommodate the new requirements. This added new
    meaning to the term ``trade facilitation.'' It was not a term that
    indicated a regress of Customs enforcement policies, rather it alluded
    to the Customs side of the agreement. While industry has fulfilled its
    side of the Mod Act, at a cost of tremendous additional resources and
    expenditures, the Customs Service has been unable to provide the most
    important component of its side of the agreement--automation. At this
    point, industry can only continue to hope that the Automated Commercial
    System will last long enough for Customs to develop its successor.

                     The Automated Commercial System (ACS)

        As JIG has testified previously, our membership continues to be
    concerned about the aging Automated Commercial System (ACS). It is
    almost 15 years old and is experiencing brownouts, delays, and
    declining service with increased frequency. A major blackout or
    ``crash'' of the system will have devastating effects on companies, the
    environment, and the economy.
        For Caterpillar, the company I represent, a one-day shut down of
    ACS will cause disruptions. A prolonged ACS blackout of more than a day
    or two would halt our production lines and cause serious delays in
    shipping needed replacement parts to our customers. An inactive
    assembly line is a scenario that will face many of JIG's manufacturing
    company members. General Motors, DaimlerChrysler, and Ford Motor
    Company will be forced to shut down production lines at a much earlier
    date than Caterpillar because of their high volume just-in-time-
    delivery procedures. In fact, miles of idling trucks strung across the
    Texas, California, New York, and Michigan borders is certain to occur
    during a major shut down of ACS. Setting aside the environmental impact
    of thousands of trucks frozen with engines running along our borders,
    imagine the impact to the U.S. economy and U.S. laborers if production
    comes to a halt in our major U.S. manufacturing companies.
        Further adding to industry concerns is the low level of funding
    available for ACS maintenance. In FY2000, a minimum of $99 million is
    necessary just to maintain ACS. The President's budget proposed $35
    million with an additional $32 million in base funds. This represents a
    deficit of $32 million. While this lack of funding is alarming, more
    alarming are the funds currently available for ACS maintenance. In
    FY1999 Customs has a deficit of $8.5 million for ACS life support. This
    means that funding for ACS will expire at the end of this month. We
    urge the Committee to authorize emergency funds in the amount of $8.5
    million before the end of April.

                   The Automated Commercial Environment (ACE)

        The replacement system, the Automated Commercial Environment (ACE)
    has been scrutinized for years. JIG members have taken an active role
    in ACE development and funding since the passage of the Mod Act. Our
    organization has participated in the Customs Trade Support Networks
    (TSN's) that have given industry an opportunity to ensure that each
    sector's automation needs were addressed. Industry advised Customs to
    adopt a modular approach to the ACE design, and Customs has done so. We
    suggested that Customs outsource the construction of ACE to an
    information technology firm specializing in automated systems. Customs
    has concurred and is preparing a request for proposal with the help of
    a Federally Funded Research and Development Contractor (FFRDC).
    Overall, we have been pleased with the Customs approach to this point.

                     International Trade Data System (ITDS)

        The Joint Industry Group has been asked to comment on the Treasury
    Department's International Trade Data System (ITDS). JIG supports the
    concept of a front-end interface to serve as a single data collection
    point between government and industry. We support the Treasury
    Department's mission to reduce the amount of data required by the
    government prior to importation. However, as we have come to understand
    the design and enforcement nature of the Treasury ITDS system we are
    concerned with its true role in the clearance process. Therefore, at
    this point JIG cannot support the proposed ITDS system. We do agree
    that a front-end element is necessary for ACE, but the ITDS proposed to
    us today is not the solution.

                                Recommendations

        In proposing an unacceptable and insufficient budget, the
    Administration has failed to develop an adequate method to fund ACE or
    support ACS. We turn to Congress to provide the solution to the ACE and
    ACS funding issues. In order to develop ACE over a four year period,
    which is the time frame agreed upon by industry and Customs, a funding
    level of at least $300 million per year in each of the next four years
    is required. Because industry has contributed, and continues to
    contribute, more than $800 million per year in MPF, we urge that a
    portion of those funds be appropriated to Customs for ACE development.
        In doing so, we recommend that Congress treat the Customs Service
    as though it were a business. Conduct oversight hearings, require
    deadlines to be met, hold Customs responsible for its management of the
    process. For its part, JIG pledges to continue its participation in the
    TSN's to ensure that all industry sector's automation requirements are
    met. JIG will insist upon regular updates and informative meetings from
    the Customs Service. Indeed, with all that industry has invested in the
    Mod Act to this point, ACE development will not proceed without JIG's
    scrutiny.

        Chairman Crane. Thank you, Mr. Schoof.
        Mr. Powell.

      STATEMENT OF PETER H. POWELL, SR., CHIEF EXECUTIVE OFFICER,
        C.H. POWELL CO., PEABODY, MASSACHUSETTS, AND PRESIDENT,
    NATIONAL CUSTOMS BROKERS AND FORWARDERS ASSOCIATION OF AMERICA,
                        INC., NEW YORK, NEW YORK

        Mr. Powell. Thank you, Mr. Chairman, Mr. Levin,
    Subcommittee Members. My name is Peter Powell of the C.H.
    Powell Company. I also serve as president of the National
    Customs Brokers and Forwarders Association of America.
        As you well know, Mr. Chairman, from our many years of
    working together, a customs broker acts on behalf of an
    importer in its obligations to the Customs Service, filing
    information, paying duties, and ensuring compliance with
    thelaws of the United States. We have long known that Customs
    automation is essential to these processes. While we heard
    ``automate or perish'' long ago, brokers quickly understood the
    criticality of this tool, and worked in conjunction with
    Customs to develop ACS, the Automated Commercial System.
        Jointly, Customs and the broker community were responsible
    for its early development and then its evolution over almost
    two decades. Recently however, it has become clear to our
    community that ACS is in trouble. We, who are on the front
    lines, became aware of this first. The most obvious signs of
    ACS's inability to keep up with rapidly increasing volumes has
    been the brownouts and outages experienced in this past year.
    Yet ACS has other limitations caused by aging technology,
    coupled with expanding demands for better and more
    sophisticated performance.
        In many respects, ACS successor system, the Automated
    Commercial Environment, known as ACE, sounds like something
    different. In fact, it's merely modernization of what is
    frankly antiquated today. Yes, there needs to be new hardware
    and software. However, the Customs process itself remains
    functionally the same, albeit more efficient and improved to
    cope with workloads that increase at an alarming pace. ACE can
    increase productivity through faster processing of information.
    ACE increases flexibility by permitting resort to other tools
    for processing information such as the Internet, as an example.
    ACE improves interfaces with the private sector and with 104
    other Federal agencies. And, ACE helps implement those
    processes that this Committee has mandated through laws such as
    the Customs Modernization Act.
        We customs brokers can tell you that trade will come to a
    crashing halt if ACS collapses under the weight it must now
    bear. Unfortunately, we seem headed in that direction. This
    year's funding outlook is bleak. To maintain ACS on life
    support, Customs estimates that it will need $12 million this
    year. However, $8.5 million is unfunded. To continue life
    support in fiscal year 2000, the Administration proposes $35
    million, which we understand to be $32 million short.
        But stop for one moment. Even were Congress to find the
    money to fund ACE, whether over 4 or over 7 years, do we want
    our lifeline to international trade merely sustained on life
    support? I would venture that we need a robust, functioning
    automation system in the interim that can meet the demands of
    trade over the next 4 to 7 years.
        To put processing in limbo, without improving the present
    system to meet intervening contingencies is equally neglectful
    on all of our parts. How can we stand by and wait another 4 to
    7 years to enjoy benefits conceived by this Committee over 5
    years ago?
        As for ACE, the funding outlook is equally poor. Treasury
    continues to dole out funds sparingly, with $3.4 million in
    fiscal year 1999 funds, awaiting a cost-benefit analysis. This
    Committee has authorized some funds in a bill now being delayed
    in the Senate. However, the Administration has requested no
    funds, I repeat, zero funds for fiscal year 2000. And, it has
    proposed an untenable user fee concept, which we oppose, to
    permit a mere $150 million in fiscal year 2001.
        To adequately fund ACE, we project that Congress must
    appropriate at least $300 million each year for 4 years.
    Instead, we have only the Administration's proposal, which at
    best is misguided, and at worst, woefully inadequate.
        NCBFAA believes that ACE must be constructed forthwith. We
    acknowledge that a $1.2 to $1.4 billion price tag demands great
    caution and the necessary diligence on the part of those
    authorizing, appropriating, and overseeing the spending of
    these funds. NCBFAA in no way implies that the Congress should
    simply throw money at this problem. Congress must insist on
    meaningful oversight. Treasury must guarantee that it can meet
    your terms. Nonetheless, the days of armchair quarterbacking
    must draw to a close. We must reduce the demands on Customs
    planners and implementers so that they can realistically move
    forward, focus on achieving the result demanded by Congress,
    rather than merely constructing an elegant risk-adverse
    process.
        We have confidence that Customs, under your oversight, can
    produce a successful Automated Commercial Environment. NCBFAA
    urges you to support ACE with the necessary authorizations. Mr.
    Chairman, thank you.
        [The prepared statement follows:]

    Statement of Peter H. Powell, Sr., Chief Executive Officer, C.H. Powell
    Co., Peabody, Massachusetts, and President, National Customs Brokers
    and Forwarders Association of America, Inc., New York, New York

        Mr. Chairman, my name is Peter H. Powell Sr., of the C. H. Powell
    Company, a logistics company whose services include customs brokerage.
    I am also President of the National Customs Brokers and Forwarders
    Association of America (NCBFAA).
        As you well know, Mr. Chairman, from our many years of working
    together, a customs broker acts on behalf of an importer in its
    obligations to the Customs Service: filing information, paying duties
    and ensuring compliance with the laws of the United States. This role
    has led to a very close relationship between a customs broker and a
    customs official, and between the NCBFAA and the U.S. Customs Service.
    We are ``force multipliers,'' handling 95% of all commercial entries. A
    professional, customs broker, by virtue of his acting as the link to
    Customs for hundreds of importers, greatly simplifies the task for
    Customs of handling, this year, 21 million entries and provides the
    best possible assurance that information is complete, accurate and
    timely.
        We have long known that Customs automation is essential to these
    processes. While we heard ``automate or perish'' long ago, brokers
    quickly understood the criticality of this tool and worked in harmony
    with Customs to develop ACS--the Automated Commercial System. Jointly,
    Customs and the broker community were responsible for its early
    development and then its evolution over almost two decades. Recently,
    however, it has become clear to our community that ACS is in trouble--
    and we who are on the front lines became aware of this first. The most
    obvious sign of ACS' inability to keep up with rapidly increasing
    volumes (entries will double between 1994 and 2001 and nearly triple by
    2005) has been the brownouts and outages experienced in this past year.
    Yet, ACS has other limitations caused by aging technology coupled with
    expanding demands for better and more sophisticated performance. In
    many respects, ACS' successor system, the Automated Commercial
    Environment (ACE), sounds like something different. In fact, it's
    merely modernization of what is--frankly--antiquated. Yes, there needs
    to be new hardware and software; however, the customs process itself
    remains functionally the same, albeit more efficient and improved to
    cope with work loads that increase at an alarming pace. ACE can
    increase productivity through faster processing of information. ACE
    increases flexibility by permitting resort to other tools for
    processing information--such as the Internet, for example. ACE improves
    interfaces with the private sector and with 104 other federal agencies.
    And, ACE helps implement those processes that this committee has
    mandated through laws such as the Customs Modernization Act.
        Let's assess the cost of inaction. We customs brokers can tell you
    that trade will come to a crashing halt if ACS collapses under the
    weight it must now bear. This extends not only to imports but also to
    exports. This affects not just foreign, but American businesses. It
    involves domestic manufacturers dependent on imported parts or foreign
    markets. It will be catastrophic to American retailers, now reliant on
    ``just-in-time-inventory,'' who will find their warehouses empty while
    their goods pile up at America's docks and airports.
        Unfortunately, we seem headed down that road. This year's funding
    outlook is bleak. To maintain ACS on ``life support,'' Customs
    estimates that it will need $12 Million this year--however $8.5 Million
    is unfunded. To continue life support in FY2000, the Administration
    proposes $35 Million, which we understand to be $32 Million short. But,
    stop for one moment. Even were Congress to find the money to fund ACE--
    whether over 4 or over 7 years--do we want our lifeline to
    international trade merely sustained on life support? I would venture
    that we need a robust, functioning automation system in the interim
    that can meet the demands of trade over the next four to seven years.
    To put processing in limbo, without improving the present system to
    meet intervening contingencies, is equally neglectful on all our parts.
    NCBFAA has proposed EEEP--Enhanced Electronic Entry Processing--a means
    by which ACS can accommodate remote entry filing until ACE is on its
    feet. How can we stand by and wait another four to seven years to enjoy
    benefits conceived by this Committee over five years ago?
        As for ACE, the funding outlook is equally poor. Treasury continues
    to dole out funds sparingly, with $3.4 Million in FY99 funds awaiting a
    ``Cost Benefit Analysis.'' This committee has authorized some funds in
    a bill now being delayed in the Senate; however, the Administration has
    requested no funds--I repeat, zero funds--for FY2000. And, it has
    proposed an untenable user fee concept, which we oppose, to permit a
    mere $150 Million in FY2001. To adequately fund ACE, we project that
    Congress must appropriate at least $300 Million over four years.
    Instead, we have only the Administration's proposal, which is, at best,
    misguided and, at worst, woefully inadequate.
        NCBFAA believes that ACE must be constructed forthwith. We
    acknowledge that a $1.2 to $1.4 billion price tag demands great caution
    and the necessary diligence on the part of those authorizing,
    appropriating and overseeing the spending of these funds. NCBFAA in no
    way implies that the Congress should simply throw money at this
    problem. In fact, we too have our reservations. That is why we intend
    to participate at every level, over every issue coming before Customs'
    Trade Support Network (TSN). We believe that the fielding of ACE must
    be, to a great degree, evolutionary and collaborative. Just as we
    worked with Customs to field a system, ACS, that has proven
    monumentally successful over 15 years, we intend to insist on that same
    level of partnership now. After all, our livelihood is at stake. So too
    must Congress insist on meaningful oversight and Treasury guarantee
    that it can meet your terms.
        Nonetheless, the days of armchair quarterbacking must draw to a
    close. We must reduce the demands on Customs planners and implementers
    so that they can realistically move forward, focussed on achieving the
    result demanded by Congress rather than merely constructing an elegant,
    risk adverse process. We have confidence that Customs, under your
    oversight, can produce a successful Automated Commercial Environment.
    NCBFAA, urges you to support ACE with the necessary authorizations.
        Thank you, Mr. Chairman.

        Chairman Crane. Thank you, Mr. Powell.
        Mr. Salamone.

        STATEMENT OF RICHARD J. SALAMONE, MANAGER, CUSTOMS AND
    INTERNATIONAL REGULATORY COMPLIANCE, BASF CORP., MT. OLIVE, NEW
      JERSEY, AND CHAIRMAN, AMERICAN ASSOCIATION OF EXPORTERS AND
                     IMPORTERS, NEW YORK, NEW YORK

        Mr. Salamone. Thank you, Mr. Chairman, Mr. Levin, and other
    members of the Trade Subcommittee. I am Richard Salamone,
    manager of customs and international regulatory compliance for
    BASF Corporation, one of the largest chemical companies in the
    United States. I am currently chairman of the American
    Association of Exporters and Importers. AAEI is a national
    organization of approximately 1,000 firms involved in every
    facet of international trade. AAEI is the largest membership
    organization devoted to observing Customs' policies and
    practices.
        As you know, the funding of the redesign of Customs'
    computer systems has emerged as a critical and time-sensitive
    problem. We are here before you today to express our concern on
    this matter. AAEI urges Congress to support the U.S. Customs
    Service in its vital effort to keep pace with the exponential
    growth in international commerce by rolling out its next
    generation automation system, known as the Automated Commercial
    Environment, or ACE. Time is of the essence, as Customs'
    existing 15-year-old Automated Commercial System, known as ACS,
    is operating at nearly 95 percent capacity. It is on the verge
    of collapse, threatening to gravely disrupt trade at our
    borders, which will ultimately inflict severe blows to the
    national economy.
        In today's global marketplace, U.S. manufacturers rely
    heavily on component parts and materials from all over the
    world. U.S. competitiveness has been significantly enhanced in
    recent years by utilization of just-in-time inventory supply
    chains. Even short-term ACS failures will break a multitude of
    just-in-time links, preventing essential raw materials and
    parts from reaching U.S. manufacturing plants. The failure of
    these raw materials and parts to reach the manufacturing site
    on a timely basis can lead to halts in production, the shutting
    down of entire production lines, and the idling of numerous
    workers.
        Following on Mr. Schoof 's remarks, I know also that in our
    industry, in the chemical industry, disruptions in delivery can
    translate into disruptions in the manufacturing process. Not
    only will imports be impeded, but exports will also be affected
    as many of them are manufactured in the United States from
    imported raw materials.
        The Administration proposes an inadequate $150 million for
    ACE funding for fiscal year 2001, which is to be derived from
    an insupportable user fee, which we strongly oppose. The
    Administration has requested zero funds for fiscal year 2000.
    At the proposed level of funding, full implementation of ACE
    will take at least eight to 10 years, well beyond the limited
    life expectancy of ACS. We believe funding of at least $300
    million per year over 4 years is much more in line with an
    optimal implementation, and is likely to lower the total cost
    of the project. Successful rollout of ACE is vital to our
    Nation's management of a 10 percent annual growth in
    international commerce.
        Without ACE, Customs will be unable to meet legislative
    mandates for informed compliance and for improved financial
    controls over the more than $20 billion in duties it collects
    annually. The trade community, Customs, and the national
    economy will all gain from Customs having a modern software and
    hardware system that will adapt to future technology
    developments.
        AAEI supports Customs Commissioner Kelly's decision to
    retain private sector contractors experienced in Government
    systems, as well as to consult with the Internal Revenue
    Service in its design and development of future ACE
    functionalities. Independent contractors not only have
    extensive experience in large Government systems, but they
    understand the methodologies of private sector systems, which
    ultimately have to interface with their Government
    counterparts. Also, these contractors have previously served
    large Fortune 1000 companies that have similarly undergone
    conversion from mainframe-centered computer systems to
    distributed systems, usually under urgent conditions dictated
    by the restricted budgets and tight time constraints of private
    industry.
        AAEI is dismayed by the President's proposed budget for
    Customs automation, calling for the imposition of a new user
    fee to fund ACE. AAEI believes that the cost of ACE, as well as
    the cost of maintaining Customs' existing ACS should be borne
    by general Treasury. Customs has said it needs a predictable
    and reliable source of funding for its systems. We
    wholeheartedly agree. We do not agree that an increase in the
    merchandise processing fee will provide either the given
    unpredictable shifts in trade and questionable legality of a
    user fee. Any user fee paid by importers to finance a computer
    system used by exporters and by Customs for non-commercial
    purposes would be inherently discriminatory and vulnerable to a
    challenge in the World Trade Organization. Also, if the United
    States implements a user fee for computerization of clearance
    functions for imports, we can expect other countries very
    quickly to do the same, imposing additional costs and
    competitive burdens on U.S. exports.
        We also hope that Customs and Treasury can come quickly to
    agreement on the appropriate role for the International Trade
    Data System, or ITDS. There is merit in the concept of ITDS, as
    it is a single trade data collection and distribution point for
    all agencies requiring such data, and it is the location of the
    Government-wide trade data warehouse. ITDS should result both
    in reduced data demands on the private sector at a much higher
    quality and quantity of data for analysis. ITDS should be
    limited to a neutral transparent technical role, and should not
    include functions assigned to its constituent agencies. While
    Customs could regularly query ITDS's stored data regarding
    trade patterns, Customs, not ITDS, should be making judgments
    regarding entry or enforcement policies.
        In summation, ACE development can be delayed no further.
    The current ACS is on the verge of collapse, threatening to
    paralyze international commerce and ultimately wreak havoc on
    our national economy. An increase in user fees to pay for ACE
    and/or ITDS will inevitably face concerted legal challenge for
    more trading partners. AAEI believes that if Customs continues
    in the direction of which it is now headed, with continued
    support from the trade community and adequate Government
    appropriations, a successful ACE system can be realized without
    serious disruptions to the U.S. economy.
        Thank you for the opportunity to present our views today.
        [The prepared statement follows:]

    Statement of Richard J. Salamone, Manager, Customs and International
    Regulatory Compliance, BASF Corp., Mt. Olive, New Jersery and Chairman,
    AAEI; American Association of Exporters and Importers New York, New
    York

                          Introduction and Background

        Good Afternoon, Chairman Crane and members of the Trade
    Subcommittee. I am Richard Salamone, Manager, Customs and International
    Regulatory Compliance, BASF Corp. I am testifying today in my role as
    Chairman of the American Association of Exporters and Importers (AAEI).
        AAEI is a national organization of approximately 1000 firms
    involved in every facet of international trade. AAEI is the largest
    association concentrating on policies and practices of the U.S. Customs
    Service. Our members are active in importing and exporting a broad
    range of products including, chemicals, machinery, electronics,
    textiles and apparel, footwear, foodstuffs, household consumer goods,
    toys and automobiles. AAEI members are also involved in the industries
    which serve the trade community such as customs brokers, freight
    forwarders, banks, attorneys, accountants and insurance carriers. AAEI
    is a member of the Coalition for Customs Automation Funding.
        We are pleased to have this opportunity to address agency budget
    authorizations and other issues concerning the U.S. Customs Service.
    The management and oversight of Customs commercial operations are of
    great concern to AAEI, as our members interact with the agency on a
    daily basis. AAEI and Customs have always dealt with each other in a
    direct, honest, usually harmonious, and always mutually respectful,
    manner. Due to this long-standing relationship, AAEI does not hesitate
    to point out problems to or ask questions of Customs. We believe both
    sides, as well as the public, greatly benefit from this exchange and we
    are pleased to say that, through discussion, many specific problems are
    resolved.
        As you know, the funding of the redesign of Customs computer
    systems has emerged as a critical and time-sensitive problem. We are
    here before you today to express our concerns on this matter.
        AAEI urges Congress to support the U.S. Customs Services design and
    implementation of its next-generation automation system, known as the
    Automated Commercial Environment (ACE). Time is of the essence as
    Customs 15 year-old Automated Commercial System (ACS) is on the verge
    of collapse. Even short ``brownouts'' of ACS (which already are
    beginning to occur) are threatening to disrupt trade and, ultimately,
    inflict severe blows to the national economy.
        In order to avert the looming Customs automation disaster, we
    believe the following steps must be taken:

    Emergency ACS Funding

        It is critical that emergency funds be immediately appropriated for
    the maintenance and preservation of the fragile ACS. This 15 year-old
    system, is currently operating on average at 90 to 95 percent of its
    capacity. Several recent ``brownouts,'' temporarily halting the flow of
    trade, are warnings that larger failures are likely unless its
    maintenance is made the highest priority.
        In todays global marketplace, U.S. manufacturers rely heavily on
    component parts and materials from all over the world. U.S.
    competitiveness has been significantly enhanced in recent years by
    utilization of just-in-time inventory supply chains. Even short-term
    ACS failures will break a multitude of just-in-time links, preventing
    essential raw materials and parts from reaching U.S. manufacturing
    assembly plants. The failure of even one essential part to reach the
    manufacturing site on a timely basis will cause the shutting down of
    entire production lines, halts in production and the idling of numerous
    workers.
        ACS is also linked to the Census Bureaus Automated Export System
    (AES), which is the vehicle in which U.S. exporters are required to
    file export documentation. Thus, ACS failures will delay exports as
    well.
        A protracted failing of ACS, necessitating the manual entry and
    review of data, would impede the flow of trade, thereby paralyzing
    operations of major segments of U.S. industry including the
    manufacturing, retail and transportation sectors, all of which depend
    on the timely delivery of imported supplies. The disastrous impact on
    the U.S. economy if production lines go down and distribution channels
    are stalled will directly translate into sales and job losses,
    decreased exports and a diminishing tax base.

    Government Funding for Customs Automation Now

        The Presidents $163 million FY2000 funding request for ACE
    is inadequate. If this level of funding in continued, full
    implementation of ACE will take at least eight to ten years.
    Since it is unlikely that ACS can last that long, recurring
    day-to-day failures in ACS will almost certainly result in
    implementation delays in the new system as resources are
    diverted to ACS to ensure the day-to-day availability of basic
    functions. Such compromises will delay even further the value
    and productivity that we expect from ACE. Funding at least $300
    million per annum over four years is much more in line with an
    optimal implementation and is likely to lower the total cost of
    the project.
        There is no dispute as to whether Customs needs a new,
    reliable system. The trade community, Customs and the national
    economy will all gain from Customs having modern software and
    hardware that will adapt to future technology developments. The
    successful development of ACE is essential to Customs
    management of a 10 percent annual growth in international
    commerce. Without ACE, Customs will be unable to meet
    legislative mandates for informed compliance and for improved
    financial controls over the approximately $20 billion in duties
    it collects annually. Also, requirements articulated by the
    trade and Customs field personnel as part of the trade process
    reengineering effort are reliant on the timely availability of
    ACE.
        It is crucial that Customs obtain government funding now to
    develop and implement ACE over a four-year period and under
    appropriate Congressional oversight as well as industry
    consultation. Customs should provide Congress with an ACE
    target architectural implementation plan as well as supporting
    information as requested by Congressional appropriations
    committees. Outreach programs, as required by the 1993 Customs
    Mod Act, would be a useful vehicle to maintain meaningful
    business participation. These programs should be focused on
    narrow design and implementation issues, both technical and
    substantive, rather than on general overviews. The private
    sector recognizes that its role must necessarily be limited,
    but, for example, it is essential that Customs be made aware
    when technology choices in the private sector are diverging
    from Customs own plans and preferences. Recently, for example,
    the private sector has been moving away from older message
    protocols such as EDIFACT to the more flexible XML protocols.
    Customs had been planning to require EDIFACT exclusively for
    data transmission.
        Ensuring Customs Project Management Competence--Customs has
    been taking numerous steps to ensure that it can see to the
    design and development of the system it needs and to reassure
    the private sector. AAEI supports Customs Commissioner Kellys
    decision to retain private sector contractors experienced in
    government systems as well as consult with the Internal Revenue
    Service in its design and development of future ACE
    functionality. Recently, Mr. Kelly told members of the House
    Appropriations Subcommittee on Treasury, Postal Service, and
    General Government that his agency is contracting outside firms
    with proven track records in project management support and the
    Carnegie Mellon University Systems Engineering Institutes
    Capability Maturity Model (CMM) level 3 expertise to guide
    enterprise improvement in software development and acquisition
    and to serve as a resource for ACE project management support.
        Customs is developing a directive that will require all
    software contractors that do business with the agency be
    certified at least at the CMM level 2. Additionally, Customs
    not only recently reorganized its Office of Information
    Technology to provide for improved accountability and program
    control, but it engaged a contractor to update and improve the
    ACE cost-benefit analysis. Sometime this month, Customs plans
    to implement a plan for ensuring that software development and
    acquisition processes comply with CMM level 2 by December 2000.
    Mr. Kelly noted that this will improve software development and
    acquisition controls prior to any further substantial
    investment in ACE.
        Customs also hired a Chief Information Officer (CIO) with
    extensive experience in enterprise architecture and major
    systems acquisition. The CIO is currently consulting with the
    IRS and its main contractor to evaluate the applicability of
    its method for Customs. He has impressed us with his
    understanding of this complex situation.
        Outsourcing ACE Design and Development--Given the severe
    time constraints imposed by the doubtful reliability of ACS, we
    encourage Customs to outsource as much of the system design and
    development as possible to private entities experienced in
    developing large systems. AAEI supports Customs outsourcing of
    its systems development. Independent contractors not only have
    extensive experience in large government systems, but they
    understand the methodologies of private sector systems which
    ultimately have to interface with their government
    counterparts. Also, these contractors also are working with
    Fortune 1000 companies that have or are now undergoing similar
    conversion from mainframe-centered computer systems to
    distributed systems--usually under urgent conditions dictated
    by the restricted budgets and tight time constraints of private
    industry.
        Using Commercially Existing Software--We hope that in its
    design of ACE Customs will choose commercially available and
    proven software wherever possible. The private sector has
    generally concluded that custom software takes longer to
    implement, is expensive to maintain, does not permit integrated
    data analysis, and is hostage to the long-term availability of
    its authors. The use of ``off-the-shelf'' or at least
    customized software for parts of the new system will speed
    implementation and reliability.
        We also hope that Customs and Treasury can come quickly to
    agreement on the appropriate role for the International Trade
    Data System (ITDS). There is merit in the concept of ITDS as
    (i) a single trade data collection and distribution point for
    all agencies requiring such data and (ii) the location of a
    government-wide trade data warehouse. ITDS should result both
    in reduced data demands on the private sector and a much higher
    quality and quantity of data for analysis.
        Treasury already has made significant progress in the
    design and implementation of ITDS and its work should not be
    repeated in the design of another system. At the same time,
    ITDS should be limited to a neutral, transparent technical role
    and should not include functions assigned to its constituent
    agencies. While Customs could regularly query ITDSs stored data
    regarding trade patterns, Customs, not ITDS, should be making
    judgments regarding entry or enforcement policies.
        What we certainly cannot afford is the development of
    redundant functionality by any two agencies. Even worse would
    be delay caused by disagreement over development jurisdiction.
    In the example of ITDS, if ITDS is superior both in concept and
    in stage of development to the comparable elements of ACE, ITDS
    and the ACE project should be integrated immediately. If it is
    not, it should be modified or abandoned. The analysis of ITDS
    also should include consideration of how it will be supported
    over the next decade if it remains a standalone product within
    Treasury.
        For ACE, ITDS, and trade-related software under development
    in other agencies, there is neither time nor money for anything
    less than a ``best of breed'' analysis.

    Continued Opposition to User Fees

        AAEI believes that the cost of ACE as well as the cost of
    maintaining Customs existing Automated Commercial System (ACS) should
    be borne by the general treasury. AAEI is dismayed that the Presidents
    proposed FY2000 budget for Customs automation still calls for the
    imposition of a new user fee to fund ACE.
        Customs' computer costs are not generated by a service provided to
    importers. The cost of computer systems are as much a core cost of an
    agencys existence as is office space, employee salaries, pens and
    paper. These core costs should be borne by the nation as a whole as the
    price of having that agency. Also, in addition to clearing commercial
    import shipments, Customs computer system is used for many other
    purposes including drug enforcement, export shipments, health and
    safety regulations, and processing of data of other federal agencies.
    Importers cannot fairly be asked to finance these uses.
        Customs has said that it needs a ``predictable and reliable''
    source of funding for its systems. We wholeheartedly agree. We do not
    agree that an increase in the MPF will provide either given the
    unpredictable shifts in trade and the questionable legality of use of a
    user fee. User fees that are not assessed equally on all parties who
    benefit from or are required to use the service to be financed by the
    fee have met disfavor in the courts. It would be truly unfortunate if
    Customs were to rely on the user fee to finance its computer system
    only to have the fee later found illegal and subject to refund.
        Any user fee paid by importers to finance a computer system used by
    exporters and by Customs for non-commercial purposes would be
    inherently discriminatory and vulnerable to challenge in the World
    Trade Organization. Also, if the United States implements a user fee
    for the computerization of clearance functions for imports, we can
    expect other countries very quickly to do the same, imposing additional
    costs and competitive burdens on U.S. exports.
        AAEI requests a bipartisan review be conducted by an unbiased
    government agency, such as the ITC or USTR to assess the compatibility
    of the proposed new automation MPF with the rules of the World Trade
    Organization. We also ask Congress to join AAEI in its efforts to
    obtain from Customs, OMB and/or Treasury any analysis or review they
    have already conducted with regard to WTO compatibility.

                                   Conclusion

        In its February 1999 reports, Customs Service Modernization--
    Serious Management and Technical Weaknesses Must be Corrected, and
    Ineffectual Software Development Processes Increase Customs System
    Development Risks, the General Accounting Office indicated that Customs
    agreed with its recommendations and stated that it is committed to
    remedying the problems highlighted in the reports. As underscored by
    the Commissioners recent Congressional testimony, the agency has wasted
    no time in implementing new strategies to get ACE up-an-running.
        AAEI commends Customs on its success in achieving Y2k compliance
    with respect to its current system. The GAO recently testified before
    the House Ways and Means Committee on the effectiveness of Customs Y2k
    management and reporting controls. Customs overall success was
    attributed to its year 2000 program management structures and
    processes. Customs was also praised for its Y2k testing with the
    private sector.
        ACE development can be delayed no further. The current ACS is on
    the verge of collapse, threatening to paralyze international commerce
    and ultimately, wreak havoc on our national economy. An increase in
    user fees to pay for ACE and/or ITDS will inevitably face concerted
    legal challenges. AAEI has launched a grass roots campaign among its
    1000 company members to educate their respective representatives on the
    exigent circumstances that we, as a nation, are now confronting and the
    need for prompt action.
        AAEI believes that if Customs continues in the direction in which
    it is now headed, with continued support from the trade community and
    adequate government appropriations, a successful ACE system can be
    realized without serious disruptions to the U.S. economy.

        Chairman Crane. Thank you, Mr. Salamone.
        Our final witness, Ms. O'Dell.

      STATEMENT OF JANE B. O'DELL, VICE PRESIDENT, INTERNATIONAL
    TRADE AND CUSTOMS COMPLIANCE, THE LIMITED, REYNOLDSBURG, OHIO,
    ON BEHALF OF THE COALITION FOR CUSTOMS AUTOMATION FUNDING, AND
       INTERNATIONAL MASS RETAIL ASSOCIATION, ARLINGTON, VIRGINIA

        Ms. O'Dell. Thank you, Mr. Chairman, Members of the
    Subcommittee. My name is Jane O'Dell. I am vice president of
    international trade and customs compliance for The Limited. I
    am appearing today on behalf of the Coalition for Customs
    Automation Funding, which is an industry coalition made up of
    manufacturers, retailers, importers, exporters, carriers, air
    couriers, forwarders, and trade associations, all of whom have
    significant interests in the operations of the Customs Service,
    and range in size from Fortune 500 companies down to sole
    proprietorships with a handful of employees.
        I am also representing the International Mass Retail
    Association, which is the trade association that represents the
    fastest growing segment in the retail industry, discount
    department stores, home centers, catalog showrooms, warehouse
    clubs, and even category-dominant specialty retailers like The
    Limited.
        You recognize the name through a number of our known family
    of fashion brands, Express, Lerner New York, Lane Bryant,
    Structure, Limited and Limited Too, Galyans, Victoria's Secret,
    and Bath and Body Works, are all members of The Limited family.
    We currently comprise over 5,000 stores in the United States
    and in the United Kingdom, and over 142,000 associates in the
    United States.
        Because we depend on a global sourcing base for both our
    U.S. supply and our supply in the U.K., you could say that we
    see U.S. Customs both coming and going. That gives us a unique
    perspective on their operations. I am also particularly
    interested in U.S. Customs. I began my career as an import
    specialist in the early 1970's, before there was such a thing
    as automation of Customs processes. I am also a licensed
    Customs broker, so I have worked with them in that capacity. I
    have worked also for importing companies as I am now.
        I was fortunate enough to be appointed to two terms by the
    Secretary of the Treasury on the committee that advises the
    Secretary on the commercial operations of U.S. Customs. In that
    capacity, had an opportunity to learn a lot more about the
    strategic interests of the Customs Service, as well as the way
    it has a direct impact on the business community. We want to
    see them do their job well, and we want them to have the tools
    to be able to do that.
        Before the current automated commercial system, ACS was
    designed in the 1980's, Customs did its work by hand. I vividly
    remember drawing red lines on salmon-colored pieces of paper.
    That was the standard that was used to pick up data which would
    subsequently be keyed into a computer by someone else. In that
    process, the number of clerical errors that were made and the
    amount of judgment that had to be brought to the process on
    limited information certainly affected the ability of Customs
    to do its job both as an enforcement agency, and as a revenue-
    collecting agency. The automation of that process has made a
    huge difference, both to the efficiency of the service and to
    their effectiveness.
        In the past 15 years, U.S. businesses have also planned
    around the capabilities of an automated Customs Service. We are
    now more or less dependent on it. Every time it crashes or
    slows down, someone somewhere along the supply chain pays a
    price. For carriers, warehouses and docks become congested and
    over-crowded. If they cannot keep their employees fully
    occupied, then they are forced to work them over-time and the
    economic impact ends up resonating through the entire economy.
        For manufacturers, waiting for components, as you have
    heard from some of my colleagues here today, you may have an
    entire production line closed down, and the accompanying
    economic effects. For importers like The Limited, the price is
    not having the merchandise that someone expects us to have at
    the appropriate time. Timing is very important to us. We need
    to have a mix of merchandise that changes constantly. We target
    holidays with special products so we need to have a supply
    chain that is both efficient and is predictable, that can move
    thousands of items to thousands of stores, from hundreds of
    global locations, in a series of orchestrated transportation
    moves.
        I will give you an example. I don't suppose that this week
    there are very many people buying baskets with egg-shaped soaps
    and little terry cloth Easter bunnies in them. Bath and Body
    Works combines lotions, soaps, and personal care products that
    are made in the United States with imported novelty items in
    imported baskets as gift sets. The components are all scheduled
    to arrive at an assembler in the United States just in time for
    assembly, and then for store delivery. In order to accomplish
    this, we need to have the Customs Service operating and
    predictable.
        Now there are those who may ask whether it is Congress'
    business to ensure that there is an efficient supply chain. I
    think the answer to that is yes. As you have also heard, this
    is one of the foundations of the U.S. economy at this point.
    Manufactures rely on it. Retailers rely on it. The entire
    support sector relies on it. Unfortunately, the President's
    budget for the year 2000 does not recognize the need for this
    funding to build an automated commercial system that ensures a
    steady supply of merchandise back and forth across our borders.
        You have also heard it said that this is something that
    should be paid for by the import community, to which we respond
    we have paid for it. The merchandise processing fee that was
    levied on importers was levied as a means of funding the
    operations of the Customs Service, and the processing of
    international trade is their fundamental reason for being
    there. We ask Congress to live up to the agreement that we made
    in accepting this and the Modernization Act, and fund the
    Automated Commercial Environment.
        [The prepared statement follows:]

    Statement of Jane B. O'Dell, Vice President, International Trade and
    Customs Compliance, The Limited, Reynoldsburg, Ohio, on behalf of the
    Coalition for Customs Automation Funding, and International Mass Retail
    Association, Arlington, Virginia

        My name is Jane O'Dell. I am Vice President of International Trade
    & Customs Compliance for The Limited and I'm appearing today on behalf
    of the Coalition for Customs Automation Funding; an inter-industry
    coalition representing trade associations, Fortune 500 companies,
    customs brokers, manufacturers, retailers, importers, exporters,
    forwarders, air couriers, and transportation companies all with
    significant interests in Customs automation.
        I am also representing the International Mass Retail Association,
    the trade association that represents the fastest growing retailers in
    the world, including discount department stores, home centers,
    catalogue showrooms, dollar stores, warehouse clubs, deep discount
    drugstores, off-price stores and category dominant specialty retailers
    like The Limited.
        The Limited, Inc., through Express, Lerner New York, Lane Bryant,
    Limited Stores, Structure, Limited Too, Galyan's and its interest in
    Victoria's Secret and Bath and Body Works, is a leading branded
    retailer with over 5,000 stores (including stores in England) and
    142,000 associates. Like many in our industry we rely on a global
    sourcing base, and both import into and export from the United States.
    You could say we see U.S. Customs coming, and going.
        My interest in how Customs does its work comes from many years in
    the industry, in a variety of roles. In the early 70's I was a U.S.
    Customs Import Specialist. I am a licensed customs broker. I have
    worked as a customs expert for brokerage firms, importers, consultants
    and retailers. I was also appointed by the Secretary of the Treasury to
    two consecutive terms on the Treasury Advisory Committee on the
    Operations of the U.S. Customs Service, completing the second term in
    1998. While I am certainly concerned with Customs' ability to process
    international transactions, I am also concerned with their strategic
    goals, and what they need to do their job well.
        Before the current automated commercial system, ACS, was designed
    in the 80's, Customs did its work by hand. Automation has made it
    possible for the Service to introduce efficiencies into its revenue
    collection process, into its enforcement process, and handle explosive
    increases in trade with a steady work force. Incidentally, it has made
    the supply chain more effective and predictable. You have heard from
    other witnesses today that ACS is now out of date, subject to
    slowdowns, brownouts and crashes.
        In the past 15 years, U.S. business has planned around the
    capabilities of ACS, and each time it crashes or slows down someone,
    somewhere in the supply chain pays a price. For carriers, their
    warehouses and docks become congested and they cannot keep employees
    fully occupied. For manufacturers waiting for components, a production
    line may close. For importers like The Limited, the price is not having
    merchandise that someone expects us to have at our stores.
        For some of our fashion merchandise stores, it's also very
    important that we have a mix of merchandise that changes constantly. We
    target holidays with special products. We continuously change the
    merchandise in our stores. To keep a steady schedule, we need a supply
    chain that's efficient; that can move thousands of items to thousands
    of stores from hundreds of global locations in a series of orchestrated
    transportation moves designed to have all the coordinated fashion
    elements arrive more or less simulaneously. If we don't achieve this,
    we lose sales to our many competitors.
        I'll give you an example. I don't suppose many people are buying
    baskets with egg-shaped soap, and terry cloth bunnies this week. Bath &
    Body Works combines lotions, soaps, and personal care products made
    domestically with imported novelty items in imported baskets as gift
    sets. The components are scheduled to arrive at an assembler in the
    U.S., just-in-time for assembly and store delivery for holidays. Losing
    16 hours on the delivery of the baskets costs the workers their time
    (they aren't paid when there is no work), and the economic impact of
    our inability to bring a product to market will be felt by the
    division, but may also affect the corporation, the suppliers (both
    international and domestic). On Monday bunnies went to markdown.
        We rely on U.S. Customs to perform its work in a way that does not
    inhibit legitimate commerce. The efficiency of the Customs Service also
    reflects their ability to collect revenues efficiently, to identify
    contraband with sophisticated tools, and to meet the obligations of our
    international trading relationships, which are often targetted at non-
    tariff barriers to trade.
        Now some might think it's humorous that I appear here today to talk
    to you about efficiency in the global supply chain. Some might even ask
    whether Congress should work to achieve an efficient global supply
    chain. There are those who believe it's in the larger domestic interest
    for the process at the nation's ports to be inefficient. For the
    reasons stated above, that is not true.
        Indeed, the President's fiscal year 2000 budget appears to take
    this view. It appropriates no money for the development of a new
    customs automation system, even though virtually every senior official
    at Customs and Treasury knows ACS is on the brink of catastrophic
    failure. Instead, it proposes a new, WTO and NAFTA illegal user fee,
    which would make the trade community responsible for paying for
    upgrading Customs' automated systems. If it happens in business, we
    consider it normal operating expense. It's paid out of our revenues. A
    comparable scenario: when we sell that holiday basket, and the buyer
    comes to the cash register, we tell them it's another quarter, because
    we need to work on our computer.
        Now, let me be clear on where the Coalition for Customs Automation
    Funding stands on the Administration's user fee proposal. Many of the
    coalition's members need efficiency at the ports, but we all share one
    common viewpoint: the process of collecting revenues and regulating
    commerce at the nation's borders is an essential government function.
    If we had no duties, quotas, dumping statutes we wouldn't need a
    Customs Service to process commercial entries. It's these essential
    government functions that impose a corresponding responsibility upon
    the government itself--a responsibility that somehow the Administration
    failed to recognize in its FY2000 budget.
        That responsibility is to ensure that regulation at the ports--a
    necessity to protect domestic industry--doesn't become so inefficient
    that it harms the very industry it's there to protect.
        As you have heard from many here today, if ACS fails, many U.S.
    industries and workers will be harmed. The question here is whether the
    system has to completely break down before the Administration will
    recognize its responsibility or Congress will appropriate the money?
        Government should pay for the creation of a new computer system for
    the Customs Service out of general revenues. Is the business community
    willing to foot the $1.2 billion it will take to build the Automated
    Commercial Environment? The simple answer is that we already have paid
    for this system, several times over. Importers pay $20 billion each
    year in duties and an additional $800 million annually in merchandise
    processing fees designed to cover the cost of processing entries at the
    nation's ports. That adds up to $20.8 billion each and every year. It
    would take only about $300 million annually for the next four years to
    build the new Automated Commercial Environment. The cost of the system
    comes to about 1.4 percent of the revenues and merchandise fees
    collected from the trade community each year.
        There is no need for a new user fee.
        The Administration has spoken on this issue, it obviously does not
    believe that a revenue collection system is important enough to fund
    out of general revenues.
        It's up to Congress now. If Congress fails to appropriate the
    necessary funds, inefficiencies will escalate. I've tried to convey
    something of the impact here, but let me add one additional point. The
    United States frequently takes other countries to task for the
    failings, inefficiencies and unfairness of their customs regimes.
    Unless we give our Customs officers the tools they need, we're on the
    path to third world operating capability.
        I urge you not to let that happen.
        Almost seven years ago, this committee of Congress made a deal with
    U.S. businesses in the form of the Customs Modernization Act. We in the
    trade community took on the task of informed compliance, reasonable
    care, new recordkeeping requirements and penalties. In return we were
    promised a more transparent, efficient process for releasing goods and
    paying duties. And Customs has worked with us, to ensure all parties
    benefitted from the changes.
        The business community has expended enormous resources in
    reengineering our systems to ensure that we are able to meet our Mod
    Act responsibilities, so that Customs need not be a bottleneck in our
    supply chain. We've kept our end of the bargain.
        It's time for Congress to keep it's part of the deal. Fund customs
    automation now, in this fiscal budget.

        Chairman Crane. Thank you, Ms. O'Dell.
        Are any of you in your processes of modernization in the
    automation area, apprehensive about the uncertainty of the ACE
    project impact on your automation plans?
        Ms. O'Dell. I can say something to that. We are actually in
    the process of developing our own supply chain architecture at
    this point. I think Mr. Schoof noted that, Customs has been
    very helpful in making available to the trade community the
    plans for the development of the Automated Commercial
    Environment. I was able to involve our technical people in the
    trade support network meetings where they discussed the actual
    structure of it. We fully intend, as ACE is developed, to
    remain in communication with Customs so that we can ensure that
    there is compatibility in processes.
        Chairman Crane. I gather, based upon your testimony and Mr.
    Salamone's before, that there may be none of you in favor of a
    user fee to cover the cost? Correct?
        Ms. O'Dell. Well, there is a user fee. We are currently
    paying it.
        Chairman Crane. I mean above and beyond.
        All right. Mr. Levin.
        Mr. Levin. Let me just ask a question, and why don't you
    submit your responses for the record because I am afraid we
    need to go ahead. Before I ask it, you make a very persuasive
    case. I hope you will accelerate your efforts to make it to all
    the powers that be around here. I think you have a long way to
    go. I doubt if it has been included in anybody's plans at this
    point, the Budget Committee, Appropriations Committee, Ways and
    Means Committee. What's left?
        Several of you have referred to emergency funding. I am
    sure that even further has been away from the consciousness of
    people. So again, I think you make a very, very strong case,
    but strong cases don't win by themselves. So I really urge you
    to re-triple your efforts.
        Then for the record, several of you have indicated you
    think that the user fee, whatever its other merits, would
    violate NAFTA, WTO, or both. So why don't you, if I might
    suggest it, Mr. Chairman, why don't you send us your thoughts
    on that for the record so we can consider the question of WTO
    or NAFTA consistency, which are important considerations.
        So good luck. I guess it's not appropriate for a Member to
    suggest how you lobby, so I won't. But I do suggest that there
    is a very low level of information, I think understandably,
    with all the other issues. Some of us are going to go soon to a
    briefing on Kosovo. So there are other things going on. Customs
    issues tend not to be at the top of the priority list for most,
    understandably so. I think you have your work cut out for you.
        Thank you, Mr. Chairman.
        Chairman Crane. Mr. Becerra.
        Mr. Becerra. Mr. Chairman, I think Mr. Levin put it best. I
    would love to see what you have to say about both of those
    questions that Mr. Levin has posed or commentary he made. It
    would be helpful for us to know why the industry shouldn't have
    to pay the fee. A billion dollars is quite a bit of money. We
    will have to figure out how we pay for that. So it would be
    very helpful, it would be instructive to have that in the
    record, that there are legitimate reasons why the industries
    don't believe that they should have to take on another fee.
        It also would be helpful if you could provide any other
    comment beyond your written testimony and oral testimony about
    some of the changes that Customs is trying to make. You know,
    there is still some question about whether this ACE system is
    really the way to go, if they will be able to merge well with
    the ITDS. Anything you can offer that will help us feel more
    comfortable going a particular direction--it is going to be an
    investment of money one way or the other--that would be
    instructive.
        So I will leave it at that. I thank everyone for being here
    and providing testimony.
        Chairman Crane. I again thank you all for your
    participation today and your input. We look forward to
    continuing to work with you.
        [The following information was subsequently received:]

      Coalition for Customs Automation Funding, Joint Industry
            Group, and National Customs Brokers and Forwarders
                                   Association of America, Inc.
                                                         April 15, 1999
    The Honorable Philip Crane
    Chairman, House Ways & Means Committee,
    Subcommittee on Trade
    1104 Longworth House Office Building
    Washington, DC 20515-6354

        Dear Congressman Crane:

        Thank you for the opportunity of the Coalition for Customs
    Automation Funding (CCAF) to testify before the House Ways & Means
    Committee, Subcommittee on Trade, regarding the President's proposed
    FY2000 budget and the US Customs Service automation funding level. At
    the Subcommittee's request, we are sending a legal opinion supported by
    the CCAF that supports the statement that the user fees proposed in the
    President's budget violate the North American Free Trade Agreement
    (NAFTA) with Mexico and Canada. We believe the proposed fee may also be
    a violation of the GATT.
        The President's budget for FY2000 states under the heading
    ``Automation Modernization:''

              ``Contingent upon the enactment of authorizing legislation,
            the Secretary shall charge a fee for the use of Customs
            automated systems, and such fee shall be deposited as an
            offsetting collection to this appropriation, to become
            available on October 1, 2000 and remain available until
            expended, for the purpose of modernizing Customs automated
            commercial operations, and of which, $13,000,000 shall be for
            an international trade data system: Provided further, That upon
            enactment of such authorizing legislation, the amount
            appropriated above from the General Fund shall be reduced by
            $163,000,000: Provided further, That none of these funds shall
            be obligated until 10 days after a spending plan for the funds
            has been submitted to the Office of Management and Budget and
            the Treasury Investment Review Board.''\1\
    ---------------------------------------------------------------------------
        \1\ Page 836 of The Budget For Fiscal Year 2000

        Furthermore, the Automation Modernization Fee was described as
    ---------------------------------------------------------------------------
    follows:

              ``The Administration proposes to establish a fee for the use
            of Customs automated systems. The fee will be charged to users
            of any Customs automated system based on the user's units of
            data input. Proceeds of the fee will offset the costs of
            modernizing Customs automated commercial operations and an
            international trade data system, and will be available for
            obligation after 2000. Legislation will be transmitted to allow
            the Secretary to establish a fee for the use of Customs
            automated systems.''\2\
    ---------------------------------------------------------------------------
        \2\ Page 836 of The Budget For Fiscal Year 2000

        NAFTA Article 310 (entitled ``Customs User Fees'') prohibits the
    adoption of any Custom user fees as follows:
        1. No Party may adopt any customs user fee of the type referred to
    in Annex 310.1 for originating goods.
        2. The Parties specified in Annex 310.1 may maintain existing such
    fees in accordance with that Annex.
        NAFTA Annex 310.1 (entitled ``Existing Customs User Fees'') states:

                               Section A--Mexico

        Mexico shall not increase its customs processing fee (``derechos de
    trimite aduanero'') on originating, goods, and shall eliminate such fee
    on originating goods by June 30, 1999.

                            Section B--United States

        1. The United States shall not increase its merchandise processing
    fee and shall eliminate such fee according to the schedule set out in
    Article 403 of the Canada--United States Free Trade Agreement on
    originating goods where those goods qualify to be marked as goods of
    Canada pursuant to Annex 311, without regard to whether the ,goods are
    marked.
        2. The United States shall not increase its merchandise processing
    fee and shall eliminate such fee by June 30, 1999, on originating goods
    where those goods qualify to be marked as goods of Mexico pursuant to
    Annex 311, without regards to whether the goods are marked.
        In summation, Article 310.1 states that the US is prohibited from
    assessing customs user fees on goods originating in Canada and Mexico.
    The CCAF sustains the position that the definition of ``customs user
    fees'' not limited to merchandise processing fees alone, but also
    includes any similar user fee.
        The proposed user fee may also place the US in violation of the
    GATT. GATT Article VIII.1 (a) limits fees and charges connected with
    importations to an amount that reflects the approximate cost of
    services rendered and further states that such fees and charges shall
    not be a taxation of imports for fiscal purposes:
        1.(a) All fees and charges of whatever character (other than import
    and export duties and other than taxes within the purview of Article
    III) imposed by contracting parties on or in connection with
    importation or exportation shall be limited in amount to the
    approximate cost of services rendered and shall not represent an
    indirect protection to domestic products of a taxation of imports or
    exports for fiscal purposes. . . .
        The CCAF maintains that the proposed user fee represents a tax on
    imports imposed for the sole purpose of generating revenue for the
    development of US Customs automated systems. As such, the fee is de
    facto a tax collected to offset the costs of modernizing the automated
    systems of the US Customs Service, i.e., a fiscal purpose. Furthermore,
    any fee assessed must be based on the ``cost of services rendered.''
    From the CCAF perspective because the fee is based on the amount of
    data submitted, there is no relation to the ``cost or services
    rendered.''
        We urge the Subcommittee to reassess the validity of the
    President's proposed FY2000 budget for Customs automation
    modernization. Appropriated funds should be allocated so that the
    government can fulfill its obligations under the Customs Modernization
    and Informed Compliance Act (Mod Act) while complying with NAFTA, GATT,
    and other international agreements.
                Sincerely,

                American Association of Exporters and Importers
                                       New York, New York 10036
                                                         April 19, 1999
    The Honorable Philip M. Crane
    U.S. House of Representatives
    Washington, DC 20515

        Dear Mr. Chairman:

        The American Association of Exporters and Importers (AAEI)
    testified at the April 13 Trade Subcommittee hearing where Congressman
    Sander M. Levin requested that witnesses provide the Subcommittee with
    a legal analysis of the WTO and NAFTA compatibility of a user fee to
    fund Customs automation. AAEI believes it also would be appropriate to
    ask U.S. Customs, the Department of Treasury and OMB for the results of
    their internal analysis and review of the subject.
        In our discussions with Customs it was indicated that an internal
    analysis had been performed but was not available for review by the
    private sector. In AAEI's April 13 testimony, as well as our testimony
    presented last year, we suggested that a disinterested agency of
    government review the compatibility issue. Additionally, in both our
    1998 and 1999 testimony, we requested that Customs, Treasury and OMB
    make publicly available any such analysis already conducted.
        AAEI also understands that Canadian International Trade Minister
    Sergio Marchi has expressed Canada's objection to an automation user
    fee. In an April 1, 1999 letter Mr. Marchi stated ``In our view, the
    proposed user fee would be a customs user fee of the type that is
    prohibited by Article 310 of the NAFTA and therefore inconsistent with
    U.S. obligations under the NAFTA.'' Also, the Canadian Trucking
    Association has conducted a legal analysis which was presented to the
    Trade Subcommittee on April 13th. We understand the Canadians will
    address the issue at the NAFTA Ministerial meeting this week. Enclosed
    please find a portion of the U.S. NAFTA implementing legislation
    supporting this view.
        AAEI has not yet commissioned an analysis of the potential legal
    ramifications of the proposed user fee to fund ACE or ITDS. Current
    proposals lack sufficient detail to permit a precise review against WTO
    and NAFTA standards. Even the general proposals have been continuously
    modified, making it almost impossible to accurately ascertain whether
    the fees they propose would ultimately withstand the legal challenges
    they will inevitably face. To conduct a proper study, we would require
    specific information relative the proposals, including the following:
        1. An explanation of the ACE architectural plan including
    functionalities relating to costs of hardware, software, maintenance,
    roll-out, and timing.
        2. A cost breakdown ascribed to commercial entry processing,
    commercial enforcement, (AD/CVD duties, quotas, visas, etc.) drug
    enforcement, statistical data elements, and other agency requirements.
        3. A cost treatment and charging of export components. Will there
    be a separate fee?
        4. An explication of how the proposed fee would be structured to
    meet our obligations under NAFTA and the Israel Free Trade Agreement.
    We would need to know whether there would be free trade agreement
    offsets under ACE with explanations of the formulas proposed.
    Similarly, for ITDS, an explanation of how other countries would
    participate in software and cost recovery.
        5. If the proposal relies on a similar charging of IT costs to the
    public by other U.S. agencies or WTO member countries, we would need a
    list of how those agencies and countries treat these costs.
        6. An explanation of the degree to which importers, brokers, and
    carriers would have any oversight role in the design and maintenance
    and access to the system and the manner in which such a role would be
    exercised.
        7. The manner in which sunset provisions would be guaranteed.
        8. Demonstrated cost benefits analysis of ACE with payback
    schedules tied to sunset provisions.
        In essence, the conduct of a legal analysis of any user fee
    proposal requires a great deal more information than is currently
    available regarding both the automation plans themselves and how the
    fee would be applied. We fail to see how the Administration and/or
    Customs can advocate either a new user fee or an increase in the
    existing fee to fund automation without having first conducted a
    thorough analysis of the many issues such a fee would unquestionably
    raise. Surely, any proposal with this impact on the public must be
    backed with ample data to legally and logically support its purported
    viability.
        AAEI thanks you again for the opportunity to present our views.
    Feel free to contact me should you have any further questions.
                Sincerely,
                                            Richard J. Salamone

        [Attachment is being retained in the Committee files.]

        With that, we will now have our final panel: Mr. Tobias,
    national president, National Treasury Employees Union; Carol
    Hallett, president and CEO, Air Transport Association; Susan
    Kohn Ross, chairperson, S.K. Ross and Associates; and James
    Rogers, chairman, International Committee, Air Courier
    Conference of America. If you will all be seated, we will
    proceed in the order that I introduced you. I will ask you
    again to please try and keep oral presentations to about 5
    minutes. Any printed statements will be made a part of the
    permanent record.
        With that, Mr. Tobias, you may proceed.

      STATEMENT OF ROBERT M. TOBIAS, NATIONAL PRESIDENT, NATIONAL
                        TREASURY EMPLOYEES UNION

        Mr. Tobias. Chairman Crane, and Ranking Member Levin, and
    Mr. Becerra, thank you very much for providing NTEU with the
    opportunity to testify this afternoon on a Customs
    authorization bill.
        As you have already heard in great detail, the duties and
    responsibilities of the Customs Service have increased. The
    number of passengers and volume of trade has increased. As a
    result, the Customs Service needs additional technology and
    human resources to accomplish its mission. We have done more
    with less through creative new work processes, but we have
    reached the limit. Without more resources, we will inevitably
    be able to accomplish less. We need additional authorization,
    but more importantly, we need additional appropriations.
        The promise of an authorization must be supported by the
    reality of an appropriation in order for the Customs Service to
    do what I know it can do. In terms of expectations, it is
    important to keep in mind that the Customs inspectors and
    canine enforcement officers are journey level grade 9
    employees, who start at $33,000 a year. They may be promoted to
    the GS-11 level which starts at approximately $40,000 a year.
    So that is the salary that we are talking about for these
    folks.
         When the Customs Service fails to promote people to the
    GS-11 level because of a lack of funds, as it has for several
    years in San Diego and Calexico and other places along the
    southwest border, it is impossible to keep the best, which is
    what we all deserve.
        In addition, the inspectors and CEOs have a life controlled
    by their job. They work rotating shifts. They work in cold and
    heat. They regularly work weekends. They are at the call of
    Customs management's orders to work overtime. The staffing
    levels at most ports are not adequate to meet the needs of the
    ports, so situations occur daily that require inspectors to
    come into work on their days off, and to stay beyond their
    shift for overtime assignments. Most inspectors around the
    country do not have a full day off during the week. Frequently,
    they have to scramble to find a replacement or struggle to
    arrange childcare and juggle family commitments. Most Customs
    inspectors and CEOs work at least 16 hours of overtime each
    week. That means a 7-day work week or 16-hour days. This is not
    an odd occurrence. This is a way of life.
        Virginia Rodriguez, who you introduced earlier, Mr.
    Chairman, is a single mother of a toddler. She has been a
    Customs inspector in Brownsville, Texas, for 12 years. She
    recognizes the importance of providing an accurate picture of
    her life as a Customs inspector. That is why she came from
    Harlingen, Texas, to be with us today. In 1997, during a
    routine investigation of a bus traveling across the border,
    Inspector Rodriguez apprehended one of FBI's most wanted
    criminals. For her work, she has received Customs' performance
    awards throughout her career with the agency, and has been
    featured on the television program America's Most Wanted.
        But in spite of all of this accolade, Inspector Rodriguez
    finds it incredibly difficult to maintain her family life, care
    for her child, and maintain the work schedules required of
    inspectors in Brownsville. While she is assigned to a 40-hour
    work week, she regularly works 56 hours per week. Most
    inspectors in Brownsville work more overtime than she does. She
    usually works 8 hours a day and both her days off so that she
    can relieve her babysitter at the end of the shift and avoid
    being drafted for overtime.
        The threat of forced overtime is real for Virginia
    Rodriguez. Countless times she has been required to work
    overtime, forcing her to make last minute arrangements for her
    son. It has been almost 12 years since Inspector Rodriguez has
    spent a Thanksgiving Day or Christmas Day with her family. She
    is not alone in this effort. The same is true for most
    inspectors working around the country.
        Congress recognized that Customs employees must be paid for
    this overtime work. The original overtime payment formula was
    created in 1911, and then modified in 1993. Under the 1993 law,
    COPRA, an employee is paid only for the hours that that
    employee works. It was a change from the 1911 law. They are
    only paid for the hours that they work. Now in addition to
    overtime, Customs employees are eligible for premium pay for
    working at nights, holidays, and Sundays.
        There was an elaborate chart, as I understand it, that was
    presented this morning about when someone is entitled to time
    at 15 percent and time at 20 percent. This system was created
    to compensate the inspection personnel for living with
    unpredictability and constant irregularity.
        In addition to special pay adjustments, Federal employees
    with law enforcement officer status receive full retirement
    benefits after 20 years of Government service in law
    enforcement. Even Members of Congress have this benefit, but
    currently Customs inspectors and CEOs who carry weapons, who
    make arrests, and who seize more illegal drugs than any other
    Federal group, are denied this benefit. We have been trying to
    convince Congress to pass legislation to give Customs
    inspectors and CEOs 20-year retirement, recognize that they are
    indeed enforcement officials, but we haven't been successful.
    In the meantime, the current provisions of the Customs Officer
    Pay Reform Act must suffice as incentives for the sacrifices
    Customs inspectors make to the Customs Service. NTEU believes
    that changes to this pay system would be misguided and
    unnecessary. This difficult work situation could be made worse
    with a mandatory rotation policy.
        There was much discussion last year about collective
    bargaining between NTEU and the Customs Service. There is no
    evidence to show that the mission of interdicting drugs is
    impaired when the Customs Service lives up to the collective
    bargaining provisions it has negotiated. On the contrary,
    Customs and NTEU have an impressive working relationship. In
    1998, the Customs and NTEU received the John N. Sturdivant
    Partnership Award in recognition of their contributions to
    reinventing Government through labor-management cooperation.
    This year, the parties have been nominated for the Office of
    Personnel Management director's award for outstanding
    alternative dispute resolution programs, focusing on resolving
    employee workplace disputes. There is no need for statutory
    provisions that eliminate negotiated contractual rights or
    undermine the labor-management relationship.
        I applaud this Subcommittee for recognizing the 21st
    century needs of the Customs Service. I urge each of you to
    visit the Customs ports in your home districts, talk to the
    inspectors and CEOs there to fully comprehend what their
    regular work lives are like. Then you may understand why NTEU
    will support a Customs authorization bill, but will strongly
    oppose any legislation that would limit the pay or rights of
    the rank and file Customs officers.
        Thank you for the opportunity to be here today on behalf of
    the Customs Service employees to discuss these very important
    issues.
        [The prepared statement follows:]

    Statement of Robert M. Tobias, National President, National Treasury
    Employees Union

        Chairman Crane, Ranking Member Levin and Members of the
    Subcommittee, my name is Robert M. Tobias, and I am the National
    President of the National Treasury Employees Union (NTEU). On behalf of
    more than 155,000 federal employees represented by NTEU, almost 13,000
    of whom work for the United States Customs Service, I would like to
    thank you for this opportunity to present our Union's views on an
    authorization bill for the Customs Service.
        The Customs Service is a front line enforcement agency. Its mission
    is to ensure the public's compliance with hundreds of import laws and
    regulations while stemming the flow of illegal drugs and contraband
    into the United States. It has been nearly a decade since Congress has
    passed a Customs authorization bill. Over the last ten years,
    legitimate U.S. imports have grown at double digit rates, illegal
    narcotics smugglers have begun to exploit new and sophisticated methods
    of moving drugs into the country, and Customs employees have been
    tasked with combating international money-laundering and arms
    smuggling.
        In addition, Customs is the first line of defense against the
    illegal importation of merchandise manufactured with forced child labor
    as well as weapons of mass destruction used in terrorist threats. The
    Agency is also tasked with combating crimes in cyberspace. This type of
    crime most certainly was not envisioned back in 1789 when the Customs
    Service began as the collector of imports and duties on products
    entering the United States. Yet the Agency must keep pace with the
    criminal element that will stop at nothing to exploit children, launder
    money and violate intellectual property rights over the Internet. For
    Customs, the technology and expertise needed to combat cybercrime is as
    essential as the high tech equipment needed for processing legitimate
    cargo and passengers at the hundreds of ports of entry around the
    United States.
        In FY 1999, Customs estimates it will process over 470 million
    land, sea and air passengers. Over 130 million carriers will enter our
    ports in 1999 and over $850 billion worth of merchandise will be
    processed at the borders. Notwithstanding the Customs Service's
    relatively static workforce and increasing workload over the past five
    years, this Agency continues to seize more narcotics than all other
    federal agencies combined. While we expect to keep the drug seizures
    high throughout 1999 and into the new century, additional resources,
    personnel and technology are necessary for this effort. The goal is to
    win the war on drugs without placing an undue burden on trade.

                                 FY 2000 Budget

        The Administration has requested a funding level of $1.93 billion,
    and 17,389 FTEs for fiscal year 2000. While this figure is $95.5
    million more than the budget for Fiscal Year 1999, over $312 million of
    this amount would be derived from a proposed increase to the passenger
    processing fee. This increase in passenger processing fees would have
    to be enacted by July of this year in order to provide adequate funding
    for essential Customs programs, including long term commitments to the
    Automated Commercial Environment and new more aggressive enforcement
    efforts. Many think this will be difficult, if not impossible, and that
    Customs' funding for FY 2000 is in jeopardy of falling far short of its
    needs.
        While NTEU supports increased authorization of funds for the
    Customs Service, no increase in funds will actually be available to
    Customs without increased appropriations. The discretionary spending
    caps in the House and Senate Budget Resolutions, which have recently
    passed, will make increased appropriations extremely difficult, if not
    impossible, to achieve.

                              Inspection Personnel

        Customs Inspectors and Canine Enforcement Officers (CEOs) at land,
    sea and air ports present the first line of defense to the illegal
    importation of drugs and contraband across our borders. They are
    literally on the front lines. They work in career ladder positions that
    begin at the GS-5 level--approximately $20,000 per year. Only after two
    years will an Inspector reach the journeyman level of his or her career
    from which there is no guaranteed promotion. This journeyman level (GS-
    9) begins at $30,000 annually and is the highest grade level most
    Customs Inspectors and CEOs will attain. This level means that at the
    very height of an Inspector's career, and even after twenty-five years
    of dedication to the Customs Service, he or she will make a maximum
    base salary of about $40,000 per year. In many areas around the
    country, including San Diego, California, promotions to the GS-11 level
    have not occurred in several years. This refusal to promote qualified
    and deserving Inspectors to the GS-11 level has contributed to a low
    morale in the Inspector ranks in San Diego and Calexico and many other
    ports around the country. If Congress wants Customs to keep its most
    experienced and skilled Customs Inspectors, it should demand that more
    GS-11 upgrades be given.

                           Shifts and Irregular Hours

        Not many people recognize the concessions Inspectors and Canine
    Enforcement Officers make for the Customs Service. Their lives are
    controlled by their jobs. First, they rarely work regular 9 a.m. to 5
    p.m. schedules and, unlike hundreds of thousands of their fellow
    federal government employees, Customs inspection personnel have little
    control over the schedules they work in any given two week period.
        Cargo shipments and passengers cross our borders at all times of
    the day and night, and Customs Inspectors must be there to process
    them. It has been noted over and over again that drug smugglers rarely
    work from 9-5. Well, neither do the hard-working men and women of the
    Customs Service. Most Customs Inspectors and CEOs around the country
    are expected to work at a minimum three different shift schedules. A
    shift one week may be as ordinary as 8 a.m. to 4 p.m., but the next
    week it may be as disruptive to the body clock and family life as 5:15
    a.m. to 1:15 p.m. or even 3 a.m. to 11 a.m.
        John Wilda is a Customs Inspector in High Gate Springs, Vermont. He
    has worked for the Customs Service for over twenty-five years. He has a
    wife and two children. In order to attend his son's evening sports
    events and coach his son's baseball teams, for years, Inspector Wilda
    worked what is commonly known as a ``quick turn'' schedule, one in
    which he had less than eight hours off between his assigned eight hour
    shifts. His day began at the port at 8 a.m. and ended at 4 p.m. He
    drove home, coached his son's team, spent the evening hours with his
    family and just as they settled in for the night, he had to return to
    the port for the midnight to 8 a.m. shift.
        According to Patrick McGannon, a Customs inspector in Laredo,
    Texas, the changing times and workdays leave little time for family
    life. It is a luxury to be at home at the same time as your children
    and spouse. Often it takes hours at home to unwind from an intense and
    exhausting day working on the border. Inspectors regularly sacrifice
    attendance at school events and teacher conferences, and they rarely
    have an opportunity to oversee daily or nightly activities at home. The
    Inspectors in Laredo combat the extreme cold in winter and intense heat
    in the summer, while they battle sleep problems from working one week
    on the midnight shift and the next on the early morning shift. Many
    people can handle a few weeks of this shift work, but could never
    survive a career of this lifestyle.
        In addition to rotating shifts, Inspectors and CEOs have rotating
    weekends. They basically work a seven-day workweek, and their two days
    off can fall anywhere within those seven days. The majority of
    inspection personnel work both days of the weekend as their regular
    shift. Each individual will learn about his or her shift schedule and
    days off about ten days in advance of working the schedule. Most
    official holidays will fall within their regular workweeks. There is
    never a guarantee that a holiday or weekend will be spent with family
    or friends.

                                    Overtime

        In addition to the unpredictability their work schedules,
    Inspectors and Canine Enforcement Officers are usually at the call of
    Customs management for orders to work overtime. The staffing levels at
    most ports are not adequate to meet the needs of the port, so
    situations occur daily that require Inspectors to come in to work on
    their days off and to stay beyond their shift for overtime assignments.
    Most Inspectors around the country do not have a full day off during
    the week. Frequently, they must scramble to find a replacement or
    struggle to arrange child care and juggle family commitments. Most
    Customs Inspectors and CEOs work at least 16 hours of overtime each
    week. That can mean a seven-day work week or sixteen hour days. This is
    not an odd occurrence; this is a way of life. There are grave
    consequences for refusing to come in for overtime, including
    termination.
        Virginia Rodriguez, single mother of a toddler, has been a Customs
    Inspector in Brownsville, Texas for almost twelve years. She recognizes
    the importance of providing an accurate picture of her life as a
    Customs Inspector and she has come from Harlingen, Texas to be with us
    today. In 1997, during a routine investigation of a bus traveling
    across the border, Inspector Rodriguez apprehended one of the FBI's
    ``most wanted'' criminals. For her exemplary work, she has received
    Customs performance awards throughout her career with the Agency and
    has been featured on the television program ``America's Most Wanted.''
    The criminal she caught was a fugitive charged with perpetrating the
    largest armored bank vault robbery in the United States.
        Inspector Rodriguez has told me how difficult it is to maintain her
    family life, care for her child and work the schedules required of
    Inspectors in Brownsville. While she is assigned to a 40-hour work
    week, she regularly works 56 hours per week. Most Inspectors in
    Brownsville work more overtime than she does. She usually works eight
    hours a day on both of her days off so that she can relieve her
    babysitter at the end of her shift and avoid being drafted for
    overtime. The threat of forced overtime is real for Virginia Rodriguez.
    Countless times she has been required to work overtime, forcing her to
    make last minute arrangements for her son. It has been almost twelve
    years since Inspector Rodriguez has spent a Thanksgiving Day or
    Christmas Day with her family. She is not alone in this effort. The
    same is true for most Inspectors working around the country.
        The Port of Blaine, Washington is open 24 hours every day. The
    Inspectors and CEOs stationed there must work 56 hours every week
    (minimum of 16 hours of overtime) to meet the regular needs of the
    port. Every six to nine weeks, they work a midnight or graveyard shift.
    For two weeks, every other month, they work the 4 p.m. to midnight
    shift. According to Greg Johnson, a Customs Inspector in Blaine, the
    job provides added pressure when he leaves his family alone in the
    evenings and at night. Inspector Johnson knows first hand that law
    enforcement officers must maintain a heightened state of awareness and
    be engaged in constant decision-making during their hours at work.
    Often when they return home after a shift, they have trouble leaving
    their work behind. This leads to increased frustration by spouses and
    children and contributes to the high divorce rate among law enforcement
    officers.

                                     COPRA

        In 1911, recognizing that the type of work performed by Customs
    inspection personnel was different from that of the typical federal
    employee, Congress passed an Act that paid Customs Inspectors for
    minimum periods of overtime rather than for hours of overtime that they
    actually worked. This law was referred to as the ``1911 Act.'' In 1993,
    determining that the 1911 Act left too much room for mismanagement and
    abuse of overtime, this Committee was instrumental in replacing the Act
    with the Customs Officer Pay and Reform Act (COPRA). COPRA was drafted
    to ensure that hours paid to Inspectors bore a more direct relationship
    to hours worked. Since 1994, COPRA has been the exclusive pay system
    for Customs officers performing inspection duties. While eliminating
    the rare instance when a Customs officer could earn 32 hours of pay for
    2 hours of overtime work, provisions of COPRA continued to recognize
    that Customs officers deserved pay incentives and enhanced compensation
    for their arduous shift work and irregular hours.
        The pay system for Customs inspection personnel is not unique in
    the federal government. Most federal employees who perform law
    enforcement duties are paid under pay systems tailored to specifically
    compensate them for their work. This is the case for inspection
    personnel and criminal investigators of the INS, DEA, FBI, Border
    Patrol, and National Park Service. INS Inspectors are paid for minimum
    periods of time regardless of their actual hours worked. The FBI, DEA
    and other federal law enforcement agencies pay employees premium pay on
    an annual basis to compensate them for working irregular, unscheduled
    overtime duty. Sometimes this can amount to an additional 25% increase
    in their rate of pay although the officer may not work even one hour of
    overtime or at night during any given week. Other federal criminal
    investigators and Customs pilots receive 25% higher rate of pay
    annually. This pay incentive is known as availability pay and
    compensates these employees for being available to work outside their
    regular shifts. Like in the Customs Service, these pay schemes are
    necessary to attract and retain a high quality and professional
    workforce.
        Under COPRA, a Customs Inspector is paid overtime only when he or
    she works overtime hours as scheduled. The rare instance that an
    Inspector might receive a paycheck for overtime without having worked
    the hours occurs only when there is an administrative or judicial
    proceeding in which Customs is ordered to pay back pay for an overtime
    assignment unlawfully denied to an employee. This situation is not
    governed by COPRA. Rather the remedy complies with the Back Pay Act (5
    U.S.C. 5596) that governs situations for all federal employees who are
    the subjects of improper personnel actions. This specific remedy of
    back pay has been determined by many judges and arbitrators to be the
    adequate remedy for such violations of law by managers throughout the
    federal government. According to arbitrators and judges, without a back
    pay remedy, employers do not have incentive to comply with the
    applicable law, regulations or collective bargaining agreements that
    they enter into. Other remedies would be inconsistent with the remedies
    available to every other federal employee.
        Many Customs supervisors have difficulty managing the annual
    overtime earnings cap of $30,000. They regularly deny overtime to
    employees as they approach the cap. This situation can be addressed in
    many ways without denying employees their right to a legal remedy for
    an improper personnel action. First, the earnings cap could be
    eliminated or loosened to allow employees to exceed the cap by one
    assignment without penalizing the supervisor or employee.
        Secondly, overtime could be tracked better. Last year, Customs
    implemented a new data system called the Customs Overtime Scheduling
    System (COSS). COSS provides overtime earning information for
    individual Inspectors and CEOs. The system tracks schedules and
    assignment data, maintains projected and actual costs, pay cap,
    equalization, staffing, budgeting, time and attendance and billing
    information. The system better enables management to monitor the
    current $30,000 overtime earnings cap. Overtime disputes have
    dramatically decreased since COSS has been in place. Statutory changes
    are not appropriate to redress situations that the Agency can and is
    managing now.

                                  Premium Pay

        In addition to overtime, COPRA governs premium pay for Customs
    inspection personnel. Premium pay is a higher rate of pay for working
    at night, on holidays or on Sundays. For night pay purposes, when a
    majority of regularly scheduled work hours occurs between 3 p.m. and 12
    a.m., an officer receives an additional 15% of the basic pay rate added
    for the shift. When a majority of regularly scheduled work hours occurs
    between 11 p.m. and 8 a.m., an officer receives an additional 20% of
    the basic rate for the entire shift. When an officer's regularly
    scheduled work occurs between 7:30 p.m. and 3:30 a.m., he or she will
    receive 15% premium pay for the hours between 7:30 p.m. to 11:30 p.m.
    and 20% premium pay for hours between 11:30 p.m. and 3:30 a.m.. While
    this law requires an entire shift to be paid at the higher rate, if an
    Inspector works less than a majority of hours during the night, none of
    the evening hours are paid at the premium rate. For example, none of
    the hours in the shift 4 a.m. to noon are compensated as night pay.
        The current Customs system for night pay is meant to compensate the
    inspection personnel for living with unpredictability and constant
    irregularity in their work schedules. For most Inspectors, daily shifts
    change every two weeks. That means one week an Inspector may work the
    graveyard shift, and the next week he or she may be on from 5:15 a.m.
    to 1:15 p.m. The unpredictability of these changing work hours often
    wreaks havoc on family life. At airports, the Agency can order a blitz
    of certain flights and the Inspector is forced to change his or her
    shift within the odd hour shift. Incentive pay systems are not unique
    to the Customs Service and are in place for most law enforcement jobs
    where irregular hours and shifts exist.

                       Premium Pay While In Leave Status

        Federal criminal investigators receive their annual overtime pay
    rate while they are in a leave status. Likewise, Customs Inspectors
    receive night differentials if they take leave while assigned to a
    night shift. Other federal employees who regularly work at night are
    entitled to night pay differential while on leave and on holidays. All
    federal employees, including Customs Inspectors, are not compensated at
    a premium rate when they take leave on a Sunday they would normally
    work. The small incentive derived from receiving night differential
    while on leave is a form of compensation for the irregular and unusual
    hours Customs officers work all year. Their sacrifices are far greater
    than the slightly higher remuneration they receive while on leave.

                         Law Enforcement Officer Status

        In addition to special pay adjustments, federal employees with law
    enforcement officer status receive full retirement benefits after 20
    years of government service in law enforcement. Even Members of
    Congress have this benefit, but currently Customs Inspectors and CEOs,
    who carry guns, make arrests and seize more illegal drugs than any
    other federal group are denied this benefit. As in past years, NTEU
    will continue its efforts to enact legislation (H.R. 1228 and S. 718)
    to give Customs Inspectors and CEOs law enforcement officer status and
    end this disparity. But in the meantime, the current provisions of the
    Customs Officer Pay Reform Act must suffice as incentives for the
    sacrifices Customs Inspectors make to the Customs Service. NTEU
    believes that changes to this pay system are misguided and unnecessary.
        According to Inspector McGannon in Laredo, he nets an additional
    $3,500 in premium pay compensation annually. This is hardly adequate
    compensation for the disruptions this shift work causes. The extra
    money he earns is typically spent on the salaries of child care
    providers who assist with his children's schedules when he is not
    available. Inspector McGannon has hardly been overpaid during his ten
    years with the Customs Service. He should not be confronting an attack
    on his $39,000 salary while members of Congress, who earn more than
    three times his salary and benefit from a 20-year retirement system,
    debate raising their own pay this year.

                           Recruitment and Retention

        Factors including the uncertainty of irregular hours and the
    requirement to work overtime have contributed to a high turnover rate
    among the Customs inspection ranks. These turnover rates lead to
    increased training costs for the Agency. After being hired by Customs,
    many young Inspectors complete the training program, gain valuable on
    the job experience and move to positions with the Department of
    Justice, the Secret Service, the FBI or with state or local government,
    where they are guaranteed all the benefits of being a law enforcement
    officer.
        I recently testified before an Appropriations Subcommittee on the
    issue of Customs integrity where the subject of mandatory Customs
    Inspector rotation was discussed. NTEU has been clear that requiring
    rotation for any percent of the Customs employees will have a
    devastating impact on the mission of the Agency, as well as the lives
    of the Inspectors and their families. There is no empirical evidence to
    show that uprooting experienced Customs officers and moving them around
    the country will lead to a reduction in corruption. In any case,
    Customs has stated that there is no systemic corruption problem to
    address, so a rotation program would be an astoundingly expensive
    endeavor that would do more harm than good. Implementation of a
    mandatory rotation scheme would contribute to the difficulty Customs
    has in attracting new hires in their inspection ranks. I believe
    retention problems would be insurmountable in light of the relatively
    low salaries, constant shift work and dangerous nature of the job.

                             Collective Bargaining

        Evidence clearly demonstrates that the men and women of the Customs
    Service need better resources to better perform their mission. But,
    there is no evidence to show that the mission of interdicting drugs is
    impaired when the Customs Service lives up to the collective bargaining
    provisions it has negotiated. On the contrary, Customs and NTEU have an
    impressive working relationship. In 1998, the Customs and NTEU received
    the John N. Sturdivant Partnership Award in recognition of their
    contributions to reinventing government through labor-management
    cooperation. This year the parties have been nominated for the Office
    of Personnel Management Director's Award for Outstanding Alternative
    Dispute Resolution (ADR) programs focusing on resolving employee
    workplace disputes. A proposal allowing management to nullify bargained
    agreements will have a disastrous effect on employee morale and the
    current labor-management relationship.
        No federal agency, including the Customs Service, would enter into
    labor contracts that it believes interfere with its mission. There is
    nothing in the current contract that hinders the interdiction of drugs
    or contraband. In fact, we have worked closely with Customs on many
    special programs, including Operation Brass Ring, that have resulted in
    record amounts of drugs seized in short periods of time.
        Currently, Customs and NTEU have a process in place to work out
    differences between labor and management when they arise. After years
    of working together, the parties have agreed to what I believe is the
    most innovative collective bargaining agreement in the federal
    workforce. According to a provision in the contract, any party can
    reopen a negotiated article, at any time, if the party believes that
    the article is not working as intended. In addition, a provision in the
    contract allows Customs to take action prior to bargaining if emergency
    situations exist. The Federal Service Labor-Management Relations
    Statute (5 U.S.C. 7100 et seq.) allows Customs to take whatever actions
    may be necessary to carry out the agency mission during emergencies
    prior to bargaining with NTEU. There is no need for statutory
    provisions that eliminate negotiated contractual rights or undermine
    the entire labor-management relationship.
        I know that the more than 13,000 Customs employees represented by
    the NTEU are capable and committed to the Customs mission. They are
    proud of their part in keeping our neighborhoods safe from drugs and
    our economy safe from illegal trade. These men and women are deserving
    of more resources and technology to perform their jobs better and more
    efficiently. But, they do not deserve attacks on their pay and
    restrictions on their rights.
        I applaud this Subcommittee for recognizing the twenty-first
    century needs of the Customs Service. I urge each of you to visit the
    Customs ports in your home districts. Talk to the Inspectors and CEOs
    there to fully comprehend what their regular work lives are like. Then
    you may understand why NTEU will support a Customs authorization bill,
    but will strongly oppose any legislation that would limit the pay or
    rights of the rank and file men Customs officers.
        Thank you for the opportunity to be here today on behalf of the
    Customs Service employees to discuss these very important issues.

        Chairman Crane. Thank you.
        Ms. Hallett.

     STATEMENT OF CAROL B. HALLETT, PRESIDENT AND CHIEF EXECUTIVE
             OFFICER, AIR TRANSPORT ASSOCIATION OF AMERICA

        Ms. Hallett. Thank you, Mr. Chairman, Mr. Levin, Mr.
    Becerra. It is a pleasure to be here with you today. I
    appreciate the opportunity to present the views of the Air
    Transport Association concerning the Administration's proposal
    to increase and create new user fee burdens upon the aviation
    industry.
        Traditionally, the aviation industry has supported user
    fees that are properly cost allocated and cost effective. Thus,
    your efforts to authorize the use of Customs user fees to
    provide pre-clearance services in the Caribbean and Canada and
    to establish a user fee advisory committee are greatly
    appreciated. Moreover, termination or reduction of pre-
    clearance in Canada would have a devastating impact on U.S.
    tourism. We therefore urge you to authorize continued use of
    COPRA funds for service expansion, as well as enhancement.
        Unfortunately, the Administration's proposal to increase
    the Customs' user fee and create a new user fee for automated
    systems is simply a device to further tax the aviation
    industry. Let me explain. In 1997, Customs stated that the true
    cost of pre-clearing an airline passenger was approximately
    $3.25. Last month, Assistant Secretary Lubick testified that
    the cost was over $5.00. In so doing, he implicitly attempted
    to justify the Administration's request to increase the fee to
    around $6.40 per passenger. It is implausible that Customs'
    cost per passenger have doubled in only 18 months. We doubt
    there is adequate justification for these proposed user fee
    increases. They are tax increases masquerading as user fees.
        This proposed tax increase would have a substantial effect
    upon the traveling public. In 1998, 54 million international
    passengers paid Customs' user fees. By 2010, that number will
    double. Meanwhile, Customs simply has failed to make a
    convincing case that this ever-increasing revenue stream from
    airline passenger traffic will not meet its legitimate
    financial needs. Moreover, the Administration's proposal to
    remove existing exemptions from the Customs user fee in Canada,
    Mexico, and the Caribbean, does not advance our national
    commitment to law enforcement, but rather, it appears to be
    merely another tax imposed upon passengers as a direct
    consequence of NAFTA. Any financial shortfalls necessary to
    underwrite these inspections should be covered by removing the
    restrictions from the COPRA fee. In addition, we believe that
    all accumulated fees should be reserved for the benefit of air
    and sea passengers.
        International cargo and passengers encounter border
    crossings at air and seaports as well as land locations, all of
    which have one thing in common, a crossing of national
    boundaries. Every one of those crossings, especially for air
    cargo, results in increased transportation time, costs, as well
    as communication requirements.
        Our member airlines cannot support the Administration's
    proposal to introduce an enhancement fee for the Customs
    automated systems. Nevertheless, we continue to support the
    common goal of an improved information processing system.
    Automated manifest system for air is in its ninth year of
    operation. Yet it requires the burden of paper submittal. We
    have invested millions of dollars to support this automated
    infrastructure, yet we still experience significant daily
    operational costs. Thus, Customs' attempt to introduce yet
    another automated system is very disturbing, because they have
    so far failed to deliver a high quality, cost-savings
    automation program for imports.
        Carriers fear another wave of startup investments for the
    Automated Commercial Environment, while still bearing the costs
    of an incomplete AMS-Air. Air carriers want a fully paperless
    automated manifest process, but participation in ACE may
    seriously delay this goal. Future trade practices will be based
    on electronic commerce and the Internet. Unfortunately, the
    current ACE foundation has very little in common with those
    future practices or the Internet.
        While the current programs need upgrading and eventual
    replacement, the Administration's proposal for an automation
    fee is unwarranted. It is simply another tax on top of the $800
    million already paid annually in the merchandise processing
    fee. We believe that maintenance of Customs automation programs
    should be funded out of those fees.
        Mr. Chairman, it is unclear, particularly to us, what the
    benefit of any automation fee would be. Development costs have
    sky-rocketed, from an initial estimate of $600 million, to
    $1.48 billion. That was told to us by Customs very recently,
    but without an explanation. Its developmental track, quite
    frankly, in this particular area is suspect. With a host of
    unresolved questions and with a lack of clear detail regarding
    how a user fee would be implemented, it is impossible for us to
    agree to an automation enhancement user fee.
        Once again, Mr. Chairman, I want to express my appreciation
    to you, and particularly on behalf of all of our members, we do
    appreciate everything the Committee is doing, and to the
    Members of the Subcommittee, I hope that we will have an
    opportunity to respond to questions either verbally or in
    writing. Thank you very much.
        [The prepared statement follows:]

    Statement of Carol B. Hallett, President and Chief Executive Officer,
    Air Transport Association of America

        Mr. Chairman and Members of the Subcommittee, I appreciate the
    opportunity to appear before you today to present the views of the Air
    Transport Association (ATA) concerning the Administration's proposal to
    increase the U.S. Customs Service User Fee and to create a new user fee
    for the use of Customs automated systems. I welcome the opportunity to
    return to this subcommittee, not as Commissioner of Customs in which
    role I appeared before you many times, but from the perspective of a
    Customs Service customer--the airline industry.
        ATA represents the major U.S. passenger and cargo air carriers in
    the United States. Our members transport approximately 95 percent of
    the passengers and goods transported by air on U.S. flag airlines. Last
    year, the U.S. airline industry safely and successfully carried over
    600 million passengers. The Federal Aviation Administration (FAA)
    predicts that that number will reach one billion passengers by 2010.

                                Committee Action

        I want to thank you Mr. Chairman for your continued efforts to
    authorize the use of Customs user fees to maintain critical equipment
    and positions required to provide preclearance services at critical
    foreign locations. I also want to extend our appreciation for the
    decision to include language in the Miscellaneous Trade bill to
    establish a user fee advisory committee to advise the Commissioner on
    issues such as the level of fees, proper application of funds to
    functions and activities, and the appropriateness of any proposed fee.
        Although we are still awaiting Senate action on the Miscellaneous
    Trade Bill which contains the Customs user fee and advisory committee
    language, we hope that you will work with your Senate colleagues to
    ensure passage as soon as possible. We are fast approaching the busiest
    season for air travel and it is critical for Customs to have the
    authority to expend fees for preclearance operations in both Canada and
    the Caribbean.
        Termination or reduction of preclearance operations in Canada would
    have a devastating impact on U.S. tourism, not to mention air carriers
    operating through the U.S. and utilizing this service both for Canadian
    originating traffic and for transit traffic originating in Europe and
    the Pacific Rim. We urge you to authorize continued use of COBRA funds
    for service expansion and enhancements in order to provide effective
    and seamless service to the travelling public.

                            Administration Proposal

        I would now like to address the Administration's proposal to
    increase the Customs User Fee and to create a new user fee for the use
    of Customs automated systems.
        In August, 1997, at a meeting between U.S. Customs Service staff,
    House Trade Subcommittee staff, and ATA, Customs stated that the true
    cost of preclearing an airline passenger was approximately $3.25. Last
    month, Assistant Secretary Lubick testified that the cost was over
    $5.00, implying adequate justification for the Administration's request
    to increase the fee to $6.40 per passenger. Mr. Chairman, doesn't it
    strike you as odd that in 18 months new found costs have almost doubled
    Customs' cost per passenger? With inflation so low, how could
    government be so inefficient as to result in its costs rising so much
    in excess of the CPI. In all candor, we think you should be
    particularly suspicious of the basis for these new found costs.
        We doubt there is adequate justification for these proposed ``user
    fee'' increases. They are tax increases masquerading as user fees. As
    you know, airlines and the traveling public already pay more than their
    fair share in taxes and fees.
        In 1998, 54 million international passengers paid the Customs user
    fees. FAA predicts that this number will likely double by 2010. With
    these dramatic increases in international air travel, revenues from the
    Customs user fee, and other taxes and fees will grow substantially. The
    question is, can Customs or Treasury efficiently use these fees at the
    rate they are currently collected, or, is the proposed fee increase
    just a tax increase?

                            Purpose of the User Fee

        Mr. Chairman, the collection of the Customs user fee on every
    international air passenger ticket has helped the Customs Service to
    make improvements in passenger processing over the years. However there
    are many restrictions on the use of the funds which need to be
    addressed. We suggest the establishment of a government/industry
    oversight committee, such as the one you have proposed, to assess the
    uses of these monies and to make recommendations for improvements.
    Through a useful government/industry dialogue, real gains can be made
    in Customs processing.
        Additionally, the COBRA fee, which funds a baseline of Customs
    airport staffing, is highly restricted in its use. We would propose and
    strongly support the removal of restrictions, however, the fees
    generated should continue to be segregated from the general fund and
    reserved specifically for air and sea passenger-related Customs
    inspection activity. The removal of restrictions on spending for
    staffing will allow Customs the flexibility it needs to respond to
    transportation industry needs, trends, growth, and changes. The use of
    these funds should be clearly limited to activities that benefit the
    overall provider of the funds--air and sea passengers. Therefore,
    unrelated activities or operations without a nexus to air and sea
    passenger inspection, should not have access to the funds.

                           Administration's NAFTA Tax

        The Administration has proposed once again to remove the existing
    exemptions from the Customs user fee for passengers originating in
    Canada, Mexico, and the Caribbean. This exemption exists to promote
    good will between North American nations and we appreciate Congress'
    recognition of their special status within North America. But to extend
    benefits through NAFTA, on the one hand, and then take them away, on
    the other, suggests that this proposal is just a NAFTA tax.
        Just as with NAFTA, Open Skies agreements dismantle barriers with
    countries like Canada to facilitate the flow of people across our
    shared borders. The adjacent islands of the Caribbean also deserve an
    exemption because of their unique status within the Americas.
    Preclearance operations utilize the highest levels of Customs
    processing efficiencies without sacrificing our national commitment to
    law enforcement. Imposing the Customs user fee on these passengers does
    not advance these efforts.
        Lastly, Customs user fees, collected from air passengers are being
    used for non-air passenger processing, such as land border overtime.
    These revenues are not used exclusively for the benefit of the persons
    paying the fee. Thus, industry participation through a user fee
    advisory committee would enhance the appropriate and efficient use of
    these resources.

                       Customs Automation Enhancement Fee

        We want to commend the on-going efforts of Customs to bring its
    procedures and processes into the 21st Century. International cargo and
    passengers encounter border crossings at air and sea ports, as well as
    land locations; all of which have one thing in common--a crossing of
    national boundaries.
        The result of crossing that imaginary line, specifically for air
    cargo, is an off-the-chart spike in increased transportation time,
    costs, and communication requirements. In like manner, the number of
    participants involved in the transaction increases significantly,
    creating the need to coordinate activities with numerous transportation
    partners and government agencies at both origin and destination with
    similar, if not identical, information.
        Unfortunately, after thorough review and consultation with our
    member airlines, we cannot support the Administration's proposal to
    introduce an automation enhancement fee for the Customs automated
    systems. Notwithstanding our opposition to the fee, we want to remain
    actively engaged with the Administration and Congress in identifying
    the right mechanisms to develop our common goals to improve the
    information processing system.
        It is important to recognize that there are other influences that
    inhibit further engagement by air carriers in Customs automation
    development, specifically the Automated Commercial Environment (ACE).
    It is our view that Customs' current Automated Commercial System (ACS)
    and the current path of ACE produces a magnification of existing
    problems inherited from a manual document process. Converting a
    document into an electronic data format does not take full advantage of
    automation and information technology development. No less can be said
    of the recent Automated Export System (AES) implementation; the system
    attempts to automate a flawed export document process. As a result, a
    multitude of problems has surfaced for Customs and the trade community.
        Furthermore, several problems intrinsic in the Automated Manifest
    System (AMS-Air) for imports have been carried over to AES. For
    example, the attempt to reconcile trade data with transportation data
    in AMS-Air has been consistently difficult, thereby increasing
    processing costs and delaying cargo movement. It remains an elusive
    goal after more than nine years of operation.
        Having said that, we have several areas of concern related to ACE
    and AES development that are made worse by continuing frustrations with
    Customs' current import system, AMS-Air. While we want to develop a
    fully paperless automated manifest process, industry-wide participation
    in ACE may be seriously delayed due to a number of contributing
    factors.
        Customs' support for AMS-Air has become a very important issue for
    our members. We have invested millions of dollars in AMS-Air and incur
    significant daily operational costs. Customs' attempt to introduce a
    new automated system at this time is very disturbing, more so since
    Customs has not yet delivered a high quality, cost saving automation
    program for imports. Quite logically, we fear another wave of start-up
    investment for ACE and AES, all the while still bearing the costs of an
    incomplete AMS-Air.
        AMS-Air is in its ninth year of operation with a steady growth to
    over 130 participants and 28 ports nationwide. However, serious flaws
    remain, some since the October 1989 start-up date. For example:
         After nine years of operation, paperless processing is
    available at only one of 28 ports nationwide;
         Only five freight forwarders nationwide participate in
    AMS-Air and at only three ports;
         AMS-Air is not fully endorsed by local Customs and USDA
    personnel. In fact, USDA refuses to participate at some ports, thereby
    preventing a truly paperless environment;
         Split manifest processing, a common event in air cargo, is
    bug ridden; and
         Programming enhancements and system corrections vital to
    air carrier operation and freight forwarder participation, such as
    Project 323 (in-bond enhancements) and others, are over seven years
    behind schedule.
        Again, we want to be clear--the ACS legacy systems are in the
    twilight of life expectancy, the export process is paper intensive, and
    it is in dire need of automation. However, the foundation of automation
    cannot be built on the premise that automating the existing manual
    process will address our mutual concerns. The ideal system fully re-
    engineers the flow of data to minimize the cost to the trade and
    government while maximizing information for compliance, quality of
    statistics, and information enforcement.
        Nonetheless, the cornerstone of Customs' effort to maintain pace
    with the growth of international trade is eroded by the exceedingly
    long time it is taking to deliver on the promise of the Modernization
    Act. In fact, it is acknowledged by many in the trade that the Mod Act
    needs to be rewritten and ACE redesigned.
        Our concern is not that Customs is an unwilling partner in
    automation development, but is on a collision course with information
    technology development and its effect on trade practices. We believe
    that it is imperative that Customs become a part of the transportation
    process rather than creating a detour for international shipments
    caused by manifest and commodity data requirements of a closed
    proprietary system. The flow of legitimate goods is enhanced if Customs
    becomes a part of the transaction rather than attempting to manage it.
    The blueprint of future trade practices is based on electronic commerce
    and the Internet; however, the ACE foundation to date has very little
    in common.
        While we agree that current ACS programs need upgrading and
    eventual replacement, the Administration's proposal for an automation
    fee, is unwarranted and unacceptable, as traditional budget request
    procedures have not been followed. It is nothing more than a tax on top
    of the $800 million paid annually in Merchandise Processing Fees (MPF),
    a portion of which should be used to enhance and maintain Customs
    automation programs.
        Mr. Chairman, until Customs breaks-out development costs by trade
    functionality and internal Customs requirement, it is unclear what the
    industry is paying for. Moreover, the development costs have
    skyrocketed from an initial estimate of $600 million to $1.48 billion
    without a detailed explanation from Customs.
        These investments obviously require careful planning in the context
    of industry/government partnership and return on investment. With
    numerous outstanding questions and issues, and the lack of detail on
    how a user fee would be implemented, it is impossible for our air cargo
    carriers to agree to an automation enhancement user fee.
        Once again, Mr. Chairman, I want to express my appreciation, and
    that of ATA, to you and the members of the subcommittee for the
    opportunity to appear here today. Thank you.

        Chairman Crane. Thank you.
        Ms. Ross.

       STATEMENT OF SUSAN KOHN ROSS, CHAIRPERSON, S.K. ROSS AND
      ASSOCIATES, P.C., LOS ANGELES, CALIFORNIA, ON BEHALF OF THE
                BORDER TRADE ALLIANCE, PHOENIX, ARIZONA

        Ms. Ross. Thank you, Mr. Chairman, Mr. Levin, Mr. Becerra.
    I am here today on behalf of the Border Trade Alliance. Our
    focus is folks that live and do cross border business with
    Canada and with Mexico. For us, the reliability of the Customs
    computer is a key to the economic viability, both of the
    communities along the border, those on the north and south of
    those borders, as well as the folks in the international trade
    community as a whole. From our point of view, if Customs is
    unable to promptly and efficiently process legitimate trade in
    goods, it can only harm the currently robust U.S. economy.
        Folks cross the border every day for a variety of reasons.
    If Customs is unable to segregate the legitimate crossers from
    those with whom it needs to spend more time, it must have a
    reliable operating computer system. We fully support the
    efforts of the Customs Service to interdict drugs and other
    contraband. We think reliable and up-to-date computer equipment
    can only help Customs deal with those legitimate concerns, as
    well as the ever-growing quantity of vehicles and goods
    entering the United States. The key of course is how that
    should be paid for.
        We think that there is a distinction that should be drawn
    between funding for the existing ACS system and its
    replacement, whatever that replacement should be. I am here
    today to urge Congress to continue from appropriated funds to
    make sure that the ACS system continues in operation. We have
    already heard it is going to be another 5 to 7 years before we
    have got ACE. We have got to have something reliable in the
    meantime.
        The delays caused by the antiquated nature of ACS have gone
    from shipments being released in seconds to being released in
    minutes. Now it is often hours, and on occasion, it is even
    days. It simply cannot continue. You heard Ms. O'Dell talking
    about the requirements on the part of The Limited. Large
    companies are in perhaps a better position. If they are not
    able to get the imported goods, they at least have the
    financial wherewithal to seek replacement goods. The vast
    number of importers and exporters, for that matter, are small
    companies that simply don't have the financial viability to be
    able to do that. If they are not able to deliver on time, they
    simply lose their orders.
        I asked a port director at one of the ports recently what
    his folks had done to prepare for the potential possibility of
    ACS going down. His answer was that they had ordered red pens.
    Customs does not recall how to do paper entries. Frankly, I
    don't think there are too many of us in the trade that date
    back any more to when the computer was not around.
        The Border Trade Alliance is an early supporter of the
    Coalition for Customs Automation Funding. We agree that the
    funding which comes forth either for ACS or for whatever the
    replacement may be, should come from appropriated funds. We do
    not, however, wish to take a position on whether the ultimate
    replacement for ACS should be ACE or ITDS or something
    altogether different. We think that decision ought to be made
    by the experts at Customs, Treasury, Congress, and the
    Administration. I would, however, point out one obvious fact.
    That is, for every dollar that is spent on ITDS, it is not
    spent supporting the current system, the ACS system.
        Not only does Customs need a reliable long-term solution to
    the funding question, it also needs short-term reliable support
    to fund and operate the current system. The last figures that
    we saw from Customs are that there are 384,000 importers in
    their data base. Only about 100,000 of them import twice or
    more a year. If those 284,000 importers that only occasionally
    import are asked to pay an additional user fee, I don't think
    it is unrealistic to expect that they will try to take
    advantage of the computer to get their goods released and then
    file their follow-up entries manually on paper. If the
    condition is put on them that if you file one electronically,
    you have to file the other electronically, I would not be
    surprised to see them begin to go to paper all the way around.
        Of the 100,000 other importers, we are told by Customs that
    the top 1,000 importers account for 61 percent of the value of
    all imports. So if the other 99,000 importers that import twice
    or more a year are faced with an additional user fee, one has
    to ask how many of them would try to file what portion of their
    transactions manually with paper?
        There is another question that needs to be dealt with in
    all of this. That is, if we indeed begin to access an
    additional user fee, what are our colleagues in Canada or
    Mexico going to do by way of additional user fees on their
    part? We also have to ask what that does to the cost of goods,
    what that does to the American consumer, when all we are really
    going to end up doing is that cost is going to get passed
    through and drive up the cost of goods in the marketplace.
        There was a question asked earlier about NAFTA and GATT. I
    would refer the Committee to article 403 of NAFTA, which
    specifically says that there are to be no additional user fees
    imposed. In the GATT context, it is article VII (1)(b).
        I want, with the time that I have remaining, to just touch
    on a couple of other issues, because others have talked about
    the computer, and I don't want to repeat what they have said.
    The one issue I want to talk about quickly is unintended
    consequences, or what often gets referred to as unfunded
    mandates. I want to talk quickly about section 110, which
    admittedly is an immigration issue, but because we are talking
    about the land borders, at least from the BTA context, it is
    Customs that is being asked to enforce this law. It is being
    asked to enforce this with no additional funding. It doesn't
    have the manpower. It doesn't have the money. It doesn't have
    the equipment.
        There is also the Border Smog Reduction Act of 1998. It is
    an attempt to clean the air in San Diego. It requires the
    Customs Service to make a determination of whether a Mexican-
    plated vehicle comes into the United States for specific
    purposes more than twice a month, and if so, to bar it from
    entry. Again, there was no funding allocated.
        The last thing I would like to do is refer the Committee,
    because I am out of time, to some comments in my written
    materials about a public-private partnership that was generated
    initially at the suggestion of the Customs Service, and ask the
    Committee to encourage the Customs Service to continue to be as
    innovative as it has been in the past.
        On that note, I will close with a continuing offer on the
    part of our members to serve as a resource for the Committee
    and for the Members. Thank you, Mr. Chairman.
        [The prepared statement follows:]

    Statement of Susan Kohn Ross, Chairperson, S.K. Ross and Associates,
    P.C., Los Angeles, California, on behalf of the Border Trade Alliance,
    Phoenix, Arizona

        The Border Trade Alliance (BTA) was founded in 1986 and consists of
    individuals, entities and companies which live and do cross-border
    business with Canada and Mexico.
        Over the past decade, our agenda has consistently focused on trade
    facilitation, fast track authority, NAFTA implementation, trade
    expansion, border transportation and environmental infrastructure
    issues, and regional industrial and economic development.
        We are here today to testify regarding the automation efforts of
    the U.S. Customs Service. The reliability of the Customs' computer is a
    key to economic viability for all communities along the land borders--
    both north and south and on both sides of each of those borders, as
    well as the international trade community as a whole. We are all too
    familiar with long lines of cars and trucks coming south at the
    Detroit-Windsor tunnel as well as long lines of cars and trucks coming
    north through Laredo, El Paso and Otay Mesa. If Customs is unable to
    promptly and efficiently process legitimate trade and goods, it can
    only harm the currently robust U.S. economy.
        At the land borders, some Mexicans and Canadians cross for the day
    to conduct legitimate business while others cross for pleasure. They
    also cross into the U.S. on holiday or to attend school. In all
    instances, it is important for U.S. Customs, and the Immigration and
    Naturalization Service with which it cross-trains and serves, to be
    able to segregate legitimate crossers from those with whom it needs to
    spend more time. It requires a fully operational computer system to do
    so.
        We fully support the efforts of the Customs Service to interdict
    drugs and other contraband. We think reliable and up-to-date computer
    equipment can only help Customs deal with those legitimate concerns as
    well as the ever-growing quantity of vehicles and goods entering the
    U.S.
        The question is how should that computer system be paid for? We
    think a distinction should be drawn between funding for the existing
    ACS system and its replacement, whether that replacement is ACE or
    something else. I am here today on behalf of the BTA to urge Congress
    to continue to adequately fund ACS while the question of its
    replacement is debated and decided.
        There is little question neither Customs nor the trade can afford
    to have the existing computer system crash or ``brown out.'' Brown-outs
    have already occurred on several occasions. Delays in the release of
    shipments have already exploded from seconds to minutes and now often
    to hours and, on occasion, even days. The impact of extended delays can
    be catastrophic. In the current just-in-time environment, many large
    companies have inventory on hand for one shift. Others have sufficient
    inventory for the equivalent of a half to a full day's production.
    Smaller companies have it more difficult. If they are not able to
    receive product in a timely fashion, they do not have the resources to
    obtain replacement goods. They simply lose their orders.
        When asked recently what the local port had done to prepare for the
    possibility of paper processing of entries, one Port Director responded
    by stating he had purchased red pens for his staff! Customs is simply
    not set up to timely process paperwork in a manual environment and
    neither is the trade.
        The BTA is a supporter of the Coalition for Customs Automation
    Funding. We agree with other Coalition members that funding for
    Customs' automation efforts should be accomplished from appropriated
    funds. Like many other members of the Coalition, the BTA also does not
    take a position on whether the ultimate replacement for ACS should be
    ACE or ITDS. That decision is one for the experts at Customs and
    Treasury to make in concert with the Administration and Congress. The
    only point we would make is the current system is in dire need of
    financial and technical support. Until a decision is made about the
    long-term replacement of ACS, we would point out the obvious--every
    dollar spent on ITDS is a dollar not used to keep ACS operating.
        Not only does Customs need a reliable long term solution to the
    funding question, it also needs short-term reliable support to fund and
    operate the current system. To that end, we are opposed to the
    Administration's proposal for an electronic user fee. The last figures
    we saw published by Customs state there are approximately 384,000
    importers in its database. Only about 100,000 import more than twice a
    year. If the 284,000 importers who only occasionally import were now
    asked to pay an additional user fee for electronic processing, we see a
    real possibility they would opt to obtain release of their goods
    electronically but file their follow-up entry summary in paper form.
        Customs has stated the top 1,000 importers account for 61% of all
    imports by value. What would happen if even a small portion of the
    99,000 other regular importers chose the same option and filed their
    entry summaries in paper form?
        Against a back-drop of the additional electronic user fee
    envisioned by the Administration, we question what steps either Canada
    or Mexico might take to retaliate for the fee increases imposed on
    their traders which serves to only drive up the cost of the goods they
    are selling? What about the impact on U.S. consumers? The retail sector
    still suffers the irritant of different personal exemption levels in
    the U.S., Canada and Mexico, a never-ending thorn in the side of
    particularly U.S.-Mexican relations. At a time when duty rates are
    dramatically falling but duty collections are rising just as
    dramatically, we question the wisdom of imposing any additional user
    fees on traders.
        In addition, both NAFTA and GATT have as one of their goals, the
    reduction and/or elimination of user fees as part of an overall process
    of streamlining import procedures. How does imposing an electronic user
    fee square with U.S. obligations under GATT Article VII (1)(b)? With
    think it is anathema and against the general purposes of all multi-
    lateral trade agreements.
        There are some additional issues we take this opportunity to bring
    to the Committee's attention. These issues fall in the category of
    unintended consequences, otherwise known as unfunded mandates. One
    example is Section 110 which revised the Immigration and Naturalization
    Act to include entry and exit controls. We support its repeal through
    S.745 and H.R.1250. We think there are other ways currently in the law
    which allow the U.S. to manage and control its borders.
        It is true Section 110 is an immigration issue. However, at the
    land borders at least, it is both INS and Customs which will be called
    upon to enforce this law. Customs has received no additional funding
    for this effort. Where is it supposed to find the money and personnel
    to enforce this new requirement? While we have from time-to-time had
    our differences with Customs, we support their efforts and contend they
    do a remarkable job given the fact the agency has not been supported
    with either increased funding or personnel while increased funding and
    personnel for the Border Patrol and INS has been setting records. For
    this reason, we whole-heartedly support S.658 recently introduced by
    Senator Gramm of Texas and others.
        Another example of unintended consequences is the Border Smog
    Reduction Act of 1998. Its effect is currently limited to the San Diego
    area. It will be implemented on April 27, 1999 and is intended to allow
    San Diego to improve its air quality by limiting the entry of Mexican
    automobiles. Implementation requires a distinction to be drawn between
    Mexicans entering the U.S. to work or study from those just visiting.
    Many visitors will be allowed to take their Mexican cars into the U.S.
    However, workers and students will not. The way it is written, it would
    appear this law denies a Mexican the ability to bring his Mexican
    registered vehicle into the U.S. if that car even transports a U.S.
    citizen, green card holder, student, worker or even a visa holder.
        In order to properly implement this law, Customs personnel will be
    required to stop every Mexican automobile which does not meet U.S.
    federal emission standards. Since their inspectors are not experts in
    smog emission standards, Customs has stated for the first sixty (60)
    days, it will not impound vehicles or turn them back. However,
    thereafter Mexican plated vehicles will be subject to being impounded
    or refused entry.
        We are also concerned about the cost to Mexicans as the fee is
    $20.00 per year plus a tax based on 2.6% of the car's value. A car
    worth $20,000 would pay an annual fee of $540.00, a real disincentive
    to visit the U.S. and shop! These costs are in addition to registering
    the vehicle in Mexico.
        Especially in light of the fact that the winds in San Diego
    generally blow south so the pollution caused by these vehicles
    generally flows back into Mexico, we contend a better way to address
    pollution concerns at the Southwest border is to shorten wait times.
        The San Diego Dialog recently published figures which make clear a
    large contributor to pollution in the area is wait times. The latest
    figures available are through January 1999. For San Ysidro on January
    5, the average length of the line was 85 vehicles, the wait time was
    approximately 27 minutes. The average length of the line increased to
    180 vehicles and 47 minutes by January 30th. On weekends, the situation
    worsened. The numbers span from 100 vehicles and 14 minutes to 180
    vehicles at 52 minutes.
        At Otay Mesa on weekdays the queue ran from 75 vehicles and 26
    minutes to 165 vehicles and 61 minutes average waiting time. On
    weekends, the numbers rose from 55 cars and 20 minutes to 180 cars and
    61 minutes.
        For San Ysidro, wait times greater than 20 minutes varied. In
    November 1998 it was 41% of the time, in December 1998 it was 36% and
    in January it was 14%. The average wait time of 30 minutes was 10% of
    the time in November, 18% in December and 6% in January. At Otay Mesa,
    the 20 minute wait time in November was 26% of the time, 41% in
    December and 6% in January. A 30 minute wait time occurred 6% of the
    time in November, 2% in December and not at all in January 1999.
        Similar figures undoubtedly exist for other crossing points. It is
    for this reason we support Senator Gramm's bill. We have seen evidence
    of the increased speed with which cargo and commuters move as Customs
    and INS have been able to technologically keep up with the times. In
    July 1998, Customs implemented Operation Brass Ring. Despite the fact
    that more cargo and conveyances were examined, there were no
    appreciable delays nor did the trade complain for the simple reason
    Customs was able to use advanced technology to accomplish its
    interdiction mission with minimum interruption of the flow of goods.
        BTA also wants to take this opportunity to bring to the Committee's
    attention a public-private partnership with which it is proud to be
    involved. The U.S. Customs Service, Immigration and Naturalization
    Service, Department of State, Food & Drug Administration, Dept. of
    Agriculture (APHIS), Department of Transportation-Federal Highway
    Administration, Drug Enforcement Agency, and Environmental Protection
    Agency, as well as the Embassies of Canada and Mexico are participating
    with us in an effort to conduct long-term planning for the land border
    regions, north and south. Observing these efforts are the General
    Service Administration and the General Accounting Office. In this
    strategic planning effort, we are looking at a variety of issues
    revolving around how business is currently conducted at the border by
    these U.S. federal agencies, including a focus on innovative programs
    which have worked, if there are changes which should be made, and
    programs which are operating at one location which address specific
    problems present at another location. Our purpose in participating
    together is to see what can be done within the existing legal and
    regulatory framework to have the agencies join with the trade to
    envision the future and arrive at what is needed to address the ever-
    exploding land border trade corridors.
        We are organized into four (4) public-private working groups: (1)
    Compliance and Interdiction--dealing with law enforcement concerns; (2)
    Infrastructure--addressing traditional brick and mortar concerns such
    as facilities but also quality of life concerns; (3) Environment; and
    (4) Trade and Travel Standards--looking at operational concerns. The
    fifth working group is focused on legislative issues and so is limited
    to private sector participation.
        Following we have included a summary of our legislative agenda
    presented for fiscal year 2000.

                A. Legislative Agenda Items for Fiscal Year 2000

        (1) U.S. Mexico Border Capital Improvement Initiative
         $75,000,000 in fiscal year 2000; $200,000,000 over four
    years to fund port-of-entry, non-transportation related infrastructure
    projects.
         Resurrects a program initiated by the Congress in the
    Treasury, Postal Service and General Government Subcommittee in 1987/
    $350,000,000+ appropriated to-date.
        (2) Support Senator Phil Gramm's Authorization Legislation to
    Increase U.S. Customs Service Staffing and Fund Border-Related
    Inspection and Control Technologies
         Last year Senator Gramm introduced and had passed his bill
    to authorize an additional $347 million for U.S. Customs Service
    (S.1787). It was not approved in conference.
         Senator Gramm has reintroduced legislation this year. We
    are supporting his legislation.
        (3) FDA/U.S. Customs Service Coordination--Legislation of Senator
    Susan Collins of Maine
         Senator Collins intends to introduce legislation to
    enhance cooperation between FDA and Customs on several fronts. We are
    supporting her efforts.
        (4) Section 110
         BTA continues to strive for a reasonable solution to the
    Section 110 problem. Negotiations are ongoing. BTA supports the efforts
    of Senator Abraham, Representative LaFalce and other and the provisions
    of S.745 and H.R.1250
        (5) Off-Dock Non-Narcotic Examinations
         We are seeking a study of this proposal for off-site cargo
    examination approach through U.S. Customs.
        (6) Upgrade of U.S. Customs Service Cargo Release Computer Systems
         Border trade community is very concerned about failure of
    Customs to upgrade the current ACS system or to reach closure on the
    new ACE system for cargo release.
         BTA is supporting enhanced appropriated funding to ensure
    this problem is resolved immediately.
        (7) Agriculture Plant and Health Inspection Service (APHIS) Re-
    Authorization Legislation
         BTA is supporting an agency-backed bill to re-authorize
    APHIS program in fiscal year 2000.
        (8) Environmental Border Initiatives, Fiscal Year 2000
         BTA is supporting (4) Legislative Initiatives for FY
    2000--action
        (a) EPA to establish environmental benchmarks from which to measure
    progress in achieving environmental mitigation goals on the Southwest
    border.
        (b) EPA to establish a Southwest Border Environmental Information
    Clearinghouse within the Southwest Center for Environmental Research
    and Policy to serve as a ``one-stop-shop'' for such information on
    programs, policies and funding sources along the border.
        (c) EPA to establish a Southwest Border Center on Environmental
    Technologies with Texas Regional Institute for Environmental Studies at
    Sam Houston State University in order to provide a tool to better
    identify and verify technologies for application on the border.
        (d) Department of Energy to carry out a multi-year Southwest Border
    Region Technology Deployment Initiative for hazardous waste along the
    border. We are seeking $2,600,000 in fiscal year 2000 to carry out the
    first year of this plan.
        (9) Southwest Border Region Partnership Act of 1999
         Freestanding bill to authorize formation of a Southwest
    Border Action Plan for economic development, infrastructure, education,
    health care and related matters to enhance community development along
    the Southwest Border.
         Authorizes formation of a Revolving Loan Fund to leverage
    private resources to fund community development and economic
    development projects along the border with a ``community-based''
    approach.
        On behalf of the BTA, I close by thanking the Committee for the
    opportunity to participate at today's hearing and again express our
    willingness to serve as a resource for the Committee and its staff.

        Chairman Crane. Thank you, Ms. Ross.
        Mr. Rogers.

         STATEMENT OF JAMES A. ROGERS, CHAIRMAN, INTERNATIONAL
      COMMITTEE, AIR COURIER CONFERENCE OF AMERICA, FALLS CHURCH,
                                VIRGINIA

        Mr. Rogers. Thank you, Mr. Chairman. It is a pleasure to
    appear before you today. I am the chairman of the International
    Committee of the Air Courier Conference of America. ACCA is the
    trade association representing the air express industry. Its
    members include large firms with global delivery networks such
    as DHL, FedEx, TNT and UPS, and small businesses with strong
    regional delivery networks. Together, our members employ
    approximately 510,000 American workers who move more than 25
    million packages each day, operate 1,200 aircraft, and earn
    revenues in excess of $50 billion.
        I would like to focus my comments on three of the issues
    being examined today by the Subcommittee: Customs automation
    programs and their funding, the International Trade Data
    Systems, and Customs user fees.
        Almost exactly a year ago, I testified before the Trade
    Subcommittee that Customs automation efforts had not adequately
    confronted the express industry and the rest of the trade
    community. Today I want to commend U.S. Customs for making
    impressive strides in the last 12 months. Most important in
    this regard, is Customs' resuscitation of the trade support
    network, through which it has actively consulted with the trade
    community on the development of its next generation automated
    system, ACE.
        ACCA believes that Customs is moving in the right direction
    with ACE. As the Subcommittee knows, the current Customs
    automation system is in desperate need of replacement. All the
    witnesses here have testified to that. ACCA is extremely
    concerned about the impact of future brownouts, and even
    blackouts, because the express industry more than any other
    mode of transportation, relies on automation. Without
    automation, thousands upon thousands of international shipments
    every day would fail to be processed in time to meet their
    express delivery deadlines, stranding those who rely on our
    industry for just-in-time parts, keep manufacturing lines in
    operation, computers, telecom, and other equipment they need to
    keep offices running, critical care pharmaceuticals, et cetera.
        In short, an interruption in Customs automation programs
    would devastate our ability to meet our express delivery
    deadlines, and would harm a significant portion of the U.S.
    economy. As a woeful illustration of this, you need only think
    back to the havoc wreaked through the U.S. economy by the UPS
    strike in 1997.
        ACCA is extremely concerned that the Administration's
    proposed user fees for automation fails to acknowledge the true
    cost of developing ACE or the fact that ACE must be developed
    over the next 4 years because the trade community and the U.S.
    economy simply cannot wait longer than that.
        The Administration's proposal also fails to acknowledge
    that the trading community pays roughly $800 million annually
    in merchandise processing fees that should be directed to U.S.
    Customs operations, including automation programs. ACCA
    understands Congress' past hesitation to appropriate moneys for
    Customs automation was fueled by their well-founded
    reservations about Customs' approach to these problems.
    However, as we have already testified, Customs has taken giant
    strides to rectify these problems.
        ACCA urges Congress to acknowledge this, as well as the
    critical importance of this issue to the U.S. economy by
    appropriating MPF money specifically for the development of ACE
    over the next 4 years.
        With respect to ITDS, ACCA supports the general objectives
    in theory underlying ITDS, but has numerous concerns about its
    practical implementation. ACCA is especially concerned with the
    apparent lack of coordination between Treasury's work on ITDS
    and Customs' development of its next generation automation
    systems. These systems seem to be being developed side-by-side
    rather than together. We may end up with two different systems.
        The cost of double reprogramming expense, because Customs
    and ITDS are unable to agree on a joint approach, would be
    ridiculous. ACCA urges the Trade Subcommittee to exercise its
    oversight authority to prevent the U.S. Government from
    imposing this needless cost on U.S. industry simply because of
    the Government's inability to work with itself.
        Turning now to the issue of user fees, our industry is in a
    unique situation because we pay for dedicated Customs resources
    at our facilities. In order to obtain inspectional services
    whenever needed at express facilities, we agreed years ago to
    pay reimbursables to Customs. These fees are supposed to cover
    the cost to Customs of providing inspectors when needed.
    However, in recent years, the cost of reimbursables has
    escalated well beyond what we envisioned, to the point that
    they have become a serious burden on the express industry.
    Customs is expanding even further the scope of services for
    which it is billing the express industry.
        It bears noting that when we first agreed to pay
    reimbursables years ago, Customs considered express facilities
    to be a special service, divorced from the mainstream of U.S.
    commerce, and to a great extent that was true. Today however,
    the express industry is an integral part of the U.S. economy.
    Its demise, as we have testified, would harm a wide swath of
    U.S. commerce.
        We believe that a resolution to this issue will probably
    require legislative action. ACCA expects to be approaching
    Members of this Committee soon to discuss ways to redress this
    situation.
        I want to thank the Subcommittee for holding this hearing
    on a subject of great importance to American business. Mr.
    Chairman, thank you again for the opportunity to comment on the
    operations of the U.S. Customs Service and their impact on the
    express industry.
        [The prepared statement follows:]

    Statement of James A. Rogers, Chairman, International Committee, Air
    Courier Conference of America, Falls Church, Virginia

        Thank you, Mr. Chairman; it is a pleasure to appear before you
    today. My name is Jim Rogers, and I am the chairman of the
    International Committee of the Air Courier Conference of America
    (``ACCA''). Formerly, I was vice president, government relations, of
    United Parcel Service, one of ACCA's members. ACCA is the trade
    association representing the air express delivery industry; its members
    include large firms with global delivery networks, such as DHL
    Worldwide Express, Federal Express, TNT Skypack International Express
    and United Parcel Service, as well as smaller businesses with strong
    regional delivery networks, such as Global Mail, Midnite Express and
    Quick International. Together, our members employ approximately 510,000
    American workers. Worldwide, ACCA members have operations in over 200
    countries; move more than 25 million packages each day; employ more
    than 800,000 people; operate 1,200 aircraft; and earn revenues in
    excess of $50 billion.
        The express transportation industry specializes in time-sensitive,
    reliable transportation services for documents, packages and freight.
    We are a relatively new and rapidly expanding industry, having evolved
    during the past 25 years in response to the needs of global
    international commerce. Express delivery has grown increasingly
    important to businesses needing to use ``just-in-time'' manufacturing
    techniques and supply-chain logistics in order to remain
    internationally competitive. The express industry has revolutionized
    the way companies do business worldwide and has given a broad-based
    application to the just-in-time concept. Producers using supplies from
    overseas no longer need to maintain costly inventories, nor do business
    persons need to wait extended periods of time for important documents.
    In addition, consumers now have the option of receiving international
    shipments on an expedited basis. Increased reliance on express
    shipments has propelled the industry to average annual growth rates of
    20 percent for the past two decades.
        I am very pleased to be able to discuss issues regarding U.S.
    Customs today, because Customs administrations play a critical role in
    ensuring expeditious movement of goods across borders and consequently
    are critical to our industry's ability to deliver express international
    service. To give you a sense of the size of our industry in U.S.
    trade--and as a customer of U.S. Customs--the express industry accounts
    for roughly 25 percent of all Customs formal and informal entries. In
    addition, express operators enter more than 10 million other manifest
    entries on low-value shipments, plus millions of clearances on letters
    and documents. In short, American business is dependent upon our
    industry, and we are dependent upon an efficient and effective Customs
    Service.
        I would like to focus my comments on three of the issues being
    examined today by the Subcommittee: Customs' automation programs and
    the funding mechanisms for these efforts, the International Trade Data
    System (ITDS), and Customs' user fees.

       It is Essential to the U.S. Economy that Customs' Next-Generation
                 Automation Systems be Brought On-line Rapidly

        Almost exactly one year ago, I testified before the Trade
    Subcommittee that Customs' automation efforts had not adequately
    accommodated the needs of the express industry and the rest of the
    trade community. Today, I want to acknowledge that U.S. Customs has
    made impressive strides in the last 12 months, and ACCA commends
    Customs for this. Most important in this regard is Customs'
    resuscitation of the Trade Support Network, through which it has
    actively consulted with the express industry and other members of the
    trade community on the development of its next-generation automated
    system, the Automated Commercial Environment (ACE). While many
    important issues with respect to ACE remain to be decided, we are
    encouraged that Customs appears genuinely committed to working with the
    trade community to develop its next-generation automation system.
        ACCA believes that Customs is moving in the right direction with
    ACE. If Customs adheres to its current plans, ACE should provide the
    functionality and enhanced automated abilities--processing of data,
    remote entry filing, account-based systems, reconciliation, etc.--
    mandated by the Customs Modernization Act. Customs also plans to
    incorporate into ACE features that will enable Customs to adjust and
    upgrade the system as technology developments warrant, rather than
    having to create entirely new automation programs every few years.
        As the Subcommittee knows, the current Customs automation system--
    the Automated Commercial System, or ACS--is in desperate need of
    replacement. The system is rapidly nearing the end of its lifespan and
    is increasingly subject to brownouts. ACCA is extremely concerned about
    the impact of future brownouts and even blackouts because the express
    industry, more than any other mode of transportation, relies on
    automation. We have invested tens of millions of dollars in automated
    systems designed to expedite shipment and delivery of goods within an
    express timeframe. For our industry to survive and expand, automation
    is critical. Without automation, thousands upon thousands of shipments
    every day would fail to be processed in time to meet their express
    delivery deadlines, stranding thousands of individuals and small,
    medium and large businesses who rely on our industry to provide them
    with the parts and components they need on a just-in-time basis to keep
    their manufacturing lines in operation; the computers,
    telecommunications and other equipment they need to keep their offices
    running; the blueprints they need to keep their construction projects
    on schedule; the critical-care pharmaceutical and medical devices they
    need to provide urgent patient care; the wedding gown they need for
    their marriage ceremony; and, I would venture to say, the next-day
    documents and packages Congressional offices need to conduct their work
    every day.
        In short, an interruption in Customs' automation programs would
    devastate our ability to meet our express delivery deadlines and would
    harm a significant portion of the U.S. economy. As an illustration of
    this, you need only think back to the havoc wreaked throughout the U.S.
    economy by the UPS strike in 1997.

    The Clinton Administration's Proposal for a User Fee to Fund Automation
                   Programs is Ill-conceived and Ill-advised

        ACCA is extremely concerned that the Clinton Administration budget
    fails to acknowledge the critical importance to the U.S. economy of
    maintaining and improving an automated Customs environment. The budget
    proposes a new user fee to pay for automation, with the expectation
    that this would generate $163 million in the next fiscal year. This
    proposal fails to acknowledge the true cost of developing ACE and also
    fails to acknowledge the fact that the trading community has been and
    continues to pay an enormous annual stipend in the form of the
    merchandise processing fee (MPF) that should be directed to U.S.
    Customs' operations, including automation programs.
        First, with respect to the true cost of ACE development: Customs
    estimates that the trade portion of ACE will cost roughly $1.2 billion
    dollars if the program is developed over four years. The
    Administration's proposal would therefore only provide approximately
    half of the money needed for the first year of development. The costs
    of ACE development will be far greater than $1.2 billion if the project
    is stretched over more than four years. Furthermore, given the imminent
    obsolescence of ACS, the trade community and the U.S. economy simply
    cannot wait more than four years for development of ACE.
        Second, with respect to the trade community's annual contributions
    to the U.S. Treasury: throughout the 1990s, U.S. importers have paid
    MPF on most imports into the United States. MPF revenues total about
    $800 million annually. When first imposed, the MPF was challenged as
    being illegal under the GATT; it was determined that the surcharge
    would be consistent with GATT requirements only if it was directly
    related to the costs of U.S. Customs' operations. Notwithstanding the
    subsequent U.S. modifications of the MPF to bring it into GATT
    compliance and the U.S. assertion that the purpose of the MPF is indeed
    to offset Customs' operating costs, the fact remains that MPF revenues
    have not been channeled to U.S. Customs. Instead, they have gone to the
    general revenue fund of the U.S. Treasury.
        The problem, therefore, is not that the money is not there for
    modernization of Customs' automation systems, it is that the
    Administration has refused to request and Congress has refused to
    appropriate MPF monies for this purpose. ACCA understands that
    Congress' past hesitation in this regard has been fueled by well-
    founded reservations about Customs' automation efforts. However, as we
    have already testified, Customs has taken giant strides to rectify
    these problems. ACCA urges Congress to acknowledge this, as well as the
    critical importance of this issue to the U.S. economy, by appropriating
    MPF monies specifically for the development of ACE over the next four
    years.

     Development of the International Trade Data System must take place in
                 Coordination with Customs' Automation Programs

        With respect to the International Trade Data System (ITDS), ACCA
    supports the general objectives and theory underlying ITDS, i.e.,
    elimination of redundancy in government reporting requirements related
    to trade, confusion in data requirements, and incompatible data
    exchange methods. However, we have numerous concerns about the
    practical implementation of such objectives--for example, with respect
    to potential delay in express operations and burden on the industry in
    collecting all the ITDS required data elements. We have held several
    meetings with the ITDS team to discuss these issues and plan to
    continue this process.
        ACCA is especially concerned with the apparent lack of coordination
    between Treasury's work on ITDS and Customs' development of its next-
    generation automation systems. One noteworthy aspect of this applies to
    exports. The existing automation program for reporting exports--the
    Automated Export Reporting Program, or AERP--expires this December 31.
    Customs has announced that it will be replaced by the Automated Export
    Sytem, or AES. The trade community is now being asked to bear the costs
    of reprogramming commercial systems for AES, at considerable expense.
    At the same time, the ITDS team is informing the trade community that
    it could be required to re-program its systems once again to
    accommodate the ITDS-based export reporting program as early as 2002.
    Both U.S. Customs and ITDS officials privately acknowledge that this
    redundant re-programming would be a waste of private sector resources,
    yet they also indicate that, because Customs and ITDS are unable to
    agree on an appropriate joint approach, they fully expect that industry
    will face this double reprogramming expense. ACCA urges the Trade
    Subcommittee to exercise its oversight authority to prevent the U.S.
    government from imposing this needless cost on U.S. industry simply
    because of the government's inability to work with itself.

      The Cost of Reimbursables to the Express Industry Has Grown Out of
                   Balance and the System Needs to be Altered

        Turning now to the issue of user fees, our industry is in a unique
    situation because we pay for dedicated Customs resources at our
    facilities. In order to obtain inspectional services whenever needed at
    our hub and express consignment facilities, the express industry agreed
    12 years ago to pay ``reimbursables'' to Customs. These fees are
    supposed to cover the costs to Customs of providing inspectors when
    needed. However, in recent years the cost of reimbursables has
    escalated well beyond what we envisioned, to the point where
    reimbursables have become a serious burden on the express industry. In
    fact, the industry has grown so much in the past 12 years that today
    collections under the MPF from this industry would more than cover the
    cost of providing inspectional services when needed to the express
    operators. We should note, by the way, that the express industry's
    principal competitor, the U.S. Postal Service, pays no reimbursables.
    Rather, U.S. Customs pays the Postal Service for the privilege of being
    on-site at its international mail clearing facilities.
        Recently, Customs has expanded even further the scope of services
    for which it is billing the express industry. For example, the express
    industry fought for several years for a technical correction to the law
    that would permit Customs to provide additional inspection personnel at
    our facilities during daytime hours in response to the industry's
    request, and that provision was finally enacted in 1996 as part of
    Public Law 104-295. Now, however, Customs has deliberately
    misinterpreted the provision as allowing it to bill for all daytime
    services, whether requested or not. Clearly, it was never the intention
    of the industry or of Congress in enacting this provision to provide a
    windfall to Customs to bill for services which it routinely provided
    free of charge in the past and which it continues to provide free of
    charge to all other members of the transportation industry.
    Furthermore, Customs has indicated to us that it plans to expand its
    billing for export-related services, even though there is no legal
    authority for it to do so.
        Reimbursable charges cost the industry close to $20 million last
    year--and the bills are mounting rapidly. On top of that, the express
    industry generated almost $75 million in MPF in 1998. Since the MPF
    collected already exceeds the cost of services provided by Customs for
    express operations, reimbursables represents a hidden tax that is borne
    by the express industry and that is ultimately paid by U.S. importers.
        It bears noting that, when we first agreed to pay reimbursables
    years ago, Customs considered express facilities to be a special
    service divorced from the mainstream of U.S. commerce and, to a great
    extent, that was true. Today, however, the express industry is an
    integral part of the U.S. economy and its demise, as we have testified,
    would harm a wide swath of U.S. commerce. In addition, I should also
    note that the express industry has pioneered automation innovations for
    Customs that enable Customs to process express shipments far more
    efficiently than it can for any other mode of transportation, while
    retaining high rates of compliance.
        We believe that a resolution to this issue will probably require
    legislative action, and ACCA expects to be approaching members of the
    Ways and Means Committee soon to discuss ways to redress this
    situation.
        In closing, I want to thank the Subcommittee for holding this
    hearing on a subject of great importance to American business. Mr.
    Chairman, thank you again for this opportunity to comment on the
    operations of the U.S. Customs Service and their impact on the express
    industry.

        Chairman Crane. Thank you, Jim.
        Mr. Tobias, what is the status of negotiations concerning
    the use in El Paso of that very successful drug interdiction
    approach called Pre-primary roving, which is used everywhere
    else in the Southwest?
        Mr. Tobias. The resolution of that is over a year old, Mr.
    Chairman. It is being used. It has been used.
        Chairman Crane. In El Paso?
        Mr. Tobias. Yes, Sir. It has been used for a year. Thre is
    a final agreement, in place right now. I just checked an hour
    ago. I called to make sure that I was correct on that. It has
    been in place for a year, over a year.
        Chairman Crane. Because we had a witness earlier who said
    that it's been going on for years.
        Mr. Tobias. Well, I think that witness spoke in error.
        Chairman Crane. Well that is encouraging. I am glad to hear
    that. OK.
        Carol, how will an increase in the passenger processing fee
    affect your industry?
        Ms. Hallett. Well, obviously the increase will be one more
    nail in the coffin of not only our industry, but industry in
    general. The continuous increase of user fees when we have not
    received an adequate explanation as to how the money is being
    spent, and particularly in the one instance that I gave you,
    where you have the Customs Service explaining that it only
    costs $3.25 per passenger to process a passenger, and then they
    want to increase it to $6.40, is an example of why business is
    going to have more and more trouble being able to provide the
    service that is expected of them when you have costs that are
    increasing rampantly.
        We really believe that because we have already been
    contributing along the years, as has everyone else in business
    through the merchandise processing fee, that that is the
    appropriate way in which to be able to establish ACE and to
    move it forward in a very quick fashion. Four years is a long
    time, but that nevertheless is the way it should be done.
        I certainly heard Mr. Levin today when he said we should be
    more aggressive on this. We have already been to the
    Appropriations Committee, Mr. Levin. We will continue to pursue
    this because we believe it is the right way to go.
        Chairman Crane. Finally, for any member, any or all members
    of the panel, do you believe from your daily experience with
    Customs that Customs can effectively plan and manage a program
    of the magnitude of ACE?
        Ms. Ross. Absolutely. We have seen them do it in all kinds
    of different circumstances. We have seen them respond to
    outside pressures and put all kinds of programs in place.
    Admittedly, this may not be the best of analogies, but
    Operation Brass Ring the response to the criticism that Customs
    was not doing enough to interdict drugs. In the span of, I
    think, a short a period of 4 to 6 weeks, we saw a very
    successful program put in place using high technology, using
    the same manpower, and interdicting more drugs.
        Chairman Crane. Has anybody else got a perspective?
        Ms. Hallett. Mr. Chairman, having served as the
    commissioner of Customs for almost 4 years, I would have to say
    that the Customs Service does a remarkable job. At the same
    time, I also feel that it needs to operate even more on a
    business-like fashion. I think that Commissioner Kelly's
    proposal to go outside with a private contractor may be on the
    right target.
        When Ed Kloss arrived at Customs Headquarters from the New
    York Region to take over it--the ACS and the ACE program, they
    were on the right track. But it's 9 years later, and where are
    we? If there is an indictment, it is the failure of ACE to
    succeed, that is what worries me. It is taking too long for
    something like this to be done. That isn't to say that one of
    the flaws has not been the lack of funding; but that decision
    comes directly from the Administration.
        I would like to just take 1 minute to say that one of the
    biggest problems Customs has is that they are part of the
    Treasury family. What happens is that Treasury, no matter which
    party is in the White House, dictates how much money Customs
    will be allocated. Believe me, Treasury and Cutoms and the
    other branches in Treasury are all in lockstep. But then you go
    over to Justice, where you have INS and DEA and the other
    agencies, they literally do not pay the same kind of attention
    to budget controls. So there is a disproportionate amount of
    adherence to the budget process on the Treasury/Customs side,
    that does not exist in some other agencies. It is to the
    disadvantage of the Customs Service in doing a dual role with
    much of the same functions as the INS, with fewer resources.
        Sorry. I had to get that off my chest, but I'll tell you,
    it is very important for Customs to be treated fairly and
    equally.
        Chairman Crane. Thank you.
        Mr. Levin.
        Mr. Levin. Mr. Chairman, this has been a long and excellent
    hearing. We appreciate your patience. Let me just then omit a
    question and just two quick reflections.
        Mr. Tobias, I think it would be good if I might suggest
    that if you and Mr. Kelly came in and would talk to as many
    members as would talk to you about labor-management relations.
    I think there are some, let me put it this way, gaps in
    information here about what is happening. There are some
    outstanding questions. But I think it would be helpful so that
    people don't kind of choose up sides. I think that would be
    useful. It won't resolve all issues. We will have to face some
    of them, but I think it would help.
        Mr. Tobias. I would be pleased to do that, Mr. Levin.
        Mr. Levin. Mr. Kelly talked about the general State of
    labor-management relations. You have responded to some
    questions. I think it would be a good idea if you would do
    that.
        Then let me just say to the three of you, everybody here
    has testified as to the critical needs for an adequate modern
    information system. I am afraid you are in a catch-22 situation
    conceivably. That is, how it is going to be paid for. Your kind
    of overview of the problem may be totally salient or totally
    accurate, but it may not be relevant in terms of appropriations
    this year, if I might say so.
        It is hard to know, I mean no one here has come and said
    that we don't need to fortify the information system, no one. I
    mean everybody said the opposite. Mr. Zimmer was as
    categorical. Of course I guess he is getting paid for it, but
    he was so categorical about the adequacy of what Customs is
    trying to do. Not the adequacy, but the effort.
        Now I mean how are we going to pay for this? We are going
    to get into the usual tug and pull, right? Appropriations, user
    fees? You don't like the exclusion of Mexico, Canada and the
    Caribbean, though they represent a substantial amount of our
    trade. The spirit of NAFTA is invoked, but we are still going
    to have to find the money somewhere.
        So I think the answer is for everybody to kind of dig in
    and keep in touch with each other and see how we are going to
    find the resources, because your concerns, your forebodings, if
    they were to occur, would have major ramifications through our
    trade system and through our economy. Right? Or they could. I
    think we all should be realistic. I mean there is no easy
    answer to this issue. To simply say a user fee is violative,
    we'll have to see, or is out of the question, Congress doesn't
    always abide by that.
        So I wish you good luck. I just again want to urge that
    these efforts be intensified because the wheel has to squeak
    here. Whether it picks up appropriations or a user fee, is the
    second question. But it won't pick up either unless there is a
    greater understanding, I think, of the urgency of this
    situation.
        Mr. Chairman, I think this has been really an excellent
    hearing with a lot of good testimony. I wish us well.
        Chairman Crane. Well, I share that view.
        Mr. Becerra, before we wrap up here, do you have any
    questions?
        Mr. Becerra. Yes, Mr. Chairman. I do.
        First, let me thank all the panelists for their testimony.
    Mr. Tobias, maybe I can ask you, and actually I think
    Congressman Levin, again, has done a good job of touching on
    some points where maybe it would be good to have individual
    follow-up as well. But what was the resolution in El Paso?
        Mr. Tobias. One of the real issues was whether or not there
    would be three people doing the pre-primary roving. That was
    sort of the sticking point. We wanted to have three people
    there for purposes of safety.
        Ultimately, we agreed to two, because El Paso is not
    staffed at the level which would really allow for three. So we
    finally agreed to two in order to have the pre-primary roving
    and also have people directed to all lanes.
        Mr. Becerra. How is that working so far?
        Mr. Tobias. Well, it's working. I mean it is working. You
    know, it's interesting, last year there was a great deal of
    discussion at this Committee about bad labor-management
    relations at a time when everyone at the same time cites
    Operation Brass Ring, for which we received an award, a
    national award for our ability to cooperate and collaborate.
        I think the record speaks for itself in terms of the
    success that we have had and the success that we are having
    now.
        Mr. Becerra. Actually, I think Commissioner Kelly actually
    testified that relations were in good standing. While he
    indicated that there were some wrinkles that had to be ironed
    out between Customs and its employees, he did say he believed
    that there were good working relationships between the two.
        Mr. Tobias. That is accurate. Nobody agrees with anybody
    else all of the time.
        Mr. Becerra. You're kidding.
        Mr. Tobias. But what is true is that we have created a
    relationship with the Customs Service which has really allowed
    us to focus on accomplishing the business of the Customs
    Service, while at the same time, including the efforts, and
    ideas of employees in the work place. That has really been the
    goal of the effort.
        Mr. Becerra. Let me ask you two questions. I would ask you
    to answer them as quickly as you can. First, is overtime
    optional for employees or is it if not mandated, close to a
    requirement in order to have the Customs Agency fulfill its
    obligations? Second, how common is it for an employee, an
    inspector, to experience changes in his or her work schedule,
    on these rotating shifts? Please answer as quickly as you can.
        Mr. Tobias. Well, overtime is really a mandatory part of
    the job. Most Customs inspectors and canine enforcement
    officers are working a minimum of 16-hours of overtime a week.
    Second, the shifts change depending on the port. They can
    change every week or every 2 weeks. But that is sort of the
    common change in shifts.
        Mr. Becerra. So it is pretty common for any employee, any
    inspector, to have a different work shift at any given month of
    the year?
        Mr. Tobias. For sure. At least in a month. More likely,
    every 2 weeks. In some places, every week.
        Mr. Becerra. Is there some accommodation made for people
    who have personal and family obligations?
        Mr. Tobias. Well, sometimes people can swap out of shifts
    if there is another person who is available to do the work. But
    what that means is that the person who is doing the work is
    doing a double shift to accommodate someone who is swapping.
        Mr. Becerra. Thank you for the responses.
        Let me ask a couple of questions with regard to the
    automation fee. Some of the panelists in the previous panel as
    well have mentioned that the merchandise processing fee should
    really be one of the fees that we resort to to try to pay for
    this automation.
        Let me just ask some questions and perhaps we can get some
    answers into the record later. I understand that this
    merchandise processing fee raises something over $800 million.
    What does it get spent on as far as you know, and what is it
    supposed to be spent on, as far as you know? I will check with
    Customs to find out how they respond to those two questions.
        Can you think of any other fees that are already imposed on
    the various industries that should be used to help pay for the
    automation that perhaps Customs hasn't told us about or
    identified? It would be nice to know what your sense would be
    if we don't go forward with automation because one, we don't go
    forward with the fee, and two, Congress and the Administration
    don't put it in a budget in an appropriations bill. What then?
    What do we do about the delays, the brownouts? What is the
    scenario?
        Finally, if I could perhaps ask for a response at this
    point for this final question. The INS last year, actually
    beginning January 15 of this year, increased its fees for
    people who were applying to naturalize. The fee went from $95
    to $225. The INS saying it needed to charge that to recoup the
    costs of the service, the user fee. That is what the use would
    cost. That is about 150 percent increase. It would be nice to
    hear what the industries say in response to that. On top of the
    merchandise processing fee and so forth, do you all believe
    that you are paying the full cost of the service being provided
    by Customs?
        Ms. Hallett. Mr. Becerra, let me just respond by saying
    that all agencies of the Government are by and large looking to
    increase fees, from the FAA to the Customs Service, to INS,
    across the board. This is part of the problem. I would refer
    back to my comment about the fact that Customs testified or
    told us 18 months ago that it only cost them $3.25 to process
    each passenger. Even though we have been paying $5, or I should
    say collecting $5 from our passengers, we have never asked for
    the difference between the $3.25 and the $5. Now they want to
    go to $6.40. We believe the Congress should at least receive an
    explanation as to how that money is being spent. That is an
    example of part of the problem.
        I would also say that we have been aggressively opposing
    the INS fees just as we are these Customs fees. But
    unfortunately, we are not always successful.
        Ms. Ross. If I could just add to that. Your question is
    very salient in terms of what is the money being spent on. It
    is very difficult to say ``yes'' or ``no'' in terms of whether
    we are paying for the whole thing, because nobody is--well, let
    me back up. The MPF was supposed to pay for Customs' commercial
    operation. There are some reporting requirements that
    apparently have never been met in terms of really tying the MPF
    expenditure to the cost of the operation.
        In the absence of those kinds of reports, well, you know,
    there are statistics, there are statistics, and there are
    damned lies. You can pretty much take the numbers and make them
    say whatever you want. So it would be very difficult to really
    be able to give you a straight answer to that without getting
    the necessary reports from Customs. But certainly at $800
    million a year, or thereabouts, and enumerable importers saying
    they are paying more in user fees than they are paying in
    duties, it is a pretty safe generality to say we are probably
    not only paying for it, but we have paid for it two or three
    times over.
        Mr. Becerra. Thank you. Thank you, Mr. Chairman.
        [The following information was subsequently received:]

                                           Board Trade Alliance
                                                         April 19, 1999
    The Honorable Philip Crane
    Chairman, House Ways & Means Committee
    Subcommittee on Trade
    1104 Longworth House Office Building
    Washington, DC. 20515-6354

        Re: FY 2000 Budget

        Dear Congressman Crane:

        Thank you again for the opportunity accorded the Border Trade
    Alliance (BTA) to testify at the April 13th hearing before the
    Subcommittee on Trade regarding the President's FY 2000 budget and the
    proposed electronic processing fee.
        As you know, the President's budget includes a provision
    authorizing the imposition of a fee on users of the Customs computer
    system ostensibly to offset the costs of modernizing that system. We
    see several problems with this approach and appreciate the opportunity
    to further articulate those concerns.
        First, the proposed electronic processing fee is clearly in
    violation of the North American Free Trade Agreement (NAFTA). NAFTA
    Article 403 states:
        1. Neither Party shall introduce customs user fees with respect to
    goods originating in the territory of the other Party.
        That the electronic processing fee is a user fee is supported by
    the language of the budget proposal itself which characterizes the
    method in which the fee will be charged as one based upon usage.
        Whether looking at NAFTA Article 403 or Annex 310.1, whether
    calling the fee a merchandise processing fee or an electronic
    processing fee, the result is the same. It is a user fee. The clear
    language of the NAFTA agreement bars the imposition by the U.S. of an
    electronic processing fee (or any other user fee) on goods which
    originate in Canada or Mexico. A similar prohibition applies to U.S.
    goods being imported into either Mexico or Canada.
        The same result likely arises in regard to the obligations of the
    United States under GATT. Article VIII.1. provides:
        (a) All fees and charges of whatever character (other than import
    and export duties and other than taxes within the purview of Article
    III) imposed by contracting parties on or in connection with
    importation or exportation shall not represent an indirect protection
    to domestic products or a taxation of imports or exports for fiscal
    purposes.
        (b) The contracting parties recognize the need for reducing the
    number and diversity of fees and charges referred to in subparagraph
    (a).
        Also of interest are the provisions of Article VIII.4.:
        The provisions of this Article shall extend to fees, charges,
    formalities and requirements imposed by governmental authorities in
    connection with importation and exportation, including those relating
    to:
        . . .
        (e) statistical services;
        (f) documents, documentation and certification;
        (g) analysis and inspection . . .
        The Customs computer has many users. For example, one source for
    balance of trade calculations is the Customs database. Hence, its use
    could be argued to provide statistical services as defined in Article
    VIII.4.(e). Likewise, a major purpose of the Customs computer is to
    certify the accuracy of information used for the purpose of releasing
    goods and paying duty. A fee for such purposes might well fall within
    the prohibitions of Article VIII.4.(f) or (g). It is also obvious that
    the purpose of the electronic processing fee is fiscal in nature. It is
    part of a budget proposal and is characterized as a means to raise
    money to pay for modernizing Customs' computer and is assessed based
    upon usage. As such it would appear to be a tax prohibited by GATT
    Article VIII.1.
        In addition, the electronic processing fee as proposed is to be
    assessed on all non-government users of the Customs computer. As such,
    it would be seem the fee is to be assessed against importers as well as
    exporters. The President's budget does not specify the amount at which
    the fee is to be set. We raise this lack of detail because of the
    debacle surrounding the harbor maintenance tax which you may recall was
    ruled unconstitutional as a tax on exports. United States vs. United
    States Shoe Corp., 118 S.Ct. 1290 (1998). We see the likelihood of a
    similar result with the electronic processing fee.
        Our concern arises by analogy to the merchandise processing fee
    (mpf) situation. GATT found the mpf to be acceptable only because the
    U.S. successfully argued the amount of the mpf was related to the costs
    it sought to recover--Customs commercial operations. 19 U.S.C. Sec.
    58c(4) (in addressing assessment of the mpf fee) provides:
        At the close of each fiscal year, the Secretary of the Treasury
    shall submit a report to the Committee on Finance of the Senate and the
    Committee on Ways and Means of the House of Representatives . . .
    regarding how the fees imposed under subsection (a) . . . should be
    adjusted in order that the balance of the Customs User Fee Account
    approximates a zero balance. . . . The recommendations shall, as
    precisely as possible, propose fees which reflect the actual costs to
    the United States Government for the commercial services provided by
    the United States Customs Service.
        The best information we have is that no such reports have been
    submitted nor has the requisite opportunity for public comment
    occurred. In other words, in the absence of a similar reporting
    requirement (and its enforcement), how is the U.S. going to be able to
    establish the amount of the electronic processing fee which the
    Secretary of Treasury has yet to set is, in fact, a reasonable one
    under the circumstances? The way in which the budget proposal is framed
    imposes no such requirement. Further, the President's proposed budget
    places no limitations on this user fee other than to state $13,000,000
    is to allotted to the ITDS system and $150,000,000 is to be reimbursed
    to the General Fund. In other words, a total of $163,000,000 must be
    raised by this user fee regardless of whether than sum bears any
    rational relationship to the costs associated with non-government use
    of the system.
        Can an electronic processing user fee be established which is able
    to raise such a sum of money and be GATT compliant if imposed on
    imports alone? Probably not as GATT requires us to treat our imports
    and exports similarly. If assessed on imports and exports, is the user
    fee violative of the U.S. Constitution as a tax on exports? Probably so
    for the reasons articulated by the Supreme Court in the U.S. Shoe,
    supra, decision.
        In round numbers, over the last three (3) years, Customs has
    collected $2,486,000,000 in merchandise processing fees (1996--
    $751,000,000; 1997--$831,000,000; and 1998--$904,000,000). Because the
    reporting requirement of 19 U.S.C. Sec.  58c(4) has not been met, we do
    not know how those monies have been expended. We do not know if those
    sums approximate the cost of Customs commercial operations as they have
    been taken into the general fund rather than allocated as statutorily
    mandated.
        There are special Customs fees currently imposed on a variety of
    users including commercial vessels, trucks, rail cars, private aircraft
    and vessels, passengers, mail, customs broker permits, and barge and
    bulk carriers. There are a plethora of additional user fees imposed on
    such industries as beef, pork, honey, cotton, pecans, potato, and
    mushroom importers. These user fees are, of course, in addition to the
    mpf which is currently set at 0.21% ad valorem, with a minimum of
    $21.00 and a maximum of $485.00.
        In addition, the harbor maintenance tax continues to be assessed on
    all imports. 26 U.S.C. Sec. 4461(b) sets this tax at 0.125% ad valorem.
    Since neither a minimum nor a maximum is imposed, A $1.3 billion
    surplus has arisen. In reaching its decision in the U.S. Shoe case,
    supra, one point made by each court in turn was the tax is collected
    but not spent in proportion to where it is collected. It also continues
    to be collected while the account has a huge surplus. In other words,
    the tax bears no rational relationship to the costs on which it is
    intended to be spent, nor does it fairly compensate the government for
    the expenditures it incurs in keeping the nation's harbors and
    waterways modernized. What is to prevent the electronic processing fee
    from a similar fate?
        The final question posed was if not ACE, then what? It is clear a
    more modern computer system is needed if Customs is to meet the ever
    growing demands of international trade. We do not have an opinion as to
    whether ACE is the answer, whether it should be ITDS in a revised
    fashion or whether some other system is more appropriate. We think that
    decision is better made by the experts in Customs and Treasury in
    consultation with Congress and the Administration. We can say we are
    intrigued by the idea behind ITDS--that there is one place where all
    the necessary data is inputted and that the required data elements are
    reduced. However, our understanding is ITDS does not reduce the data
    elements but rather increases them. Further, ITDS does not duplicate
    the function of the Customs computer--the release of goods. ITDS would
    appear to simply funnel certain required information to Customs while
    serving as a data input central point for all the government agencies
    which chose to tie into it. With that idea in mind and because of the
    impending demise of ACS, we again urge that as much appropriated
    funding as possible be quickly dispatched to allow Customs to continue
    to support the functionality of ACS while the decision regarding its
    replacement is considered, decided and funded.
        As a last comment, we would like to take this opportunity to amend
    our written testimony to include the Federal Highway Administration,
    Dept. of Transportation as one of the government agencies participating
    in the Strategic Planning Working Group mentioned at the end of that
    testimony. Please excuse the inadvertent omission.
        If we can provide any further information, please feel free to
    contact us. I can be reached at: S.K. Ross & Assoc., P.C., 5777 W.
    Century Blvd., Suite 520, Los Angeles, CA 90045-5659; 310-410-4414; Fax
    310-410-1017; e-mail--skross@skralaw.com
        Your continuing courtesies and cooperation are appreciated.
                Very truly yours,
                                                Susan Kohn Ross
                                        Chair, Ports of Entry Committee
                                             Member, Board of Directors

        Chairman Crane. Well again, let me express appreciation to
    all of you folks for your participation. We look forward to a
    continuing working relationship with you. With that, the
    Committee stands adjourned.
        [Whereupon, at 3:34 p.m., the hearing was adjourned.]
        [Submissions for the Record follow:]

    Statement of the American Iron and Steel Institute

        The American Iron and Steel Institute (AISI) submits this testimony
    on behalf of its U.S. member companies who together account for
    approximately two-thirds of the raw steel produced annually in the
    United States.
        AISI has maintained a strong working partnership with the U.S.
    Customs Service since the mid-1960s. AISI's Customs Liaison Subgroup is
    an especially active unit of our U.S. producers' Trade Committee. We
    meet regularly with headquarters and field personnel in Customs'
    Offices of Strategic Trade and Field Operations. We also conduct an
    ongoing series of seminars for Customs personnel to help officials of
    the U.S. Customs Service better understand how to properly identify and
    classify steel mill products. In addition, we provide a network of
    technical and commercial experts to help answer questions from Customs
    on an as-needed basis. As a result of these activities, AISI has a
    thorough understanding of Customs' responsibilities and capabilities in
    the enforcement, classification, processing and facilitation of steel
    trade. In this regard, we offer the following comments on budget-
    related Customs issues for FY 2000 and 2001.

        Automated Commercial Environment (ACE) Modernization at Customs

        There is an urgent need to fund and implement Customs' computer and
    software capabilities, through the proposed new ACE system, now. The
    weaknesses and inadequacies of the current Automated Commercial System
    (ACS) have been well documented. Virtually everyone agrees that the ACS
    is headed toward near-term failure, possibly within a year or less.
    AISI therefore strongly supports the immediate and rapid funding and
    development of a comprehensive, flexible and durable ACE, through the
    general appropriations process. At the same time, we remain opposed to
    the enactment of various special fees as a means of funding ACE.
        Failure to develop and implement ACE in a timely manner could
    invite a trade disaster for the United States. Failure of the ACS would
    probably not cause U.S. imports to slow. Rather, the most likely result
    of any massive failure of Customs' current computer capability would be
    to prompt political pressure from importers that could instead result
    in a relaxation of Customs' vigilance, thus opening the floodgates to
    imports without any ability to allow proper enforcement to ensure that
    these imports comply fully with United States' and Customs' rules,
    regulations and laws.
        It is not in the interest of the U.S. economy or U.S. industry to
    allow the ACS to fail, because the resulting flood of imports would
    almost certainly include a significant amount of unfairly traded and
    even fraudulent product that would cause substantial harm to U.S.
    producer and consumer interests alike. Moreover, any benefit to U.S.
    importers from such a breakdown in Customs' computer capability would
    be short-lived, while the injury to competing manufacturers in the
    United States would be long term.

                Steel Import Monitoring and Notification System

        Calendar years 1997 and 1998 were the two highest steel import
    years on record but, in 1998, the United States imported a record 41.5
    million net tons (NT), exceeding the previous record tonnage of 1997 by
    over 10 million NT--or 33 percent. What occurred in the U.S. steel
    market in 1998 was a supply-driven crisis caused by unprecedented
    levels of unfairly traded imports. In 1998, the U.S. steel trade
    deficit was a whopping $11.7 billion--or nearly 7 percent of the total
    record U.S. trade deficit last year. In 1998, the 8 months April-
    November were the 8 highest individual monthly totals for steel imports
    in U.S. history. With our docks and warehouses full to the brim with
    imports and with U.S. steel inventories at all-time levels, this record
    surge of steel imports was a cause of serious injury to U.S. steel
    companies and employees, including layoffs, short work weeks, severe
    price depression, production cuts and lost orders.
        Unfortunately, America's steel trade crisis is not over. We believe
    it's important to put the numbers into proper context. What we've seen
    is just a couple of months of lower imports overall since November and
    a modest, halting improvement in market conditions in some steel
    product lines. Meanwhile, expectations are that, when first quarter
    1999 financial results are released, the vast majority of U.S. steel
    companies will report either losses or sharply reduced profits compared
    to first quarter 1998. In addition, in certain product lines such as
    plate and special quality bar, both orders and prices remain extremely
    depressed. Accordingly, it is very premature to claim that this crisis
    is over. It is not over because:
        1. severe economic difficulties abroad continue, and there remains
    enormous excess capacity offshore;
        2. steel inventories in the United States remain at record levels;
        3. the large, open U.S. market continues to be especially
    vulnerable;
        4. America's steel companies and employees continue to suffer
    injury;
        5. steel producers have not recovered from the serious injury
    caused by record imports in 1998;
        6. imports of products that are temporarily down are down because
    of trade cases;
        7. fair pricing in these products has not been restored;
        8. concern is growing about import source and product switching;
        9. imports of other products not subject to investigation are
    increasing; and
        10. imports overall, even at an annual 25-30 million NT rate, are
    still very high and imports from many countries remain at historically
    high levels.
        On the subject of import source and product switching, it is
    important to stress, first of all, that the imported steel share of the
    U.S. market remains well above levels in recent years, even though
    import volumes have declined since November 1998. Looked at on a
    monthly basis, while the import market share has come down since its
    peak in November 1998--primarily due to trade cases--it also remains
    well above levels in recent years. In fact, aside from the current
    crisis period, the January 1999 import share of 27.8 percent was higher
    than all but 2 months going back all the way to 1994.
        In addition, imports of many products from many countries continue
    to increase. For example:
         imports of hot rolled flat products are continuing to
    surge from China, Indonesia and other countries not covered by unfair
    trade cases;
         imports of cold rolled sheet from Brazil have increased
    sharply after cases were filed against hot rolled sheet in September
    1998;
         imports of hot-dipped galvanized steel products have
    increased in recent months;
         imports of rail steel products have surged significantly
    since November 1998; and
         imports of tin mill products have also surged
    significantly since the end of 1998.
        It is therefore clear that (1) America's steel import problem is
    not limited to a single product or 2 or 3 offshore suppliers and (2)
    there must be more forceful action to address the ongoing steel trade
    crisis in the United States.
        On behalf of our U.S. member companies, AISI supports an effective,
    global solution to the steel trade crisis in the United States. As a
    part of any such solution, it is imperative that the United States
    government and U.S. steel industry have access to the most up-to-date
    information possible on potentially disruptive and unfairly traded
    steel imports. Therefore, AISI continues to support strongly
    legislation to develop and implement a U.S. steel import monitoring and
    notification system capable of providing as near as possible ``real-
    time'' data on steel imports.
        An effective steel import monitoring and notification system would
    require that an electronic notice of importation accompany each import
    entry. Steel import notices would be accumulated, updated and published
    weekly in summary form on an Internet web site. Such data would provide
    the information needed for the U.S. government and steel industry to
    assess the steel import situation in near-real-time. This would enable
    U.S. policy makers to anticipate trade problems before they become
    crises and enable U.S. steel producers to respond as early as possible
    to potential disruptive and unfair trade.
        America's NAFTA partners Canada and Mexico already employ steel
    import monitoring and notification programs that provide, as close as
    possible, real-time data. The U.S. system that is being proposed would
    be modeled on the Canadian system. In Canada, the steel import
    monitoring and permit system is administered outside of Customs, and
    does not appear to present a burden to Canada's Customs Service.
    Canadian Customs does, however, have a modern automated computer system
    in place. We therefore recommend including a steel import monitoring
    and notification program in the development of ACE, to ensure both
    compatibility and efficiency.
        Most importantly, the proposed U.S. steel import monitoring and
    notification system would not constitute a nontariff barrier to trade.
    Under the automatic notification system that is being proposed, (1)
    steel import notice applications could not be refused, (2) any nominal
    fee would not be an economic burden and (3) import entries would not be
    delayed. Again, Canada presents a good example. In Canada, record steel
    imports occurred in 1998 in spite of that country's steel import
    monitoring and permit program.
        Based on the experience in Canada, a similar U.S. steel import
    monitoring and notification system should not pose either a budgetary
    or a human resource burden on the U.S. Customs Service. It is important
    to AISI and our U.S. members that Customs resources not be diverted
    from current enforcement efforts. As in Canada, we believe that a small
    fee for each steel import notice application could substantially fund a
    similar system in the United States. If, however, the nominal fee
    imposed on steel import notice applications were to prove inadequate to
    cover all necessary resources to implement and maintain this program,
    both within and outside of Customs, we would support additional funding
    through general appropriations.
        The U.S. members of the American Iron and Steel Institute are
    grateful for this opportunity to express our views on budget
    authorizations for the U.S. Customs Service and other customs issues.

    Statement of the American Textile Manufacturers Institute

        This statement is submitted by the American Textile Manufacturers
    Institute (ATMI), the national association of the domestic textile mill
    products industry, in response to the Subcommittee on Trade's March 29,
    1999 advisory inviting comments on U.S. Customs Service budget
    authorizations for FY 2000 and 2001.
        It would be difficult to understate the importance of the Customs
    Service, the oldest federal agency, to the United States' national well
    being. The Customs Service is the second largest producer of revenue
    for the federal government (after the Internal Revenue Service) and
    guards our borders against the entry of dangerous, illegal and smuggled
    goods, while insuring that a bewildering array of laws and regulations
    is adhered to. With over 200 ports-of-entry to administer, nearly 20
    million import entries to process annually, representing a value of
    over $900 billion, and $18 billion in duties to collect, Customs' task
    is a daunting one.
        As the volume of imports has soared during the last few years,
    Customs' ability to efficiently process that value has diminished. This
    is acknowledged by Customs. Furthermore, as the volume of imports
    continues to grow, the problem will only get worse and will assume
    crisis proportions in the not too distant future. The reason for this
    is well-known: the Customs computer system used to process and record
    import entries is hopelessly antiquated and simply unequal to the task.
    To address the problem, Customs proposes to retire its current system
    and the architecture on which it runs, the Automated Commercial System
    (ACS), and replace it with a new system, the Automated Commercial
    Environment (ACE.) While everyone concerned agrees that this is a
    necessary step forward, there is not agreement on how its cost,
    estimated to be over $1 billion, should be funded.
        Numerous press reports indicate that the ``trade community,'' i.e.
    importers, their agents, brokers and forwarders are reluctant to fund
    the changeover to the ACE through an additional assessment on imports.
    They believe that ACE should be funded out of the overall federal
    budget, i.e. largely by taxpayers, and the argument used to advance
    this point of view is that ACE will be good for the overall economy and
    therefore everyone should pay for it. This is wrong-headed thinking
    which ignores the incontrovertible fact that the primary beneficiaries
    of ACE will not be factory workers or farmers or teachers or
    stockbrokers; the primary beneficiaries will be a . . . importers.
    (This includes textile mills which import certain of their raw
    materials and machinery not made in the United States.) Users should
    pay for it. Drivers pay for highway construction and maintenance
    through gasoline taxes and tolls; airlines pay for the use of airports
    through landing fees; ships pay for the use of port facilities. These
    are user fees; the concept behind them is quite simple: if you use it
    and benefit from it, you pay for it.
        The argument is also advanced that the operations of the Customs
    Service are already funded by the duties collected. While it is true
    that the Customs Service collects more in duties than it spends (its
    budget), the fact is that these revenues go into the general fund and
    have since 1789. Customs' operations must be funded by congressional
    appropriation. It is also a fact that the duties collected by the
    Customs Service during 1998 represented two percent of the value of
    merchandise imports, the lowest rate in history and hardly an undue
    burden on those who paid them. Under the Uruguay Round Agreement and
    other, preferential trade agreements entered into by the United States
    during the past several years, the volume of U.S. imports has expanded
    greatly while the tariffs paid on them have been reduced sharply. Both
    phenomena have proven richly rewarding to importers, so it does not
    seem unreasonable to require importers to pay a miniscule fee to
    continue to enjoy these benefits.
        It is hard to understand the resistance from most importers about
    funding the conversion to ACE. If ACE is not funded and the present,
    outmoded, inefficient ACS is not able to handle future import volumes
    even ``crashes,'' as many fear it will, who will suffer the greatest
    economic harm? The question is, of course, rhetorical.

    Statement of M. Brian Maher, Chairman, and Steward B. Hauser,
    President; the Coalition for Customs Modernization, New York, New York

        The Coalition for Customs Modernization was created in July 1998 by
    New York and New Jersey industry leaders to raise regional and national
    awareness of the critical possibility of a computer breakdown and the
    need for immediate funding for a new system to replace the current
    system. A collapse of this system would affect every segment of the
    U.S. economy and jeopardize drug interdiction efforts throughout the
    country as well as the flow of goods and raw materials in and out of
    the country.
        Presently the Automated Commercial System (ACS) Customs computer
    system is over 14 years old and requires continued funding to maintain
    its current operation. In the past 14 years international trade has
    grown exponentially and ACS is handling over 95 per cent of all Customs
    transactions and is operating at well beyond its design capacity. As a
    result, the system is subject to failures such as happened last
    September 14 costing the Government a $60 million delay in revenue
    collections. Again, on October 1, the system failed and blocked the
    flow of $2.2 billion worth of goods into the national economy. It is
    evident that a new and larger system is an absolute must and that the
    current system, ACS, must be funded until the new system Automated
    Commercial Environment (ACE) is in place.
        The above financial impact was the result of just a few hours
    delay. Should there be a system breakdown of a catastrophic nature, the
    effect on the nation's industrial base would be even more devastating.
    Almost every industry in this country relies either directly or
    indirectly on the importing of raw or finished materials or the export
    of the products it produces. Every segment of the nation's economy
    would be affected by a Customs computer failure. The most immediate
    effects would be on the nation's air and seaports. Passengers would be
    substantially delayed at airports awaiting Customs clearance. Likewise
    air cargo shipments, by nature high value and very time sensitive,
    would also be substantially delayed at the airports. Within a week of a
    computer failure, ocean cargo necessary to our daily lives and long-
    term production would sit on vessels and even cargo on those vessels
    able to divert to Canada or Mexico would fare no better as border
    crossings would not be able to function. The nation's ports would be
    clogged with export/import cargo with resultant rail and highway
    congestion beyond belief. Ships arriving from foreign ports would be
    unable to neither unload their import cargoes nor would they be able to
    load their export cargo thus delaying shipping worldwide. To avoid the
    dire consequences of a Customs computer failure, funding must be
    provided immediately.
        Equally important, a system breakdown will severely handicap
    crucial drug interdiction efforts. Significant progress has been made
    in this area; however, a system collapse may open the drug trafficking
    floodgates. Ultimately, a prolonged disruption of the system would
    affect the economic well-being, safety, and security of every man,
    woman and child in the country. To date the crucial national
    significance of this issue has not received the attention it warrants.
    The endless rhetoric on funding and technology should cease and in its
    place a unified public/private partnership should be formed to rapidly
    address the issue while there is still time to avert this impending
    crisis.
        The $1.2 billion funding to develop and implement the Automated
    Commercial Environment (ACE) must be appropriated immediately. Each
    year U.S. industry pays over $22 billion in duties to the United States
    Customs Service to be deposited in the United States Treasury.
    Importers have been paying user fees for over 10 years for technology
    improvements, yet these funds have not been disbursed for use by
    Customs in its operations. Because of the importance of international
    trade to the nation's economy, trade, security and public health and
    safety, averting a major Customs computer collapse by immediately
    funding a new computer system for Customs should be viewed as a
    critical national priority.
        Clearly, the Federal Government has an obligation to ensure that
    not only is there an adequate system to collect these funds, but also
    that an impending system breakdown, with catastrophic consequences to
    the national economy and drug interdiction efforts, be immediately
    averted.
        We respectfully request that you take immediate action to fund this
    critically important and necessary function of the Federal Government.

    Statement of James J. Havelka, KPMG LLP

        KPMG's Assessment of U.S. Customs Service efforts associated with
    Customs Modernization and Automated Commercial Environment (ACE) Cost
    Estimating

                                   Background

        Chairman Crane and Members of the subcommittee, I am Jim Havelka, a
    principal in KPMG LLP's Public Services practice based in our
    Washington D.C. office. I am the firm's senior representative
    responsible for our efforts within the U.S. Customs Service. KPMG is
    providing this Statement of Record as testimony to the Committee on
    Ways And Means to be used while preparing fiscal year (FY) 2000 and
    2001 budget authorizations. KPMG LLP is one of the world's largest and
    most diversified professional firms, with more than 92,700
    professionals in 157 countries and annual revenues in excess of $10.4
    billion. KPMG's Public Services practice, where I am engaged, employs
    more than 2,300 people and operates in over 90 geographic locations
    throughout the United States. The Public Services line of business is
    dedicated to serving the diverse needs of federal, state, and local
    governments.
        Because of the extensive level of experience that KPMG has
    throughout the public services sector, the U.S. Customs Service has
    engaged our services under federal contract. We are tasked to provide
    advisory services to the Assistant Commissioner, Chief Information
    Officer (CIO) of U.S. Customs Service (Customs) and perform a number of
    Customs Modernization specific review tasks.
        Between November 17, 1998 and continuing through the date of this
    Statement of Record, we conducted an assessment of the approaches and
    methodologies used to develop Customs Modernization budget estimates.
    It is important to emphasize from the onset that KPMG conducted an
    independent review and not an audit. By its very nature, this review
    was intended to provide Customs with a ``snapshot'' look at the
    progress the Office of Information Technology (OIT) was making with
    respect to estimating costs associated with modernizing their automated
    systems.
        The scope of KPMG's efforts is limited to the following tasks:
        1. Conducting an assessment of the approaches and methodologies
    used by Customs in developing life cycle costs associated with Customs
    Modernization.
        2. Reviewing and providing comments on the Automated Commercial
    Environment (ACE) Budget Estimate, dated January 29, 1999, revised
    February 23, 1999.
        3. Reviewing and providing comments on the Automated Commercial
    Environment (ACE) Cost Benefit Analysis (CBA), dated March 12, 1999.
        Again, it is important to note that KPMG did not perform an audit
    of the estimates nor validate the values presented in the documents or
    the source data. In all tasks, KPMG was asked to provide an assessment
    as to the appropriateness, reasonableness, and soundness of Customs
    efforts. KPMG evaluated available artifacts and interviewed Customs and
    Contractor personnel associated with the development of Customs
    Modernization cost estimates. KPMG forwarded gaps and issues identified
    during our review to Customs. Customs, in turn, has closed, or is
    currently responding to these gaps and issues. Additionally, KPMG
    provided recommendations to Customs to assist them in developing a
    modernization roadmap.

                              Testimonial Details

        An outside contractor working in conjunction with Customs developed
    the ACE Budget Estimate. Although the Budget Estimate document is
    limited to the ACE program, it will become part of a larger series of
    documents that when completed, will form a roadmap for Customs
    Modernization. KPMG reviewed the document with the focus of identifying
    areas that contained inaccuracies, inappropriate methodologies, or
    where additional analysis might be necessary.
        KPMG also reviewed the ACE Budget Estimate document for its overall
    value to Customs moving forward with their modernization plans. This
    included reviewing recent General Accounting Office (GAO) reports and
    evaluating the effectiveness of the document to satisfy or resolve
    GAO's issues.

    Overall Observations

        Customs has performed a large amount of work in developing the
    modernization cost estimates. While some of the information may seem
    unorganized on the surface and not easily traceable, through
    information provided during the interviews, we were able to map the
    detailed components to the rolled-up modernization estimates.
    Assessments of the individual components of the Customs Modernization
    effort that were reviewed during our engagement are as follows:

    ACE Application Software Development

        Customs, with the support of a Contractor, used reasonable
    methodologies in developing ACE software development budget estimates.
    Customs used three different estimating techniques to extrapolate
    historical data, averaging the results to establish a point estimate.
    Although there are some minor issues, the three methodologies
    demonstrated a comprehensive approach by using historical data gained
    from previous experience as well as accounting for areas of risk. While
    ACE is in its infancy and discrete functional requirements have not yet
    been fully defined, we feel Customs has taken appropriate steps in
    preparing the ACE software estimate.

    Automated Commercial System (ACS) Software Maintenance

        Customs drew upon an experienced Contractor's estimate and
    incorporated historical data to develop the ACS Software Maintenance
    cost estimates. While there may be some areas where an apparent
    methodology could not be identified and only results were presented,
    the ACS estimates seem appropriate if the ACE program is fully
    developed. If ACE is not fully developed, additional costs may be
    incurred to keep ACS up to date with evolving Trade policies and
    procedures.

    Infrastructure

        One of the major cost drivers Customs is planning for is
    Infrastructure. A majority of this cost area is equipment and
    telecommunications that are required for both sustaining ACS operations
    and preparing the operational environment for ACE. As an aggregated
    cost area, Customs appears to have fully examined the breadth of
    possible costs. However, due to the Infrastructure being ``shared`',
    Customs has had some difficulty in apportioning this cost across the
    different programs. While there are some elements of the infrastructure
    yet to be finalized, KPMG feels that Customs estimate, as an aggregate
    for the infrastructure is appropriate at this time.

    ACE Cost-Benefit Analysis

        KPMG is currently reviewing the ACE Cost Benefit Analysis. Upon
    initial review, the document appears to follow a comprehensive
    approach, which addresses some of the previously mentioned minor
    issues.

    Summary

        Customs has had some difficulty in identifying and developing an
    effective and complete presentation format capable of satisfying a
    diverse audience. Additionally, Customs does not appear to have
    adequate personnel resources to effectively plan and manage a program
    with the magnitude of ACE. However, it does appear Customs has the
    information building blocks necessary to prepare a comprehensive ACE
    budget estimate and begin to develop a modernization blueprint for
    Customs.
        KPMG feels that in whole, Customs approach to developing cost
    estimates are mostly sound and appropriate. The few exceptions should
    be considered minor and should be reevaluated as the modernization
    program matures. As an aggregate program, Customs seems to have applied
    reasonable methodologies to develop thorough modernization cost
    estimates.
        We appreciate the opportunity to provide this Statement of Record
    as testimony during the House Ways and Means Committee, Subcommittee on
    Trade hearings relative to budget authorization for Customs.

    Statement of Maritime Exchange for the Delaware River and Bay, Lewis,
    Delaware

        The Maritime Exchange for the Delaware River and Bay is a non-
    profit trade association and represents the interests of approximately
    300 businesses which depend upon the economic health of the Delaware
    River port complex, which encompasses the states of Pennsylvania, New
    Jersey and Delaware. Established in 1872, the Exchange's mission is to
    promote and protect Delaware River port commerce.
        There are several vehicles we utilize to achieve that mission,
    foremost among which is our port-wide community information system. In
    its role as the ``electronic information hub,'' the Exchange operates a
    comprehensive automation system which tracks ships and barges and their
    cargoes. This data is provided to the Coast Guard, Immigration Service,
    USDA, and U.S. Customs. The Maritime Exchange developed its TRACS
    system, which is certified on the U.S. Customs Automated Commercial
    System (ACS) since 1989. Over 40 businesses throughout the tri-state
    port business community use TRACS to clear cargo electronically with
    Customs on a daily basis.
        The Maritime Exchanges port automation network is as integral a
    part of our port's infrastructure as are the cranes and warehouses. In
    total, nearly 200 companies operating at Delaware River ports depend on
    these systems to make day-to-day operational decisions and for long-
    term strategic planning purposes. The availability of electronic
    information has become an increasingly important component of our port
    community's competitiveness.
        As a result, when any one of the components of this network is not
    functioning properly, it affects not only the performance of our entire
    system, but also the daily operation of our port.

                               Customs Automation

        The delays in Customs ability to process cargo manifests and entry
    data over the last several months have resulted in significant delays
    in processing the cargo itself. These delays in turn result in
    significant costs to our port customers--and to their customers as
    well. Particularly at Delaware River ports, where one of the key
    cargoes handled includes time-sensitive perishable fruit products,
    delays in data processing which keep handlers from moving the goods in
    a timely manner can indeed result in the complete loss of entire
    shipments. Someone must absorb that cost. Other costs associated with
    system-related delays include increased storage expenses, lost time
    spent in monitoring and communicating--and miscommunicating--status,
    backups at the terminal when cargo cannot be transferred to an inland
    carrier, and an inability to meet just in time inventory orders.
        According to one of our members, the issue can be very simply
    stated: in handling general cargoes, each hour is precious and each
    hour wasted in idle is costly. With perishables such as fruit, each
    minute is precious. Industry simply cannot afford these continual and
    ongoing delays.
        The Maritime Exchange has long supported federal agency automation
    initiatives. We worked hard in the early 1990s to support the passage
    of the Customs Modernization and Informed Compliance Act. Subsequent to
    its enactment, we have dedicated both financial and human resources to
    working with Customs and other government agencies to ensure the system
    meets its users' needs. We have also worked closely with the local
    offices of Customs, Coast Guard, Immigration, USDA, the Corps of
    Engineers and others to identify opportunities to streamline
    operations, promote safety, and facilitate commerce through technology.
        We don't believe that anyone at this point is arguing against
    enhancing the existing ACS. The question now facing us is how will the
    new system perform?
        Shortly after the passage of the Mod Act in late 1993, Customs
    determined that rather than expend resources improving ACS, a more
    efficient approach would be to completely redesign a system which would
    mirror processes, rather than simply automating forms. The Automated
    Commercial Environment (ACE) would be the means to accomplish this
    objective. The Maritime Exchange and many other Customs constituents
    not only approved of this decision but offered to help in the design
    and development processes. These organizations which came together as
    the ACE Trade Support Network (TSN), including the Maritime Exchange,
    have spent, and continue to spend, a great deal of time and energy on
    this project.
        In August of 1998 the ACE team presented a design and cost concept
    document for the new system to the TSN for review. Consistent with
    Customs ACS development philosophy, the ACE Team wanted to ensure its
    industry partners had the ability to comment on the design process and
    make suggestions for change if appropriate.
        This is, however, where the process fell apart. At that time,
    looking ahead to FY '99 budget appropriations, Customs needed industry
    to support the proposal. Time, of course, was of the essence. Yet
    industry was reluctant to provide and communicate that support until
    Customs answered two key questions: (1) What is the detail behind the
    cost estimate? and (2) Are all those individual steps necessary--and in
    that order--to accomplish our goal? It is our understanding Congress
    has asked the same or similar questions.
        Although Customs has been somewhat responsive to our inquiries, the
    members of the TSN have not yet received all the answers. However,
    given our past history with Customs, we are confident that they will be
    satisfactory.
        In the interim, however, we've watched the existing system degrade
    severely and the reality is we cannot afford to wait any longer. Our
    entire international trade industry is in jeopardy.
        Both individually and as a member of the newly-formed Coalition for
    Customs Automation Funding, the Maritime Exchange strongly supports the
    U.S. Customs ACE system and encourages its immediate and full funding,
    including dollars to keep the existing ACS operational. We do not mean
    to suggest that Customs should be given free reign over the
    appropriated dollars; on the contrary, we expect both the federal
    watchdogs and the private business community to be vigilant in their
    oversight of Customs' activities. Yet Customs must be allocated the
    necessary resources to provide service to its primary constituency--the
    importers, exporters and other cargo carriers and handlers who drive
    our global marketplace.
        The Maritime Exchange does not support the implementation of user
    fees to support these activities. The U.S. international trade
    community is already funding Customs activities through the payment of
    taxes, duties, and fees--including the merchandise processing fee,
    which has contributed approximately $800 million to the general
    treasury over the last 10 years. These funds should be used to fund
    this critically needed system.
        Business has further demonstrated its financial commitment by
    investing billions of dollars in the development of the systems, such
    as TRACS, that are used to communicate with the Customs system. By
    adding a new user fee to fund automation initiatives, the private
    business community would, in essence, be paying for both halves of a
    system--through three separate vehicles--that benefits every one of our
    nation's citizens. This is an unfair burden.

                        International Trade Data System

        Given that the Exchange has gone on record in support of ACE, which
    includes automation for certain Other Government Agency interfaces,
    such as USDA, INS, DOT and others, it may appear illogical to also
    support the ITDS. Yet we do.
        It is not necessarily ``the'' ITDS but ``an'' ITDS which would be
    of tremendous benefit to the port business communities throughout our
    country. It is the concept we wholeheartedly endorse.
        With an ITDS, the commercial maritime industry would have the
    opportunity to take advantage of technologies in a way that will
    provide demonstrable efficiencies in terms of our providing commercial
    trade data to the federal government and to our other partners in the
    transportation chain. As we have learned from our experience in
    building our own network, centralizing and unifying data processing and
    distribution--as ITDS seeks to do--significantly saves time and paper
    costs, reduces errors, and expedites the flow of information.
    Centralized databases also greatly reduce programming, communications,
    and technical support costs. And, the ITDS plan to utilize world-wide
    Internet standards as a communications option is undoubtedly the
    correct approach.
        In short, the current international trade environment demands new
    logic with regard to data exchange. The existing systems are antiquated
    and must be replaced. New systems which capitalize on technologies must
    be implemented.
        We are willing to support the existing ITDS as it has been
    proposed, subject to the following caveats:
         ITDS must to work with other agencies who may already be
    operating/developing systems to ensure the federal government avoids
    duplicative costs
         ITDS must ensure that all communications between industry
    and the government are in fact centralized and that there are options;
    multiple connectivity requirements, as may be necessary under the
    current plan, are inefficient and unnecessarily expensive.
         ITDS must provide options. Allowing only one file format
    type or one communications interface does not allow for the unique
    nature of the various industry business types.
         ITDS must involve industry during the development/
    implementation process.

                                    Summary

        The Maritime Exchange absolutely opposes the development of
    multiple, redundant federal agency automation systems.
        We believe the federal government must keep pace with its industry
    partners. Many agencies have no electronic interface with the private
    sector; and for those which do, the existing systems will not meet our
    business needs going into the next century.
        ACE works because Customs abilities and methodologies are proven;
    we have a system which, while perhaps not complete with regard to the
    automation of all Customs processes, has served us well since the early
    1980s. ACE will encompass the full array of data reporting requirements
    for Customs.
        ITDS works because the individual agency approach can only hamper
    our ability to make the best use of our resources. Not only does this
    government insufficiency devalue our own investments, it also greatly
    hampers our to ability service our customers. However, ITDS as proposed
    is not as comprehensive as it needs to be; the system will not meet the
    full international trade data reporting requirements.
        It is our view that the federal government must take the best
    components of ACE and ITDS and merge them into one comprehensive U.S.
    import/export data processing and distribution system.

    Statement of Karen Sager, President, National Association of
    Foreign-Trade Zones

        Mr. Chairman and Members of the Subcommittee: On behalf of the
    National Association of Foreign-Trade Zones, I thank you for the
    opportunity to present this statement for the record to the
    Subcommittee hearing on U.S. Customs Service issues. My name is Karen
    Sager. I am the President of the National Association of Foreign-Trade
    Zones.
        The NAFTZ is a nonprofit trade association representing over 700
    members, including grantees, operators, users and service providers of
    U.S. foreign-trade zones. Today there are more than 200 approved zone
    projects located in 50 states and Puerto Rico. The total value of
    merchandise received at foreign-trade zones annually is approximately
    one hundred eighty billion dollars. The total value of merchandise
    exported from foreign-trade zones is approximately seventeen billion
    dollars. Over 2,900 firms utilize foreign-trade zones and employment at
    facilities operating under FTZ status exceeds 367,000. The NAFTZ
    provides education and leadership in the use of the FTZ program to
    generate U.S.-based economic activity by enhancing global
    competitiveness.
        The growth in the number of zone projects throughout the United
    States and the increased use of those projects by U.S.-based companies
    is a strong indication of how important participation in the
    international marketplace has become to the U.S. economy. A key to the
    success of those endeavors is the ability to move merchandise quickly
    and cost effectively with a reasonable degree of predictability.
    Critical to that movement is the processing of merchandise by U.S.
    Customs.
        The Customs Modernization and Informed Compliance Act, commonly
    referred to as the ``Mod Act,'' was passed in November 1993 to give the
    U.S. Customs Service the tools that it needed to streamline and
    automate its commercial operations. There were two major elements to
    Customs' ``modernization'' efforts--the revision of the regulations
    themselves to eliminate obsolete or unnecessary procedures and
    requirements and the development and implementation of the systems
    needed to support the revised regulations that now govern the movement
    of merchandise across U.S. borders.
        Customs has made significant progress in rewriting and revising its
    regulations to incorporate the changes envisioned in the Mod Act. To
    their credit, Customs has involved the trade community in their efforts
    in order to develop regulations that address both the needs of Customs
    to ensure compliance and the needs of trade to be able to move their
    merchandise smoothly, efficiently and predictably. The trade community
    has responded with increased compliance and by developing their systems
    and procedures to address Customs requirements. It is now time for
    Customs to be given the resources to develop and implement their own
    systems to realize the full benefits envisioned in the Mod Act.
    Customs' current system, the Automated Commercial System (ACS) is a 15
    year old system that is now operating at 90%+ of its capacity. There
    have been several instances of system ``brownouts'' and failures that
    have impacted the movement of critically needed merchandise to U.S.
    based production facilities causing production slowdowns with a
    potential loss of employee earnings. It is only a matter of time before
    ACS experiences a prolonged shutdown with the potential for a severe
    negative impact on the U.S. economy.
        The U.S. Customs Service has been working with the trade community
    to develop a replacement system for ACS. Their efforts to date have
    come under a great deal of criticism principally for a lack of cost
    accountability and a lack of written plans for development, evaluation,
    implementation and ongoing monitoring for their proposal. While the
    NAFTZ agrees that these weaknesses must be addressed, the international
    trade community cannot afford to wait much longer for the unveiling of
    a ``perfect'' system. Customs' proposed system, the Automated
    Commercial Environment (ACE), in conjunction with the International
    Trade Data System (ITDS), successfully addresses many of the processes
    and procedures needed to implement the full benefits of the Mod Act.
    Rather than waste all the time, effort and resources expended to date
    by both Customs and the trade community on the development of ACE, the
    NAFTZ urges Congress to support the appropriation and release of the
    funding required to address the identified weaknesses in ACE so that a
    new Customs automation system can be developed and implemented within
    four years. Oversight by Congress, with continued input from the trade
    community, should be a condition of the appropriation and release of
    these funds.
        In the President's proposed FY2000 budget, there is a request for a
    new user fee to fund Customs' automation. The proposed user fee is in
    addition to the current merchandise processing fee (MPF) which was
    established to offset the cost of commercial operations. We object to
    this proposal for two reasons. First, the NAFTZ believes that given the
    amount of money paid to date in addition to the ongoing payments
    currently being paid by the importing community through the MPF this
    fund alone should be more than adequate to cover Customs' cost of
    automation. More importantly, the underlying basis of this proposed
    user fee shares the same problems inherent in the current merchandise
    processing fee assessment.
        The current MPF is assessed on an entry by entry basis. Simply put,
    if Customs processes more entries, more MPF is collected. Customs
    defines what constitutes an entry. Therefore, if Customs wants to
    collect more revenue, it can cause more entries to be processed. This
    becomes a disincentive to the implementation of modernization measures
    designed to increase productivity and maximize efficiency.
        In addition, the MPF as it currently exists lacks cost
    accountability. The MPF collected is directed to the General Fund
    rather than being dedicated to the cost of Customs commercial
    processing. Further, there is no cost-basis accounting system to ensure
    that there is a correlation between the actual cost of the service and
    the fee collected. This type of approach to assessing user fees is
    subject to challenge by members of the World Trade Organization (WTO).
    Under WTO guidelines, user fees assessed on international goods must be
    justified by the cost of the services provided for that fee. Since
    there is no cost accounting system in place, Customs is not only unable
    to justify any additional user fees, it cannot cost justify the fee
    that is currently being assessed on importers today.
        Within the foreign-trade zone program, we have experienced the
    effects of this type of user fee assessment first hand. The
    implementation of a weekly entry procedure for non-manufacturing zones,
    although deemed an operational success by Customs following a 3-year
    pilot, has been delayed for two years because it would result in the
    processing of fewer entries, thus potentially reducing the collection
    of MPF. The NAFTZ believes that reducing the frequency of entries
    processed for the same merchandise from one per shipment to one per
    week must provide Customs with opportunities to improve its operational
    efficiency thus decreasing its cost of operation. Because Customs has
    no cost accounting system in place for its commercial operations, it
    has not been able to assess the true financial impact of implementing a
    weekly entry procedure. Therefore, Customs has chosen to forego the
    potential operational efficiencies afforded by weekly entry simply
    because individual entries generate more MPF than a weekly entry. This
    basis for decision making appears to be contrary to the Customs
    environment envisioned when the Mod Act was passed in 1993. It also
    gives support to the argument that the MPF is not a user fee dictated
    by costs but rather a tax placed on imports which is contrary to WTO
    guidelines.
        In summary, the National Association of Foreign-Trade Zones (NAFTZ)
    urges Congress to appropriate adequate funding to allow the U.S.
    Customs Service to correct the weaknesses identified in the proposed
    Automated Commercial Environment (ACE) and to move forward with the
    final development and implementation of this new system in conjunction
    with ITDS. We believe that because automation is an integral part of
    Customs' commercial operations, the merchandise processing fee
    currently being collected from importers should be used for this
    funding. The NAFTZ also believes that the time has come for Congress to
    reexamine and restructure the basis for the assessment of the
    merchandise processing fee so that the MPF collected is not dependent
    upon the number of entries processed by Customs. Instead, it must be
    based on what Customs needs to effectively fulfill its dual missions of
    trade facilitation and enforcement within its commercial operations.
    Until this cost justification is in place, the user fees imposed on
    imports could be subject to challenge by our trading partners under WTO
    guidelines as a tax rather than a fee charged for a service provided.
        Thank you for the opportunity to comment on these important issues.

    Statement of the Science Applications International Corporation,
    Vienna, Virginia

                                1. Introduction

        Science Applications International Corporation (SAIC) was engaged
    by the United States Customs Service (USCS) to conduct a cost benefit/
    cost effective analysis of trade management system alternatives. The
    system alternatives under consideration will satisfy legislative
    requirements and serve the trade by better accommodating the steadily
    growing volume of entries that cross the nation's borders. For several
    years SAIC has provided technical support and more recently financial
    and capital budgeting analysis to the Department of the Treasury and
    USCS. SAIC is pleased to submit this written testimony which summarizes
    the preliminary findings of the Automated Commercial Environment (ACE)
    cost benefit/cost effectiveness analysis conducted for USCS.
        SAIC is the nation's largest employee-owned research and
    engineering company, providing information technology and systems
    integration products and services to government and commercial
    customers. SAIC scientists and engineers work to solve complex
    technical problems in telecommunications, national security, health
    care, transportation, energy and the environment. With estimated annual
    revenues in excess of $4 billion, SAIC and its subsidiaries, including
    Telcordia Technologies, have more than 35,000 employees at offices in
    more than 150 cities worldwide. More information about SAIC can be
    found on the Internet at SAIC (www.saic.com). Information about
    Telcordia Technologies is available at Telcordia Technologies
    (www.telcordia.com).
        Questions and/or comments regarding this testimony may be directed
    to Mr. Peter W. Engel at 703-905-6205 or peter.w.engel@cpmx.saic.com.

    1.1 Background

        USCS modernization and automation initiatives began over fifteen
    years ago, and since then, the benefits of automation have been
    overwhelmingly demonstrated. While activity levels at ports of entry
    have increased threefold over that time period, automated systems have
    allowed the USCS to accommodate this growth while maintaining steady
    staffing levels. At the same time, USCS has maintained a high level of
    compliance and enforcement while providing quality service to the trade
    community. Over the course of the past decade, pressure on the USCS IT
    infrastructure has intensified. Increasing demands placed on the
    current Automated Commercial System (ACS) by USCS, other government
    agencies, and the trade community have necessitated improvements to
    system capacity and functionality. ACS is currently operating at over
    90% capacity causing serious delays that ripple through Customs and the
    trade community. However, as the volume of entries expands with a
    fairly static USCS workforce and a straining IT system, there will
    likely be some impact on enforcement and regulatory compliance. As a
    result the USCS is engaged in a vigorous initiative to identify the
    tool, or tools, that will optimize the Custom Service's ability to
    ensure a high level of compliance and enforcement while providing
    quality service to the trade community. The cost benefit/cost
    effectiveness analysis summarized in this testimony is one part of that
    USCS initiative.

    1.2 Purpose

        There is little question that legislative requirements and growing
    trade volume necessitate a long-term IT solution supported by advanced
    business processes. This analysis evaluates the question of whether the
    ACE, or an enhanced ACS, is the most cost-effective long-term solution
    to meet those legislative and business process requirements.
        The financial analysis provides:
         A structured, analytical methodology with a solid
    framework for future financial analyses;
         A preliminary life-cycle cost estimate for developing the
    ACE System;
         A preliminary life-cycle cost estimate for developing a
    Base Case ACS;
         Information regarding the benefits and weaknesses of each
    I/T alternative; and
         Information regarding the effect of differing deployment
    schedules on cost and benefits.

                                  2. Approach

    2.1 General Assumptions

        The option of enhancing ACS to meet legislative requirements versus
    replacing it with a new system presents unique challenges. First, to
    comply with General Accounting Office (GAO) and U.S. Treasury system
    development guidelines, the full functionality of the ACS system must
    be documented and this may require 2 years to accomplish. This
    documentation period creates costs and delays and, for a period of
    time, may inhibit USCS's ability to reap benefits from further
    automation. Second, a reconfigured ACS would be expected to have some
    cost advantages over ACE to the extent that it could leverage off of an
    existing infrastructure (i.e., data center). Thus, the principal risk
    drivers in the analysis are when ACS would achieve legislative
    conformity and, ACS and ACE software programming costs.
        The ACS and ACE alternatives were assumed to have an operational
    system life cycle of no less than 15 years. For purposes of this
    analysis, a common number of years no less than 15 plus the development
    period are required to evaluate each alternative against the enhanced
    ACS base case. Therefore the period of analysis encompasses 22 years
    spanning fiscal years 2000 through 2021. It was further assumed that
    the reconfigured ACS and either of the ACE alternatives will encompass
    the functionality identified in legislative requirements and intent.
        Given these characteristics, a preliminary timing profile has been
    established for a reconfigured ACS that would process 100% of the
    transactions with full functionality 9 years following the
    reconfiguration initiation date. ACS must be reconfigured in order to
    meet legislative requirements and intent, as well as the reliability
    and functionality desired by both USCS and the trade community. By
    comparison, two alternative ACE deployment strategies were considered.
    The first ACE alternative deploys the technology in 4 years and
    provides a further 18 years of operational capability (4 Year ACE). The
    second ACE alternative extends the deployment schedule to 7 years and
    provides a further 15 years of operational capability (7 Year ACE).
        Based on these general assumptions, a reconfigured ACS would
    functionally operate similar to the ACE alternatives. The exception
    would be that ACS would retain some elements of a legacy system and, as
    such, may lack compatibility with advances being made in the trade
    community and with information technology advances in general.
        It is further assumed that software development estimates will
    contain relatively large risk levels given the magnitude of the
    project's scope, lifecycle and stage of requirements definition.
        This analysis and methodology relies upon Office of Management and
    Budget (OMB) Circular A-94 guidelines pertaining to the application of
    cost-effectiveness and cost-benefit analysis.

    2.2 Methodology

        Two ACE alternatives were compared to an ACS system that has been
    enhanced to meet legislative requirements and intent. In doing so,
    alternative systems with identical functionality that comply with
    statute and regulation are assessed.
        In selecting the superior financial investment, a cost
    effectiveness analysis (CEA) rather than a cost-benefit analysis (CBA)
    is applied. A cost-effectiveness analysis asks, ``What is the least
    costly approach to attaining a given objective?'' Here the stated
    objective is full conformance with all legislative requirements and
    program goals. The cost-effectiveness analysis is typically employed
    when benefits are difficult to quantify and objectives are clearly
    defined by policy or legislative initiatives. It is also more likely to
    be employed when there are budget limitations in a public sector
    environment.
        A cost-benefit analysis asks a more broadly defined question:
    ``Which project maximizes the difference between discounted benefits
    and costs?'' The cost-benefit analysis focuses more on broader resource
    allocation questions when benefits are clearly defined and measurable.
        Because all alternatives share a common legislative and business
    process objective, the comparative basis is one of cost effectiveness.
    However, differential benefits will accrue to that alternative which
    first achieves the objective. As a result, this study expands the scope
    of the cost-effectiveness analysis to identify benefit categories and
    calculate the marginal benefits of each ACE alternative relative to the
    reconfigured ACS Base Case. Therefore, for an ACE alternative to be
    financially attractive either of the ACE alternatives must demonstrate
    net benefits which exceed the net benefits of a reconfigured ACS.
    Because ACS is the Base Case, ACE costs and benefits are stated as
    negative or positive marginal values, relative to ACS Base Case.
        The CEA evaluates three costs categories: Infrastructure; Data
    Center; and
    Software Development. Infrastructure costs reflect equipment upgrades
    and telecommunication charges used at port and Customs Service Center
    locations throughout the nation. Data Center costs include mainframe
    upgrades, network management, UNIX upgrades, voice communications,
    database, server operations and system security expenditures made at
    the Newington Data Center located in Virginia.
        Software development costs typically carry greater estimation risk
    because code reuse rates and other variables are difficult to gauge,
    especially for a system in the functional requirements definition
    stage. As a result, for both ACE alternatives, three separate software
    estimation techniques are applied: A business complexity analysis; a
    parametric analysis; and a function point analysis. In the absence of
    an ACS software reconfiguration estimate the ACE 7-Year software
    estimate was applied as a proxy to the ACS system. Future analysis will
    refine the ACS software estimate.
        As part of the CEA, the sources of uncertainty surrounding input
    assumptions were evaluated. In particular, the study provided
    probability ranges for key input assumptions and probabilistic
    representations for key outputs, including life-cycle costs. These
    formed the basis for a risk analysis in which the underlying
    uncertainty in key inputs was assessed.

                            3. Preliminary Findings

        Preliminary results show common Data Center and infrastructure
    costs with both ACE alternatives (4-Year ACE and 7-Year ACE) and the
    ACS Base Case. This is true of most infrastructure costs associated
    with deploying hardware to ports of entry. The ACS Base Case is less
    costly in terms of data center applications but also requires some
    level of documentation and incurs downtime costs that are not present
    in ACE. Overall, preliminary estimates show ACS Base Case
    infrastructure costs to be somewhat less than either ACE alternative.
        Software development costs are more expensive with the 4-Year ACE
    alternative than the 7-Year option. This is, in part, attributable to
    the compressed schedule in which the effort must be accomplished. The
    7-Year software estimate was applied to the ACS Base Case as a proxy
    measure for the effort necessary to make the legacy system conform with
    legislation and achieve the same functionality inherent in the ACE
    alternatives.
        The preliminary analysis shows very strongly that results are
    sensitive to the timing of the investment and development decisions. If
    selected, an ACS redesign solution could delay achieving full
    functionality by as much as 2 years. This 2-year delay would result in
    significantly less revenue collection by USCS. Even though the ACS Base
    Case lifecycle costs are less, the revenue loss would diminish the cost
    advantage.
        The primary sources of uncertainty in this analysis are timing and
    software programming costs. If ACS documentation results in a two year
    implementation delay, full functionality would not be achieved for
    approximately 9 years. In contrast, ACE alternatives would achieve
    functionality within 4 or 7 years depending upon the alternative.
        It is important to note that the CEA is a financial decision tool,
    not a budget tool. As such, a common time horizon of 22 years is
    necessary to evaluate both ACE alternatives against the ACS Base Case.
    Once an alternative is selected, a budget can be formulated for the
    chosen alternative's development period and 15 year operational life.
        The figure below demonstrates that while ACE lifecycle costs exceed
    those of the ACS Base Case, the ACS documentation delay results in
    benefits accruing to both ACE alternatives. Preliminary results
    indicate that over the 22 year analytical timeframe, the 4-Year ACE
    alternative will cost $555 million more than the reconfigured ACS Base
    Case, and the 7-Year ACE alternative will cost $72 million more. During
    the same time period, the 4-Year ACE alternative will yield $567
    million more in benefits than the ACS Base Case, while the 7-Year ACE
    alternative will capture $286 million more in marginal benefits. When
    marginal costs are subtracted from marginal benefits, both ACE
    alternatives show a positive net present value relative to the
    reconfigured ACS Base Case. The 4-Year ACE alternative has a relative
    net benefit of $12 million and the 7-Year ACE alternative a comparative
    $214 million net benefit. Note these estimates are preliminary.
    [GRAPHIC] [TIFF OMITTED] T6895.002

        In addition to the internal financial analysis, SAIC interviewed or
    reviewed written responses from approximately 35 members of the trade
    community and identified three principal themes:
        1. Customs is part of a larger logistics chain that is being
    modernized at each stage;
        2. The current ACS system should be replaced as soon as possible;
    and
        3. Trade community savings from a new system are difficult to
    quantify, but are expected to be significant.
        The first theme is that importers, brokers, manufacturers,
    carriers, and insurers view USCS as one part of the overall logistics
    chain and they want to modernize their systems to ensure that USCS is
    not an impediment to their business. Many companies are waiting for a
    new Customs system so they can complete this modernization, while other
    companies are in the midst of modernizing and need to know how they
    will link to Customs. The community believes that the way of conducting
    international trade has changed forever and Customs must become part of
    the modernized trade process.
        The second theme is that the current system must be replaced as
    soon as possible. The slowdowns and occasional system downtime have
    been enough to make system users aware of how bad things will be if the
    system fails completely. Therefore, the trade favors a system that
    achieves functionality sooner than later.
        Finally, the third theme is that the trade community is not able to
    provide specific estimates of savings because ACE has not been fully
    defined to allow them to make those estimates. Some functionality that
    has been articulated, such as remote location filing and periodic entry
    summary payment, has been enthusiastically endorsed. Those changes are
    enough for the trade to conclude that there will be significant savings
    when an alternate system is implemented.
        Thus on a preliminary basis, the analysis supports both ACE
    alternatives and recognizes that the growing ACS system capacity
    constraints will likely impede the trade community's ability to achieve
    logistic efficiencies and Customs ability to fully accomplish its
    mission.

                     4. General Accounting Office Comments

        The GAO recently provided feedback pertaining to a financial
    analysis conducted for USCS prior to SAIC involvement. SAIC, in
    conjunction with USCS, has and is responding to those suggestions.
    Namely, sources of risk and uncertainty along with range estimates are
    included in the financial analysis; a repeatable, sound methodology is
    established and executed; multiple alternatives are accessed; and more
    than one software estimation technique is applied. SAIC and Customs are
    currently conducting an incremental analysis to establish the financial
    feasibility of the first phase of functional design and development.

                                   Conclusion

        Increasing trade volumes continue to place pressure on Customs
    staff and information technology (IT) resources. Over the past 14
    years, import trade activity has increased at an average annual rate of
    8.28%. ACS is currently operating at over 90% capacity causing serious
    delays that ripple through Customs and the trade community.
    Understandably, capacity problems and projections of continued growth
    in activity levels have caused serious concerns. In response to these
    concerns, Customs has been intensively investigating the feasibility of
    the ACE system through ongoing requirements analysis, cost estimation
    efforts, and system benefits assessments.
        Preliminary results indicate that both the 4-Year and 7-Year ACE
    alternatives show a positive net present value. The principal risk
    drivers in the analysis are when ACS would achieve legislative
    conformity and ACS and ACE software programming costs.
        Based upon interviews and survey responses, the trade community
    views Customs as a link in the overall logistics chain that must be
    modernized. While many companies are waiting for a new Customs system
    so they can complete their efforts, others are in the process of
    modernizing but need to know how they will link to a new Customs
    system. The interviews and responses also indicate that the current ACS
    system must be replaced as soon as possible given the effects downtimes
    and system slowdowns have upon commercial activities. The trade
    community also noted that while savings from a new system are difficult
    to quantify, they are expected to be significant.
        In conclusion, SAIC endorses applied, systematic decision making
    processes when evaluating information technology investments--
    especially for mission critical systems of the magnitude and scope
    considered in the ACE cost benefit/cost effectiveness analysis. SAIC
    believes the U.S. Customs Service is applying a reasonable approach to
    evaluating system alternatives. SAIC is proud to support U.S. Customs
    in its information technology endeavors, and is grateful for the
    opportunity to submit this independent testimony.