[Senate Hearing 107-1064]
[From the U.S. Government Publishing Office]



                                                       S. Hrg. 107-1064

               CURRENT STATE OF MANUFACTURING INDUSTRIES

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

                                HEARING

                               before the

                         COMMITTEE ON COMMERCE,
                      SCIENCE, AND TRANSPORTATION
                          UNITED STATES SENATE

                      ONE HUNDRED SEVENTH CONGRESS

                             FIRST SESSION

                               __________

                             JUNE 21, 2001

                               __________

    Printed for the use of the Committee on Commerce, Science, and 
                             Transportation


                    U.S. GOVERNMENT PRINTING OFFICE
89-034                      WASHINGTON : DC
____________________________________________________________________________
For Sale by the Superintendent of Documents, U.S. Government Printing Office
Internet: bookstore.gpo.gov  Phone: toll free (866) 512-1800; (202) 512ï¿½091800  
Fax: (202) 512ï¿½092250 Mail: Stop SSOP, Washington, DC 20402ï¿½090001


       SENATE COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION

                      ONE HUNDRED SEVENTH CONGRESS

                             FIRST SESSION

              ERNEST F. HOLLINGS, South Carolina, Chairman
DANIEL K. INOUYE, Hawaii             JOHN McCAIN, Arizona
JOHN D. ROCKEFELLER IV, West         TED STEVENS, Alaska
    Virginia                         CONRAD BURNS, Montana
JOHN F. KERRY, Massachusetts         TRENT LOTT, Mississippi
JOHN B. BREAUX, Louisiana            KAY BAILEY HUTCHISON, Texas
RICHARD H. BRYAN, Nevada             OLYMPIA J. SNOWE, Maine
BYRON L. DORGAN, North Dakota        SAM BROWNBACK, Kansas
RON WYDEN, Oregon                    GORDON SMITH, Oregon
MAX CLELAND, Georgia                 PETER G. FITZGERALD, Illinois
BARBARA BOXER, California            JOHN ENSIGN, Nevada
JOHN EDWARDS, North Carolina         GEORGE ALLEN, Virginia
JEAN CARNAHAN, Missouri
BILL NELSON, Florida
               Kevin D. Kayes, Democratic Staff Director
                  Moses Boyd, Democratic Chief Counsel
                  Mark Buse, Republican Staff Director
               Jeanne Bumpus, Republican General Counsel


                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on June 21, 2001....................................     1
Statement of Senator Allen.......................................    33
Statement of Senator Dorgan......................................    29
Statement of Senator Hollings....................................     1

                               Witnesses

Baker, Dean, Co-Director, Center for Economic and Policy Research    18
    Prepared statement...........................................    21
Faux, Jeff, President, Economic Policy Institute.................    13
    Prepared statement...........................................    15
Griswold, Daniel T., Associate Director, Center for Trade Policy 
  Studies, CATO Institute........................................    23
    Prepared statement...........................................    25
Jasinowski, Jerry, President, National Association of 
  Manufacturers..................................................     1
    Prepared statement...........................................     3

                                Appendix

American Textile Manufacturers Institute, prepared statement.....    50
Carnahan, Hon. Jean, U.S. Senator from Missouri, prepared 
  statement......................................................    50
Economic Policy Institute, prepared statement....................    56
McCain, Hon. John, U.S. Senator from Arizona, prepared statement.    49
National Coalition for Advanced Manufacturing, letter dated June 
  28, 2001, to Hon. Ernest F. Hollings...........................    55

                          Additional Material

Excerpt from The New York Times by Franco Modigliani and Robert 
  M. Solow.......................................................    45

 
               CURRENT STATE OF MANUFACTURING INDUSTRIES

                              ----------                              


                        THURSDAY, JUNE 21, 2001

                               U.S. Senate,
        Committee on Commerce, Science, and Transportation,
                                                    Washington, DC.
    The Committee met, pursuant to notice, at 10 a.m. in room 
SR-253, Russell Senate Office Building, Hon. Ernest F. 
Hollings, Chairman of the Committee, presiding.

         OPENING STATEMENT OF HON. ERNEST F. HOLLINGS, 
                U.S. SENATOR FROM SOUTH CAROLINA

    The Chairman. Good morning. The Committee will come to 
order. What we have this morning is a hearing on the current 
state of the American manufacturing industry. It is a very 
important panel: Mr. Dean Baker, the Co-Director of the Center 
for Economic Policy Research; Mr. Jeff Faux, President of the 
Economic Policy Institute; Mr. Dan Griswold, Associate Director 
of the Center for Trade Policy at the Cato Institute; and Dr. 
Jerry Jasinowski, the head of the National Association of 
Manufacturers.
    It was only yesterday that I was able to contact Dr. 
Jasinowski. When I looked up and saw that we were going to have 
a hearing on manufacturing and did not have the head of the 
manufacturers association. I picked up the phone, and he 
readily agreed to come and give us his testimony with the 
caveat that he had to get out early.
    So let me start, Dr. Jasinowski. The full statements of all 
four witnesses will be included in their entirety into the 
record and we will ask you to summarize them in a 5-, 10-minute 
fashion.
    Dr. Jasinowski.

           STATEMENT OF JERRY JASINOWSKI, PRESIDENT, 
             NATIONAL ASSOCIATION OF MANUFACTURERS

    Mr. Jasinowski. Thank you, Chairman Hollings. You honor me 
by including me in this important panel and I appreciate it on 
behalf of our 14,000 large and small companies. I want to thank 
you and your leadership on focusing on manufacturing, which is 
right now in recession, and I think that there is the threat 
that, given the poor condition of manufacturing in a cyclical 
sense, it is possible that the economy more generally could 
face recession. I want to talk on that as one of my points 
today.
    The other three points I want to make is that the U.S. 
manufacturing, however, continues to be internationally quite 
competitive and that trade is in general positive with respect 
to manufacturing output and employment, and then I want to talk 
a little bit about the policies that we need in order to move 
manufacturing out of recession and also the move manufacturing 
forward on the trade front.
    I also want to acknowledge Senator Dorgan, who has been a 
person who we have worked with on issues having to do with 
manufacturing and interest rates.
    First of all, I will ask that my full prepared testimony be 
included in the record, and you have already acknowledged that 
I would be. I want to just draw to the conclusions of that in 
order to be as brief as I can. If you turn to the conclusions 
of that prepared statement, which is at the very end, of 
course, it says on page 10:

          ``Because of America's increasing competitive edge in the 
        global marketplace, we have been able since the mid-1980's to 
        expand our exports in the world economy, which have increased 
        from less than 7 percent to more than 14 percent of domestic 
        output. Over the same period, America's share of world exports 
        has increased by 20 percent.''

    Other charts in this prepared statement and information 
indicate that manufacturing productivity has been growing at 
more than 5 percent a year. That is why we have been able to 
expand our exports. That is why we continue to be 
internationally the most competitive manufacturing sector in 
the world. That has, again referencing a few charts in our 
prepared statement, allowed us to increase manufacturing 
compensation so that the average compensation for a 
manufacturing worker is $50,000 a year.
    The final chart in the prepared statement, Mr. Chairman, 
shows that manufacturing employment had been increasing until 
1999, not dramatically but consistently, even as the trade 
deficit in fact widened. Now, that is not to say that the trade 
deficit and international competition never reduces jobs. We 
all know that in some cases, such as apparel and footwear, it 
has. You know better than anyone that that is the case. I am 
not here to suggest that trade is an unmitigated positive for 
industry, either. It does increase price competition and 
because we are so exposed to the fluctuations in the 
international economy it can when the international economy 
turns down or the dollar is overvalued make things difficult.
    Having said that, we believe that the vast aspect of 
international trade is positive for manufacturing and that the 
current recession in manufacturing has very little to do with 
international trade, with the exception, as you know, of the 
overvalued dollar with respect to the euro and the yen.
    Turning to the charts that I have provided to the 
Committee, Mr. Chairman, you have a summary of what has caused 
this recession and I can go through those very quickly. You see 
that industrial production has dropped for the last 8 months 
and is now at the lowest level it has been since the last 
recession. Inventories as a result have jumped very sharply and 
so we have had an inventory recession in part.
    Turning to the charts on page 2, as we all know, Senator 
Dorgan in particular and you, interest rates have been much too 
high. The Federal Reserve went too far in tightening interest 
rates and that has had a devastating impact on small business, 
farmers, and industry, and thank God that the chairman and 
others have reversed that course and we have had 3 percentage 
point reductions in interest rates. But it is essential, Mr. 
Chairman, that the Federal Reserve and Mr. Greenspan further 
reduce rates at the meeting next week by a half a percentage 
point.
    But it is not just high interest rates that have caused 
this manufacturing recession. Last year energy costs took $115 
billion out of the American economy and the manufacturing 
sector is the most sensitive sector to energy costs, and we use 
about a third of American energy.
    The next item there is the euro exchange rate imbalance. As 
you will notice, in the Wall Street Journal today there is a 
long story talking about Mr. John Dillon of the Business 
Roundtable meeting with Secretary O'Neill yesterday and the NAM 
also having met with Secretary O'Neill, arguing that the 
overvalued dollar is killing American manufacturing and 
provides a 30 percent disadvantage to American manufacturing. 
There is a wide variety of ways that that can be dealt with and 
I would be prepared to respond to those.
    Finally, on page 3 it shows that manufacturers have not 
been able to raise prices during this period despite all these 
cost increases. That means it is essential that we not pass 
legislation to further increase costs.
    I want to thank you on behalf of the 14,000 manufacturing 
firms for your support of reducing regulation, including 
ergonomics, excessively costly ergonomics legislation. I would 
ask both of you to look carefully at the current health care 
reform to be sure that we do not damage American manufacturing 
by raising costs further at a time when you cannot raise prices 
and manufacturing is in recession.
    Let me end by saying that I think we are bottoming out in 
this recession. We think that we can have a recovery late this 
year and we think that manufacturing, because of its 
productivity, technology, and all the other things mentioned in 
my prepared statement, are quite capable of competing in the 
long run and that we therefore ought to move forward with trade 
promotion authority and with a Free Trade Agreement for the 
Americas, as well as the other trade legislation that you have 
before you.
    I would be happy to answer any questions, Mr. Chairman, and 
again want to thank you for including me in this hearing.
    [The prepared statement of Mr. Jasinowski follows:]

          Prepared Statement of Jerry Jasinowski, President, 
                 National Association of Manufacturers

    The National Association of Manufacturers represents 14,000 
American firms producing about 80 percent of all U.S. manufacturing 
output. Manufacturing comprises approximately one-fifth of all the 
goods and services produced by the U.S. economy, and directly supports 
56 million Americans--the 18 million American men and women who make 
things in America and their families.
    Trade is of great importance to the NAM, for more than 6 out of 10 
dollars of total U.S. exports of goods and services are manufactured 
products. Last year, U.S. exports of manufactured goods were $690 
billion, 88 percent of total U.S. merchandise exports. The $52 billion 
of agricultural goods exported last year accounted for 7 percent of 
U.S. merchandise exports, and mining and all other industries accounted 
for the remaining 5 percent.
    Similarly, manufactured goods dominate our imports; last year, they 
accounted for 70 percent of all goods and service imports, or $1.014 
billion.
    About one-sixth of our total manufacturing output is exported and, 
for many important industries the ratio is much higher. For example, 
exports account for 54 percent of U.S. aircraft production, 49 percent 
of machine tools, 46 percent of turbine and generator output, 45 
percent of printing machinery, and the list goes on.

                   BENEFITS OF TRADE TO MANUFACTURERS

    Too often, the trade debate focuses on mercantilist arguments that 
exporting industries benefit from trade while those that compete with 
imports suffer. Unfortunately, this view, shared by both opponents and 
supports of free trade, misses the point. Together, industries where 
either imports or exports dominate make up just 1 percent of the 
economy. In reality, industries that account for the bulk of U.S. 
exports also compete with the bulk of imports coming into our country. 
In manufacturing, these industries that are globally engaged are the 
most prosperous. It's time to change the debate from exports are good 
and imports are bad to trade means prosperity.
    Whether measured in terms of growth in output or incomes of 
workers, the industries that have been the most open to the world 
economy have fared much better during the past decade than the rest of 
the economy. That this is not widely known shows that there is much 
work to be done to explain what matters most is not exports or imports 
but openness to trade.
    America is becoming more connected to the global economy. Between 
1991 and 1999, trade (exports plus imports) rose from 12 percent to 14 
percent of our nation's economic gross output\1\. As Table 1 shows, 
this increased engagement can be attributed to the manufacturing 
sector, which makes up more than two-thirds of U.S. trade. Apart from 
manufacturing, the rest of the economy, excluding farms, has remained 
fairly autarkic. So, it stands to reason that the effects of increased 
trade on the U.S. economy should be most evident in manufacturing.
---------------------------------------------------------------------------
    \1\ Gross output consists of sales or receipts and other operating 
income; commodity taxes; and inventory change. Source: U.S. Department 
of Commerce, Bureau of Economic Analysis, Survey of Current Business, 
December 2000.
---------------------------------------------------------------------------
      Table 1.--Trade (exports+imports) as a Share of Gross Output
    1991: Manufacturing--27%; Farms--18%; Rest of Economy--6%
    1999: Manufacturing--36%; Farms--18%; Rest of Economy--6%

    Export and import intensity tend to go hand in hand for nearly all 
(97 percent) of manufacturing. Industries that depend most on exports 
also compete most with imports. Industries that are least reliant on 
exports also have little import competition. Manufacturing industries 
roughly fit into four categories in terms of trade (see Table 2 below): 
most-open, open, least-open and import-dominated.

                   Table 2.--Openness in Manufacturing
------------------------------------------------------------------------
                                           Share of Gross Output (1999)
                                        --------------------------------
                                          Exports    Imports     Trade
                                            (In        (In        (In
                                          percent)   percent)   percent)
------------------------------------------------------------------------
Most Open: (Electronics, Industrial           26%        33%        59%
 machinery, Transportation equipment
 and instruments)......................
Open: (Primary/Fabricated Metals,             11         14         25
 Chemicals, Textiles, Furniture, Rubber/
 plastic products and Stone, clay glass
 products).............................
Least Open: (Lumber, Paper, Petroleum          5          6         11
 and coal products, Food, Tobacco and
 Printing/publishing)..................
Import-Dominated: (Leather, Apparel,          16         84        100
 Miscellaneous)........................
------------------------------------------------------------------------
Source: NAM from Commerce Department Data.


    The most-open industries, where exports and imports are each more 
than a quarter of domestic production, accounted for nearly 40 percent 
of manufacturing output and 60 percent of manufactured trade in 1999 
(see Chart 1 attached.) Manufacturing industries that are slightly less 
open to international trade make up 30 percent of manufactured output 
and 20 percent of trade. The least-open manufacturing industries also 
account for 30 percent of manufactured output and just 10 percent of 
trade. Lastly, the import-dominated portion of manufacturing represents 
about 3 percent of manufactured output and 10 percent of manufactured 
trade.\2\
---------------------------------------------------------------------------
    \2\ In 1999, the gross output of import-dominated manufacturing 
industries was $144 billion; exports were $24 billion and imports were 
$122 billion.
---------------------------------------------------------------------------
Trade and Economic Growth
    In the 1990s, manufacturing productivity grew at twice the rate of 
overall productivity. This is why change in real output and 
contribution to economic growth are much better ways to measure the 
health and importance of manufacturing than simply looking at 
employment levels. During 1991-1999, real GDP in manufacturing grew, on 
average, by 5.4 percent per year. This is nearly 40-percent faster than 
growth in the rest of the economy. In fact, manufacturers contributed 
to more than 21 percent of the increase in real GDP between 1991 and 
1999--more than any other sector!
    Three quarters of manufacturing growth came from most-open 
industries to trade, where real GDP growth averaged more than 12 
percent per year between 1991 and 1999 (see Chart 2 attached.)
    Critics of free trade often say that imports suppress domestic 
production. While this may be true in certain circumstances, the 
greater truth is that import growth is generated by a strong economy: 
The fastest-growing manufacturing industries in the 1990s competed 
directly with nearly 60 percent of all manufactured imports. Trade is 
not ``hollowing out our manufacturing sector,'' as some claim. Rather, 
trade is helping it grow and become stronger.
    So, when one asks how has manufacturing been affected by trade, the 
answer is that the most-open industries that compete directly with more 
than half of all manufactured imports and are responsible for roughly 
two-thirds of manufactured exports, grew at triple the pace of the 
overall economy between 1991 and 1999. Has globalization marginalized 
America's manufacturing base? Clearly the answer is no. Globalization 
has helped the manufacturing sector to evolve and become stronger.

Trade and the Manufacturing Worker
    Those who work in the most-open industries within manufacturing 
have seen their wages and salaries grow the fastest in the 1990s.
    By the end of the 1990s, a full-time employee in manufacturing 
earned, on average, $50,000 per year--20 percent more than the average 
throughout the rest of the economy. For the vast majority of 
manufacturing, trade and worker compensation are closely and positively 
related: the more industries are open to trade, the more workers get 
paid. In 1999, worker compensation ranged from more than $60,000 in 
most-open industries to $44,000 in industries least-open to trade (see 
Chart 3 attached.)
    As economies become more internationally engaged, they focus 
increasingly on what they have a comparative advantage in producing. In 
the case of the United States, our comparative advantage lies in the 
skill of our workers and the technologies they use to build the world's 
most sophisticated products more efficiently than anyone else. This is 
why the fastest growing sectors within manufacturing have been in 
industries that are highly capital intensive and compensate workers 
with a premium wage.
    Between 1991 and 1999, overall manufacturing employment grew by 
263,000\3\. At the same time, 18.9 million jobs in other sectors were 
created. Within manufacturing, the only contraction in employment 
occurred in import-dominated industries, where the number of full-time 
workers fell by 310,000. Employment elsewhere in manufacturing grew by 
573,000. Trade opponents often cite the loss of jobs within apparel 
manufacturing as solid evidence that imports destroy jobs. While there 
is no doubt that many of the job losses in this sector have been due to 
competition from overseas, it is important to keep in mind that import-
dominated industries represent just 3 percent of manufacturing output, 
6 percent of manufacturing employment and competed with just 14 percent 
of manufactured imports.
---------------------------------------------------------------------------
    \3\ Employment in full-time equivalents, as reported by the 
Commerce Department's Bureau of Economic Analysis.
---------------------------------------------------------------------------
    Still, the fact that our nation imports nearly as much as we 
produce of apparel, leather goods, and miscellaneous manufacturing 
shows that America does not have a comparative advantage in producing 
goods which depend on semi-skilled labor. To remain competitive, 
American firms have turned increasingly to technology and automation, 
and to higher-end products within the sector. This has lead to rapid 
increases in compensation within the import-dominated sector of 
manufacturing during the 1990s discussed below.
    Overall, real compensation for a full-time worker in manufacturing 
in the 1990s rose by 11 percent, slightly faster than the 10 percent 
rise in worker pay elsewhere in the economy. Within manufacturing, 
compensation growth and trade are very closely and positively related, 
not negatively as trade opponents often claim (see Chart 4 attached.)
    During the 1990s, compensation in both the most-open industries as 
well as the import-dominated sector grew by 13 percent in real terms, 
while income growth in the more autarkic sectors of manufacturing was a 
bit slower.
    For the import-dominated industries, the companies that survived 
the past decade were those that were able to either focus on high-end 
manufacturing or employ new technologies to stay competitive with 
overseas competition. Both of these practices depended on a skill level 
not previously associated with this sector of manufacturing. For 
example, to remain competitive, shoe manufacturers now use computer-
aided design and computer-aided manufacturing to increase quality, 
enhance design capability and lower production costs. This is evidenced 
by the fact that labor productivity for non-rubber footwear rose at an 
annual compound rate of 6 percent during the first half of the 1990s. 
Thus, even in import-dominated industries, international competition 
has served to raise worker competition and skill levels.
    As for the most-open sector of manufacturing, which competes with 
the majority of imports and accounts for most of manufactured exports, 
being successful in international trade is based on employing skills of 
American manufacturers' highly trained workforce, who command premium 
pay for their work. Whether you are a worker or a business owner, 
globally engaged industries are where you want to be.

The Trade Deficit Does Not Cost Jobs
    Some have argued that because the United States runs a trade 
deficit, trade is a net job destroyer. Essentially, the argument goes 
like this: Between 1992 and 1999, the United States created 20.7 
million jobs. At the same time, the country's gross domestic product 
(GDP) grew by $1.976 trillion after adjusting for inflation. So, every 
$1 billion change in real GDP, positive or negative, affects 10,492 
jobs. For example, personal consumption expenditures rose by $1.397 
billion between 1992 and 1999, ``creating'' ($1.397 x 10,492) 14.7 
million jobs. At the same time, our country's trade deficit grew by 
$304 billion, thus ``destroying'' ($304 billion x 10,492) 3.2 million 
jobs.
    As it turns out, allocating job losses and gains to each GDP 
component is based on a conceptually flawed understanding of the role 
that net exports (the trade balance) play in national income 
accounting.
    While many know that a nation's GDP, or C+I+G+(X-M), measures the 
value of goods and services produced domestically by adding up the 
purchases of final users: consumption (C), gross private-domestic 
investment (I), government expenditures (G) and the rest of the world 
(X-M)--the reason for the net export term is not commonly understood.
    Exports are a positive entry in GDP as sales to foreigners. Imports 
are a negative entry that include final goods (purchased by C, I and G) 
plus intermediate products, like industrial supplies, that are inputs 
into domestic production. Just as exports are counted as value-added to 
the United States, imports of both intermediate and final products are 
counted as value-added to other nations. In other words, U.S. imports 
are other nations' exports. In standard national income accounting, 
exports and imports are combined into net exports (X-M).
    Imports are combined with exports to create the net export term 
because once imports enter our country, they are seamlessly absorbed 
into the vast flow of economic transactions that take place every day 
in our country at both intermediate and final-demand levels of the 
economy. This adds complexity to computing GDP. When consumer demand is 
estimated by the Commerce Department, for example, the purchase of a 
domestically produced good or service cannot be differentiated from an 
imported one: Consumer purchases of motor vehicles, for example, 
include purchases of domestically produced Fords, as well as Audis made 
in Germany. Moreover, imported motor-vehicle components that make up 
part of the value of domestically produced cars are trucks, which are 
also included in the consumption component of GDP. This same problem 
exists for the other domestic components of GDP.
    So imports, already embodied in the C, I and G components of 
domestic demand, are removed from GDP by combining them with exports to 
create the term net exports. This is why the net export term is 
necessary in national income accounting. While it does measure the 
difference between domestic demand for foreign products and foreign 
demand for U.S. goods and services, the trade balance is not a factor 
of production that creates or destroys jobs. Rather, it is an 
accounting measure used to remove imports that are already included in 
the domestic components of GDP.
    The paragraphs above show that the trade deficit=net job loss 
figures are inaccurate. Did the $1.397 billion growth in consumption 
between 1992 and 1999 really create 14.7 million jobs? No. Some of what 
consumers purchased was imported! The only way to accurately measure 
the number of jobs created by growth in consumer demand is to remove 
imports already embodied in the consumption component of GDP. Then you 
have a true measure of the domestic production required to fill 
consumer demand. The same thing goes for the other components of the 
economy: I and G. Once this is done, the net export term no longer 
exists--imports have been allocated to their respective components of 
GDP.

Mexico, Germany, Japan and the United States Provide Further Evidence 
        Disproving the Trade-Deficit Job Loss Myth
    Another way to show that the trade deficit=net job loss just 
doesn't add up is to look at the bilateral trade balance with Mexico. 
According to free-trade opponents, the $63 billion growth in the U.S. 
trade deficit with NAFTA between 1993 and 2000 cost our country roughly 
770,000 jobs.
    One-third of our Mexican deficit comes from oil imports that we 
need to fuel our economy. The rest is in manufacturing trade. As it 
turns out, the manufactured trade deficit with Mexico can be 
attributable to motor vehicles trade. That's right. Excluding motor 
vehicles, the United States has run a manufactured trade surplus in all 
but one year since the NAFTA was enacted in 1994. In 2000, this surplus 
totaled $6.7 billion. Therefore, it stands to reason that if trade 
deficits by definition lower U.S. production and cost jobs, then the 
job losses caused by the U.S.-Mexico deficit must have taken place 
primarily in the auto sector.
    However, instead of losing jobs, the number of full-time equivalent 
workers in the auto sector increased more than 20 percent between 1994 
and 2000--faster than overall employment growth. Our auto industry 
employs more than 100,000 more workers today than before NAFTA, because 
U.S. production has grown so fast. Since 1994, real GDP in the motor-
vehicles industry has grown at an average annual rate of 4.8 percent, 
surpassing overall GDP growth by nearly 25 percent. By comparison, 
during the six years prior to NAFTA, motor-vehicle output grew at an 
average pace of just 1.1 percent, less than half the growth rate of the 
economy as a whole.
    The overall experiences of Germany, Japan and the United States in 
the 1990s further buttress the fact that trade deficits do not cause 
job losses. Between 1991 and 1999, Germany and Japan experienced rising 
trade surpluses and simultaneous reductions in manufacturing 
employment. At the same time, U.S. manufacturing employment remained 
relatively constant while our trade deficit expanded.
     Germany's merchandise trade surplus grew from $13 billion 
to $71 billion, while manufacturing employment declined 25 percent from 
close to 12 million to less than 9 million (see Chart 5 attached.)
     Japan's merchandise trade surplus grew from $78 billion to 
$108 billion, while manufacturing employment declined 13 percent from 
more than 15 million to 13 million (see Chart 6 attached.)
     The U.S.'s merchandise trade balance fell from -74 billion 
to -350 billion, while manufacturing employment remained roughly the 
same at 18.5 million (see Chart 7 attached.)
    In fact, the state of domestic economics, not trade balances, 
determines employment levels in industrial nations. The performance of 
the American economy in the past six months bears this out. Due to high 
interest rates in 2000, a surge in energy prices, an inventory 
overhang, a stock market correction and a strong dollar that has 
suppressed exports, American industrial production has been on the 
decline since the fourth quarter of last year. Concurrently, imports 
fell by 1 percent in the fourth quarter and 9 percent in the first 
quarter of 2001.
    There is no doubt that engagement in international trade affects 
America's labor force. While there is no doubt that just as trade 
creates employment opportunities for many, others are displaced by 
competition from abroad. However, labeling U.S. involvement in 
international trade as a net loss for American workers, due to the 
existence of a trade deficit, while great political theatrics, is a 
bogus claim that distracts policy-makers from engaging in a 
constructive dialog on the real challenges and opportunities that 
expanded trade offers our country.
    International trade is not pain-free. Just like the adaptation of 
new technologies, international trade causes a certain amount of 
turmoil in the economy. And government has an appropriate role in 
aiding those who have been hurt by trade.

                       CHALLENGES FOR THE FUTURE

A New WTO Round
    The NAM seeks the launch of a new trade round at the Doha 
Ministerial that would be based on broad agreement that the 
negotiations should seek sharp reductions in trade barriers facing 
industrial goods, as well as agriculture and services.
    Over the years, the WTO and its predecessor, the GATT (General 
Agreement on Tariffs and Trade) succeeded in sharply reducing tariffs 
industrial nations charged on manufactured goods, and also began to 
have trade rules cover such things as intellectual property, standards, 
government procurement, etc. Disciplines on agriculture and services, 
however, are still very weak. Additionally, many developing nations 
still maintain high tariffs on manufactured goods.
    The NAM wants a new round to include among its priorities a focus 
on reducing industrial tariffs, particularly in developing countries. 
Bound tariff rates on industrial goods average 35 percent in South 
America, and 28 percent in Southeast Asia. By comparison, the average 
U.S tariff binding for industrial goods is only 3.9 percent.
    An increasing amount of world trade takes place among developing 
countries, and some of the highest trade barriers faced by developing 
countries are those imposed by other developing countries. Accordingly, 
developing countries could be among the largest beneficiaries of sharp 
reductions in industrial tariffs globally. Both developed and 
developing countries would also benefit from a WTO agreement increasing 
transparency of government procurement--an agreement that would tend to 
reduce corruption and wasted resources in developing countries.

Free Trade Area of the Americas (the FTAA)
    The NAM's top trade priority is the creation of the Free Trade Area 
of the Americas (the FTAA). The reason for this is that the FTAA would 
strongly affect the bottom line for American industry. It is of major 
significance to U.S. manufacturing production and employment, it is 
achievable in a near-term time frame; and it is of utmost importance.
    There are two areas of the world where barriers are still high: 
South America and Southeast Asia. The FTAA would eliminate barriers 
throughout the Western Hemisphere, creating the world's largest free 
trade area--a market of 34 countries and 800 million people. The 
Western Hemisphere already accounts for nearly one out of every two 
dollars of all our exports. Most of this goes to Canada and Mexico, for 
the North American Free Trade Area (NAFTA) has generated a huge trade 
boom. We believe the FTAA will do the same for trade with Central and 
South America.
    Last year, U.S. firms exported $60 billion to Central and South 
America, an amount four times as much as we exported to China. The 
market is only a fraction of what it could be. Trade barriers have been 
holding back both our exports and the region's economic growth. This 
does not just affect large firms. In fact, of the 46,000 U.S. companies 
that export to Central or South America, 42,000--91 percent of the 
total--are small and medium-sized firms.
    Based on our experience with NAFTA, the NAM predicts that with the 
successful negotiation and implementation of the FTAA, our present $60 
billion of annual merchandise exports to Central and South America 
would more than triple within a decade to nearly $200 billion. That 
would represent a very considerable increase in U.S. industrial 
production, generating more high-paying jobs in America's factories. 
America's agricultural and services exports would also grow 
proportionately.
    America is already a very open market. The FTAA would open markets 
for U.S. products in the rest of the hemisphere. Last year, the average 
import duty paid on all imports into the United States was only 1.6 
percent. That is not a trade barrier; it is barely a speed bump. 
Moreover, two-thirds of all our merchandise imports from the world last 
year paid no duty at all. They entered the United States duty-free.
    American exporters to South America, unfortunately, face a 
different situation. There, duties in major markets average 14 percent 
or more, and it is not uncommon for U.S. manufactured goods to face 
duties of 20 percent to 30 percent or higher. For example, as one of 
our members, the 3M company, recently testified, Colombia assesses a 
20-percent duty on its U.S.-made electrical tape. Ecuador charges its 
filter products a 30-percent duty. And so it goes. Those are serious 
barriers.
    There is a real urgency to negotiating the FTAA, for the European 
Union (EU) is also negotiating free-trade agreements with key South 
American countries. This is no trivial matter, for the European Union 
currently sells about as much to South America as we do. The 
consequences for U.S. exports would be severe if the EU were to obtain 
duty-free access to these markets while U.S. exports continued to face 
duties that could be 20 percent or 30 percent. A huge shift away from 
U.S. products to European products would result. The latest development 
is that Japan is now exploring the possibility of free-trade agreements 
with South American countries.

Trade Promotion Authority (TPA)
    The one absolutely essential pre-requisite to FTAA is providing the 
President with Trade Promotion Authority (TPA). Our trading partners 
insist on having the assurance that what they negotiate with the United 
States will be voted on as a single package. They will not negotiate 
under circumstances in which the final deal turns out not to be final, 
but is one which Congress modifies.
    It must be stated bluntly: Without Trade Promotion Authority, the 
FTAA negotiations simply will not move forward. The same can be said 
for prospective negotiations on a new round in the WTO. The Latin 
business communities and government officials with whom we have met 
were all unanimous on that point: no TPA, no negotiations.
    Regrettably, some would applaud if there were to be no 
negotiations; but maintenance of the status quo means that we lose. 
Allowing Latin nations to keep their duties of 20 percent to 30 percent 
on major U.S. exports while we keep our 1.6 percent tariff speed bump 
against theirs is not a winning solution for the United States.
    The time has come to stop negotiating with ourselves and to start 
negotiating with our trading partners. In particular, the issue of how 
to handle labor and environmental concerns has stalled us for too long. 
We must find a way to move forward, for the cost of continued inaction 
is about to get very expensive. How ironic it would be if we continued 
to debate labor rights in other countries while thousands of American 
workers began to lose their jobs as our foreign competitors completed 
trade deals with Latin America and took our export business away.
The Overvalued Dollar
    At current levels, the exchange value of the dollar is having a 
strong negative impact on manufacturing exports, production and 
employment. A growing number of American factory workers are now being 
laid off, principally because the dollar is pricing our products out of 
markets--both at home and overseas.
    Since early 1997, the dollar has appreciated by 27 percent against 
the currencies of our trading partners. Industries such as aircraft; 
motor vehicles and parts; machine tools and consumer goods producers 
are suffering. No amount of cost cutting can offset a nearly 30-percent 
markup.
    The overvaluation is deepening the current downturn in 
manufacturing. Faced with stagnant domestic demand, due in large part 
to the inventory correction taking place in the economy, manufacturers 
are unable to turn to foreign markets to take up the slack, primarily 
because of the high value of the dollar. Merchandise exports fell by 10 
percent during last quarter of 2000 and 5 percent for the first quarter 
this year.
    This is why the NAM, along with the Association for Manufacturing 
Technology, the Aerospace Industries Association, the Automotive Trade 
Policy Council, the American Forest and Paper Association, and the 
Motor Equipment Manufacturers Association, sent Treasury Secretary Paul 
O'Neill a letter on June 4 requesting the Treasury clarify its dollar 
policy to be certain that it is not seen as endorsing an even stronger 
dollar irrespective of the economic fundamentals (to view this letter 
visit www.nam.org.)

                               CONCLUSION

    Succeeding in the global marketplace not only means seeking out new 
markets for sales, but also tapping into the global supply chain. By 
introducing competition from abroad, imports lower costs to U.S. 
companies. This directly increases America's competitive edge in the 
global marketplace. A greater competitive edge, in turn, expands our 
nation's industrial base by creating new global opportunities; since 
the mid-1980s, the share of U.S. manufactured goods destined for 
markets overseas has increased from less than 7 percent to more than 14 
percent. Over the same period, America's share of world exports has 
increased by 20 percent.
    The evidence from the 1990s is unambiguously clear: the 
manufacturing industries that have been the most trade-engaged have 
thrived both in terms of growth in output and worker compensation.

[GRAPHIC] [TIFF OMITTED] T9034.001

[GRAPHIC] [TIFF OMITTED] T9034.002

[GRAPHIC] [TIFF OMITTED] T9034.003

[GRAPHIC] [TIFF OMITTED] T9034.004

      
    The Chairman. Let me thank you. Have you got the time?
    Mr. Jasinowski. Yes, I have the time, Mr. Chairman, to have 
you go through the others.
    The Chairman. Oh, very good.
    Mr. Faux.

              STATEMENT OF JEFF FAUX, PRESIDENT, 
                   ECONOMIC POLICY INSTITUTE

    Mr. Faux. Thank you, Mr. Chairman. Thank you especially for 
starting this hearing on a critically important issue that does 
not get enough attention in policy discussions today. I also 
want to thank Senator Dorgan for his leadership in the creation 
of the trade deficit review commission, which I think has added 
at least some more information and some more discussion about 
an issue that we have not talked about enough.
    Clearly, Mr. Chairman, something is wrong in the American 
manufacturing sector. I agree with much of what Jerry 
Jasinowski just said about U.S. competitiveness. I think 
American manufacturing has done a great deal over the last 
decade or so to become more competitive. Still, since March 
1998 we have lost about a million jobs in manufacturing. Over 
the last 10 months we have lost 675,000 jobs. These are high-
wage jobs. These are jobs that are important to hundreds of 
thousands of Americans trying to support their family.
    We have a trade deficit in manufacturing that last year 
went to $390 billion. In the place where I think Dr. Jasinowski 
and I would part company, I think trade, trade agreements over 
the last decade have made things worse.
    Why is it important? Some would say that over the long run 
it is not important that we have strong manufacturing in 
America. I think it is. It is the source of our major 
productivity gains, the source of the diffusion of innovation 
throughout the country. Most important, I think, it is the 
source of upward mobility for millions of Americans who have 
not graduated from college.
    Non-college graduates, I would remind the Committee, make 
up 73 percent of the U.S. labor force. Manufacturing has been 
the traditional channel through which those people have been 
able to enter the middle class and to enjoy a high standard of 
living.
    The problems of manufacturing over the last decade have 
been obscured to some degree by the domestic boom that we have 
had. If you can imagine the United States of America as a 
company with two divisions, one a domestic division that has 
been doing very, very, very well until recently, making lots of 
profits, creating jobs; the other a smaller foreign division 
that in effect has been losing money. Over the last decade we 
have ignored the second division. Now we find that the domestic 
boom, especially at the rates of economic growth we enjoyed in 
the last half of the 1990's, are unsustainable.
    The dot.com bubble I think has revealed to us all the 
weaknesses and the problems in our industrial base. We may be 
bottoming out, we may not be bottoming out. According to the 
newspaper story I read this morning, the Fed does not believe 
that we are bottoming out yet and we will probably have more 
interest rate cuts when it meets again.
    Yet there has been a sublime indifference on the part of 
this administration and the previous administration to the 
problems of the trade deficit. Contrast that indifference with 
the concern that we had over the fiscal deficit. The fiscal 
deficit issue dominated this town for a decade. We were 
concerned about leaving our children a mountain of debt. We 
resolved that problem to the point where the Federal Government 
politically cannot even borrow money today in order to finance 
infrastructure.
    Arguably, the foreign debt of the Nation that is piling up 
is an even greater problem. The fiscal deficit was owed to 
ourselves. The deficit we are creating by financing our imports 
is owed to overseas investors. You cannot forever borrow money 
in order to buy more than you are selling. To avoid a financial 
collapse, sooner or later we either have to buy less, which 
means a prolonged recession or depression in this country, or 
we have to sell more.
    Here is the core of the problem. In order to sell more, we 
have to have an expanding manufacturing sector. Yet we continue 
this madcap rush into signing trade treaties that weaken 
manufacturing and thus our ability to return our trade to 
balance.
    Therefore, Mr. Chairman, I suggest that we need a strategic 
pause in our rush to sign more trade agreements. We need to 
examine the actual experience of the impact of trade on the 
manufacturing sector. The last administration signed over 200 
trade agreements. We have not evaluated them. What are the 
costs? What are the benefits? The policy debate today is still 
focused on ideology and assertions despite the fact that we 
have this experience. I think we ought to have this pause and 
consider new policies to promote manufacturing, as well as to 
reduce the overvalued dollar.
    I think we have a fundamental problem here. We have cut 
rates five times over the last year and we still have a dollar 
that is too high. I also think we need to add labor and 
environmental standards to our trade agreements.
    Finally, I think we ought to consider reorganizing our 
trade bureaucracy to make it less about deal-making and more 
about using trade as an instrument to further the economic 
policies of this country.
    Meanwhile, we need relief for key industries, such as 
steel. The steel industry has downsized, restructured, and 
become the most competitive steel industry in the world. Still 
it was devastated by steel imports. Somewhere between one-third 
and two-thirds of steel-making capacity is now in bankruptcy, 
Mr. Chairman.
    So the central problem of manufacturing in this country is 
that the trade deficit is out of control. No one knows when the 
day of reckoning will come, but it will come, and it will leave 
the next generation high levels of debt and a steadily 
diminishing capacity to produce the tradable goods that we need 
to export in order to pay that debt down.
    Thank you.
    [The prepared statement of Mr. Faux follows:]

 Prepared Statement of Jeff Faux, President, Economic Policy Institute

                        TRADE AND MANUFACTURING

    Over the last 10 months employment in U.S. manufacturing has shrunk 
by 675,000 jobs. If this were simply the temporary result of a business 
cycle downturn, it would be a serious problem.
    But as Figure 1 shows, job loss in manufacturing is a trend of two 
decades. It reflects the deterioration in the American industrial base, 
which has now reached crisis proportions.
    Why does it matter? For several reasons:
     Manufacturing is the overwhelming source of productivity 
improvements and technological innovation in the U.S. economy. If 
manufacturing were removed from the national productivity numbers, 
America would be left with a largely stagnant economy.
     Manufacturing is the traditional ladder of upward mobility 
for non-college graduates, who still make up the majority of U.S. 
workers. It provides the high wage jobs that can lift people into the 
middle class. It is also a traditional means for immigrants to 
assimilate into the economy.
     It is critical for the diffusion of innovation. Without a 
healthy steel industry, for example, the U.S. auto and aerospace 
industries would be laggards in the competitive race to produce new 
products with the next generation of HW lightweight metals.
     A strong industrial base has been essential for national 
defense throughout history.
    There is, of course, a tendency in most advanced countries for 
manufacturing to decline as a share of total employment over the long 
term. This is largely a result of the higher productivity rates in 
manufacturing relative to the service and commercial sectors. But there 
is no immutable evolutionary economic law that predicts the absolute 
decline in manufacturing jobs that we see in America today.
    A major reason for that absolute decline can be observed in Figure 
2, which shows America's current account deficit and the trade deficit 
in manufacturing goods. It mirrors the decline in manufacturing 
employment over the last two decades. The crisis in manufacturing is 
directly related to the long-term erosion of the U.S. trade balance.
    But the debate over trade policy still reflects the triumph of 
ideology over experience. The facts are clear: the trade deficit has 
done major damage to the industrial core of the economy. And it is 
common sense that a Nation cannot forever continue to buy more than it 
sells in the global market. Yet U.S. policymakers from both parties 
remain sublimely indifferent to America's trade deficit and 
corresponding deficit on the current account, which in 2000 was 4.4 
percent of GDP.
    To a large extent, the problem of the trade deficit has been hidden 
in recent years by the remarkable growth of the domestic U.S. economy 
since 1992. Imagine that the U.S. economy is a company with two 
divisions--a large ``domestic'' division and a smaller ``foreign'' one. 
During most of the 1990's, the domestic division was extremely 
profitable, obscuring the fact that the foreign division was losing 
money. Table 1 illustrates the point. From 1992 to 2000, real gross 
domestic product grew by $2.4 trillion, adding 23 million jobs to the 
economy. But a continued deficit in the international sector of the 
economy cost 3.8 million jobs.
    As long as the U.S. domestic economy grows rapidly, many have 
argued, workers who lost their jobs as a result of the trade deficit 
will be rehired in the domestic-oriented economy. However, such 
transitions are not easy for real people dealing with the real world. 
In fact, even in boom times, the average worker laid off in 
manufacturing did not obtain a new job comparable in wages and benefits 
to his or her old one.
    We now know that the extraordinarily high rate of domestic growth 
in the last half of the 1990's--driven in large part by a speculative 
bubble in the stock market--was unsustainable. The unemployment rate 
has been on a rising trend since last October. Despite a minor dip in 
May 2001, an overwhelming majority of forecasters expect it to continue 
to increase in the coming months, revealing the ongoing crisis in our 
industrial sector.
    Figure 3 shows the 12 sectors that accounted for almost 90 percent 
of the trade deficit last year. Led by autos and parts, 10 of the 12 
are manufacturing industries, and the other 3 two represent oil, 
natural gas, and petroleum products. The ``new economy'' sectors of 
audio and video equipment, semi-conductors, computers, and 
communications equipment are among the ``losers'' from U.S. foreign 
trade.
    Table 2 shows the major countries with whom America is running 
trade deficits. The huge and rapidly growing deficit with China is 
particularly troublesome, in light of the eagerness of this 
Administration, like the last one, to enlarge our trade with that 
nation. The North American Free Trade Agreement and the Free Trade 
Agreement with Canada were both sold to the Congress as a way of 
reducing the U.S. trade deficit. Instead the opposite happened; trade 
deficits with both economies grew. In the case of NAFTA, it was 
specifically argued that the trade deal would result in a massive U.S. 
surplus because of all the autos Detroit would sell to Mexican 
consumers. Instead, U.S. companies outsourced to Mexico to take 
advantage of cheaper labor and sold cars and parts back here.
    The impact of the trade deficit on American workers surpasses the 
issue of jobs. As Figure 4 shows, the long-term stagnation in workers' 
earnings stems from the mid-1970's--the time when America's trade 
balance in goods began to go into chronic deficit.
    Trade deficits are not the only contributors to the real wage 
difficulties of U.S. workers. Conventional models of wage behavior show 
that imports account for about 20-25 percent of the wage decline. 
However, these same models can only identify specific causes for about 
half of the decline in real wages. Thus, the trade deficit probably 
accounts for at least 40 percent of the identifiable causes.
    Moreover, there is ample evidence that trade deficits are having 
negative effects on wages unnoticed by standard economic models. Kate 
Broffenbrenner, a Cornell University economist, has shown how NAFTA has 
given credibility to employer threats that their firms would close down 
and move to Mexico if employees voted for a union to improve their 
wages and benefits.
    It is also important to note that the evidence to date supports the 
claim that the current type of trade agreements have encouraged a 
``race to the bottom'' as far as wages are concerned. For example, a 
recent study, NAFTA at Seven, written by economists from Canada, Mexico 
and the United States showed that deregulation has pushed down wage 
levels in all three countries. I would like to submit that study for 
the record.\1\
---------------------------------------------------------------------------
    \1\ Material is supplied in the Appendix section.
---------------------------------------------------------------------------
    In assessing the relationship of the trade balance and 
manufacturing, I would also call your attention to Figure 5. Trade 
deficits do not come free. In order to finance them, the United States 
must either borrow money or sell our assets. The net U.S. foreign debt 
represents the transfer of claims on U.S. wealth with which we are 
financing the deficit. As a result of accumulated trade deficits, the 
debt is now close to 20 percent of GDP. Unless the current trade 
deficit trend is reversed, this figure will grow relentlessly, and 
could easily reach 60 percent of GDP in another 8 years.
    So far, the use of the U.S. dollar as reserve currency for the rest 
of the world and the sense that the United States is a safe haven in a 
volatile global market have protected the United States from a 
precipitous decline in the dollar's value. Such a decline could set off 
a financial crisis that would dwarf the 1997 Asia currency debacle. But 
the debt sword of Damocles is hanging by a thinner and thinner string. 
The United States cannot borrow and sell assets forever. Eventually, 
the United States will be forced to run a trade surplus, or face a 
Depression-level shrinkage in the economy. In order to run a surplus, 
the United States will need a strong--and much larger--manufacturing 
base. Yet, this administration--like the last one--is indifferent to 
both the piling up of foreign debt and the eroding of manufacturing.
    Contrast the attitude toward the foreign trade deficit with the 
national anxiety over the government's fiscal deficit. When the Federal 
deficit reached the vicinity of 4 percent of GDP a decade ago, there 
was much handwringing and national panic over the debt that might be 
left for the next generations. The concern became so strong that it has 
now become politically impossible for the U.S. Government to borrow 
money to make capital investments in infrastructure. However, the 
danger of the foreign current account deficit is arguably greater. By 
and large, Federal deficits are owed to ourselves. In contrast, and by 
definition, the dollar liabilities generated by the trade deficit 
represent foreign claims on American incomes, which will be much more 
painful for our children to pay. Absent a large and healthy 
manufacturing base, they will not be able to do it without a dramatic 
drop in their living standards.
Causes of the trade deficit problem
    Temporary factors. In the last few years, the chronic trade deficit 
has been worsened by two factors. First, and most recently, oil and 
natural gas prices have increased, which has raised the cost of energy 
imports. Second, there has been faster growth in demand in the United 
States relative to its major trading partners, particularly after 1997, 
when the Asia currency crisis slowed down the demand for U.S. exports 
and led to a large inflow of short-term capital that financed a faster 
growth in demand for imports.
    Fundamental problems. The trade deficit has been growing for two 
decades, a time that has included periods of low oil prices and periods 
of slower relative U.S. growth. The more basic causes of a chronic 
long-term imbalance are largely due to the following:
    Shortsighted trade policies. During the Cold War, trade policy was 
largely an extension of foreign policy. Pieces of the lucrative U.S. 
market were parceled out or withheld from foreign countries as a carrot 
or stick to gain allies against the Soviet Union and its communist 
allies. After the end of the Soviet Union, the deregulation of trade 
became an end unto itself, rather than a means to achieve U.S. 
prosperity. Rationalized by the illusion that free trade amounted to a 
free lunch, successive U.S. governments have led the Nation into trade 
agreements that have reflected the interests of multinational investors 
at the expense of companies that produce in the United States and their 
workers and families. As a result, many of the so-called ``free trade'' 
agreements, such as NAFTA, are as much or more concerned with 
protecting investment as they are with trade.
    Lack of manufacturing policy. Unlike most other nations, the United 
States has no active policy to preserve its manufacturing base. Since 
trade largely involves the industrial sector, there is no policy 
framework to guide the deals made by the U.S. trade negotiators. The 
result is that American trade negotiators have a tendency to see 
expanded trade--whether imports or exports--as an end unto itself, 
rather than as a means to a healthy American economy.
    Lack of international labor and environmental standards. All 
advanced modern economies contain enforceable rules for the protection 
of labor and human rights and the maintenance of environmental 
standards. These economic rights assure that the benefits of economic 
growth will be widely shared and that growth will not jeopardize the 
air we breathe and the water we drink. But the global economy has no 
such protections. This has encouraged multinational corporations to 
shift production to locations in the Third World where labor and human 
rights and environmental standards either do not exist or are not 
enforced. This puts U.S. workers at a disadvantage and prevents 
development in the Third World from raising wages there.
    Foreign protectionism. For all the complaints about U.S. 
protectionism, the U.S. market is far more open than the domestic 
markets of its trading partners. The much greater transparency of the 
U.S. legal and political system puts America at a disadvantage relative 
to the European Union and Japan, whose economies are laced with formal 
and informal non-tariff barriers to U.S. goods.
    Overvalued dollar. Normally, a national economy adjusts to a 
prolonged trade deficit by having its currency decline in value, making 
its exports more expensive and its imports cheaper. The U.S. dollar has 
not fallen in order to allow that adjustment to take place. One reason 
is the policy of the U.S. Government to resist a drop in the dollar's 
value. This bias favors U.S. investors in foreign nations--whose 
interest is to have a more valuable dollar--over U.S. producers in 
America, who need a lower dollar in order to expand exports. Estimates 
vary, but currently the U.S. dollar is overvalued by at least 25 
percent, and possibly as much as 40 percent.
    Low savings. A low savings rate means a reliance on foreign sources 
of investment. Ultimately, net financial inflows create spending on 
foreign goods and services. Low savings also means high consumption. As 
a result of these factors, American consumers have an extraordinary 
high marginal propensity to consume imports. Currently, however fast 
the U.S. economy might grow, imports grow faster.

                         POLICY CONSIDERATIONS

    The crisis in manufacturing employment will not be resolved by a 
single policy bullet. It will require a range of policy solutions, 
guided by an understanding of the fundamental causes of the problem. 
The process must start with a commitment to restoring and maintaining 
the U.S. industrial base.
    The basic issue is not how to placate a politically important 
industry or constituency. Instead, America needs to ask if it wants to 
have an industrial base 10-20 years from now. If so, how does the 
United States assure that it will have one?
    It has been a long time since the United States asked itself such 
strategic questions about the economy. In fact, the United States has 
largely abandoned the institutions and habits of thought that are 
involved in coming up with answers.
    Therefore, if America is serious, it needs to provide the time 
necessary for a meaningful policy debate. To give us that time, I 
suggest that we need:
     A ``strategic pause'' in the relentless pursuit of trade 
agreements, such as another World Trade Organization (WTO) round or the 
proposed extension of NAFTA to the rest of the Western Hemisphere in a 
so-called Free Trade Area of the Americas. In the last decade alone, 
the United States has signed over 200 trade agreements, yet done 
virtually no serious evaluation of their impact. Despite this real life 
experience, the debate over trade and globalization in America is still 
as dominated by ideology, assertions, and theorizing as it was two 
decades ago. It is time to find out what we have learned and debate its 
implications.
     Meaningful short-term efforts to protect industries such 
as steel are now faced with virtual extinction as a result of the 
destructive trade policies of the last two decades. Without such 
efforts, there will be little industrial base to preserve.
    In terms of specific policies that might help halt and even reverse 
the erosion of the U.S. manufacturing base, I recommend a national 
commitment to strengthening the manufacturing sector in the U.S. 
economy to include:
     Increased research and development subsidies;
     Creation of a capital pool for small- and medium-sized 
U.S. manufacturers; and
     Large increases in technical training and career-long 
education for American workers.

    The Chairman. Thank you very much.
    Mr. Baker.

 STATEMENT OF DEAN BAKER, CO-DIRECTOR, CENTER FOR ECONOMIC AND 
                        POLICY RESEARCH

    Mr. Baker. Thank you very much, Mr. Chairman. I am going to 
have a bit of a slide show here, so sorry for the delay.
    I want to make two main points in my testimony here, both 
of which I realize you are well aware of, but I think deserve 
emphasis: first, that we have an overvalued dollar and that is, 
at least at the moment, the core of the problem with the trade 
deficit; and second, that this is unsustainable, that we have a 
trade deficit that clearly cannot go on at this pace for more 
than a very short period of time, 2 or 3 years.
    Just to repeat some of the basic facts. These have already 
been said very well by Jeff and Jerry Jasinowski, but just to 
remind everyone: In the last 3 years we have lost a million 
jobs in manufacturing. This has been strongly associated with 
the trade deficit. If we go back to the fourth quarter of 1997, 
the trade deficit was about $90 billion or about 1.1 percent of 
GDP. The last quarter of 2000 the trade deficit was at about 
$400 billion I believe, or about 4 percent of GDP.
    This also corresponds very directly to the fall in the 
dollar. If we look at one of the Federal Reserve Board's 
broadest indexes, the dollar in real terms has fallen by about 
20 percent from the value it was at in the summer of 1997 
before the east Asian financial crisis. So these go very, very 
clearly together.
    Now, just to make the basic points, if I could have Rob put 
this up. Again, I realize this is not new to you, but I just 
think it is really dramatic. It is certainly dramatic to me 
just to look at these numbers, very, very simple numbers. Just 
a hypothetical case, let us say that we have a foreign producer 
of steel that it would cost them $220 a ton to sell it here and 
we have a domestic producer selling at $200 a ton. In other 
words, our producers are about 10 percent more efficient in 
steel. I said this is the normal dollar case.
    Let us just flip that over and let us imagine we have seen 
the fall of the dollar, or I should say the rise in the dollar, 
that we have actually seen over the last 3\1/2\ years. Suddenly 
the foreign producers are selling their steel for $176 a ton. 
Our producers, as we saw a moment ago, were 10 percent more 
efficient. Suddenly they are costing $24 more per ton of steel.
    Now, I submit to you that there is virtually no way that a 
producer can compete in that sort of context, and the facts 
that Jeff was just presenting, that is what happens when you 
see a situation where we are in effect giving a subsidy on the 
order of $44 a ton of steel to every foreign producer. This 
would be the exact same thing--we could take it from either 
end--a foreign government subsidizing their exports to the 
United States or, if you like it our side, we are subsidizing 
imports. So this has corresponded to the decline not only in 
the steel industry, but throughout the manufacturing industry.
    Let me just make one other point. Jeff did make this point, 
but I just want to emphasize it. We are really talking about 
this occurring, not today but say 6 months ago, a year ago, in 
the best of economic times. As we know, we had 4 percent 
unemployment through the year 2000, the lowest unemployment 
rate we had had since the late sixties.
    But if we looked at the Labor Department's worker 
displacement survey that was taken that year, looking at people 
who had lost their jobs within at least 6 months ago, what we 
found is that over 25 percent, 26.5 percent of those workers, 
were either unemployed or out of the labor force altogether and 
only 43 percent of these workers were able to find jobs that 
paid a comparable amount or more.
    To me that is a very, very striking figure. So what we are 
saying is when we are seeing this sort of increase in the trade 
deficit and this sort of job loss even in the best of times, 
these workers are not finding jobs in many cases and even when 
they do find jobs the overwhelming majority are finding jobs 
that pay much less than the ones they lost. So that is what we 
can say in the best of times. Who knows how low the economy is 
going to go right now, but we are no longer in the best of 
times.
    The second point I wanted to make is this is unsustainable. 
Here the arithmetic is fairly straightforward. Again, I will 
just refer to the points Jeff had made. We had become very 
concerned about the budget deficit. We could argue whether it 
was overly concerned or not, but on the basic facts the trade 
deficit is very comparable to a budget deficit. I would just 
ask, what would we be saying in this town if we had a budget 
deficit this year of $450 billion? In effect, that is what we 
are borrowing from abroad. The broader measure of the current 
account deficit last year in the fourth quarter was about $450 
billion.
    Now, I would not want to have anyone be too scared of that. 
We are a $10 trillion economy. We could run a budget deficit of 
$450 billion for a year, 2 years, 3 years. We could do the same 
thing with the trade deficit. But just as we know with the 
budget deficit that would not be sustainable, the same story 
with the trade deficit.
    If we could get the next slide, I just carried through some 
of the arithmetic. I just said let us see what happens if we 
continue to have a trade deficit at the current level, roughly 
4 percent of GDP; what will happen to our net foreign 
indebtedness? Again, I realize this is nothing new for the 
members of the Committee, but it was striking to me at least 
just to put it down on paper and just take a look at this.
    What we would see is that by the year 2010 our net foreign 
debt would be up to about $10.6 trillion. That is a lot of 
money. In 2020 we are up to $32.5 trillion, and if we continue 
to pursue this policy, if we continue to have trade deficits of 
4 percent a year out to the year 2030, we would be looking at 
trade deficits--I am sorry, foreign debt, net foreign 
indebtedness, of $90 trillion.
    Now, to give a more meaningful number, let me get the last 
slide. To put as a share of GDP, we are starting out at the end 
of 2001. Given our current path, we are going to be looking at 
foreign debt on the order of about 20 percent of GDP. That puts 
us right near the top. Canada and Australia also have very high 
foreign indebtedness as a share of GDP, but we are right near 
the very top.
    If we carry it out to 2007 we are looking at foreign 
indebtedness of 50 percent of GDP, way above any other 
industrialized nation. If we continue on this path as far as 
2017, that is the point at which foreign indebtedness will 
pass, will be more than 100 percent of GDP. Carry it out to 
2032, 200 percent of GDP. Carry it out to 2050, it would be 
over 400 percent of GDP.
    Now, I do not mean to suggest we are going to follow this 
path. We will not follow this path. We all know it is 
unsustainable. We cannot follow it, just as when CBO does these 
projections of the debt going through the roof we are not going 
to follow those paths. Everyone knows that. Everyone knows we 
will not follow these paths.
    But the point is that we are building up debt and it 
becomes harder and harder to get off this path the longer we 
wait. The analogy I like to use is right now the high dollar is 
in effect comparable to giving us a credit card where all our 
foreign purchases are subsidized by 20 percent through that 
credit card, and everything feels really good when you can get 
those goods at 20 percent off. But we all know at the end of 
the day we are going to have to pay the bill.
    To me it is a very strong case to be made that we should be 
dealing with this issue now. We should be trying to get the 
dollar down to more normal level, get the trade deficit down to 
a more normal level, so that we do not pass this huge debt to 
our children.
    One last point I just want to make in terms of the context 
of future legislation, future trade agreements. I would like to 
make a plea for a little honesty in this debate. I was really 
struck at the end of the negotiations or the debate over the 
PNTR for China last year that immediately after it passed there 
was an article in the Washington Post that I referenced in my 
testimony, there were similar articles in the New York Times, 
Wall Street Journal, all across the media, after PNTR was 
passed, that this was really about investment, not about trade.
    That is exactly right. We are not going to be major 
exporters of steel, of cars, of these other items to Mexico, to 
China, to the rest of Latin America. It just does not make 
sense. I am an economist. I know very well the arguments as to 
why these trade agreements have gains. They do have some gains, 
no doubt about it.
    But we should try and have arguments that are based on the 
reality. This is about investment, it is about facilitating the 
ability of U.S. firms to invest in Mexico in the case of NAFTA, 
invest in China in the case of PNTR, or invest in the rest of 
Latin America if we extend that Free Trade of the Americans 
Agreement.
    So I would hope that as this goes forward we could have the 
debate take place on the merits of what actually will take 
place and not a fictitious situation.
    Thank you very much.
    [The prepared statement of Mr. Baker follows:]

  Prepared Statement of Dean Baker, Co-Director, Center for Economic 
                          and Policy Research

    I appreciate the opportunity to address the Senate Commerce 
Committee about the problems created by the strong dollar and the 
current trade deficit. In the last 3 years U.S. manufacturing has lost 
1 million jobs. During this time the trade deficit has soared from less 
than $90 billion in 1997, 1.1 percent of GDP, to more than $400 billion 
in the last quarter of 2000, or 4.0 percent of GDP. This loss of jobs 
has not only had a devastating impact on the workers directly 
affected\1\, but it is also creating serious long-run problems for the 
economy as a whole. The trade deficit is causing the United States to 
borrow money from abroad at an annual rate of more than $450 billion a 
year. This is no more sustainable than a budget deficit of $450 
billion. The immediate cause of this huge deficit is the high dollar, 
which effectively subsidizes the purchase of imports. It is important 
to understand how the high dollar hurts domestic production and why the 
current situation is unsustainable.
---------------------------------------------------------------------------
    \1\ According the Labor Department's 2000 Worker Displacement 
Survey 26.5 percent of the long-tenured workers who lost their jobs in 
the period 1997-1999 were either unemployed or out of the workforce 
altogether. Only 43 percent of these workers were able to find jobs 
that paid comparable or higher wages.
---------------------------------------------------------------------------
    The exchange rate between the dollar and other currencies 
effectively determines the relative price of foreign and domestic 
goods. When the dollar rises in value relative to other currencies, all 
goods produced in the United States become more expensive relative to 
foreign goods, or to put it another, way foreign goods become cheaper 
for people living in the United States. For example, if the dollar 
rises by 20 percent against the British Pound, then goods produced in 
Britain suddenly become 20 percent cheaper for people in the United 
States, whereas goods produced in the United States become 20 percent 
more expensive for people in Britain.
    This is essentially what has happened in the last four years. The 
East Asian financial crisis caused the currencies of the region to 
plummet in value against all major world currencies. Because of the 
relative strength and stability of the U.S. economy, many investors put 
their assets in the United States, causing the dollar to rise against 
other major currencies, as well. As a result, the dollar has risen by 
approximately 20 percent against the currencies of its trading partners 
since the middle of 1997.\2\ This rise in the dollar has made U.S. 
goods approximately 20 percent more expensive relative to the goods 
produced by our trading partners.
---------------------------------------------------------------------------
    \2\ This calculation is based on the real value of the dollar 
measured by the Federal Reserve Board's OITP currency index.
---------------------------------------------------------------------------
    Figures 1a and 1b show how this impacts U.S. goods. They show the 
cost to consumers in the United States of a ton of steel produced 
domestically compared to the cost of a ton of steel produced abroad in 
both a normal dollar scenario and a strong dollar scenario. As can be 
seen, the rise in the dollar lowers the price of the foreign produced 
steel relative to the price of steel produced in the United States. In 
this example, a ton of foreign steel which would have cost $220 before 
the drop in the dollar now costs U.S. consumers just $176 as a result 
of the rise in the dollar. This means that if U.S. producers could 
produce steel profitable at $200 per ton, the rise in the dollar 
created a situation in which they are no longer competitive. Instead of 
underselling the foreign competition by $20 per ton, the costs of U.S. 
producers are now $24 per ton higher than the price of the foreign 
steel.
    This describes the situation that has devastated much of U.S. 
manufacturing in the last four years. The high dollar has also 
contributed to the nation's farm problems through the exact same 
mechanism. As a result of the high dollar, foreign agricultural 
products appear far cheaper to U.S. consumers and U.S. agricultural 
products are far more expensive to consumers overseas. The high dollar 
has the same impact on our agricultural products as if the United 
States subsidized all imported items by 20 percent, and every other 
nation imposed a 20 percent tariff on imports from the United States.
    There are some short-term benefits to a high dollar since it 
effectively allows us to buy foreign goods at below their true cost. 
This helps keep inflation down and allows the nation to consume more 
than it is producing. But this effect is only short-term. The only way 
that the United States can pay for these imports is through foreign 
borrowing, and this clearly has its limits. It is possible for a nation 
like the United States, with a $10 trillion economy, to borrow $450 
billion for a year or two, but it cannot do so indefinitely.
    Figure 2a shows the growth of the foreign debt of the United States 
assuming that it continues to run a trade deficit equal to 4.0 percent 
of GDP, as it did in the fourth quarter of 2000. By 2010, the foreign 
debt will be $10.6 trillion. By 2020, the debt will be $32.5 trillion. 
If the current trade deficits persist for 30 years, the foreign debt 
will be more than $90 trillion.\3\ If the trade deficit remains at its 
current size relative to the economy for 50 years, then the foreign 
debt will exceed $400 trillion.
---------------------------------------------------------------------------
    \3\ These calculations assume that the trade deficit remains at 4 
percent of GDP, real GDP grows at 3.0 percent annually, and that the 
real rate of interest on foreign debt is 4.0 percent.
---------------------------------------------------------------------------
    Figure 2b shows the same information, but expressed as a percentage 
of GDP, which is a more meaningful figure. The foreign debt is already 
approaching 20 percent of GDP, which places us near the top of the 
industrialized world. If current trends continue, the foreign debt will 
exceed 50 percent of GDP by 2007, a far higher level of indebtedness 
than any industrialized nation has ever experienced. By 2017, the 
foreign debt will exceed 100 percent of GDP, a situation only 
experienced by the most impoverished of developing nations. In 2032 the 
foreign debt would be more than twice GDP, and nearly four times GDP by 
2050.
    Of course, the United States will never see its foreign debt reach 
these levels. The dollar will undoubtedly fall and bring the trade 
deficit closer to balance long before the foreign debt comes close to 
the levels shown on these graphs. But the point here should be clear, 
the situation is unsustainable. The high dollar is causing the nation 
to live beyond its means. While the short-term effects can be 
positive--as is the case for a family running up credit card debt--in 
the long-term, today's trade deficits will leave us with a huge foreign 
debt to repay.
    On a slightly different topic, there is one other point that I want 
to make on how we think about trade agreements. The proponents of 
recent pacts such as NAFTA or PNTR for China generally argued their 
case based on the increased trade that would ensue. Specifically, they 
held out the promise of increased U.S. exports to the countries 
affected and the jobs that such exports would create.
    After the approval of these agreements it was generally 
acknowledged that these agreements were about investment, not trade 
(e.g. see ``For Many, China Trade Bill Isn't About Exports,'' by John 
Burgess, Washington Post, May 27, 2000, page E1). There are legitimate 
grounds for differing opinions on the merits of the various commercial 
agreements that have come before Congress in the past, and which will 
be presented to it in the near future. However, the public will benefit 
far more if the debate is conducted in an honest manner. The notion 
that that the United States will ever export on a large scale products 
like steel or automobiles to China or Mexico, as was argued by the 
proponents of PNTR, is ridiculous on its face. If the proponents of 
these agreements really believe that they advance the public good, then 
they should be prepared to tell the nation why an agreement that 
promotes U.S. investment in China, Mexico, or elsewhere in the 
developing world will help the nation as a whole. If they can't make 
this case, then they must not believe that these agreements really 
benefit the nation as a whole.

    The Chairman. Well, thank you very much.
    Mr. Griswold.

STATEMENT OF DANIEL T. GRISWOLD, ASSOCIATE DIRECTOR, CENTER FOR 
              TRADE POLICY STUDIES, CATO INSTITUTE

    Mr. Griswold. Chairman Hollings, Senator Dorgan: Thank you 
for allowing the Cato Institute to testify today on the state 
of U.S. manufacturing. We can all agree that manufacturing is 
an important sector and that the last 9 months have been a 
rough patch. I suspect the real debate, and I think we have 
heard it already this morning, lies in what has caused the 
slump and what Congress should do about it.
    The temptation will be strong to blame foreign competition 
for the recent decline in manufacturing output, but that would 
be a serious mistake. In fact, U.S. manufacturing has prospered 
during much of the past decade, a period not only of rising 
manufacturing output but of rising imports and rising trade 
deficits.
    The cause of the recent downturn is not a flood of imports 
or a giant sucking sound of U.S. investment going overseas. The 
cause is much closer to home--a slowdown in domestic demand. 
Manufacturing has been hit by the same one-two punch of high 
interest rates and rising energy costs that has staggered the 
rest of the economy. The slowdown in demand has caused 
inventories to accumulate and production to fall. Adding to the 
pain, of course, has been an appreciating dollar and sluggish 
growth in export markets. In short, the problem for 
manufacturing is not too much trade, but not enough growth.
    As you consider the current state of U.S. manufacturing, 
allow me to make four brief points. First, the recent slump 
should be seen in perspective. Until the second half of 2000, 
the U.S. manufacturing sector was enjoying an almost decade-
long boom. Total domestic manufacturing output rose by 55 
percent from 1992 to its peak last year. Domestic output of 
durable goods during that same time almost doubled. Although 
output has fallen in the last 9 months, it remains almost 50 
percent above what it was in 1992.
    Figure 1 behind me shows the growth of U.S. industrial 
production during the past decade and compares it to the growth 
in other major industrialized countries. The chart illustrates 
a long stretch of uninterrupted growth of U.S. industrial 
output, growth that outpaced that of other major economies. 
This is hardly the profile of a nation that is losing its 
manufacturing base.
    My second point: Imports have not been the cause of the 
recent slump. Up until last fall, the economic expansion had 
witnessed both an increase in the volume of imported goods and 
an increase in domestic manufacturing output. An expanding 
economy raises demand both for domestic production and for 
imports. It spurs producers to import more capital goods and 
intermediate goods, such as auto parts, steel, and computer 
components. In fact, more than half of U.S. imported goods are 
not final consumer products, but are inputs and capital 
machinery that make U.S. businesses more competitive.
    As a result, imports tend to rise along with domestic 
output. Figure 2 behind me shows the strong correlation between 
manufacturing output and imports. It shows the growth in the 
volume of imported goods and manufacturing output for each year 
from 1989 through 2000. If the critics of trade were correct 
that rising imports have displaced domestic production, then 
manufacturing output should have declined as the volume of 
imported goods rose.
    But since 1989 manufacturing output has expanded along with 
import volume, with imports rising fastest during years when 
imports have grown most rapidly, and manufacturing output has 
grown the most slowly during years and which imports grew the 
most slowly. True to form, in the last 9 months as 
manufacturing output has dropped 3.4 percent the volume of 
imported goods has dropped 3.2 percent.
    It would be unfair to blame rising imports for the 
manufacturing slump when in fact imports have been falling.
    Third point: The recent slump in manufacturing cannot be 
blamed on an exodus of manufacturing investment to low-cost 
producers, such as Mexico and China. The giant sucking sound we 
were supposed to hear never happened. In the years after 
approval of NAFTA and the Uruguay Round agreements, domestic 
investment in the United States continued to climb, including 
investment in manufacturing.
    American manufacturing companies have been investing about 
$2.5 billion a year in Mexico, about $1 billion a year in 
China. But that amounts to a trickle compared to the flood of 
manufacturing investment pouring into the United States. From 
1997 to 1999 net inflows of direct foreign manufacturing 
investment to the United States averaged $36 billion a year. I 
do not need to remind Senator Hollings a lot of that is going 
to South Carolina. I toured that beautiful BMW plant earlier 
this year--4,500 jobs. I do not think the people there view 
that plant as a debt to our children. They view that as a good-
paying job, building the future for their families.
    Overall, about $200 billion a year is being invested in 
domestic U.S. manufacturing. American manufacturing FDI that 
does flow overseas flows overwhelmingly to other high wage, 
high standard nations.
    My final point: It would be a mistake to focus on jobs 
rather than output as the measure of manufacturing health. 
Productivity gains in the manufacturing sector have 
consistently outpaced those in the rest of the economy. We can 
produce more manufactured goods today than ever before with 
fewer workers because those workers are so much more productive 
than in the past.
    If Members of Congress are determined to stop any loss of 
jobs in the manufacturing sector, you would have to legislate, 
not against imports, but against the capital investment and 
technological improvements that are fueling the gains in 
productivity.
    Technology, not trade, is the great displacer in the U.S. 
economy. According to the Bureau of Labor Statistics, there 
were about 7.5 million Americans who lost their jobs due to 
layoffs from 1997 to 1999. About 1.8 million, or less than a 
quarter of those workers, were in manufacturing. The other 
three-quarters were in wholesaling, retailing, services, 
financial services, and government. Those workers were not 
displaced by imports, but by new technologies and changing 
market conditions.
    I will just say one thing about the one million 
manufacturing jobs that have been lost since March 1998. What 
we have to keep in mind is up until then, in fact from January 
1994, when NAFTA went into effect, until January 1998, the U.S. 
economy added 700,000 manufacturing jobs, during the first 4 
years of NAFTA.
    In summary, the recent slump in manufacturing output is not 
the fault of rising imports or an outflow of capital, but of a 
general slowdown in the economy. An open and competitive U.S. 
economy has been a tonic for American industry. International 
competition has spurred innovation, efficiency, and customer 
satisfaction. Of course, not all companies thrive in a 
competitive marketplace, but for the U.S. manufacturing sector 
as a whole international trade has been a blessing.
    Thank you.
    [The prepared statement of Mr. Griswold follows:]

     Prepared Statement of Daniel T. Griswold, Associate Director, 
            Center for Trade Policy Studies, CATO Institute

                              INTRODUCTION

    Chairman Hollings and other members of the Commerce Committee, 
thank you for inviting the Cato Institute to testify today on the state 
of U.S. manufacturing and the reasons behind the recent slump in 
manufacturing output. We can all agree that manufacturing is an 
important component of the U.S. economy and that the past three 
quarters have been an especially rough period for U.S. manufacturers. I 
suspect that the real debate lies in what has caused the slump, and 
what if anything Congress should do about it.
    The temptation will be strong to blame foreign competition for the 
recent decline in manufacturing output, but that would be a serious 
mistake. In fact, U.S. manufacturing has prospered during much of the 
past decade, a period not only of rising manufacturing output but also 
of rising imports and growing trade deficits. The cause of the recent 
slump in output is not a flood of imports or a ``giant sucking sound'' 
of manufacturing investment moving overseas, but a slowdown in domestic 
demand.
    Manufacturing has been hit by the same one-two punch of high 
interest rates and rising energy prices that has slowed output in the 
rest of the economy. The slowdown in domestic demand for manufactured 
goods, by consumers and by business, has caused inventories to 
accumulate and production to fall. Adding to the manufacturing sector's 
pain has been an appreciating dollar and sluggish growth in some 
important markets abroad. The problem for manufacturing has not been 
too much trade, but not enough domestic growth.
    As members of the Commerce Committee consider the current state of 
U.S. manufacturing, please allow me to make four points:

             MANUFACTURING OUTPUT REMAINS NEAR RECORD HIGH

    First, the recent slowdown in manufacturing output should be seen 
in perspective. Up until the second half of 2000, the U.S. 
manufacturing sector was enjoying an almost-decade-long boom. According 
to the Federal Reserve Board, total manufacturing output rose by 55 
percent between 1992 and September 2000. Domestic output of durable 
goods during that same period almost doubled. Output of motor vehicles 
and parts was up 75 percent; output of fabricated metal products, up 36 
percent; output of industrial machinery and equipment, up 160 percent; 
output of electrical machinery, up almost 500 percent. This is not the 
profile of a nation that is losing its manufacturing base.
    Since its peak last September, manufacturing output has declined 
every month, but total output remains almost 50 percent above what it 
was in 1992, and remains near its record peak of last year. Figure 1 
shows the growth of U.S. industrial production--the total output of 
U.S. factories, mines, and utilities--during the past decade, and 
compares it to growth in other major industrialized countries. The 
chart illustrates a long stretch of uninterrupted growth in industrial 
output, growth that outpaced growth in the other major economies and 
our own growth of real GDP. Again, this hardly pictures a nation that 
is ``deindustrializing.''

             MANUFACTURING OUTPUT AND IMPORTS RISE TOGETHER

    Second, the evidence is strong that imports have not been the cause 
of the recent slump in total manufacturing output. Until the recent 
slowdown, the economic expansion had been characterized by a 
simultaneous increase in the volume of imported goods and an increase 
in domestic manufacturing output. In fact, the growth of real goods 
imports and manufacturing output tend to be positively correlated. That 
is, as manufacturing output rises in the United States so too do 
imports of goods, adjusted for price changes.
    The reason for this is simple. An expanding economy raises demand 
both for imports and for domestic production. Consumers with rising 
incomes buy more goods, both imported and domestically made. American 
producers also import more intermediate goods, such as auto parts and 
computer components, and capital goods. In fact, more than half of U.S. 
imported goods are not consumer products but are inputs and capital 
machinery for U.S. businesses. For example, steel imports help keep 
costs down for a wide swath of U.S. industry, including automobiles and 
light trucks, fabricated metal products, and construction.
    As a result, imports tend to rise along with domestic output. 
Figure 2 shows the strong connection between manufacturing output and 
imports. It shows the growth in the volume of imported goods and 
manufacturing output for each year from 1989 through 2000. If the 
critics of trade were correct that rising imports have displaced 
domestic manufacturing output, we would expect manufacturing output to 
decline as the volume of imported goods rose. But since 1989, 
manufacturing output has generally expanded along with import volume, 
with output rising fastest during years in which the growth of real 
goods imports has also grown fastest. As with so many other economic 
indicators, the same economic expansion that spurs manufacturing output 
also attracts more imports and enlarges the trade deficit.
    In the last nine months, the trend has cut the opposite way: the 
3.4 percent drop in manufacturing output since the second quarter of 
2000 has been accompanied by a 3.2 percent drop in real imports of 
goods.

                         NO GIANT SUCKING SOUND

    Third, the recent slump in manufacturing cannot be blamed on an 
exodus of manufacturing investment to lower-cost producers such as 
Mexico and China. The giant sucking sound we were supposed to hear 
never happened. In the years after congressional approval of NAFTA and 
the Uruguay Round Agreements Act, domestic investment in the United 
States continued to climb, including investment in manufacturing.
    The predicted flight of capital to countries with lower costs and 
standards never materialized. In fact, during the past decade the 
United States has been the world's largest recipient of foreign 
investment. Year after year the United States has run a net surplus in 
its capital account, with foreign savers investing more in the United 
States than American savers sent abroad. This inflow of foreign capital 
has kept interest rates down, built new factories, and brought new 
technology and production methods to our economy. If there has been any 
giant sucking sound since 1993, it has been the rush of global capital 
to the safe and profitable haven of the United States.
    American manufacturers continue to be net investors in Mexico and 
China, but the relative magnitude of the investments remain small. From 
1994 through 1998 the annual net outflow of FDI in manufacturing to 
Mexico averaged $1.7 billion; the net annual outflow of manufacturing 
investment to China has been even smaller, averaging less than $1 
billion. Those sums are inconsequential in a U.S. economy that averaged 
almost $8 trillion in annual GDP during the same period, and where 
annual domestic business investment exceeds $1 trillion. In contrast to 
the relative trickle of outward investment to Mexico and China, 
domestic capital expenditures in U.S. manufacturing in 1998 totaled 
$207.3 billion. In fact, in recent years, the United States has been a 
net recipient of billions of dollars in manufacturing FDI, much of it 
from Western Europe and Japan.
    The American manufacturing FDI that does flow abroad generally 
flows to other high-wage, high-standard economies. According to a 
recent study on global manufacturing investment by the Deloitte and 
Touche consulting firm, other high-wage countries attracted 87 percent 
of total U.S. manufacturing FDI outflows in 1999, up from 75 percent in 
1998 and 69 percent in 1997. The study explained, ``Since only a 
relatively small percentage of a firm's costs are in wages, factors 
such as local market size, skill and education levels of the host 
country workforce, and political and economic stability become much 
more important for U.S. firms when making investment decisions.''
    The United States has nothing to fear from openness to trade and 
investment with less-developed countries. Global trade liberalization 
promotes investment, growth, and development in the United States as 
well as our trading partners.

                  TECHNOLOGY: THE GREAT JOB DISPLACER

    Fourth, it would be a mistake to focus on jobs rather than output 
as the measure of manufacturing health. Productivity gains in the 
manufacturing sector have consistently outpaced productivity gains in 
other sectors of the economy. We can produce more manufactured goods 
today with fewer workers because our manufacturing workers are so much 
more productive than they were in the past. If members of Congress are 
determined to stop any loss of jobs in the manufacturing sector, you 
would have to legislate not against imports, but against the capital 
investment and technological advances that are fueling the gains in 
manufacturing productivity.
    Technology, not trade, is the great job displacer in the U.S. 
economy. In the last two decades, tens of thousands of telephone 
operators, secretaries, and bank tellers have been displaced from their 
jobs, not by imports, but by computerized switching, voice mail, and 
automatic teller machines. Further back in American history, entire 
industries have downsized or disappeared because of changing 
technology. Employment in the railroad industry plunged in the second 
half of this century because of competition from domestic airlines, 
automobiles, and trucks, not from foreign railroads. Employment in the 
agricultural sector fell steadily for decades, again not because of 
imports--America has long been a net exporter of food--but because of a 
mechanical revolution on the farm.
    Recent employment data confirm that imports are not the major cause 
of job displacement. According to the Bureau of Labor Statistics, 7.5 
million American workers age 20 and over were ``displaced'' from their 
jobs in 1997-99 because work was insufficient, the plant or company 
where they worked shut down or moved, or their position or shift was 
abolished. Of all the displaced workers counted by the BLS, 1.8 
million, or less than one-quarter, were working in the manufacturing 
sector when they lost their jobs. The other three-quarters of displaced 
workers were in the essentially non-tradable wholesale and retail 
sectors or in other service industries at the time they lost their 
jobs. Those workers were displaced not by imports, but by new 
technologies and changing market conditions.

                               CONCLUSION

     In summary, the recent slump in manufacturing output is not the 
fault of rising imports or an outflow of capital, but of a slowdown in 
the domestic economy caused by high energy and borrowing costs. 
Manufacturing output boomed during much of the last decade during a 
time of steadily rising import volume and trade deficits.
    An open and competitive U.S. economy has been a tonic for American 
industry. International competition has spurred innovation, efficiency, 
and customer satisfaction. The biggest winners have been American 
families, who benefit from the lower prices, greater variety, and 
higher quality of products that international competition makes 
available. Not all companies thrive in a competitive marketplace, of 
course, but for the health and vitality of the American manufacturing 
sector as a whole, not to mention the overall economy, international 
trade has been a blessing. 

[GRAPHIC] [TIFF OMITTED] T9034.005

    The Chairman. Thank you very much, Mr. Griswold.
    Let me yield to our colleague. Senator Dorgan has to get to 
another hearing, but I appreciate his appearance here.

              STATEMENT OF HON. BYRON L. DORGAN, 
                 U.S. SENATOR FROM NORTH DAKOTA

    Senator Dorgan. Mr. Chairman, thank you very much. I have 
to go to the Energy Committee. Let me say how pleased I am that 
you are beginning to put a spotlight on some of these trade 
issues, Mr. Chairman. I think it is long past the time to do 
that. As many of our witnesses suggested, there is this 
tendency to ignore this trade deficit, especially the alarming 
growth in the merchandise trade deficit. There is a tendency to 
say nothing about it. You do not see any pieces written in the 
Washington Post much about it. They have an institutional mind 
set about how things ought to be and they write that. You 
cannot even have an effective trade debate in this town. But 
maybe you will light the fuse to start it, and I appreciate 
your efforts.
    Let me just explore just for a moment these issues. Mr. 
Griswold, your testimony was particularly interesting to me, as 
I knew it would be. Your proposition I guess is that things are 
going really, really well and that we just have this temporary 
slump. We have a relentless march of a merchandise trade 
deficit that has been moving up and up and up and up. I am not 
talking about this slump now. I am just talking about a 
relentless increase in the merchandise trade deficit.
    That in part is because we are importing much more than we 
are exporting in terms of goods. You referred to this giant 
sucking sound, which is of course the phrase that was used in a 
campaign about these issues dealing with NAFTA. But many of us 
take a look at the same situation you look at and see something 
completely different. The largest imports from Mexico to the 
United States are what? Would you be able to tell me, what are 
the largest imports coming from Mexico to the United States?
    Mr. Griswold. Probably automobiles and automobile parts.
    Senator Dorgan. And electronics, right. Automobiles, 
automobile parts, and electronics are the three largest 
imports. Those who supported NAFTA predicted the largest 
imports coming into the United States would be what, prior to 
the enactment of NAFTA?
    Mr. Griswold. I do not know. I am not in the prediction 
business.
    Senator Dorgan. The product of low-skilled labor. All of 
them said the product of low-skilled labor will be what we 
bring into the United States from Mexico. Of course, they were 
wrong about that, but almost all of the so-called experts have 
been wrong about almost everything with respect to 
international trade for a decade or two.
    Now, the question today is about the health of the 
manufacturing sector. I happen to think that the manufacturing 
sector is the center pole of an economic tent. If you have a 
manufacturing sector that collapses on you, you are not going 
to have a world-class economy. It is just that simple.
    So as this discussion ensues today, the question is how do 
we be sure that we have a strong manufacturing sector, how do 
we support that? I assume that all of you would agree that, for 
example in the area of steel--and let us just use that because 
it has been mentioned today--became very, very efficient, 
highly productive, and that we are losing ground. I assume--
would all of you agree that that was because of unfair trade 
and perhaps for a long while the lack of enforcement of trade 
agreements? Is there general agreement on that?
    Mr. Jasinowski. Well, I think that I would add some points 
to that, Senator Dorgan, which is that, notwithstanding the 
efficiency of the American steel industry, many of which are my 
members, there was a tendency for some of it not to be so 
efficient. We have too much steel supply worldwide and there 
needs to be a restructuring. That is point No. 1.
    Second, there is a host of other things that have caused 
problems in steel, from high energy prices to regulations and 
these extraordinarily high interest rates.
    Having said that, I certainly agree there has been unfair 
competition and support of the 201 action that has been taken. 
So I think it is a mixed bag. The steel industry's problems are 
not simply the result of unfair trade.
    Senator Dorgan. A fair point. Let me just make a couple 
comments. One, I think we negotiate trade agreements that are 
terribly unfair to our country's interests. There is too much 
foreign policy and too little hard-nosed economic policy in our 
trade agreements, No. 1.
    No. 2, there is pathetically little enforcement of trade 
agreements. It is just pathetic. That is true of Mexico and 
Canada, it is true with China and Japan and Korea. We just do 
not enforce trade agreements at all, and shame on us. We owe it 
to our producers and our workers to enforce trade agreements 
and ask other countries to own up to the things they have 
signed up to.
    Mr. Griswold. Excuse me, Senator. You did ask if we all 
concurred.
    Senator Dorgan. Yes.
    Mr. Griswold. I have to say I do not agree that steel's 
problems are principally unfair foreign competition. One, that 
is a very subjective term to nail down. U.S. businesses engage 
in the same sort of practices foreign producers do every day, 
selling at below cost, selling at different prices in different 
markets. It is just that we have one set of laws for foreign 
producers and one for domestic. That is one question.
    Second, a lot of what I said about manufacturing generally 
applies to steel, and that is in the year 2000 the steel 
industry, shipments of the U.S. steel industry were 109 million 
tons. That was the most steel that was shipped in 25 years. We 
are producing more steel than we produced in a quarter of a 
century. It is just that demand up until the recent slump had 
outpaced our capacity to produce. That is why more imports were 
coming in.
    The reason why steel employment has been declining 
relentlessly in the steel industry year after year is because 
of increasing efficiency. We have 60 percent fewer steel 
workers than we did 20 years ago, not because we are producing 
60 percent less steel, but because it requires 60 percent fewer 
man-hours to produce a ton of steel. We are actually producing 
more steel than we were 20 years ago, doing it with 60 percent 
fewer workers, because those workers are so much more 
productive than they were 20 years ago.
    If you want to cite a problem in the steel industry, that 
is it, rising productivity, driven largely by the minimills.
    Mr. Jasinowski. Can I comment on that? What the steel 
industry did in the 1980's was extraordinary. They cut their 
labor force by half. They invested loads and loads of money in 
new equipment, becoming modernized. They went through a 
restructuring that is probably unsurpassed in manufacturing in 
the globe.
    Yet, because of this overcapacity--now, it is not a 
question of blaming foreign competitors. It is about looking at 
the world as it is, a world with an overcapacity in steel and a 
market in this country that is open to everyone else. Because 
of those conditions and the high dollar, all of this effort to 
invest, to downsize, all the pain that the steel industry went 
through, was really for naught. Would an investor today looking 
over the American landscape, the landscape of the American 
economy, put money into an industry that had gone through all 
of that and still got hammered in world competition?
    It became the most efficient steel industry in the world 
and still, because of what I would call neglect, benign or 
otherwise, on the part of the U.S. Government, we allowed this 
key industry to go through all that and did nothing to put a 
buffer between it and this global overcapacity out there. So 
that the lesson for an investor is, why invest in manufacturing 
if that is going to happen?
    Mr. Baker. Senator, if I can.
    Senator Dorgan. Yes, Mr. Baker.
    Mr. Baker. Just to be very quick on your comment, I would 
have to disagree slightly in the sense I think the 
overvaluation of the dollar by 20 to 30 percent is probably far 
more important than any unfair trade practice that may exist.
    Just to comment on my colleague's point, the fact that we 
are producing more steel than we did 20 years ago is not saying 
much. The economy is nearly twice as large, so we should expect 
that.
    Senator Dorgan. The Chairman has been very generous. 
Interest rates I think are very important. I share Mr. 
Jasinowski's hope that the Fed will do the right thing and 
reduce interest rates by another 50 basis points. I think they 
are obviously confused about this economy, have been for some 
long, long while. It is a new economy. None of us quite know 
how it works, but that certainly applies to the Fed.
    I am also very interested in this issue of currency 
fluctuations. I guarantee you the next trade agreement somebody 
is going to want to negotiate they will not worry about 
currency fluctuations. That will be an ignored topic. Yet all 
of you described this as something of significance.
    Let me make one final point, Mr. Chairman. I have been 
looking again at the issue of automobiles with Korea because I 
am interested in Mr. Griswold's point about manufacturing. We 
imported roughly 450,000 cars from Korea last year, roughly 
450,000 to 500,000 automobiles. Any of you know how many we 
shipped to Korea?
    Mr. Griswold. It is a very small amount.
    Senator Dorgan. Twelve hundred.
    Mr. Griswold. I would say we have 450,000 happy families 
that have cars.
    Senator Dorgan. Yes, but we are talking about the 
manufacturing sector today. So if we have 450,000 cars 
manufactured in Korea by happy Koreans who have jobs in the 
manufacturing sector and we are able to move--one would presume 
that you would agree, Mr. Griswold and others, that we have 
pretty good automobiles these days. We can only get 1200 U.S. 
cars into Korea in a year. Would that suggest that that injures 
our manufacturing sector, to have a circumstance in trade where 
you have that kind of imbalance? In my judgment it is clear, 
and yet you talk about the happy families being able to drive a 
Korean car.
    What I look at is a circumstance that this country is not 
insisting to other countries that part of the admission price 
for being able to access our marketplace is to have your 
marketplace open to that which we produce.
    Yes?
    Mr. Jasinowski. I would agree with you about that. I think 
we must open up these markets where we do have tariffs or 
quotas that prevent us from selling in those markets.
    But I wanted to go back to the overvalued dollar or the 
currency probably, because I do not think, Senator Dorgan, as 
you would conclude, I am sure, that we have to stand by and 
accept this.
    Senator Dorgan. That is right.
    Mr. Jasinowski. I think there are measures to take. One is 
to reduce interest rates further, which would help align the 
exchange rates.
    The second is for this administration and Secretary O'Neill 
not to talk about the strong dollar as if it is an unmitigated 
wonderful thing and that we should just have it get higher and 
higher and higher. I think that the Treasury ought to be silent 
with respect to those issues and allow markets to determine it.
    Third, I think we could have, and my colleague is proposing 
today, the Commerce Department do a special analysis of the 
impact of the fluctuating exchange rates and high dollar on 
manufacturing in the American economy. We need to know more, as 
you have suggested. We ought not to bail out Japan. I think 
those kind of policies will allow markets to adjust in a way in 
which we would get a more realistic dollar.
    Senator Dorgan. Well, the words ``strong dollar'' provide 
positive connotation. In fact, it is overvalued or expensive. I 
mean, those would be better words to use in terms of the 
consequences of that kind of fluctuation of currency values. 
But I think it is a very serious problem.
    Mr. Faux. Could I just quickly point out that a high dollar 
also provides benefits to people who import. So what we have 
here, what we have to look at, is who is winning and who is 
losing, who is gaining and who is losing from these policies. 
The policy on the dollar ought to be included in this trade 
conversation.
    Senator Dorgan. Mr. Chairman, thank you very much.
    The Chairman. Thank you very much.
    Senator Allen.

                STATEMENT OF HON. GEORGE ALLEN, 
                   U.S. SENATOR FROM VIRGINIA

    Senator Allen. Thank you, Mr. Chairman. I applaud you for 
having this hearing. I will only make a few comments.
    I have been reading through all the remarks. I was over on 
the Banking Committee introducing someone earlier. The comments 
are all very cogent and all worthy of consideration. I am for 
free and fair trade and I do think that there should be markets 
open for our products, because I have faith that American 
workers and technology can compete with anyone in the world.
    But we do--and I do agree with Senator Dorgan's comments--
we need to enforce these agreements. No business would enter 
into contracts and just sluff it off if somebody is violating 
that agreement, that contract. I do think that we need to be 
very strong in making sure that, whatever the agreements are, 
that there is reciprocity. If we have Chinese goods coming into 
our country, we need to be able to get our goods and our 
products in to their customers.
    Now, granted you say, ``Oh well, China, only 10 or 15 
percent of their population, maybe 20 percent, can afford it.'' 
Well, heck, that is a pretty good market. That is 200 million 
people. That is the same market as the U.S. So that is 
important.
    When you look at trade deficits, one of the reasons we have 
a trade deficit is our energy policies. So Senator Dorgan is 
going over to an Energy meeting. A lot of it is oil imports. So 
we do need to have our own, more secure, energy policy in this 
country. Again, technology will matter.
    But I have faith, Mr. Chairman, that the United States can 
compete and succeed with anyone in the world. We need to be a 
leader. We need to make sure that our tax policies are 
competitive and not overburdensome. We need to make sure that 
our regulations are based on sound science, not political 
science. We need to embrace advances of technology which allow 
our manufacturers to manufacture more efficiently, with better 
quality, with fewer imperfections, and also be good for the 
environment as well.
    The key to all of this, though, will be knowledge. In our 
country, the only way we are going to compete and succeed is 
with knowledge. The people in this country need to be getting a 
good quality basic academic education in K through 12 so that 
when they go on to community college or the field of work or 
universities or colleges they have the appropriate knowledge.
    While we are benefiting to some extent by immigrants coming 
in in technology fields, we need to make sure that every single 
American student who is trying, is getting a good education, 
because knowledge will be more important than ever. We cannot 
compete with those who pay a dollar an hour wages in other 
countries. It is a war of competition.
    I will always remember going to Fieldale, Virginia, to a 
Fieldcrest mill. They were putting in new yarn-spinning 
equipment for their towels and so forth, and they were showing 
me those old bobbers and spinning wheels and so forth in there. 
I said: Well, what are you going to do with this old machinery 
here? Are you going to sell that off? They said: ``No, we are 
just going to cut this stuff up and melt it down.'' If that got 
into the Philippines with the wages that they pay there, that 
equipment with the lower wages would be very efficient and that 
would be harming them.
    So when you look at others like the Parkdale Mills or 
Magnolia Manufacturing, for example, in Hillsville, Virginia, 
Carroll County, they have the most up to date spinning 
equipment and technology and they are exporting actually to 
Mexico from Carroll County, Virginia. So we can compete, but we 
do need to have the most advanced equipment and technology.
    Now, the bottom line when you do all these pluses and 
minuses, and you carry on about all these wonderful subjects 
and theories and principles and philosophy that I generally am 
in agreement with--it is basically a net plus in Virginia, 
international trade is a plus. Some of it is because of our 
ports. Even if the origin or the destination is not in 
Virginia, that is good because of our ports and airports and so 
forth, it is a net plus.
    But I would hope that people would also recognize that 
there are some losses due to international trade. In the 
textile industry, I am sure in South Carolina, which is doing 
great as an economy in attracting international investment, as 
has Virginia, North Carolina, Georgia, and Tennessee and other 
States that have good economic, tax, regulatory and labor 
policies, right to work States and so forth--all that matters.
    But there are good, decent, hard-working people who are 
losing jobs due to international trade or international 
competition. The Congress wisely, in the midst of the NAFTA 
agreement, put in a provision to help with transition benefits, 
for job training, for job search, re-education, retraining, and 
I think that is very important.
    I also saw in Henry County in the Martinsville area where 
thousands of jobs, nearly 4,000 jobs, were lost right before 
Christmas about a year and a half ago. It was like a bomb hit 
that community--this was Toltechs that shut down. These people 
who were working at Toltechs, and others like Plume and other 
textile industries, were caught up in this international 
competition.
    I am not saying NAFTA caused it, but that is the general 
view. ``NAFTA'' is a dirty word in that area. Those jobs may 
have been lost eventually anyway regardless of NAFTA, unless we 
are just going to close our borders preventing consumers in our 
country from buying products made elsewhere.
    But the worst thing of it all was these folks who maybe 
even had generations of people, very loyal workers and families 
working for these companies, who were losing their homes. I 
would think that what we could do is look at ways in these 
transitions where good, decent, hard-working people with a good 
work ethic are losing their homes to provide maybe a transition 
loan to them, a bridge loan, so that in the midst of those 
transitions of trying to find a new job, being re-educated, 
retrained, that they do not lose the biggest asset in their 
entire life, which is their home and all that equity. Plus it 
has a terrible impact on the rest of the economy and the real 
estate market.
    But those folks, we ought to have a bridge loan for them. 
Do not make them pay any principal or interest on it for say a 
year, and when they get back on their feet let them pay it over 
several years, so in the midst of this, these real live people 
in the real world, while we talk about trends, trend lines and 
principles, let us make sure that we are treating these folks 
like there was a natural disaster.
    When a flood comes in or a hurricane hits, we help people 
and get them situated. Some of these situations where literally 
thousands of jobs are lost are like a natural disaster. It is 
an economic disaster. These people are not malingerers, they 
are not lazy, they want to work. They had been working, many 
long hours.
    So I think that is a way that we can put some compassion, 
let us say, or reality in helping folks in the midst of these 
situations.
    So I look forward to our debate on various trade issues and 
discussions about the Trade in the Americas. It may be an 
occasion for us to revisit transition assistance to folks who 
do lose jobs, certified that they were lost due to 
international competition, so that they do not lose their best 
asset, their biggest asset.
    Mr. Faux. Could I make a comment on that, Mr. Chairman?
    The Chairman. Yes.
    Mr. Faux. I think you are absolutely right about that. I 
think we do very, very little, Senator, for people who are in 
that situation. Job training is inadequate. Certainly people 
ought to be given an ability to adjust.
    Having said that, when you look at the numbers of the trade 
deficit and you look at the relentless increase in that, the 
problem I think that we face is not just the normal transition 
in a market that fluctuates and a community with a firm that 
suddenly cannot compete because consumer tastes change, 
etcetera, but now we are faced with a situation that we can 
expect more and more and more of these because of this 
relentless increase in the trade deficit, which means we are 
importing more than we are selling.
    So that we are in a problem that is not just a transition 
to another equilibrium, as an economist would say, but we are 
in something like a free fall. So while we have got to make 
those adjustment policies, we also have to look at our trade 
policies.
    It is not a question of trade versus no trade. We have been 
a trading Nation since we started and we are going to continue 
to do that. The question is what are the strategies and 
policies that we ought to pursue that will allow us to be 
successful and to reverse this relentless increase in the trade 
deficit.
    Mr. Jasinowski. Senator, may I comment on your comments as 
well? I wanted to just say that, representing 14,000 companies 
and one of the strongest proponents of open trade in this city, 
that I could not agree with you more about the need for us to 
recognize that in some cases trade does cause dislocations, it 
causes unemployment, and we simply must in the business 
community be more responsive to that.
    I told my staff when I was preparing this, because I got 
into it at the last minute, I said: You are a little too 
unmitigated or unqualified about how trade is just wonderful in 
all cases. It is not wonderful in all cases. There are these 
dislocations and I think we must respond to them with 
compassion and intelligence.
    I would differ from Jeff, however, and I would put a lot 
more emphasis, as you did, on the education and training. We 
face an education and training crisis in this country apart 
from trade, in addition to trade. It gets much worse and if we 
do not respond to that, we are not going to be successful.
    Then the other things you mentioned--energy. It is all well 
and good to keep coming back to trade, saying it is causing 
these unemployment problems, but the unemployment problems over 
the last couple of years had almost nothing to do with trade. 
It has been excessive energy costs, it has been high interest 
rates and all the other things that you mentioned.
    So I think we have to have a balanced policy, which I think 
is what you said and which we very much agree with.
    Senator Allen. Thank you.
    Mr. Baker. I will be very quick. I think all of us support 
trade. I really do not think that is the issue. The question is 
how to structure it. Really, the course of the trade agreements 
passed over the last three or four decades has certainly been 
to put U.S. manufacturing workers, who are overwhelmingly non-
college-educated workers, in competition with the lowest wage 
labor anywhere in the world.
    That has the predictable result of depressing their wages. 
We have actually seen over the last 20 years there has been a 
big split between the wages of college-educated and non-
college-educated workers. We did not see that before. Part of 
that, as I say, not all of it but part of it, is due to putting 
them in competition with people in developing nations who get 
very low wages.
    Part of it also is we protect the higher end of our labor 
force. I know there was a piece in The Times a few years ago 
about how doctors were complaining that foreign doctors were 
coming into the Nation and pushing down their wages, and there 
were restrictions put on the admissions of foreign doctors into 
the United States.
    I can say as an economist I feel largely protected from 
foreign competition. We have accountants, lawyers, doctors, 
other highly paid professions that we have not gone around 
trying to standardize our laws and our regulations so that 
smart kids from Mexico or India or wherever can just come here 
and practice those professions. We have very serious obstacles 
to that. We have gone around making it very easy for auto 
workers in Mexico and China and other places to compete with 
our auto workers, and that has had the result that all of us 
would have expected. It has driven down their wages.
    Mr. Griswold. If I could just respond to a few things. 
First, Senator Allen, I think you are exactly right that 
education and training is the key. You know, two and a half 
million Americans lose their jobs every year through layoffs 
and job churning. Only a quarter of those are in manufacturing. 
Montgomery Wards laid off 20,000 people recently. We need to 
talk about job retraining for them.
    It is not a trade problem. It is not a manufacturing 
problem. It is just a fact of life in a dynamic economy that 
jobs are going to shift.
    Second, a warning about talking about reciprocity. I think 
I got a chuckle from a few people when I mentioned families 
being happy buying new cars. I think families, consumers, are 
underrepresented in the halls of Congress. Let us not forget 
about them.
    The people who pay the highest price for South Korea's 
difficulty in importing cars are the South Koreans themselves. 
They have a lower standard of living because of lingering 
protectionist trade policies. Let us not mimic their bad 
policies by imposing costs, basically a higher tax on U.S. 
families, just because they make policy mistakes.
    Finally, this talk about the relentlessly growing trade 
deficit. Well, as a matter of fact we got some new numbers out 
this morning and, as in many recent months, the trade deficit 
is actually going down. Trade deficits tend to contract during 
bad times because, as I showed, imports tend to fall off as 
general domestic production falls off. So the trade deficit has 
not been growing relentlessly and when the trade deficit does 
grow the rest of the economy tends to do better because we are 
drawing in these imports, we can afford to buy more.
    Actually, manufacturing output grows about four times 
faster during years when we have an expanding trade deficit 
than when we have a contracting trade deficit. If you really 
want to see manufacturing grow, you should welcome news about 
an expanding trade deficit because the two tend to go hand in 
hand.
    Mr. Faux. Mr. Chairman, if I can just briefly respond.
    The Chairman. Please do.
    Mr. Faux. It is an interesting concept that as we grow we 
increase our trade deficit. That would suggest to me that there 
is something structurally wrong in the way we are operating our 
manufacturing. If in order to grow--and I think I do not 
dispute the numbers--we have to suck in more imports, that 
means that suppliers who used to be in the United States are 
someplace else. This is a result of a history, not just 
something that happened in the last couple of years, but a 
history of the erosion of the manufacturing base.
    There is something structurally wrong when the more we grow 
the more our trade deficit grows. That cannot be a recipe for a 
healthy economy. As we explained before, sooner or later the 
day of reckoning on that debt will come.
    Mr. Jasinowski. Mr. Chairman, I am going to have to excuse 
myself. I just wanted to thank you and ask you if you wanted to 
raise any questions before I left. I am sorry for that 
inconvenience.
    The Chairman. Very good. What I really wanted out of each 
of the four witnesses are some solutions. I will have to object 
with the testimony relative to the fact that we really do not 
have any worries, everything is up to date in Kansas City, we 
are the most productive, do not worry about trade deficits, 
after all this is just a slight turndown, we are getting in a 
lot of new foreign industry, and on and on.
    That is not the fact. Dr. Jasinowski, I want you as the 
head of manufacturing--you have got 14,000 companies--to tell 
me what to do.
    As Governor Allen and Governor Hollings, we have been in 
competition. I started this thing over 40-some years ago with 
my friend Luther Hodges from North Carolina. I was the first 
Governor to go to Latin America to look, not McDonald jobs or 
laundry jobs or retail jobs. We know just from nickel and dime 
dealings--read Barbara Ehrenreich book--where we are headed.
    I mean, yes, they are getting all these other little jobs 
and the overall job picture might look good as they continue to 
report. But the truth of the matter is they are losing 
manufacturing jobs, Dr. Jasinowski, your particular jobs.
    I have resources that report these job losses: industrial 
output down in May; Greenspan to worry about idling factories; 
Business Week again, the industrial weakness; U.S. industrial 
output falls for the eighth consecutive month, and on; The 
Financial Times, the manufacturing slips further. Then some of 
you here on the panel are telling me, not to worry.
    When I listen to my friend Mr. Griswold here, he reminds me 
of that tenth round boxer. He is in there just getting knocked 
all over the ring. He gets back to his corner. His second is 
slapping him: He has not put a glove on you, you are doing 
great, he has not put a glove on you. He said: ``Well, for 
God's sake watch that referee, because somebody is knocking the 
hell out of me over there''.
    They are telling me I am in good shape. I have lost 
32,000--let me get the figure here--32,900 manufacturing jobs 
since NAFTA. There has been a big swishing sound. We have all 
heard it all over South Carolina. Also, I've actually lost 
43,200 textile jobs.
    Yes, we got in BMW. I helped bring it in. But there is no 
question about it, we have a net loss. When little South 
Carolina is losing jobs since NAFTA, 32,900, and they tell me 
that a great swishing sound never happened, I want to take my 
friend to South Carolina and show him.
    What do I do about it?
    Mr. Jasinowski. Well, Mr. Chairman, if you would allow me 
to go back to what I said at the beginning, which is everything 
is not great. We are in a recession. The recession is as 
serious as the last one. Manufacturing output, all the numbers 
you identify, are in fact true. I said that there were a 
variety of causes of that. The first and most important--and we 
have to address each of those--interest rates.
    The second is of course these energy costs. The education 
costs reduced the growth last year by over a percentage point. 
I mean, they skyrocketed out of sight. You have got in addition 
to that this extraordinary overvaluation of the dollar. That is 
probably causing more job loss in South Carolina than any other 
single factor.
    Then you have got issues like rising health care costs. 
Health care costs went up 10 percent last year. When that 
happens, you simply have to cut head count.
    Now, if you turn to the trade side--but you cannot take it 
separately. You have to do all these domestic things, as you 
know very well. If you turn to the trade side, it starts with 
the dollar and then I think we have to look at all these 
agreements in the way in which they are responsive to fair and 
open trade.
    If we do not, however, move forward with some of these 
trade agreements, how do you reduce the tariffs in Korea so 
that we can in fact ship more cars there? If you look now at 
the tariffs in other countries around the world, they are much 
higher than they are in the United States. Trade is a weapon as 
well as a vulnerability. I think that we need to work together 
to be sure that the trade agreements are tough. Let us not be 
simpleminded and simply pretend that we can negotiate with the 
Chinese or anybody else and open our markets and not insist 
that their markets be opened.
    But right now we are at a disadvantage with respect to many 
of these countries and we must negotiate additional agreements 
to reduce their tariffs.
    Then finally, I think terribly important is this 
transitional aid that Senator Allen spoke about. So we need an 
overall economic growth and trade strategy for manufacturing, 
of which the trade strategy must be proactive and not 
protectionist.
    Mr. Baker. Mr. Chairman, if I could very quickly comment.
    The Chairman. Very good. Dr. Jasinowski, if you have to 
excuse yourself, we understand.
    Mr. Jasinowski. Thank you very much, Mr. Chairman.
    The Chairman. We thank you very much for your appearance.
    Mr. Baker. I just want to comment very quickly about Mr. 
Jasinowski's point on energy. All of us would like cheap 
energy, but the fact is energy prices fell a great deal in 
1997, 1998, and 1999, and I would trust very few of Mr. 
Jasinowski's members expected those prices to stay very low. So 
in other words, if they acted as though those very low prices 
were normal and are suddenly surprised, I think that is simply 
bad business more than a problem of our energy policy.
    The Chairman. Well, I wish I had that article from last 
September's Business Week. In fact, they were talking about 
earlier in the year of last year where the market experts at 
the New York Stock Exchange had counseled the oil companies to 
cut back on production to get their stocks up because they were 
not competing with the high tech stocks, so to cut it back.
    So now they cut it back and a year later they call it a 
crisis. There is no real crisis there.
    You gentlemen all talk about not worrying about the high 
tech industry. Yet 42 percent of Silicon Valley is part-time 
employees. They have no health care and they have no retirement 
plans. I want more manufacturing jobs. That is middle America. 
That is the strength of the democracy.
    At the BMW plant, Mr. Griswold, over 50 percent, over half 
have lived there all of their lives, within 50 miles of that 
plant there in Spartanburg, South Carolina. We had never before 
made a car in South Carolina in our lives. But BMW came to 
South Carolina and not Detroit because we have the training.
    BMW can train you in any kind of real manufacturing 
production.
    But it is going overseas, Senator. I was amused because I 
have been in this debate since I have been in the Congress and 
my Boeing friends out there in Seattle and everything say 
protectionist, protectionist. I am a protectionist. We have the 
Army to protect us from enemies outside our borders, the FBI to 
protect us from enemies within, Social Security to protect us 
from the ravages of old age, and Medicare to protect us from 
ill health.
    Fundamentally government is to protect the economic 
strength of this land. It is like on a three-legged stool of 
security. You have got the one leg of our values, unquestioned. 
You have got the second leg, the military, unquestioned. But 
the economic leg is fractured and we have got to strengthen it, 
and we have got to do it through manufacturing, through middle 
America.
    I just hate to get all of these economic rationales of how 
everything is confused with the important issues of job 
training or oil imports. I just do not want to clutter the 
record. I got word yesterday from the International Trade 
Commission that everything is in a deficit. I am meeting with 
them this afternoon, but I was amazed. Of course, they have got 
agriculture in there and I find out that we have got a deficit 
in the balance of trade with the People's Republic of China in 
cotton. Can you imagine that?
    And they can exceed us--we will have it soon in wheat, and 
then the Midwest crowd will sober up. You know, they talk about 
us in textiles. They get subsidies, you know what I mean. Their 
entire operation is protected and everything else; they cannot 
lose.
    But in any event, let me ask--oh, on steel. You do not put 
it off on steel. We started with McNamara running all around 
the world with the World Bank, and they tell every emerging 
Third World country that you have got to have the steel for the 
tools of agriculture and the weapons of war. Willy Krup from 
Germany, I dedicated one of his plants 40 years ago on the 
Rhine in Kiel, Germany, right across from Strasbourg. He built 
them all over America, all over Saudi Arabia, and when he went 
into an air crash he was building them in the People's Republic 
of China.
    We have got Nucor, the most competitive steel plant that 
you could possibly find. He built Georgetown, but they just 
declared bankruptcy. Why?, because they are dropping the price 
of steel. Whoever testified was exactly right. When they 
dropped the steel $24 more than we charge rather than the 176, 
they are dumping it at less than cost.
    So we have these hearings on dumping and you go before the 
International Trade Administration and they find a dumping 
violation. But you go over to the fix commission, the 
International Trade Commission, and, oh, there is no injury, 
and they give you this economic rationale and we continue to go 
out of business.
    When you lose 675,000 manufacturing jobs in 10 months, we 
in Congress have got to take note. We have got to take note.
    Now let me yield and let each of the three comment. Yes, 
sir.
    Mr. Faux. Starting with steel, it seems to me, Mr. Chairman 
that it is a great example of why our trade policies are 
failing. For a long time our trade policies were a function of 
the cold war. We parceled out the U.S. market to provide people 
with an incentive for being on our side. Well, the Soviet Union 
has been out of business now for more than a decade, but we are 
still operating trade policies on the basis of objectives that 
are not connected to the considerations for developing high-
wage jobs in this country.
    Steel is a perfect example. If you are looking out at a 
world which has this huge overcapacity, in part because the 
World Bank and the IMF and others have done it, but if you are 
looking out at that world it makes no sense to have a trade 
policy that assumes somehow that we can get our share competing 
against people who are subsidized and whose wages are below the 
productivity gap.
    Let me give you an example of that. I was in northern 
Mexico a little while ago and I went into a plant where they 
make television sets and parts for TV's. It was a Sanyo plant. 
I asked the manager what was the productivity of this plant in 
terms of skilled workers producing high-quality goods? He said:

    ``Well, we have been in business for 4 years. It took us 2 years to 
catch up to the Koreans and now we have the productivity that equals 
plants in the United States and in Japan.''

    So I said: ``Well, OK, your productivity is equal; what is 
the ratio between the entry wage here and the entry wage at a 
similar plant in the United States? Without blinking he said: 
``It is one to ten.''
    Now, if your labor productivity is the same and you are 
paying 10 percent of the wage cost, you have a comparative 
advantage that no genius entrepreneur in the United States is 
ever going to be able to overcome.
    So what should we do about it? First I think we should have 
a pause in the breakneck speed that we are on to sign trade 
agreements all over the world. We do not need to do the Free 
Trade Agreement of the Americas, which would expand NAFTA to 
the rest of the western hemisphere, before we have absorbed the 
lessons of NAFTA.
    We were told before NAFTA that we would have a trade 
surplus with Mexico. It turns out we have a trade deficit. I 
remember journalists and people in this building asking me: 
``What are your friends in the automobile industry worried 
about?'' ``What are those auto workers worried about?'' They 
will get great jobs because we will have a trade surplus on 
autos with Mexico, all those Mexican consumers buying U.S. 
cars.
    None of that worked out. Now, the point is not that people 
made mistakes in forecasting the future. The point is we made 
this treaty on the basis of assumptions that have not turned 
out. It is now time for us to look at that again and say, where 
did we go wrong and what do we have to do when we do the next 
treaty in order to make sure we do not repeat those mistakes.
    No business would be losing money for 20 years without 
asking itself, are we doing the right thing here? Well, 
essentially we have been losing money for 20 years on trade and 
it is about time to ask ourselves what are we doing.
    I think that the dollar issue is a major question. I think 
there is a mystery here that we have got to clear up. We have 
reduced interest rates relentlessly over the last 6 months and 
we still have a dollar that is overvalued. The Fed does not 
know what to do with it. We have got a world out there that we 
do not understand and it is suicidal for us to keep signing 
these trade agreements, essentially doing the same thing we 
have done for the last 10 or 20 years.
    We certainly need a commitment to lowering the value of the 
dollar. I also think that we need a strategy for manufacturing. 
Every other country in the world has an industrial policy. Our 
industrial policy is entirely a function of defense spending. 
That is our manufacturing policy.
    The Chairman. What was that?
    Mr. Faux. Our manufacturing policy in this country is 
entirely a function of defense spending. That is the only area 
in which we pay any attention to the issue of a healthy 
manufacturing. Now, it obviously makes sense for national 
security to do that, but we have lots of other considerations 
that we talked about here in our national interest in having a 
strong and healthy manufacturing sector.
    I also think that we need to reorganize the way that we do 
trade policy. As I said before, trade policy has become focused 
and obsessed on deal-making. If I were appointed to be USTR 
tomorrow and I was looking at what would be my success in this 
job, the success would be make a deal. No matter what, make a 
deal. It is not guided by any policy. Deal-making has become an 
end unto itself in trade relationships, rather than a function 
of our national need to have a healthy economy.
    Some deals may be good, some deals may be bad, but they 
should be based upon a notion of what is good for the country, 
not on what is the best deal you can get. So I think that we 
need to take a serious look at the way we do trade policy. Any 
trade agreement that does not look at the issue of currency 
fluctuations and currency exchange at this point in the game is 
certainly not worth signing.
    The Chairman. Thank you.
    Mr. Baker.
    Mr. Baker. First off just in terms of the backdrop, one of 
the things that to me I think should be front and center is we 
are looking at a period, a quarter century, where the economy 
has had pretty healthy growth through most of that. 
Productivity has increased roughly 45 percent over the last 
decade--or the last 25 years. But if we look at the wages of a 
typical worker, it has barely changed, depending are we 
counting benefits or which price indices. You know, and we can 
play around with that a little bit.
    But the point is if they had kept pace, if your typical 
worker had kept pace with the rate of productivity growth, they 
would be 30 to 40 percent richer than they are today. To me 
that is a crisis. What is this country about, what is our 
policy about, if not to ensure that most of the country can 
enjoy rising living standards through time? That to me is sort 
of the greatest tragedy that we could talk about, that we could 
say for a quarter century there is very little to show.
    Now, I do not mean to say trade is the whole story, but 
clearly it is an important part of that. I do not know any 
economist--perhaps I will get an exception here with my 
colleague, but I cannot think of any economist who has argued 
that it is not part of that story.
    So I think we have to keep that in mind as the backdrop. 
The second point, not to keep beating a dead horse on this, but 
the strong dollar. You know, we send our manufacturers out 
there into the world with a 20, 25, 30 percent handicap 
competing with other nations. How could you possibly hope to 
compete, regardless of whether they are being fair or unfair or 
whatever it might be? Going off the bat, they have to compete 
with nations that in effect have a 20 to 30 percent cost 
advantage simply because the dollar is strong.
    I have heard a lot of people say, well, what would you do? 
I am a big fan of talk. I think that sometimes talk goes a long 
way, and certainly Chairman Greenspan's talk goes a very, very 
long way because he is so strongly respected by financial 
markets. I was sort of struck. He was testifying yesterday, I 
believe it was before the Senate Banking Committee, and he 
tried talk there. He suggested that bank loan officers were 
being too tight with credit and he urged them to loosen their 
standards.
    I would just question to you, which sounds more plausible, 
that bank credit officers will change their lending standards, 
in other words give a loan to someone they otherwise would have 
rejected because Chairman Greenspan said it would be good for 
the economy, or that if Chairman Greenspan says, ``Look, the 
dollar is at an unsustainable level, it has got to fall?'' I 
suspect the latter would have more of an impact, and I would 
have liked to have seen that sort of talk from Chairman 
Greenspan and perhaps also from the administration.
    The last point I want to make is just to reiterate Jeff's 
point about the need for a pause in these agreements. You know, 
we should say, OK, fine, maybe we want to do an FTAA with the 
rest of Latin America, maybe we want to go along with other 
trade agreements. But the question is what is the cost of 
delay? Suppose we waited a year, suppose we waited 2 years, 
suppose we waited 3 years.
    We have heard a lot of talk, well, others will get in there 
sooner. You know, let us have someone do a cost-benefit 
analysis of that. What would that mean? Who is going to get 
there sooner? They will not trade with us 3 years from now?
    It is a little hard to tell that story, I think, with a 
straight face.
    So I think the point Jeff made is very well taken, that let 
us get a better analysis of the impact of the past trade 
agreements, let us get the currency sorted out, because as long 
as we have a hugely overvalued dollar trade is not going to 
make sense in any respect, and then down the road, some time 
down the road, if we want to have more trade agreements, fine. 
But we are not going to lose anything by waiting 2, 3, 4 years, 
whatever it might be, to get things straightened out. So I 
would put a very strong emphasis on putting the brakes on for 
now.
    The Chairman. Mr. Griswold.
    Mr. Griswold. Senator, you started asking about steel. Let 
me just reiterate that the steel industry is not going away and 
it is in no sign of going away. Record production last year, 
the highest production in 25 years last year, 109 million tons 
shipped. Nucor, one of the most competitive companies, Nucor is 
going to be around no matter what happens on the trade front.
    I think the problems of the steel industry are worth a 
whole other hearing and I am sure there will be more. But they 
have a problem. They are not globally integrated. It is a 
fractured industry. They have just got a lot of problems, but 
the bottom line is they are virtually all home-grown.
    Third, let us not forget steel-consuming industries. They 
use a lot of steel at that BMW plant and in Detroit. These 
fabricated metal shops all around the country--the construction 
industry uses I believe about a third to 40 percent of the 
steel produced in the United States. When you drive up steel 
costs through, say, a section 201 action, you raise costs for 
all these industries, and for every worker in the steel 
industry there are 40 workers in these industries that use 
steel. You are making their jobs less secure by driving up the 
cost of steel through trade intervention.
    Second, wages and benefits. Yes, we had some problems in 
the seventies and eighties with productivity. Productivity 
lagged, productivity growth lagged from what it was in the 
sixties and as a consequence the growth in wages lagged. But if 
you read the Economic Report of the President, especially the 
last two, they point out very clearly that in the last half of 
the 1990's we had this spurt in productivity.
    Wages went up up and down the income scale. In fact, there 
was a lot of evidence that lower skilled, lower income workers 
were actually seeing their wages growing faster than upper 
income worker, at a time when, one, trade was expanding 
rapidly, trade deficits were going up. I am not saying wages 
went up because trade deficits went up. I am just saying that 
should give you pause in trying to blame everything on trade 
deficits.
    Finally, you ask what we should do. I think, one, we should 
keep our market open. There are two very indisputable facts. 
One, we have one of the most open markets in the world; and 
two, we have one of the most productive, efficient economies in 
the world. Americans enjoy a standard of living that is 
virtually unparalleled in the rest of the world. That is why so 
many people want to come here.
    We also have one of the most open economies. That should 
give us something to think about. Do we really want to follow 
Japan's example of a sort of heavy-handed industrial policy? 
You know, I had not heard the term ``industrial policy'' for a 
few years. Back in the early nineties we heard a lot of it. 
Here is the United States' industrial production: 50 percent 
above what it was 10 years ago. Japan, it is below what it was 
10 years ago. Do we want to mimic Japan's policies? I say no.
    Let us keep our market open. Let us pursue market-opening 
agreements abroad. If we are pursuing trade agreements at a 
breakneck speed, I would hate to see what it is when we slow 
down, because we have not signed many agreements lately. There 
have been small ones, but basically trade policy, trade 
negotiations, have slowed down very much.
    But we need to sign agreements to encourage open markets 
abroad and to keep trade barriers down. Then finally, of 
course, we need to pursue sound domestic policies of low 
taxation, sensible regulation, stable monetary policy. These 
are the things that attract capital from abroad.
    Yes, I do not doubt that there are some industries, like 
the textile industry and others, where the flow of jobs and 
investment has been to overseas. In a way, that is the natural 
evolution of economies. The less developed economies tend to 
take on these more labor-intensive, low-skilled manufacturing 
jobs. That is the only way they are going to join the developed 
world.
    But as a whole, $36 billion a year in recent years has been 
coming into the United States. That is a net inflow of foreign 
direct manufacturing investment. 500 companies in South 
Carolina alone, as you know, from overseas, foreign-owned 
companies.
    I would say let us pursue more open trade. It has been a 
blessing to the United States. It will continue to be in the 
future.
    Thank you.
    The Chairman. Very good. You talked about the standard of 
living. There is no question that we here in the Congress are 
responsible for the disparity or otherwise high standard of 
living, Baker Manufacturing, we all agree, whether Republican 
or Democrat, has got to have a minimum wage, clean air, clean 
water, Social Security, Medicare, Medicaid, plant closing 
notice, parental leave, a safe working place, and safe 
machinery.
    I can keep going down the list, but if you can go down to 
Mexico at 58 cents an hour you do not have to worry. That is 
why the swishing sound is loud and clear.
    Yes, we sacrificed that economic backbone in order for 
capitalism to defeat communism, and we all believed in the 
Marshall Plan and in the policy and we are very happy it 
worked. But we have gotten to the position now where we just 
cannot continue to drain the tub. As of NAFTA, and we have the 
figures from the Bureau of Vital Statistics in the Department 
of Labor, since NAFTA and WTO we lost 276,000 manufacturing 
jobs since NAFTA and since WTO 670,000 manufacturing jobs, 
respectively.
    Now, we blame the Fed, but I think the record should show 
that the trade deficit was not helped a bit by our fiscal 
policy. We all talk about the short-term rates, but the long-
term rates--I have got an article in here from two of the Nobel 
Prize winners, Mr. Franco Modigliani and Robert Solow of MIT--
they are both professors emeriti of Massachusetts Institute of 
Technology, and we will include that in the record--where we 
went in the exact wrong direction with the so-called tax cut 
because of the large surpluses.
    [The material referred to follows:]

                [From The New York Times, April 9, 2001]

                      America is Borrowing Trouble

             (By Franco Modigliani and Robert M. Solow)\1\
---------------------------------------------------------------------------

    \1\ Franco Modigliani and Robert M. Solow are Nobel Prize winners 
in economics and professors emeriti at the Massachusetts Institute of 
Technology.
---------------------------------------------------------------------------
    Cambridge, MA.--Many have criticized President Bush's proposal for 
a deep and lasting cut in income taxes, but hardly anyone has addressed 
its implications for what may well be the greatest potential danger 
facing the economy in the years to come: the large and growing deficit 
in our international trade balance. A massive, permanent tax cut would 
make the international economic position of the United States worse, 
not better. This is in addition to its other disadvantages.
    The past decade has been one of exceptional economic vigor: output 
increased nearly 40 percent, investment more than doubled and 
consumption grew just over 40 percent, pushed by a spending spree that 
reduced personal saving to near zero. But this rosy picture was 
accompanied by one worrisome development: throughout this period, 
spending grew faster than what the country earned, spilling over, in 
large part, into a growing trade deficit. By the end of 2000, the 
excess of expenditure over income had reached about 4 percent of 
America's gross domestic product and was apparently still on the rise.
    For a country, just as for a family, there are only two ways of 
getting the money to spend more than one's income: borrowing it and 
selling assets. In the case of nations, the creditors and the buyers of 
the assets are foreigners. And inded, throughout this prosperous past 
decade the United States sold more and more assets, like government 
bonds and shares in its companies, and went deeper and deeper into 
debt.
    But why should one worry about this development? It is not serious 
as long as the debt is small and remains under control so as not to 
worry creditors. But if the debt is not under control, or if some event 
makes the debtor appear less creditworthy than before, the creditors 
may decide that they are not willing to finance a country's growing 
debt--for fear of a depreciation of the debtor's currency that lowers 
asset values in their own currencies. They may even want to liquidate 
part of their investment in search of diversification. If such a thing 
happened to the United States, there could be very unpleasant 
consequences for Americans.
    Depreciation of the dollar would make imports so expensive and 
exports so cheap as to eliminate the trade deficit. But this 
depreciation would create a further motive for foreigners to liquidate 
their American assets, dumping the dollars so obtained in exchange for 
foreign currency. The size and power of the American economy has 
protected us from capital flight in shorter episodes of unfavorable 
trade balance, but there is no guarantee that this will remain true. 
Nor could the dollar be propped up through purchases by the Federal 
Reserve or the Treasury, since their small reserves of foreign currency 
would be woefully inadequate to stem the tide. (The United States 
reserves amount to some $60 billion compared with a current trade 
deficit of $400 billion a year, just 2 months' borrowing.)
    Thus a flight from the dollar would produce a deep devaluation and 
accompanying rise in the prices of imports and of things made with 
imports. At worst we might experience a wage and price spiral, calling 
for sharply higher interest rates. The final result could be failing 
investment and output, and high unemployment. And our weakness would be 
very likely to spread to other countries.
    Few believe that this hard-landing scenario is an immediate threat. 
But there is good reason to believe that if nothing is done to change 
the current course, the probability of a costly ending will keep 
increasing. To avoid that danger, the administration and Congress 
should develop a.plan that promptly stops the growth of the trade 
deficit, then reduces it to zero and possibly produces a positive 
balance, allowing for some repayment--and all this without an 
appreciable increase in unemployment.
    The success of such a plan would rest on two main ingredients: a 
gradual reduction of total domestic expenditure relative to income--
that is, a rise in national saving--and an increase in net exports. 
These two components should proceed hand in hand; indeed, given the 
current level of demand for domestically produced goods and services, 
if we added to it by shifting more of our output to exports 
prematurely, the result would be inflationary pressures. Conversely, a 
reduction of domestic demand would have to be ountered by an expansion 
of net exports to avoid creating a contraction in output and 
employment.
    Unfortunately, there is no evidence that the administration and 
Congress are concerned with the balance of trade issue or are even 
aware of it. On the contrary, President Bush is galloping in exactly 
the wrong direction with his advocacy of using the likely (though by no 
means certain) large forthcoming budget surplus for a deep, permanent 
tax cut, rather than for retiring the debt or endowing Social 
Security--or both.
    The president's proposal is just the opposite of the needed 
increase in national saving, and the consequences would be very 
negative. First, it would raise consumption by roughly one dollar for 
every dollar of tax reduction--which is precisely what the supporters 
of the bill claim to be its justification. But, given the limitations 
on our labor force and our abiity to produce, the rise in consumption 
would sooner or later produce some combination of the following 
unhealthy outcomes: significant inflationary pressures, in part undoing 
the tax rebate; a likely rise in interest rates to counter the 
inflation, leading to a reduction in investment; and a further increase 
in the trade deficit.
    Can anyone really favor encouraging a further expansion of the 
recent spending spree at the expense of investment, the source of 
future growth? Or reducing taxes at the expense of a sharp addition to 
future taxes, required to service a much larger debt at higher interest 
rates? Or supporting a tax cut financed with money borrowed abroad, 
even in the favorable case in which foreign lenders would be prepared 
to finance a rapidly growing debt?
    If Congress is acting responsibly, the least it can do is to 
postpone a deep permanent tax cut until this trade balance has turned 
positive.
    But, some tax-cut proponents will argue, what if right now there is 
a clear danger of a significant economic contraction? If this were 
clearly the case--and it is still in doubt--then some measure to 
support demand might be appropriate. But the best approach would be to 
expand net exports, helping both domestic demand and the trade 
balance--perhaps by aiming at a controlled, limited devaluation of the 
dollar and by encouraging other countries, like Europe, to pursue more 
expansionary policies in their own interest.
    It may even be justifiable to consider a modest, temporary tax cut, 
but with a warning that theory and evidence suggest that transitory tax 
cuts are likely to produce only limited, quick effects.

    The Chairman. Any of you at the panel believe we are going 
to have a surplus at the end of this fiscal year in a few 
months, at the end of September? Do you believe we are going to 
have one, Mr. Griswold?
    Mr. Griswold. You are talking about the fiscal?
    The Chairman. Yes, the budget deficit or surplus. Do you 
think we will have a surplus? We have had lowering deficits 
each year now for 8 years, but it has been my contention that 
we are headed back up with that tax cut. You think I am wrong, 
is that right? Do you think that we are going to end up with a 
surplus here?
    Mr. Griswold. Are you talking unified budget including 
Social Security?
    The Chairman. Do not give me that doubletalk. Do not play 
that game. I can give you the exact figure. The so-called what 
they call public debt unified, not including Social Security 
and everything, is $114 billion that it has been lowered. But 
they borrowed $100 billion from the government in order to do 
that. We are spending Social Security money at this minute, and 
everybody is talking about how to save it. All they have got to 
do to save it is quit spending it, quit spending it. There is 
no mystery to this.
    Do you think we are going to have the debt go up or go down 
as of the end of this fiscal year in September?
    Mr. Griswold. The trend in the last couple of years at 
least has been for the publicly held national debt to be going 
down.
    The Chairman. No, no, do not give me--the overall national 
debt is what I am talking about, how much money comes in and 
how much money goes out, not what we borrow from each other.
    Mr. Griswold. Well, you would need to get somebody in here 
who is a budget expert.
    The Chairman. Well, sir, I have been on the Budget 
Committee since we started. I am not an expert, but I have 
followed it.
    Do you think we are going to have a surplus or a deficit? 
Is the debt going up or down by the end of September?
    Mr. Baker. We are going to have a certainly smaller surplus 
this year than last, and it may well be a deficit. But the one 
thing I would be willing to wager on is by your measure we 
would certainly have a deficit next year, because the 
prediction rests on us having somewhere on the order of $120 
billion in capital gains tax revenues next year. With the stock 
market down as much as it is, I am willing to bet we are not 
going to see that. So for next year at least, I would feel 
pretty comfortable in saying by this measure of the on-line 
budget that it will be in deficit next year.
    The Chairman. How about you, Mr. Faux?
    Mr. Faux. I think you do not have to be a budget expert, 
Mr. Chairman. You just have to look at the trend in the 
economy. Essentially, we have made a decision with this tax cut 
to borrow money in order to provide tax relief, mostly to 
people on the top. So that we may squeak by the end of October, 
but we are in bad trouble in terms of next year.
    The Chairman. Well, as of last night we had $31 billion and 
we were in the black. But by next week, the end of June here, 
we are going to pay the interest cost, which comes every 6 
months, and it will be around $79 billion. So we will end up 
this month with the debt increasing. There is no question that 
by the end of the fiscal year here in a couple of months, 
before we have spent any money with respect to any of the 
appropriations bills because we have not passed a single one of 
them, just on the present ones that we had the so-called tax 
cut, I will bet anybody--and if you want to take the bet we 
will talk about odds--that the debt will be increased at least 
$50 billion. How about that?
    You see, you talk about the headline in the morning paper, 
the front of the Washington Post says, Mr. Greenspan is puzzled 
why his interest cuts have not worked at all. It is fiscal 
policy, it is not monetary policy. When the market and 
everybody else sees it, the economic slowdown, the demise of 
manufacturing and everything else like that, they see what 
happened when we cut $750 billion of revenues under President 
Reagan and we went into a deep recession. Now we are cutting 
$1.6 trillion from a so-called surplus that did not exist. We 
do not have a surplus. The debt is going up each year. We were 
bringing it down and finally into the black as of last night, 
$31 billion.
    But by next week when they make that $79 billion interest 
payment, it will go back into the red, and it will stay in the 
red July, August, and September, and it will go right on up 
some 50 billion bucks at least.
    But your testimony, you did agree I think on the overvalued 
dollar, and you gentlemen did agree that we need some kind of 
policy with respect to trade. There is no question about it. We 
have got 28 departments and agencies in it, and I have talked 
to Secretary Evans about it and we hope to develop, if we do 
not actually have a reorganization--I have put in a bill for 20 
years on a Department of Trade and Commerce and correlate them 
all into one entity, and let us get competitive and everybody 
know and understand the policy. I hope we can do that. Along 
that line, your testimony has been very, very valuable.
    We appreciate your appearance here this morning and the 
record will stay open for questions from the other Senators. 
Thank you all very much.
    The Committee will be in recess until the call of the 
chair.
    [Whereupon, at 11:33 a.m. the Committee was adjourned.]


                            A P P E N D I X

   Prepared Statement of Hon. John McCain, U.S. Senator from Arizona

    Thank you, Mr. Chairman--and thank you for continuing the dialogue 
on this important topic. While I know that members of this Committee do 
not always see eye-to-eye on trade issues, I think that we all benefit 
from this debate. Chairman Hollings, I would like to congratulate you 
for ensuring that both sides are well represented here today. I think 
we can expect a lively debate.
    I am an active proponent of free trade, and it is clear to me that 
free trade promotes prosperity, both domestically and abroad. Trade 
produces wealth and technological advancement, thereby encouraging 
innovation, competition, and improved productivity. U.S. corporations 
are not the only beneficiaries of that free trade. Consumers benefit 
from the dramatically reduced prices of goods and services that trade 
brings, allowing them to stretch their dollars further. By 2005, the 
Office of the United States Trade Representative estimates that reduced 
tariffs will allow the average American family of four to almost double 
their purchasing power on household items.
    This is by no means a new debate, but I hope that the protectionist 
tendencies on both sides of the isle will not deter the United States 
from enjoying the existing, and potential, benefits of free trade. 
Globally, the interdependence fostered by free trade benefits all 
global citizens. Multilateral trade agreements and membership in 
organizations such as the WTO advance democratic values and encourage 
free markets, transparency, and the rule of law. Conflicts and wars are 
less likely to occur between trading partners, freely exchanging goods 
and services. From this perspective, free trade is more important now 
than it has ever been.
    While there are many benefits associated with free trade, 
employment displacement remains a concern in the trade debate. Job 
displacement is an unfortunate aspect of free market economies, whether 
due to technological advancement, changes in consumer preferences, or 
trade. Just as the automobile replaced the buggy, new technologies will 
continue to emerge, and old technologies eventually become obsolete. 
These changes naturally result in both the creation and the loss of 
jobs. While buggy manufacturers were forced to cut jobs, the new 
automobile industry created many more. This cycle will continue as long 
as innovation and ingenuity remain.
    Today, much of our manufacturing labor force has shifted from labor 
intensive to capital intensive work. Not only are more Americans now 
employed thanks to freer trade, they now work in better, higher paying 
jobs. Export supported jobs pay an average of 16% to 20% more than the 
average wage. Trade has given workers the opportunity to earn more and 
stretch their dollars further than ever before, improving the overall 
quality of life. Workers displaced by major industrial shifts merit 
attention and concern, but do not in any way justify protectionist 
actions.
    In general, U.S. workers benefit more from free trade than from 
protectionism. According to the Office of the U.S. Trade 
Representative, in just four years--from 1994 to 1998--1.8 million new 
jobs were created by the increased exportation of goods and services. 
During this same period, the unemployment rate declined from 6.1% to 
4.5%. When the U.S. trade deficit expanded, unemployment levels 
continued to decline.
    Isolationist and protectionist sentiments are natural in a nation 
as vast as the United States. For many years we did not need to rely on 
other nations to provide us with goods and services, we produced them 
ourselves. Today, our economic strength has created a demand greater 
than our production capacity, and we need to import goods in order to 
meet the demands of our consumers. Our trade deficit should be 
celebrated as a sign of our economic strength.
    The world is now politically and economically interdependent. It is 
time to stop hesitating. Rather than fear freer trade, we must embrace 
it.

                                 ______
                                 
  Prepared Statement of Hon. Jean Carnahan, U.S. Senator from Missouri

    We are all familiar with the manufacturing job loss numbers 
reported lately. It seems like you can hardly open the newspaper 
without reading about another factory closing and more job layoffs.
    In the Midwest, new unemployment claims have risen almost 45% from 
the same time three years ago. There is little doubt that job losses 
are on the rise in the Midwest.
    For example, Kansas City recently lost 750 good, high-quality jobs 
when GST Steel shutdown a steel plant first opened in 1888. Soon, a 
bakery that has been a part of St. Louis for sixty years will close its 
doors. 110 workers will be out of a job.
    These are only a couple of examples of Missouri plants that have 
closed in recent years. There are many more examples throughout the 
Midwest and throughout the country.
    When we see articles on these plant closings we see figures like 
750 jobs but do we really recognize the impact of this fact? Do we see 
the impact that a plant closing has on the workers who lose their jobs, 
their families, and on their communities?
    What happens to these laid-off workers? What happens to their 
families? What happens to the communities where the plants are located?
    Often these workers are losing good-paying, skilled jobs. Are they 
able to find jobs with comparable pay or benefits or are they forced to 
take a lower paying job just to put food on the table? Are there 
adequate resources available to help a laid-off worker find a new job?
    Is the spouse of a laid-off worker forced to leave the home or take 
a second job to pay the bills?
    We cannot ignore the effect that a mass job loss has on the 
community in which a factory is located. Without a dependable source of 
revenue that came from the paychecks of these workers, local 
businesses, churches, and charitable organizations are bound to suffer.
    There are many possible reasons to explain why these jobs are being 
lost and that is a whole other debate entirely. The key issue is 
ensuring that we are able to handle the aftermath of these job losses.
    Bringing attention to what is happening in our communities through 
this hearing is a good first step in the right direction.

                                 ______
                                 
   Prepared Statement of the American Textile Manufacturers Institute

    This statement is submitted by the American Textile Manufacturers 
Institute (ATMI), the national trade association of the United States 
textile industry. The combined U.S. fiber/textile sector, which 
includes cotton and wool growers, man-made fiber producers, yarn 
spinners, knitters, weavers and home furnishings manufacturers is one 
of the largest manufacturing sectors in the United States, employing 
over 600,000 workers and representing over $100 billion in sales.
    The topic of this hearing--current conditions of U.S. manufacturing 
and the impact of the manufacturing recession--is a particularly timely 
and important one to the U.S. textile industry. Rarely, if ever, has a 
major manufacturing sector such as textiles, one which has successfully 
weathered the Great Depression and 12 subsequent recessions, seen its 
fortunes contract as swiftly and as devastatingly as they have over the 
past three and a half years.
    To put the current crisis in perspective, in 1997, the U.S. textile 
industry posted record shipments, near-record profits, near-record 
investment in new plant and equipment, record fiber consumption, record 
productivity growth and record exports.
    Last year, the industry posted its first ever annual loss (over 
$350 million) and has experienced 3 years of declining shipments and 
fiber consumption and 3 years of sharply declining prices. This year 
the crisis in the industry deepened further--in the first 6 months of 
the year, at least 44 U.S. textile mills have closed their doors, 
including two textile companies that had been in business for over 100 
years. In May 2001 alone, 9,000 U.S. textile workers lost their jobs. 
Over the past 12 months, 10 percent of the textile workforce--56,000 
workers--lost their jobs.

       DEVASTATING EFFECTS OF ONGOING ASIAN CURRENCY DEVALUATIONS

    The catalyst for the current crisis is the severe Asian currency 
devaluations that began in June 1997 and have continued to this day. As 
the accompanying chart shows, since 1997 the currencies for the top ten 
Asian textile-exporting countries have declined on average by 40 
percent. The currencies of India, Indonesia, Pakistan, the Philippines, 
Sri Lanka and Taiwan are now at record lows. Imports of textiles from 
these and other Asian countries, after years of relatively low growth, 
have jumped 80 percent over the past 4 years.
    In the face of these depressed import prices, U.S. producer prices 
for yarn and fabric have fallen sharply over the past 3 years. In late 
1998 and 1999, U.S. textile profits began to plummet; in 2000, they 
turned sharply negative. This year, bankruptcies and mill closures 
escalated sharply as cash-flows all but disappeared. ATMI President 
Charles Hayes describes current industry conditions ``as the worst I've 
seen them in 50 years in the industry.''
    This devastation has not only been wrought by artificially low 
Asian currencies. Unfortunately, U.S. Government policy as well as 
flawed international agreements have added to and deepened the current 
textile crisis.

[GRAPHIC] [TIFF OMITTED] T9034.006

    The rest of this statement examines the role that U.S. Government 
policies have, unwittingly or not, played in contributing to the 
current crisis. It concludes with a number of urgently needed action 
steps by the government to rebalance the competitive situation.

            U.S. GOVERNMENT INACTION & FLAWED POLICY-MAKING

    While the textile crisis was precipated by the collapse of Asian 
currencies, U.S. government inaction and flawed policies have made the 
crisis much worse. In particular, ineffective or harmful U.S. 
Government trade policies at the Commerce Department, the United States 
Trade Representatives Office, the Treasury Department and the U.S. 
Customs Service have cost the U.S. textile industry billions of dollars 
of lost sales a year and thousands of jobs. With the onset of the weak 
economic conditions in the United States, these policies have become a 
strong contributing factor in the devastation that is occurring today 
in the U.S. textile sector.
Ineffective or Harmful U.S. Policies
    1. U.S. Customs: Refuses to Make Textile Fraud a Priority Despite 
Documentation of Dramatically Increased Smuggling From Asia
    2. U.S. Treasury: Strong Dollar Policy Contributes to Artificially 
Low Asian Textile Prices
    3. USTR: Continues to Ignore Industry Requests to Make Textile 
Market Access a Priority
    4. Commerce Department: Regulations Hamstring Industry Efforts to 
Attack Illegal Dumping and Subsidization

   1. U.S. CUSTOMS: REFUSES TO MAKE TEXTILE FRAUD A PRIORITY DESPITE 
                  DOCUMENTATION OF INCREASED SMUGGLING

    Widespread Customs fraud totals billions of dollars annually and 
represents lost sales and jobs for U.S. textile industry. While U.S. 
Customs as well as the U.S. domestic industry have repeatedly 
documented a continuing flood of illegal textile transshipments through 
dozens of countries, U.S. Customs has proven unwilling or unable to 
devote the time and effort to significantly affect the flood of Asian 
transshipped and smuggled goods.
    In the last 2 years, the domestic industry has raised new concerns 
about increased smuggling of Asian goods that pass through Mexico or 
are smuggled directly into the United States as ``in transit'' goods. 
In 2000, Mexican sources estimated that hundreds of millions of dollars 
of goods marked ``made in Mexico'' but actually shipped from China and 
other Asian countries are sold into the domestic Mexican market. Many 
of these goods then enter the United States as NAFTA products and pay 
no duty.
    Independent investigations by ATMI which have been shared with both 
Mexican and U.S. Customs have also shown increasingly large amounts of 
smuggling of Asian textile and apparel products on the U.S. side of the 
border, usually going through San Diego, Nogales or Laredo and often 
marked as ``in bond'' or ``in transit\1\ '' goods.
---------------------------------------------------------------------------
    \1\ ``In bond'' or ``in transit'' refers to goods that are supposed 
to be transiting U.S. territory but not entering U.S. commerce. U.S. 
Customs does not inspect these goods and electronically ``wipes'' 
entries once shipments supposedly exit U.S. territory. Smugglers take 
advantage of the lack of Customs oversight to send Asian goods ``in 
transit''to Mexico but then to divert them while in the United States 
into U.S. commerce. The goods not only avoid quotas but duties as well.
---------------------------------------------------------------------------
    To its credit, the Mexican government has cracked down hard on its 
side of the border, seizing thousands of containers of illegal Asian 
textile products and replacing dozens of ineffective or corrupt customs 
officials. The U.S. Customs Service, despite its own internal reports 
that estimate up to half a billion dollars in Asian goods are being 
smuggled as ``in transit'' goods, has yet to act in an effective 
manner.

2. U.S. TREASURY: STRONG DOLLAR POLICY KEEPS ASIAN PRICES ARTIFICIALLY 
                                  LOW

    Since the Asian financial crisis began in 1997, the U.S. Government 
has promoted a ``strong dollar' policy partly in order to assist Asian 
economies in exporting their way out of the crisis caused by widespread 
government mismanagement of financial sectors across Asia and partly to 
avoid U.S. inflationary pressures. The U.S. Government effort has 
``worked.'' Asian textile exports have risen 80 percent and Asian 
economies are again showing positive growth rates.
    On the domestic side, however, the strong dollar policy has helped 
to unleash a flood of artificially low-priced Asian exports that has 
created a enormous swath of destruction in what had been a profitable, 
growing industry, one consistently ranked as among the most modern and 
productive in the world. Entire domestic textile complexes, full of 
State of the art equipment, are now being dismantled and sold, often to 
Asian manufacturers, at fire-sale prices. The strong dollar has also 
paralyzed U.S. textile exports--formerly a strong growth area--which 
make up nearly 15 percent of textile output.
    By continuing to promote the strong dollar, particularly during 
weak economic times at home, the U.S. Government encourages this 
predatory behavior to continue full force.
    The damage has not been limited to just the textile sector. The 
National Association of Manufacturers (NAM), in a letter to Secretary 
O'Neill, has called the effects of the strong dollar ``staggering.'' 
NAM noted that ``a growing number of American factory workers are being 
laid off principally because the dollar is pricing our products out of 
markets--both at home and abroad.\2\ ''
---------------------------------------------------------------------------
    \2\ June 4th, 2001. For a copy of a press release and the letter, 
go to: http://www.nam.org/tertiary.asp?TracklD=&CategorylD=1 
&DocumentlD=23097.
---------------------------------------------------------------------------
 3. USTR: CONTINUES TO IGNORE REPEATED TEXTILE REQUESTS TO MAKE MARKET 
   ACCESS A PRIORITY--WHILE U.S. GOVERNMENT DOUBLES ACCESS FOR ASIAN 
                                TEXTILE 

                               EXPORTERS

    In 1994, as part of the Uruguay Round Agreements Act, the U.S. 
Government assured the domestic textile industry that it would get 
market access to lucrative Far Eastern markets that have been closed to 
U.S. textile exports for generations. The government also included in 
the legislation, punitive measures that were supposed to be invoked if 
the major textile exporting countries in Asia continued to keep their 
markets closed.
    Seven years later, not only have these market openings failed to 
materialize, but the U.S. Government has refused to take the punitive 
steps it promised against Asian exporters that continue to keep their 
markets closed. As a result, most of the textile exporting countries 
still block most or all U.S. textile exports from their markets\3\.
---------------------------------------------------------------------------
    \3\ For an in depth look at U.S. Government promises regarding 
market openings for U.S. textile products see ``Promises Unkept: A 
Report on U.S. Textile Access'' at http://www.atmi.org/Promises.pdf.

[GRAPHIC] [TIFF OMITTED] T9034.007

    Thus, while the U.S. Government has doubled access to the U.S. 
textile market for Asian suppliers since 1994\4\, it has gotten no new 
or compensating access to overseas markets for U.S. textile 
manufacturers. Repeated industry attempts to get the government to take 
action under various discretionary government vehicles, including the 
GSP clause, the market action provisions of the Agreement on Textiles 
and Clothing and Section 301 have met with almost total failure. In 
addition, industry attempts to get the government to list textile 
market access as a priority trade area have been repeatedly ignored.
---------------------------------------------------------------------------
    \4\ The United States agreed as part of the Uruguay Round 
Agreements to progressively increase textile and apparel market access 
into the United States for Asian countries.
---------------------------------------------------------------------------
  4. COMMERCE DEPARTMENT: REGULATIONS HAMSTRING INDUSTRY IN ATTACKING 
 ILLEGAL DUMPING AND SUBSIDIZATION--OTHER IMPORTANT TRADE REMEDIES ARE 
                            BLOCKED AS WELL

    Since the Asian financial crisis caused Asian economies to go into 
recession, reports of dumping of textile products from Asia have been 
on the upswing. In particular, textile imports from China, Indonesia, 
Korea, Pakistan, and Thailand have been entering the United States at 
prices even below those that deflated Asian currencies could support.
    However, in many instances, U.S. Commerce regulations prevent U.S. 
textile manufacturers from taking effective actions against dumped 
Asian goods. Under current U.S. dumping laws, Asian producers of dumped 
textile products can often make minor technical changes to their 
products in order reclassify them under a different tariff line and 
thereby avoid dumping margins.
    In addition, countervailing duty (CVD) rules developed by the 
Commerce Department, which are aimed at illegal subsidies, are also 
limited in their effectiveness. The Commerce Department refuses to 
allow CVD cases to be brought against non-market economies, despite the 
fact that these economies often subsidize their exports to a much 
greater degree than market economies. In cases like China, government 
subsidies for state-owned textile mills--which have lost money in six 
out of the last 7 years--provide Chinese exporters with a large, and 
unfair, competitive edge. This situation will worsen when Vietnam, with 
its large state-owned sector, receives NTR tariff treatment.
    ATMI would also like to note that. two important trade remedies, 
the 201 petition and imposition of category specific quotas, are also 
of limited use to the domestic industry. A sector-wide 201 petition, 
which the Administration is pursuing on behalf of the domestic steel 
industry, should also be available to the domestic textile industry. 
However, the Uruguay Round Agreements Act denies the industry recourse 
to such a petition for products which are subject to quota coverage.\5\
---------------------------------------------------------------------------
    \5\ The Administration should consider initiating 201 actions in 
those instances, though limited, that it can be employed.
---------------------------------------------------------------------------
    In addition, in many instances over the past 5 years, textiles or 
apparel from WTO member countries have surged into the U.S. market. The 
U.S. Government has rarely established quotas on these products for 
fear of challenges by the WTO's Textile Monitoring Body (TMB), a non-
binding review panel dominated by developing countries.
    Since being formed in 1995, the TMB has erected voluminous new 
technical requirements for making a case for a new quota. These new 
TMB-imposed requirements are often impossible to meet in the United 
States\6\ and, rather than protest their inequity, the U.S. Government 
has essentially stopped seeking new quotas despite record import surges 
over the last few years. In some cases, damaging surges have come from 
non-WTO countries. Such surges are quickly addressable through the use 
of Section 204 import quotas, which cannot be reviewed by the TMB. 
However, in some instances, the U.S. Government has refrained from 
acting despite the clear presence of market disruption in the United 
States.
---------------------------------------------------------------------------
    \6\ Since the TMB requirements were imposed, the U.S. Government 
has required trade associations and groups to provide the additional 
data to meet the requirements. However, the American Apparel and 
Footwear Association, which consists mainly of apparel companies that 
import much more product than they produce in the United States, 
refuses to supply the data. As a result, the U.S. Government no longer 
imposes restraints against surging apparel imports from WTO members. 
Note that domestic textile industry companies that produce fabric for 
apparel have been hit the hardest of any textile sector by the recent 
surge from Asia.
---------------------------------------------------------------------------
 GOVERNMENT ACTIONS URGENTLY NEEDED TO REBALANCE THE COMPETITIVE ARENA

    During this time of economic crisis for the domestic industry, the 
U.S. textile industry needs its government to move swiftly to rebalance 
the competitive situation. Actions should include:
    (A) Self-initiation by the U.S. Government of dumping and 
countervailing duty, escape clause or other unfair trade cases against 
Asian countries that are dumping into the U.S. market and illegally 
subsidizing their exports; or otherwise injuring U.S. textile producers 
and workers.
    (B) A commitment by the U.S. Government not to lower textile and 
apparel tariffs during or prior to upcoming WTO negotiations.
    (C) New, effective efforts by U.S. Customs to curb textile and 
apparel transshipments and smuggling, particularly those involving 
preferential duty claims and in-transit shipments.
    (D) A comprehensive effort by the U.S. Government to open up the 
many markets that are still closed to U.S. textile products including 
the use of punitive actions against those countries that continue to 
block U.S. access.
    (E) Quota calls--Regarding WTO member countries, the United States 
should challenge the TMB, not the other way round, regarding its 
impossible data requirements. The United States should move forward and 
introduce quota restraints wherever market disruption is occurring, 
regardless of TMB protestations. For non-WTO countries, the United 
States should use Section 204 to introduce restraints to the fullest 
extent possible against non-WTO countries.
    (F) The United States should reject all attempts at the WTO by 
Asian textile exporting countries to speed up the quota phase-out 
schedule agreed to in the Uruguay Round or to liberalize other 
provisions of the Agreement on Textiles and Clothing. Recently, a 
number of these countries have pressed the Administration for new 
changes to the agreed upon rules and schedules governing textile and 
apparel trade in order to get yet more access to the U.S. market. These 
new efforts, coming from countries that continue to block U.S. textile 
access to their own markets and which have already enjoyed a doubling 
of their own access to the U.S. market, must be rejected.
    In addition, ATMI urges the U.S. Government to abandon its strong 
dollar policy, which is putting into peril the livelihoods of hundreds 
of thousands of U.S. manufacturing workers across this country.
                                 ______
                                 
                                                    NACFAM,
                                     Washington, DC, June 28, 2001.
Hon. Ernest Hollings,
U.S. Senate,
Washington, DC.
    Dear Senator Hollings: The Commerce Committee's hearing on the 
``Current State of American Manufacturing Industries'' on June 21st 
raised a number of important issues and certainly is a welcome addition 
to the national dialog on manufacturing.
    In concluding that hearing, you asked the panel to enumerate the 
most important issues facing manufacturing today. International trade, 
energy efficiency, interest rates, and health care costs, which were 
some of the issues mentioned, are certainly important, but we want to 
bring another to your attention--Sustaining Productivity Growth.
    The industry-led National Coalition for Advanced Manufacturing 
(NACFAM) has long taken the position that the key to expanding 
prosperity is technology-driven productivity growth across all industry 
sectors. Higher productivity growth rates enable the economy to grow 
with higher wages but lower rates of inflation and unemployment--
yielding Federal budget surpluses in the process.
    In particular, the manufacturing sector drives national 
productivity growth. In the 1990's, manufacturing productivity growth 
far exceeded that of other sectors. Now that the rate of growth is 
beginning to slow, it is imperative that American manufacturers and the 
Federal Government invest in those areas needed to maintain continued 
advances in productivity.
    NACFAM's Advanced Manufacturing Leadership Forum (AMLF) has 
conducted extensive research on the factors driving productivity growth 
over the last decade and policy actions needed to expand prosperity in 
the future. The AMLF, which includes leaders from industry, academia, 
and government, concluded that the economy is undergoing a major 
transformation-the fusion of the new economy with manufacturing-that is 
creating a second industrial revolution with enormous potential for 
expanding prosperity. In light of this momentous change in America's 
industrial capacity, the AMLF identified three key areas for policy 
action to support this industrial transformation:
    1. Basic research investment to support the fundamental role of the 
U.S. private sector to produce and integrate the next generation of 
process and product technologies.
    2. Workforce skills development to overcome extraordinary shortages 
of human capital and give American workers the tools needed to keep 
pace with rapid technological change.
    3. Improving the performance of small and medium sized enterprises 
through enhanced technology adoption, extension services and software 
interoperability.
    The findings were published in the White Paper: Smart Prosperity: 
An Agenda for Productivity Growth\1\ The paper presents the roadmap for 
achieving a high productivity economy that can benefit all economic, 
regional and demographic sectors. To implement the agenda leadership 
roles for the private sector and government were defined (at all 
levels). We are confident that, if the recommendations are acted upon, 
they will enable even higher levels of productivity growth that will 
drive greater prosperity.
---------------------------------------------------------------------------
    \1\ The publication referred to is being retained in Committee 
files.
---------------------------------------------------------------------------
    We welcome the opportunity to discuss these issues with you or your 
staff.
            Sincerely,
                                          Eric Mittelstadt,
                                                  Chairman, NACFAM,
                             Chairman Emeritus, Fanuc Robotics, NA.
                                                 Leo Reddy,
                                             CEO & Founder, NACFAM.
                                            Egils Milbergs,
                                                 President, NACFAM.
                                 ______
                                 
          Prepared Statements of The Economic Policy Institute
      NAFTA At Seven--It's Impact on Workers in All Three Nations

                             (By Jeff Faux)

    Each year since the implementation of the North American Free Trade 
Agreement (NAFTA) on January 1, 1994, officials in Canada, Mexico, and 
the United States have regularly declared the agreement to be an 
unqualified success. It has been promoted as an economic free lunch--a 
``win-win-win'' for all three countries that should now be extended to 
the rest of the hemisphere in a Free Trade Area of the Americas 
agreement.
    For some people, NAFTA clearly has been a success. This should not 
be a surprise inasmuch as it was designed to bring extraordinary 
government protections to a specific set of interests--investors and 
financiers in all three countries who search for cheaper labor and 
production costs. From that perspective, increased gross volumes of 
trade and financial flows in themselves testify to NAFTA's 
achievements.
    But most citizens of North America do not support themselves on 
their investments. They work for a living. The overwhelming majority 
has less than a college education, has little leverage in bargaining 
with employers, and requires a certain degree of job security in order 
to achieve a minimal, decent level of living. NAFTA, while extending 
protections for investors, explicitly excluded any protections for 
working people in the form of labor standards, worker rights, and the 
maintenance of social investments. This imbalance inevitably undercut 
the hard-won social contract in all three nations.
    As the three reports in this paper indicate, from the point of view 
of North American working people, NAFTA has thus far largely failed.
    These reports, based in part on more comprehensive labor market 
surveys in all three countries,\1\ show that the impact on workers in 
each Nation has been different according to their circumstances. For 
example, given their respective sizes, the impact of economic 
integration has been inevitably greater in Canada and Mexico than in 
the United States. But despite this, there are striking similarities in 
the pattern of that impact.
---------------------------------------------------------------------------
    \1\ The findings in this report grew out of work done in larger 
studies published in all three of the countries concerned. For more 
information on the U.S. labor market, see Lawrence Mishel, Jared 
Bernstein, and John Schmitt, State of Working America, 2000-2001, an 
Economic Policy Institute Book, Ithaca, N.Y.: ILR Press, an imprint of 
Cornell University Press, 2001.
    For a detailed analysis of the Mexican labor market, see Alcalde 
Arturo, Graciela Bensusan, Enrique de la Garza, Enrique Hernandez Laos, 
Teresa Rendon, and Carlos Salas, Trabajo y Trabajadores en el Mexico 
Contemporaneo, Mexico, D.F.: Miguel Angel Porrua, 2000.
    A recent analysis of the Canadian labor market can be found in 
Andrew Jackson and David Robinson, Falling Behind: The State of Working 
Canada, 2000, Ottawa, Ontario: Canadian Centre for Policy Alternatives, 
2000.
---------------------------------------------------------------------------
    In the United States, as economist Robert Scott details, NAFTA has 
eliminated some 766,000 job opportunities--primarily for non-college-
educated workers in manufacturing. Contrary to what the American 
promoters of NAFTA promised U.S. workers, the agreement did not result 
in an increased trade surplus with Mexico, but the reverse. As 
manufacturing jobs disappeared, workers were downscaled to lower-
paying, less-secure services jobs. Within manufacturing, the threat of 
employers to move production to Mexico proved a powerful weapon for 
undercutting workers' bargaining power.
    Was U.S. workers' loss Mexican workers' gain? While production jobs 
did move to Mexico, they primarily moved to maquiladora areas just 
across the border. As Carlos Salas of La Red de Investigadores y 
Sindicalistas Para Estudios Laborales (RISEL) reports, these export 
platforms--in which wages, benefits, and workers' rights are 
deliberately suppressed--are isolated from the rest of the Mexican 
economy. They do not contribute much to the development of Mexican 
industry or its internal markets, which was the premise upon which 
NAFTA was sold to the Mexican people. It is therefore no surprise that 
compensation and working conditions for most Mexican workers have 
deteriorated. The share of stable, full-time jobs has shrunk, while the 
vast majority of new entrants to the labor market must survive in the 
insecure, poor-paying world of Mexico's ``informal'' sector.
    As Bruce Campbell of the Canadian Centre for Policy Alternatives 
reports, Canada's increased market integration with the United States 
began in 1989 with the bilateral Free Trade Agreement, the precursor to 
NAFTA. While trade and investment flows increased dramatically, per 
capita income actually declined for the first 7 years after the 
agreement. Moreover, as in Mexico and the United States, Canadians saw 
an upward redistribution of income to the richest 20% of Canadians, a 
decline in stable full-time employment, and the tearing of Canada's 
social safety net.
    This continent-wide pattern of stagnant worker incomes, increased 
insecurity, and rising inequality has emerged at a time when economic 
conditions have been most favorable for the success of greater 
continental integration. The negative effect of increasing trade and 
investment flows has been obscured by the extraordinary consumer boom 
in the United States, especially during the period from 1996 through 
the summer of 2000. The boom, driven by the expansion of domestic 
consumer credit and a speculative bubble in the stock market, spilled 
over to Canada and Mexico. Their economies have now become extremely 
dependent on the capacity of U.S. consumers to continue to spend in 
excess of their incomes. As the air seeps out of that bubble, the cost 
of those nations' reliance on the U.S. consumer market is becoming 
apparent.
    The current imbalanced structure of NAFTA is clearly inadequate for 
the creation of an economically sustainable and socially balanced 
continental economy. The experience suggests that any wider free trade 
agreement extended to the hemisphere that does not give as much 
priority to labor and social development as it gives to the protection 
of investors and financiers is not viable. Rather than attempting to 
spread a deeply flawed agreement to all of the Americas, the leaders of 
the nations of North America need to return to the drawing board and 
design a model of economic integration that works for the continent's 
working people.
                                 ______
                                 
 NAFTA'S Hidden Costs--Trade Agreement Results in Job Losses, Growing 
         Inequality, and Wage Suppression for the United States

                          (By Robert E. Scott)

    The North American Free Trade Agreement (NAFTA) eliminated 766,030 
actual and potential U.S. jobs between 1994 and 2000 because of the 
rapid growth in the net U.S. export deficit with Mexico and Canada. The 
loss of these real and potential jobs\1\ is just the most visible tip 
of NAFTA's impact on the U.S. economy. In fact, NAFTA has also 
contributed to rising income inequality, suppressed real wages for 
production workers, weakened collective bargaining powers and ability 
to organize unions, and reduced fringe benefits.
---------------------------------------------------------------------------
    \1\ Potential jobs, or job opportunities, are positions that would 
have been created if the trade deficit with Mexico and Canada had 
remained constant, in real terms (and holding everything else in the 
economy constant). The total number of jobs and job opportunities is a 
measure of what employment in trade-related industries would have been 
if the U.S. NAFTA trade balance remained constant between 1993 and 
2000, holding everything else constant.
---------------------------------------------------------------------------
    NAFTA's impact in the U.S., however, often has been obscured by the 
boom and bust cycle that has driven domestic consumption, investment, 
and speculation in the mid- and late 1990's. Between 1994 (when NAFTA 
was implemented) and 2000, total employment rose rapidly in the U.S., 
causing overall unemployment to fall to record low levels. 
Unemployment, however, began to rise early in 2001, and, if job growth 
dries up in the near future, the underlying problems caused by U.S. 
trade patterns will become much more apparent, especially in the 
manufacturing sector. The U.S. manufacturing sector has already lost 
759,000 jobs since April 1998 (Bernstein 2001). If, as expected, U.S. 
trade deficits continue to rise with Mexico and Canada while job 
creation slows, then the job losses suffered by U.S. workers will be 
much larger and more apparent than if U.S. NAFTA trade were balanced or 
in surplus.

                 GROWING TRADE DEFICITS AND JOB LOSSES

    NAFTA supporters have frequently touted the benefits of exports 
while remaining silent on the impacts of rapid import growth (Scott 
2000). But any evaluation of the impact of trade on the domestic 
economy must include both imports and exports. If the United States 
exports 1,000 cars to Mexico, many American workers are employed in 
their production. If, however, the U.S. imports 1,000 foreign-made cars 
rather than building them domestically, then a similar number of 
Americans who would have otherwise been employed in the auto industry 
will have to find other work. Ignoring imports and counting only 
exports is like trying to balance a checkbook by counting only deposits 
but not withdrawals.
    The U.S. has experienced steadily growing global trade deficits for 
nearly three decades, and these deficits have accelerated rapidly since 
NAFTA took effect on January 1, 1994. Although gross U.S. exports to 
its NAFTA partners have increased dramatically--with real growth of 
147% to Mexico and 66% to Canada--these increases have been 
overshadowed by the larger growth in imports, which have gone up by 
248% from Mexico and 79% from Canada, as shown in Table 1-1. As a 
result, the $16.6 billion U.S. net export deficit with these countries 
in 1993 increased by 378% to $62.8 billion by 2000 (all figures in 
inflation-adjusted 1992 dollars). As a result, NAFTA has led to job 
losses in all 50 states and the District of Columbia, as shown in 
Figure 1-A.

              Table 1-1.--U.S. Trade With Canada and Mexico, 1993-2000, Totals For All Commodities
                                       [Millions of constant 1992 dollars]
----------------------------------------------------------------------------------------------------------------
                                                                                        Change since 1993
                                                                                --------------------------------
                                                              1993       2000                          Jobs lost
                                                                                  Dollars    Percent   or gained
----------------------------------------------------------------------------------------------------------------
Canada
  Domestic exports.......................................    $90,018   $149,214    $59,196        66%    563,539
  Imports for consumption................................    108,087    193,725     85,638         79    962,376
  Net exports............................................   (18,068)   (44,511)   (26,443)        146  (398,837)
Mexico
  Domestic exports.......................................    $39,530    $97,509    $57,979       147%    574,326
  Imports for consumption................................     38,074    132,439     94,364        248    941,520
  Net exports............................................      1,456   (34,930)   (36,386)        n.a  (367,193)
Mexico and Canada
  Domestic exports.......................................   $129,549   $246,723   $117,174        90%  1,137,865
  Imports for consumption................................    146,161    326,164    180,003        123  1,903,896
  Net exports............................................   (16,612)   (79,441)   (62,828)        378  (766,030)
----------------------------------------------------------------------------------------------------------------

                                                                                                       [GRAPHIC] [TIFF OMITTED] T9034.008
                                                                                                       
      
    The growing U.S. trade deficit has been facilitated by substantial 
currency devaluations in Mexico and Canada, which have made both 
countries' exports to the United States cheaper while making imports 
from the United States more expensive in those markets. These devalued 
currencies have also encouraged investors in Canada and Mexico to build 
new and expanded production capacity to export even more goods to the 
U.S. market.
    The Mexican peso was highly overvalued in 1994 when NAFTA took 
effect (Blecker 1997). The peso lost about 31% of its real, inflation-
adjusted value between 1994 and 1995, after the Mexican financial 
crisis. The peso has gained real value (appreciated) recently because 
inflation in Mexico has remained well above levels in the U.S. As 
prices in Mexico rose, its exports become less competitive with goods 
produced in the U.S. and other countries because the peso's market 
exchange rate was unchanged between 1998 and 2000. High inflation in 
Mexico also made imports cheaper, relative to goods purchased in the 
U.S.
    By 2000 the peso's real value had risen to roughly the pre-crisis 
levels of 1994.\2\ Thus, the peso was as overvalued in 2000 as it was 
when NAFTA took effect. As a result, Mexico's trade and current account 
balances worsened substantially in 1998-2000, as imports from other 
countries surged, despite the fact that Mexico's trade surplus with the 
U.S. continued to improve through 2000. Given Mexico's large overall 
trade deficits, and the rising value of the peso, pressures are 
building for another peso crisis in the near future.
---------------------------------------------------------------------------
    \2\EPI calculations and International Monetary Fund (IMF) (2001).
---------------------------------------------------------------------------
    The Canadian dollar has depreciated over the past few years. The 
Canada-U.S. Free Trade Agreement--a precursor to NAFTA--took effect in 
1989. Initially, the Canadian dollar rose 4.1% in real terms between 
1989 and 1991, as Canada's Central Bank tightened interest rates. 
During this period, Canada maintained short-term interest rates that 
averaged 2.25 percentage points above those in the U.S. (1989 to 1994), 
which caused the initial appreciation in its currency. Canada then 
began to reduce real interest rates in the mid-1990's. Between 1995 and 
2000, short-term interest rates in Canada were 0.75 percentage points 
below U.S. rates, a net swing of 3.0 percentage points. The Canadian 
dollar began to depreciate in the mid-1990's, as interest rates were 
reduced, relative to the U.S. Overall, between 1989 and 2000, the 
Canadian dollar lost 27% of its real value against the U.S. dollar.\3\
---------------------------------------------------------------------------
    \3\IMF (2001) and EPI calculations. This analysis compares 
overnight money market rates in Canada (annual averages) with the 
comparable Federal funds rate for the U.S.
---------------------------------------------------------------------------
    NAFTA and the devaluation of currencies in Mexico and Canada 
resulted in a surge of foreign direct investment (FDI) in these 
countries, as shown in Figure 1-B. Between 1993 and 1999 (the most 
recent period for which data have been published), FDI in Mexico 
increased by 169%. It grew rapidly between 1993 and 1997, following the 
peso crisis, and then declined slightly afterwards, because of the 
steady appreciation of Mexico's real exchange rate between 1995 and 
2000.

[GRAPHIC] [TIFF OMITTED] T9034.009
      
    FDI in Canada more than quadrupled between 1993 and 1999, an 
increase of 429%, largely as a result of the falling value of the 
Canadian dollar in this period. Inflows of FDI, along with bank loans 
and other types of foreign financing, have funded the construction of 
thousands of Mexican and Canadian factories that produce goods for 
export to the United States. Canada and Mexico have absorbed more than 
$151 billion in FDI from all sources since 1993. One result is that the 
U.S. absorbed an astounding 96% of Mexico's total exports in 1999.\4\ 
The growth of imports to the U.S. from these factories has contributed 
substantially to the growing U.S. trade deficit and the related job 
losses. The growth of foreign production capacity has played a major 
role in the rapid growth in exports to the U.S.
---------------------------------------------------------------------------
    \4\ Bureau of the Census (2000) and EPI calculations.
---------------------------------------------------------------------------
                    NAFTA COSTS JOBS IN EVERY STATE

    All 50 states and the District of Columbia have experienced a net 
loss of jobs under NAFTA (Table 1-2). Exports from every state have 
been offset by faster-rising imports. Net job loss figures range from a 
low of 395 in Alaska to a high of 82,354 in California. Other hard-hit 
states include Michigan, New York, Texas, Ohio, Illinois, Pennsylvania, 
North Carolina, Indiana, Florida, Tennessee, and Georgia, each with 
more than 20,000 jobs lost. These states all have high concentrations 
of industries (such as motor vehicles, textiles and apparel, computers, 
and electrical appliances) where a large number of plants have moved to 
Mexico.

             Table 1-2.--NAFTA Job Loss By State, 1993-2000
------------------------------------------------------------------------
                                 Net NAFTA                     Net NAFTA
             State                  job           State           job
                                  loss\1\                       loss\1\
------------------------------------------------------------------------
Alabama........................     16,826  Missouri.........     16,773
Alaska.........................        809  Montana..........      1,730
Arizona........................      8,493  Nebraska.........      4,352
Arkansas.......................      9,615  Nevada...........      4,374
California.....................     82,354  New Hampshire....      2,970
Colorado.......................      8,172  New Jersey.......     19,169
Connecticut....................      9,262  New Mexico.......      2,859
Delaware.......................      1,355  New York.........     46,210
District of Columbia...........      1,635  North Carolina...     31,909
Florida........................     27,631  North Dakota.....      1,288
Georgia........................     22,918  Ohio.............     37,694
Hawaii.........................      1,565  Oklahoma.........      7,009
Idaho..........................      2,768  Oregon...........     10,986
Illinois.......................     37,422  Pennsylvania.....     35,262
Indiana........................     31,110  Rhode Island.....      7,021
Iowa...........................      8,378  South Carolina...     10,835
Kansas.........................      6,582  South Dakota.....      2,032
Kentucky.......................     13,128  Tennessee........     25,419
Louisiana......................      6,613  Texas............     41,067
Maine..........................      3,326  Utah.............      5,243
Maryland.......................      8,089  Vermont..........      1,611
Massachusetts..................     16,998  Virginia.........     16,758
Michigan.......................     46,817  Washington.......     14,071
Minnesota......................     13,202  West Virginia....      2,624
Mississippi....................     11,469  Wyoming..........     19,362
 ..............................  .........  Wisconsin........        864
                                ----------------------------------------
  U.S. total...................  .........  .................   766,030
------------------------------------------------------------------------
\1\ Excluding effects on wholesale and retail trade and advertising.
Source: EPI analysis of Bureau of Labor Statistics and Census Bureau
  data.

    While job losses in most states are modest relative to the size of 
the economy, it is important to remember that the promise of new jobs 
was the principal justification for NAFTA. According to its promoters, 
the new jobs would compensate for the increased environmental 
degradation, economic instability, and public health dangers that NAFTA 
brings (Lee 1995, 10-11). If NAFTA does not deliver net new jobs, it 
can't provide enough benefits to offset the costs it imposes on the 
American public.

              LONG-TERM STAGNATION AND GROWING INEQUALITY

    NAFTA has also contributed to growing income inequality and to the 
declining wages of U.S. production workers, who make up about 70% of 
the workforce. NAFTA, however, is but one contributor to a larger 
globalization process that has led to growing structural trade deficits 
and has shaped the U.S. economy and society over the last few 
decades.\5\ Rapid growth in U.S. trade and foreign investment, as a 
share of U.S. gross domestic product, has played a large role in the 
growth of inequality in income distribution in the last 20 years. NAFTA 
has continued and accelerated international economic integration, and 
thus contributed to the growing tradeoffs this integration requires.
---------------------------------------------------------------------------
    \5\ Globalization includes rapid growth in imports, exports, and 
the share of trade in the world economy, and even more rapid growth in 
the international flows of foreign investment around the world. The 
term is also used to refer to the international convergence of rules, 
regulations, and even the social structure and role of government in 
many countries. This process is often viewed as a ``race-to-the-
bottom'' in global environmental standards, wages, and working 
conditions.
---------------------------------------------------------------------------
    The growth in U.S. trade and trade deficits has put downward 
pressure on the wages of ``unskilled'' (i.e., non-college-educated) 
workers in the U.S., especially those with no more than a high school 
degree. This group represents 72.7% of the total U.S. workforce and 
includes most middle- and low-wage workers. These U.S. workers bear the 
brunt of the costs and pressures of globalization (Mishel et al. 2001, 
157, 172-79).
    A large and growing body of research has demonstrated that 
expanding trade has reduced the price of import-competing products and 
thus reduced the real wages of workers engaged in producing those 
goods. Trade, however, is also expected to increase the wages of the 
workers producing exports, but growing trade deficits have meant that 
the number of workers hurt by imports has exceeded the number who have 
benefited through increased exports. Because the United States tends to 
import goods that make intensive use of less-skilled and less-educated 
workers in production, it is not surprising to find that the increasing 
openness of the U.S. economy to trade has reduced the wages of less-
skilled workers relative to other workers in the United States.\6\
---------------------------------------------------------------------------
    \6\ See U.S. Trade Deficit Review Commission (2000, 110-18) for 
more extensive reviews of theoretical models and empirical evidence 
regarding the impacts of globalization on income inequality in the U.S.
---------------------------------------------------------------------------
    Globalization has reduced the wages of ``unskilled'' workers for at 
least three reasons. First, the steady growth in U.S. trade deficits 
over the past two decades has eliminated millions of manufacturing jobs 
and job opportunities in this country. Most displaced workers find jobs 
in other sectors where wages are much lower, which in turn leads to 
lower average wages for all U.S. workers. Recent surveys have shown 
that, even when displaced workers are able to find new jobs in the 
U.S., they face a reduction in wages, with earnings declining by an 
average of over 13% (Mishel et al. 2001, 24). These displaced workers' 
new jobs are likely to be in the service industry, the source of 99% of 
net new jobs created in the United States since 1989, and a sector in 
which average compensation is only 77% of the manufacturing sector's 
average (Mishel et al. 2001, 169). This competition also extends to 
export sectors, where pressures to cut product prices are often 
intense.
    Second, the effects of growing U.S. trade and trade deficits on 
wages go beyond just those workers exposed directly to foreign 
competition. As the trade deficit limits jobs in the manufacturing 
sector, the new supply of workers to the service sector (displaced 
workers and new labor market entrants not able to find manufacturing 
jobs) depresses the wages of those already holding service jobs.
    Finally, the increased import competition and capital mobility 
resulting from globalization has increased the ``threat effects'' in 
bargaining between employers and workers, further contributing to 
stagnant and falling wages in the U.S. (Bronfenbrenner 1997a). 
Employers' credible threats to relocate plants, to outsource portions 
of their operations, and to purchase intermediate goods and services 
directly from foreign producers can have a substantial impact on 
workers' bargaining positions. The use of these kinds of threats is 
widespread. A Wall Street Journal survey in 1992 reported that one-
fourth of almost 500 American corporate executives polled admitted that 
they were ``very likely'' or ``somewhat likely'' to use NAFTA as a 
bargaining chip to hold down wages (Tonelson 2000, 47). A unique study 
of union organizing drives in 1993-95 found that over 50% of all 
employers made threats to close all or part of their plants during 
organizing drives (Bronfenbrenner 1997b). This study also found that 
strike threats in National Labor Relations Board union-certification 
elections nearly doubled following the implementation of the NAFTA 
agreement, and that threat rates were substantially higher in mobile 
industries in which employers can credibly threaten to shut down or 
move their operations in response to union activity.
    Bronfenbrenner updated her earlier study with a new survey of 
threat effects in 1998-99, 5 years after NAFTA took effect 
(Bronfenbrenner 2000). The updated study found that most employers 
continue to threaten to close all or part of their operations during 
organizing drives, despite the fact that, in the last 5 years, unions 
have shifted their organizing activity away from industries most 
affected by trade deficits and capital flight (e.g., apparel and 
textile, electronics components, food processing, and metal 
fabrication). According to the updated study, the threat rate increased 
from 62% to 68% in mobile industries such as manufacturing, 
communications, and wholesale distribution. Meanwhile, in 18% of 
campaigns with threats, the employer directly threatened to move to 
another country, usually Mexico, if the union succeeded in winning the 
election.
    The new study also found that these threats were simply one more 
extremely effective tactic in employers' diverse arsenal for thwarting 
worker efforts to unionize. At 38%, the election win rate associated 
with organizing campaigns in which employers made threats was 
significantly lower than the 51% win rate where there were no threats. 
Win rates were lowest--32% on average--when threats were made during 
organizing campaigns involving more mobile industries, such as 
manufacturing, communications, and wholesale distribution. Among this 
last group, companies targeted for organizing are much likelier than 
they were in 1993-95 to be subsidiaries of large multinational parent 
companies with foreign operations, customers, and suppliers. The 30% 
win rate for organizing campaigns with these global multinational 
companies suggests that the existence of other sites in Latin America, 
Asia, or Africa serves as an unspoken threat of plant closing for many 
U.S. workers.
    Bronfenbrenner (2000) described the impact of these threats in 
testimony to the U.S. Trade Deficit Review Commission:

          Under the cover of NAFTA and other trade agreements, 
        employers use the threat of plant closure and capital flight at 
        the bargaining table, in organizing drives, and in wage 
        negotiations with individual workers. What they say to workers, 
        either directly or indirectly, is if you ask for too much or 
        don't give concessions or try to organize, strike, or fight for 
        good jobs with good benefits, we'll close, we'll move across 
        the border just like other plants have done before.\7\
---------------------------------------------------------------------------
    \7\ Bronfenbrenner (1999).

    In the context of ongoing U.S. trade deficits and rising levels of 
trade liberalization, the pervasiveness of employer threats to close or 
relocate plants may conceivably have a greater impact on real wage 
growth for production workers than does actual import competition. 
There are no empirical studies of the effects of such threats on U.S. 
wages, so such costs simply have been ignored by other studies of 
NAFTA.

               NAFTA, GLOBALIZATION, AND THE U.S. ECONOMY

    The U.S. economy created 20.7 million jobs between 1992 and 1999. 
All of those gains are explained by growth in domestic consumption, 
investment, and government spending. The growth in the overall U.S. 
trade deficit eliminated 3.2 million jobs in the same period (Scott 
2000). Thus, NAFTA and other sources of growing trade deficits were 
responsible for a change in the composition of employment, shifting 
workers from manufacturing to other sectors and, frequently, from good 
jobs to low-quality, low-pay work.
    Trade-displaced workers will not be so lucky during the next 
economic downturn. If unemployment begins to rise in the U.S., then 
those who lose their jobs due to globalization and growing trade 
deficits could face longer unemployment spells, and they will find it 
much more difficult to get new jobs. When trying to tease apart the 
various contributing causes behind trends like the disappearance of 
manufacturing jobs, the rise in income inequality, and the decline in 
wages in the U.S., NAFTA and growing trade deficits provide only part 
of the answer. Other major causes include deregulation and 
privatization, declining rates of unionization, sustained high levels 
of unemployment, and technological change. While each of these factors 
has played some role, a large body of economic research has concluded 
that trade is responsible for at least 15-25% of the growth in wage 
inequality in the U.S. (U.S. Trade Deficit Review Commission 2000, 110-
18). In addition, trade has also had an indirect effect by contributing 
to many of these other causes. For example, the decline of the 
manufacturing sector attributable to increased globalization has 
resulted in a reduction in unionization rates, since unions represent a 
larger share of the workforce in this sector than in other sectors of 
the economy.
    So, although NAFTA is not solely responsible for all of the labor 
market problems discussed in this report, it has made a significant 
contribution to these problems, both directly and indirectly. Without 
major changes in the current NAFTA agreement, continued integration of 
North American markets will threaten the prosperity of a growing share 
of the U.S. workforce while producing no compensatory benefits to non-
U.S. workers. Expansion of a NAFTA-style agreement--such as the 
proposed Free Trade Area of the Americas--will only worsen these 
problems. If the U.S. economy enters into a downturn or recession under 
these conditions, prospects for American workers will be further 
diminished.
    Jana Shannon provided research assistance and Jung Wook Lee 
provided administrative assistance. Eileen Appelbaum and Jeff Faux 
offered helpful comments.
    EPI gratefully acknowledges the support of the Ford Foundation for 
the Workers and the Global Economy project.

                                 ______
                                 
                Methodology Used For Job-Loss Estimates

    This study uses the model developed in Rothstein and Scott (1997a 
and 1997b). This approach solves four problems that are prevalent in 
previous research on the employment impacts of trade. Some studies look 
only at the effects of exports and ignore imports. Some studies include 
foreign exports (transshipments)--goods produced outside North America 
and shipped through the United States to Mexico or Canada--as U.S. 
exports. Trade data used in many studies are usually not adjusted for 
inflation. Finally, a single employment multiplier is applied to all 
industries, despite differences in labor productivity and 
utilization.\8\ The model used here is based on the Bureau of Labor 
Statistics' 192-sector employment requirements table, which was derived 
from the 1992 U.S. input-output table and adjusted to 1998 price and 
productivity levels (BLS 2001a). This model is used to estimate the 
direct and indirect effects of changes in goods trade flows in each of 
these 192 industries. This study updates the 1987 input employment 
requirements table used in earlier reports in this series (Rothstein 
and Scott 1997a and 1997b; Scott 1996).
---------------------------------------------------------------------------
    \8\ Other studies--see California State World Trade Commission 
(1997), which finds 47,600 jobs created in California from increased 
trade with Canada alone--have allocated all employment effects to the 
state of the exporting company. This is problematic, because the 
production--along with any attendant job effects--need not have taken 
place in the exporter's state. If a California dealer buys cars from 
Chrysler and sells them to Mexico, these studies will find job creation 
in California. However, the cars are not made in California; so the 
employment effects should instead be attributed to Michigan and other 
states with high levels of auto industry production. Likewise, if the 
same firm buys auto parts from Mexico, the loss of employment will 
occur in auto-industry states, not in California.
---------------------------------------------------------------------------
    We use three-digit, SIC-based industry trade data (Bureau of the 
Census 1994 and 2001), deflated with industry-specific, chain-weighted 
price indices (BLS 2001b). These data are concorded from HS to SIC 
(1987) classifications using conversion tables on the Census CDs. The 
SIC data are then concorded into the BLS sectors using sector-plans 
from the BLS (2001a). State level employment effects are calculated by 
allocating imports and exports to the states on the basis of their 
share of three-digit, industry-level employment (BLS 1997).

                               References

    Bernstein, Jared. 2001. Jobs Picture. Washington, D.C.: Economic 
Policy Institute. (March 9)
    Blecker, Robert A. 1997. NAFTA and the Peso Collapse--Not Just a 
Coincidence. Briefing Paper. Washington, D.C.: Economic Policy 
Institute.
    Bronfenbrenner, Kate. 1997a. ``The effects of plant closings and 
the threat of plant closings on worker rights to organize.'' Supplement 
to Plant Closings and Workers' Rights: A Report to the Council of 
Ministers by the Secretariat of the Commission for Labor Cooperation. 
Lanham, Md.: Bernan Press.
    Bronfenbrenner, Kate. 1997b. ``We'll close! Plant closings, plant-
closing threats, union organizing, and NAFTA.'' Multinational Monitor. 
Vol. 18, No. 3, pp. 8-13.
    Bronfenbrenner, Kate. 1999. ``Trade in traditional manufacturing.'' 
Testimony before the U.S. Trade Deficit Review Commission. October 29. 

    Bronfenbrenner, Kate. 2000. ``Uneasy terrain: The impact of capital 
mobility on workers, wages, and union organizing.'' Commissioned 
research paper for the U.S. Trade Deficit Review Commission. 
    Bureau of the Census. 1994. U.S Exports of Merchandise on CD-ROM 
(CDEX, or EX-145) and U.S. Imports of Merchandise on CD-ROM (CDIM, or 
IM-145). Preliminary data for December 1993 (month and year to date). 
Washington, D.C: U.S. Department of Commerce, Bureau of the Census.
    Bureau of the Census. 2001. U.S. Exports of Merchandise on CD-ROM 
(CDEX, or EX-145) and U.S. Imports of Merchandise on CD-ROM (CDIM, or 
IM-145). Preliminary data for December 2000 (month and year to date). 
Washington, D.C.: U.S. Department of Commerce, Bureau of the Census.
    Bureau of Labor Statistics. 1997. ES202 Establishment Census. 
Washington, D.C.: U.S. Department of Labor.
    Bureau of Labor Statistics, Office of Employment Projections. 
2001a. Employment Outlook: 1994-2005 Macroeconomic Data, Demand Time 
Series and Input Output Tables. Washington, D.C.: U.S. Department of 
Labor. 
    Bureau of Labor Statistics, Office of Employment Projections. 
2001b. Private email communication with Mr. James Franklin about 2000 
price deflator estimates.
    California State World Trade Commision. 1996. A Preliminary 
Assessment of the Agreement's Impact on California. Sacramento, Calif: 
California State World Trade Commission.
    International Monetary Fund. 2001. International Financial 
Statistics. Database and browser, March.
    Lee, Thea. 1995. False Prophets: The Selling of NAFTA. Briefing 
Paper. Washington, D.C.: Economic Policy Institute.
    Mishel, Lawrence, Jared Bernstein, and John Schmitt. 2001. State of 
Working America: 2000-01. An Economic Policy Institute book. Ithaca, 
N.Y: ILR Press, an imprint of Cornell University Press.
    Rothstein, Jesse and Robert E. Scott. 1997a. NAFTA's Casualties: 
Employment Effects on Men, Women, and Minorities. Issue Brief. 
Washington, D.C.: Economic Policy Institute.
    Rothstein, Jesse, and Robert E. Scott. 1997b. NAFTA and the States: 
Job Destruction Is Widespread. Issue Brief. Washington, D.C.: Economic 
Policy Institute.
    Scott, Robert E. 1996. North American Trade After NAFTA: Rising 
Deficits, Disappearing Jobs. Briefing Paper. Washington, D.C.: Economic 
Policy Institute.
    Scott, Robert E. 2000. The Facts About Trade and Job Creation. 
Issue Brief. Washington, D.C.: Economic Policy Institute.
    Tonelson, Alan. 2000. Race to the Bottom. New York, N.Y: Westview 
Press.
    Trade Deficit Review Commission. 2000. The U.S. Trade Deficit: 
Causes, Consequences, and Recommendations for Action. Washington, D.C.: 
U.S. Trade Deficit Review Commission.

                                 ______
                                 
           The Impact of NAFTA On Wages and Incomes in Mexico

    (By Carlos Salas, La Red de Investigadores y Sindicalistas Para 
                      Estudios Laborales (RISEL))

    Mexico is much changed in the 7 years since NAFTA was implemented 
in 1994. Although Mexico now has a large trade surplus with the U.S., 
Mexico has also developed a large and growing overall trade deficit 
with the rest of the world. In fact, Mexico's net imports from the rest 
of the world now substantially exceed its net exports to the United 
States. Official unemployment levels in Mexico are lower now than 
before NAFTA, but this decline in the official rate simply reflects the 
absence of unemployment insurance in Mexico. In fact, underemployment 
and work in low-pay, low-productivity jobs (e.g., unpaid work in family 
enterprises) actually has grown rapidly since the early 1990's. 
Furthermore, the normal process of rural-to-urban migration that is 
typical of developing economies has reversed since the adoption of 
NAFTA. The rural share of the population increased slightly between 
1991 and 1997, as living and working conditions in the cities 
deteriorated.
    Between 1991 and 1998, the share of workers in salaried\1\ jobs 
with benefits fell sharply in Mexico. The compensation of the remaining 
self-employed workers, who include unpaid family workers as well as 
small business owners, was well above those of the salaried sector in 
1991. By 1998, the incomes of salaried workers had fallen 25%, while 
those of the self-employed had declined 40%. At that point, the average 
income of the self-employed was substantially lower than that of the 
salaried labor force. This reflects the growth of low-income employment 
such as street vending and unpaid family work (for example, in shops 
and restaurants). After 7 years, NAFTA has not delivered the promised 
benefits to workers in Mexico, and few if any of the agreement's stated 
goals has been attained.
---------------------------------------------------------------------------
    \1\ Most workers in Mexico are paid a daily wage, as opposed to the 
hourly wage paid in the U.S. These workers are referred to in Mexico's 
statistics as ``salaried,'' or, more literally, ``waged'' employees. 
These terms refer to several different methods of payment (both daily 
and piece-work, for example). Thus, a salaried job in Mexico can be 
very different from one in the U.S.
---------------------------------------------------------------------------
                    RUNNING HARD BUT FALLING BEHIND

    Despite a quick recovery from the 1995 peso crisis and a peak 7% 
gross domestic product (GDP) growth rate in 2000 (Figure 2-A), NAFTA 
still has failed to help most workers in Mexico.

[GRAPHIC] [TIFF OMITTED] T9034.010

      
    Although foreign direct investment (FDI) in Mexico has continued to 
grow, total investment actually declined between 1994 and 1999 (Table 
2-1). The only types of investment that have grown since 1994 are the 
maquiladora industries, reinvested profits, and stock market 
investments. Speculative flows of financial capital into stock market 
investments, in particular, increased, but overall investment in Mexico 
fell between 1994 and 1999. These inflows help explain the rapid--and 
perhaps unsustainable--growth in prices on the Mexican stock market in 
the late 1990's.


                     Table 2-1.--Foreign Investment
                       [billions of U.S. dollars]
------------------------------------------------------------------------
                                           1994               1999
------------------------------------------------------------------------
Total foreign investment\1\.......            $19,045            $16,295
New investment....................              9,661              4,448
Profit reinvestment...............              2,336              2,627
Intrafirm investment..............              2,038              1,932
Investment in maquiladoras........                895              2,778
Stock market investment...........              4,083             4,509
------------------------------------------------------------------------
\1\ Partials may not add to total due to rounding.
Source: VI Informe de Gobierno de Ernesto Zedillo, 2000.

    Manufacturing exports, as officially reported, have improved 
rapidly since NAFTA took effect. From 1995 to 1999, these exports grew 
at an annual rate of 16%, due almost exclusively to ``value added'' 
exports in Maquiladora production.\2\ The total value of these exports 
increased 19.7% annually, as the average value added of products 
exported from Mexico decreased (relative to their overall value). 
However, maquiladora exports contain a substantial share of imported 
components from the U.S. and other countries, reducing the net benefits 
of these exports to the Mexican economy and its development. Thus, the 
export growth and the foreign trade performance of the Mexican economy 
look better on paper than in reality. But even these benefits disappear 
when total imports are considered. Total manufacturing imports from the 
U.S. and the rest of the world grew 18.5% per year between 1995 and 
1999, a fact that explains Mexico's rapidly growing overall foreign 
trade deficit in this period. In the long run, this process of economic 
growth with expanding foreign trade deficits could lead to another 
major currency crisis similar to the one that occurred in 1994 (Blecker 
1996).
---------------------------------------------------------------------------
    \2\ Under U.S. tariff code provisions (HTS 9802), U.S. firms are 
allowed to send U.S.-made inputs abroad for assembly and then return 
those semi-finished or finished products to the U.S., paying a tariff 
only on value added abroad.
---------------------------------------------------------------------------
        HOW STRONG WAS EMPLOYMENT GROWTH BETWEEN 1995 AND 1999?

    Total employment in Mexico grew from 33.9 to 39.1 million jobs over 
the 1995-99 period (3.7% annually), according to officially reported 
data (INEGI 1995 and 1999). But these data must be used with some 
caution, because the sample used for the National Employment Survey 
changed in 1998. Comparing the 1998 and 1999 data provides a more 
realistic rate of employment growth. Total employment reported for 1998 
was 38.6 million jobs, resulting in an actual rate of growth in 1999 of 
only 1.2%.
    Total employment in Mexico must grow 2.5% in order to fulfill the 
yearly demand for 1.2 million new jobs (CONAPO 2000). Since GDP grew 
3.7% in 1999, these data suggest that GDP should grow at about 7% 
annually to achieve a sustained 2.5% growth rate in employment and 
avoid rising unemployment. Yet Mexico has achieved a 7% rate of growth 
in only 1 year (2000) in the past decade.

Agricultural Employment Trends
    Agricultural activities are still the most important single source 
of employment in Mexico. In 1999, agricultural employment (8.2 million 
workers) accounted for 21% of the total labor force. For the past 10 
years, agricultural employment has hovered around eight million. This 
stability suggests that NAFTA did not lead to a major surge in 
migration trends from the countryside to the cities. Over the long 
term, steady growth in corn imports has helped stimulate a general 
migration process. This doesn't mean that most campesinos--traditional 
corn growers--will decide to remain in rural areas in the future. A 
major increase in rural-to-urban migration process could start sometime 
in the next decade if corn prices keep falling and no other sources of 
income generation are provided to campesinos.
    Interstate migration patterns, however, remained unchanged in this 
period, which reinforces the idea that most corn growers still are 
cultivating their land plots (Nadal 2000). What is more remarkable is 
that there was a slight increase in the share of the population living 
in rural areas between 1991 and 1997.
    Migration is another major alternative for Mexican workers who 
cannot find good jobs. Northbound international migration has increased 
all through the 1990's, and the number of permanent migrants, in 
particular, has been on the rise (Tuiran 2000). The geographical origin 
of these migrants is very diverse, as many of the new migrants come 
from regions with no previous history of migration flows to the United 
States. At the same time, more migrants are coming from urban areas and 
are better educated, which provides a stark contrast with the 
traditional image of rural, illiterate migrants. This shift in 
migration patterns is another significant indicator of a decline in the 
supply of good jobs in Mexico, even for well-educated workers.

Nonagricultural Employment Trends
    Despite the increase in migration to the north, it appears that the 
rapid growth in Mexico's potential labor supply has been matched by a 
seemingly impressive rate of growth in nonagricultural occupations. On 
average, the number of employed has increased by slightly less than 1.3 
million per year. The unemployment rate has, therefore, not shown any 
upward trend and has remained at a low level, with only short-term 
fluctuations as economic activity has varied. Unemployment in urban 
areas remained at very low levels of 2-3% between 1987 and 1999. The 
only major exception was in 1995, corresponding with the peso crisis, 
when overall unemployment surged above 6% and reached almost 14% for 
teenagers. Over 14 all, however, unemployment rates have been low by 
international standards, rarely exceeding 8% even for young people.
    It would be misleading, however, to conclude from such steadily low 
unemployment measures that Mexico has avoided the difficulties that 
most market economies face of providing enough jobs. There are, in 
fact, clear explanations as to why the official unemployment measures 
are so low. Mexico's labor force statistics count someone as employed 
if that person has worked at least 1 hour in the week before the survey 
takes place, following ILO standards (Hussmans et al. 1990). Under this 
definition, a person is counted as employed regardless of whether the 
person only works half time for no pay in a family business or works 
full time in a modern manufacturing plant. But Mexico's low rate of 
open unemployment is not a statistical distortion--it primarily 
reflects the workings of a different labor market structure.\3\ Given 
that a large proportion of the population has no capacity for saving, 
and that there is no unemployment insurance, open unemployment in 
Mexico is, to paraphrase Gunnar Myrdal, a luxury few can afford.
---------------------------------------------------------------------------
    \3\ The condition of open unemployment includes ``frictional'' 
unemployment, that is, people who know for sure or firmly believe they 
will be hired in the near future (Rendon y Salas 1993). For further 
discussion of measures of Mexico's unemployment see, for example, Fleck 
and Sorrentino (1994).
---------------------------------------------------------------------------
    Not surprisingly, unemployment rates are clearly higher for the 
most educated, who have higher incomes and greater savings capacity. 
But for those at the bottom of the wage scale, being ``employed'' does 
not guarantee an adequate standard of living, especially given the 
broad definition of what constitutes employment in the Mexican labor 
market. Deteriorating labor market conditions in Mexico have thus 
resulted in a decline in the quality of jobs rather than increases in 
unemployment rates, as might be the case in other economies with 
effective social safety nets.
    The inability of the Mexican economy to create good quality jobs 
reflects two primary trends: a virtual halt in the process of 
urbanization, and the large and growing share of workers holding low-
productivity, low-paying jobs in urban areas. While the economy was 
reducing the relative number of workers occupied in agricultural 
activities between 1970 and 1990, the past decade witnessed a reversal 
of this trend. Modernization of the economy, crudely defined as a 
declining share of rural and agricultural activities in the economy, 
was stagnant during most of these years. In spite of deficiencies in 
sampling and comparability of national employment surveys, the 
available data clearly show that, in the 1990's, the share of the labor 
force in less-urbanized areas and the share engaged in agricultural 
activities have both remained roughly constant at around 50% and 20-
25%, respectively (INEGI-ENE 1991 and 1997).\4\
---------------------------------------------------------------------------
    \4\ The share of less-urbanized areas was 52.6% in 1991 and 53.6% 
in 1997. The share in agriculture was 23.6% in 1991 and 24.1% in 1997 
(derived from INEGI-ENE 1991 and 1997).
---------------------------------------------------------------------------
    The deteriorating labor market conditions in the most important 
cities are reflected by an increase in the proportion of workers who 
are either self-employed or work in businesses with less than five 
employees. These low productivity jobs usually offer low pay. The share 
of the self-employed in total employment between 1987 and 1999 is shown 
in Table 2-2. The most important trend in urban employment in Mexico is 
the growth in service sector employment, as is happening in most 
economies. Rapid employment growth (and production) in trade and 
service industries poses two problems for the Mexican economy. Unlike 
service sector jobs in developed economies, Mexico's non-industrial 
activities do not include a strong and dynamic sector of high value-
added services. Even in the case of the growing employment in financial 
service activities--a process clearly associated with privatization and 
new investments--a large part of this expansion can be attributed to 
continued protection and the absence of regulation (but not to the 
spread of highly competitive, world-class services). Thus, wages and 
productivity in these industries are low, by world standards.

         Table 2-2.--Labor Structure In Urbanized Areas, 1991-98
------------------------------------------------------------------------
                                                        1991      1998
------------------------------------------------------------------------
Owner...............................................     4.8%      4.0%
Self-employed.......................................    16.6      22.8
Waged...............................................    73.9      61.2
Unpaid..............................................     4.6      12.0
Other...............................................       0.1       0.1
                                                     -------------------
  Total.............................................     100.0    100.0
------------------------------------------------------------------------
Source: Calculations based on data files from INEGI's Encuesta Nacional
  de Empleo (ENE), 1991 and 1998.

    Mexico's service sector growth is characterized by extreme 
heterogeneity, running the gamut from single-person activities such as 
street vending to stock market brokering using the latest technologies 
and facilities. Furthermore, unlike the newly industrialized countries 
of Asia, Mexico's adoption of an economic strategy that relies on 
sustained growth in manufacturing exports--facilitated by its close 
geographic proximity to the U.S.--has not increased the share of 
manufacturing employment in the economy.
    As a result of these trends, the structure of the urban labor 
landscape has changed in important ways in the 1990's. The most 
important shift is the diminishing share of regular salaried 
occupations in total employment. Between 1991 and 1998, the share of 
salaried employees in total employment decreased by 13 percentage 
points, from 73.9% to 61.2%. The resulting void was filled by either 
informal employment activities or simple unemployment. The share of 
self-employed workers increased by 50%, and the share of workers having 
unpaid positions as their first occupation doubled (as shown in Table 
2-2).
    Older salaried workers apparently switched to self-employed 
occupations, while younger workers were even less fortunate, moving 
into unpaid positions or becoming unemployed in this period. The share 
of workers aged 12 to 14 that had unpaid positions jumped from 40% to 
60% between 1991 and 1998. The reduction in salaried occupations has 
cut across most industries. However, there are significant differences 
between those industries. A high proportion of nonsalaried jobs in the 
labor market indicates a backward production structure. For example, 
retail trade, food, transportation, and accommodations have among the 
largest shares of self-employed and unpaid workers. The high rate of 
nonsalaried jobs in these industries reflects the large presence of 
small firms and relative simplicity of the tasks performed by the 
workers in those jobs. Comparing 1991 and 1998, the loss of salaried 
occupations was almost completely offset by the growth in self-employed 
and unpaid workers.
    Traditional manufacturing activities show the sharpest relative 
reductions in the shares of salaried workers, with the modern 
manufacturing, construction, trade, and communications industries being 
the next largest losers of salaried jobs. These changes are partially 
explained by the effects of the 1995 crisis upon traditional types of 
production in manufacturing and other industries, but they also reflect 
long-term segmentation trends in labor markets.
    The growing share of self-employed workers means that people moved 
to deteriorating labor occupations. Wages decreased by 27% between 1991 
and 1998, while overall hourly income from labor decreased 40%. Thus, 
labor income for the self-employed was cut in half in this period 
(Table 2-3). Average self-employment incomes fell from 17% above 
salaried worker incomes in 1991 to 19% below in 1998. In real terms, 
the relative well-being of the self-employed did not decrease as much 
as suggested by income comparisons, but this is far from reassuring. 
Reductions in real wages do not entirely explain the, deterioration of 
labor conditions. During the same period, the share of salaried workers 
receiving fringe benefits also fell systematically, as shown in Table 
2-4.

     Table 2-3.--Mean hourly income from labor, 1991-98 (1993 pesos)
------------------------------------------------------------------------
                                                                Percent
                                         1991        1998       change
------------------------------------------------------------------------
Owner...............................       20.53       10.71       -47.8
Subcontractors......................       12.47        n.a.        n.a.
Self-employed.......................        7.71        3.89       -49.6
Co-operatives.......................        4.22        7.01        66.2
Salaried............................        6.57        4.83       -26.6
Salaried, by piece or percentage....        8.31        4.40       -47.0
Other...............................        6.12        n.a.        n.a.
All.................................        7.04        4.22      -40.0
------------------------------------------------------------------------
Source: Author's calculations based on data files from INEGI's Encuesta
  Nacional de Empleo (ENE), 1991 and 1998.


   Table 2-4.--Share of salaried workers with fringe benefits in urban
                             areas (percent)
------------------------------------------------------------------------
                                                           1991    1998
------------------------------------------------------------------------
End-of-the-year bonus...................................    62.7    54.5
Participation in profits................................    19.2    15.4
Paid holidays...........................................    59.3    50.4
Credit for housing......................................    13.3    21.8
Health insurance (IMSS).................................    45.5    42.7
Health insurance (ISSSTE)...............................     7.0     4.6
Private health..........................................    12.5    9.3
------------------------------------------------------------------------
Source: Author's calculations based on ENE data files, 1991 and 1998.

    The maquiladora sector's employment performance contrasts 
significantly with that of Mexico's other large manufacturing plants. 
The maquiladora sector began as a program for in-bond processing 
plants, primarily making goods for re-export in Mexico's northern 
border cities. These plants employed an industrially inexperienced 
labor force to perform simple assembly tasks in traditional 
manufacturing. Maquiladoras have evolved over time, but they have 
remained largely isolated from the rest of the Mexican economy. 
Maquiladora employment grew rapidly, from 60,000 workers in 1975 to 
420,000 in 1990. The pace of job creation slowed somewhat in the early 
1990's, but it accelerated again after the 1994-95 peso devaluation. In 
2000, maquiladora industries employed 1.3 million workers, concentrated 
mostly in electrical and electronic products, auto parts, and apparel 
and textiles. Employment in those activities accounts for more than 80% 
of total manufacturing employment in the maquiladora plants (Table 2-
5).

    Table 2-5.--Employment in Selected Maquiladora ctivities In 2000
------------------------------------------------------------------------
                                                              Employment
------------------------------------------------------------------------
Electric and electronic parts and components................     335,668
Apparel and textiles........................................     281,866
Transportation equipment and parts..........................     237,004
Electric and electronic apparatus and appliances............     104,262
Other manufacturing activities..............................    142,805
------------------------------------------------------------------------
Source: Base de Informacion Economca, INEGI.

    Maquiladoras have helped offset weak job creation in other domestic 
manufacturing industries,\5\ accounting for about 13% of total 
manufacturing employment in 1995 and almost 16% in 1999. Maquiladora 
plants contributed 35% of all new manufacturing employment between 1995 
and 1999. Most of the remaining jobs created during this period were in 
small non-maquiladora plants (Alarcon and Zepeda 1997, 1998).
---------------------------------------------------------------------------
    \5\ Prior to the 1994-95 economic crisis, domestic-oriented and 
export-oriented manufacturing plants were approximately even in terms 
of employment creation. However, the 1994-95 devaluation of the peso 
gave exporters a boost, and maquiladora employment rose faster than in 
domestic-oriented producers.
---------------------------------------------------------------------------
    The 1995 recession's impact on maquiladora plants was relatively 
mild, which is not surprising given their nearly complete 
specialization in export production.\6\ Maquiladora job growth 
accelerated between 1995 and 1997, adding 150,000 positions each year 
during this 3-year period. This sum far exceeds the 60,000 jobs added 
each year between 1987 and 1989. Employment in maquiladora apparel 
production rose rapidly from 1995 to 1997, a fact closely linked to the 
relaxation of the Multifibre Agreement quotas after the implementation 
of NAFTA (O'Day 1997). Maquiladora jobs in electronics and auto part 
exports expanded as well, in keeping with those industries' global 
strategies (Carrillo and Gonzalez 1999).
---------------------------------------------------------------------------
    \6\ In fact, short-term economic or political events appear to have 
little effect on maquiladora activities.
---------------------------------------------------------------------------
    There were also important regional changes as maquiladora plants 
were established in cities far from the Mexico-U.S. border. Between 
1994 and 1999, the proportion of maquiladora workers in non-border 
locations increased from 16% to 22% as maquiladora production began 
shifting southward to sites such as Jalisco, the State of Mexico, 
Mexico City, Puebla, and Yucatan. Apparel-producing maquiladora plants, 
in contrast, moved to areas where compliance with labor laws is low, 
such as the states of Puebla and Morelos.

                            DECLINING WAGES

    Most directly employed workers have seen a steady erosion of their 
wages in the 1990's. In the last decade, the minimum wage in Mexico 
lost almost 50% of its purchasing power. The minimum wage is set each 
year through a process that includes consultations between official 
unions, employers, and the Federal Government. Currently the minimum 
wage is just a reference point for the wage bargaining process of wage 
and salary workers, and wages are usually set above this level in 
negotiated contracts.
    Labor income in industries whose wage bargaining processes are 
under Federal supervision (the so-called salarios contractuales or 
contractual wages) lost almost more than 21% of their purchasing power 
between 1993 (the year before NAFTA took effect) and 1999 (Table 2-6). 
Manufacturing wages also declined by almost 21% in this period, and the 
purchasing power of the minimum wage fell 17.9% through 1999. The 
decline in real wages since NAFTA took effect helps explain the decline 
in labor incomes (see Table 2-3).

            Table 2-6.--Wages in Mexico, 1990-99 (1990 = 100)
------------------------------------------------------------------------
                                     Mimimum  Contractual     Wages in
               Year                   wage        wage     manufacturing
------------------------------------------------------------------------
1990..............................    100.00      100.00        100.00
1993..............................     67.50       84.90        111.40
1994..............................     65.80       81.50        105.20
1995..............................     81.10       85.50         88.70
1996..............................     66.50       76.60         81.20
1997..............................     58.90       68.20         82.90
1998..............................     56.90       66.50         85.70
1999..............................     55.40       66.80         88.40
Change, 1993-99...................    -17.9%      -21.3%        -20.6%
------------------------------------------------------------------------
Source: 6 Informe de gobierno de Ernesto Zedillo, 2000.

                               CONCLUSION

    The decline in real wages and the lack of access to stable, well-
paid jobs are critical problems confronting Mexico's workforce. While 
NAFTA has benefited a few sectors of the economy, mostly maquiladora 
industries and the very wealthy, it has also increased inequality and 
reduced incomes and job quality for the vast majority of workers in 
Mexico. In many ways (such as the stagnation of the manufacturing share 
of employment), the entire process of development has been halted, and 
in some cases it even may have been reversed. NAFTA has created some of 
the most important challenges for Mexico's development in the 21st 
century. The question that remains is whether Mexico can, under NAFTA, 
restart its stalled development and find a way to redistribute the 
benefits of the resulting growth.

                               References

    Alarcon, Diana, and Eduardo Zepeda. 1998. ``Employment trends in 
the Mexican manufacturing sector.'' North American Journal of Economics 
and Finance. Vol. 9, pp. 125-45.
    Blecker, Robert. 1996. ``NAFTA, the peso crisis, and the 
contradictions of the Mexican economic growth strategy.'' Center for 
Economic Policy Analysis, Working Paper No. 3. New York, N.Y.: New 
School for Social Research.
    Carrillo, Jorge, and Sergio Gonzalez. 1999. ``Empresas automotores 
alemanas en Mexico. Relaciones cliente-proveedor.'' Cuadernos del 
Trabajo. No. 17. Mexico: Secretaria del Trabajo y Prevision Social.
    CONAPO (Consejo Nacional de Poblacion). 2000. La Situacion 
Demografica de Mexico 2000. Mexico.
    Fleck, Susan, and Constance Sorrentino. 1994. ``Employment and 
unemployment in Mexico's labor force.'' Monthly Labor Review. November, 
pp. 1-31.
    Hussmanns, Ralf, Farhad Mehran, and Vijay Verma. 1990. Surveys of 
Economically Active Population, Employment, Unemployment, and 
Underemployment. Geneva: International Labor Office.
    INEGI (Instituto Nacional de Estadistica, Geografia e Informatica). 
1991, 1995, 1998, 1999. Encuesta Nacional de Empleo. Aguascalientes, 
Mexico.
    INEGI. 1994, 1996. Encuesta Nacional de Ingresos y Gastos de los 
Hogares. Aguascalientes, Mexico.
    Nadal, Alejandro. 2000. The Environmental & Social Impacts of 
Economic Liberalization on Corn Production in Mexico. Gland, 
Switzerland and Oxford, U.K.: World Wide Fund for Nature and Oxfam 
Great Britain.
    O'Day, Paul. 1997. ``ATC phase out--A few big winners, long list of 
losers.'' International Fiber Journal. Vol. 12, February.
    Rendon, Teresa, and Carlos Salas. 1993. ``El empleo en Mexico en 
los ochenta: tendencias y cambios.'' Comercio Exterior. Vol. 43, No. 8, 
pp. 717-30.
    Tuiran, Rodolfo, ed. 2000. La Migracion Mexico-Estados. Presente y 
Futuro. Consejo Nacional de Poblacion, Mexico.

                                 ______
                                 
              False Promise--Canada In The Free Trade Era

      (By Bruce Campbell, Canadian Centre for Policy Alternatives)

    It has been 12 years since the Canada-U.S. Free Trade Agreement was 
implemented and 7 years since it was renegotiated, extended to Mexico, 
and renamed NAFTA, the North American Free Trade Agreement. And NAFTA 
is now the template for the Free Trade Area of the Americas (FTAA) 
initiative), for which presidents and prime ministers from the 
hemisphere were scheduled to meet in Quebec City in April 2001 to set a 
course for its completion by 2005.\1\
---------------------------------------------------------------------------
    \1\ Data cited in this paper are drawn directly or indirectly from 
various Statistics Canada documents: Labour Force Survey, Employment 
Earnings and Hours, Canada's Balance of Payments, Survey of Consumer 
Finances, Income Distribution by Size, and Canadian Economic Observer.
---------------------------------------------------------------------------
    ``[F]ree trade agreements are designed to force adjustments on our 
societies,'' says Donald Johnston, former Liberal government minister 
and head of the Organization for Economic Cooperation and Development 
(quoted in Crane 1997a). His words display a candor rare among free 
trade proponents. Indeed, major adjustments have taken place in the 
Canadian economic and social landscape since the government promised a 
new dawn of prosperity in 1989, when the FTA went into effect:
     Trade with the U.S. has expanded dramatically during these 
12 years. Canada's exports are now equivalent to 40% of its gross 
domestic product, up from 25% in 1989. (More than half of Canadian 
manufacturing output now flows south of the border, and Canadian 
producers account for less than half of domestic demand). This north-
south trade boom has been mirrored by a relative decline in trade 
within Canada. Trade has also become more concentrated with the U.S.--
from 74% to 85% of exports--and less concentrated with the rest of the 
world. Two-way investment flows have also increased greatly. Both 
Canadian foreign direct investment and portfolio flows to the U.S. grew 
much faster than did U.S. flows to Canada during this period.
     Growth performance in the 1990's was worse than in any 
other decade of the last century except the 1930's. Average per capita 
income fell steadily in the first 7 years of the decade and only 
regained 1989 levels by 1999. By comparison, per capita income in the 
U.S. grew 14% during this period (Sharpe 2000).
     Canada has become a noticeably more unequal society in the 
free trade era. Real incomes declined for the large majority of 
Canadians in the 1990's; they increased only for the top fifth. 
Employment became more insecure and the social safety net frayed.
     While productivity has grown--rapidly in some sectors--
wages have not, a trend mirroring the delinking that has taken place in 
the U.S. But the overall productivity gap with the U.S. has not 
narrowed as free trade proponents predicted; rather, it has widened 
recently.
     Successive waves of corporate restructuring--bankruptcies, 
mergers, takeovers, and downsizing--have been accompanied by public 
sector restructuring--down-
sizing, deregulation, privatization, and offloading of State 
responsibilities. Public sector spending and employment have declined 
sharply, and publicly owned enterprises in strategic sectors such as 
energy and transportation have been transferred en masse to the private 
sector.
    FTA and NAFTA boosters did not promise vague social adjustments, 
however; they sold the agreements based on rising productivity and 
rising incomes. By this standard the treaties have clearly not 
delivered, and their proponents can only offer the weak defense that 
things would have been worse in the absence of the agreements. Workers 
and policymakers in the FTAA countries may want to take the Canadian 
experience into account before buying into these unproved promises.

          THE CANADIAN LABOR MARKET DURING THE FREE TRADE ERA

    As noted above, exports to the U.S. have grown rapidly during the 
FTA/NAFTA era. Imports from the U.S. have also grown but not as 
quickly, resulting in a growing trade surplus (Figure 3-A).\2\ The 
average annual trade surplus was $C19.7 billion during the 1990's, more 
than double the $C9.4 billion average in the 1980's. Canada's current 
account surplus with the U.S., which includes net payments to U.S. 
investors, was also positive albeit much lower, averaging $C6 billion 
annually. Here too, though, it was a lot higher than in the 1980's when 
the bilateral current account was roughly in balance.
---------------------------------------------------------------------------
    \2\ Despite the dramatic increase in the share of total economic 
output accounted for by exports, the share of total employment 
accounted for by exports grew much more slowly (Dungan and Murphy 
1999), due mainly to the increased import content of exports. Dungan 
and Murphy also observe that there was almost no growth in labor 
productivity in the export sector. It should also be noted that the 
proportion of imported inputs in Canadian exports is much higher than 
the proportion of imported inputs in American exports.

[GRAPHIC] [TIFF OMITTED] T9034.011

      
    Manufacturing employment bore the brunt of corporate restructuring, 
most severely in the first wave (1989-93), falling by 414,000 or 20% of 
the workforce. (The number of manufacturing establishments fell by 19% 
during 1988-95). High-tariff sectors were especially hard hit--leather 
experienced a 48% drop in employment, clothing 31%, primary textiles 
32%, and furniture 39%. But employment was also slashed in medium-
tariff sectors, such as machinery (32%) and electrical and electronic 
products (28%). By the end of the decade manufacturing employment was 
still 6% below its 1989 level. Employment in clothing, for example, was 
still 26% below 1989, and electrical/electronics was down 19%. Wages 
were flat or falling even in the so-called winning export sectors.
    Unemployment in the 1990's averaged 9.6% compared to the U.S. rate 
of 5.8%--a doubling of the gap compared to the 1980's (Sharpe 2000). 
This level of unemployment was higher than in any other decade since 
the 1930's. While average worker earnings were stagnant, casualized (or 
nonstandard) employment exploded, as people struggled to cope during 
the prolonged slump and restructuring.
    Paid full-time employment growth for most of the decade was almost 
nonexistent (Jackson and Robinson 2000). The absolute number of full-
time jobs did not recover its 1989 level until 1998. Self-employment 
skyrocketed, accounting for 43% of new job creation between 1989 and 
1999. Part-time employment accounted for another 37% of net employment 
growth during 1989-99. More than half of this growth was involuntary--
due to the inability of people (mainly women) to find full-time work. 
Temporary work grew from 5% to 12% of total employment during the first 
half of the decade. Labor force participation rates dropped sharply, 
and at the end of the decade they were still well below their 1989 
rates.
    Evidence that the trade expansion and economic integration under 
NAFTA have had adverse employment effects in Canada comes from the 
government itself, in the form of a little-known study commissioned by 
Industry Canada.
    The authors, Dungan and Murphy (1999), found that, while business 
sector exports grew quickly, import growth also kept pace. At the same 
time, the import content per unit of exports also grew markedly, while 
the domestic content per unit of exports fell.
    What did this mean for jobs? Employment (direct and indirect) in 
export industries rose from 19.6% of total business sector employment 
in 1989 to 28.3% in 1997. However, the rapid rise in imports displaced 
(or destroyed) even more employment. The job-displacing effect of 
imports rose steadily from an equivalent of 21.1% of total business 
employment in 1989 to 32.7% in 1997. The authors conclude: ``imports 
are displacing `relatively' more jobs than exports are adding'' (Dungan 
and Murphy 1999).
    What did this mean in terms of actual jobs created and destroyed? 
It is a simple matter to derive these numbers from Dungan and Murphy's 
data (see Figure 3-B). The result is striking. Between 1989 and 1997, 
870,700 export jobs were created, but during the same period 1,147,100 
jobs were destroyed by imports. Thus, Canada's trade boom resulted in a 
net destruction of 276,000 jobs.

[GRAPHIC] [TIFF OMITTED] T9034.012

      
    With this evidence, we can say more convincingly than ever that the 
conventional wisdom propagated by the business and political elites--
that the trade expansion under NAFTA has meant a jobs bonanza for 
Canada--is false. On the contrary, trade expansion caused, at least in 
the first 8 years of free trade, a major net destruction of jobs.
    The study also found that the labor productivity of the jobs 
displaced by imports was moderately lower than that of exports, though 
the productivity of these displaced jobs was still higher than the 
average productivity level for the business sector as a whole. This the 
authors see as beneficial for the economy as whole.
    However, the positive spin on the study's findings is premised on 
the existence of macroeconomic policies whose priority is creating full 
employment conditions and on the expectation that displaced workers 
will find other jobs, and that those jobs will be at higher levels of 
productivity and income. There are three problems with these 
assumptions. First, it is not clear that these displaced workers are, 
by and large, finding higher productivity jobs elsewhere in the 
economy. In fact, to the extent that they are finding jobs outside the 
tradable sector, the jobs they find are likely at lower levels of 
productivity. Second, workers both in the tradable sectors and in the 
economy generally have not seen productivity growth translate into 
income gains. Third, and most importantly, macroeconomic policy in the 
1990's (as will be described shortly) has not focused on employment 
creation. Rather, policymakers have focused on ultra low inflation and 
wage control to enhance business competitiveness under NAFTA. 
Unemployment since the grim 1990's has lately fallen to around 7%, but 
this is still far above the 5.4% average unemployment rate for the 
entire three decades from 1950 to 1980.
    As for incomes, market income collapsed for low-income earners and 
inequality widened, most strikingly during the first half of the 
decade. Market incomes of the bottom 10% of families with children fell 
an astounding 84% during 1990-96, and those of the next 10% fell 31% 
(Yalnizyan 1998). But the restructuring and the massive labor market 
failure was offset by public transfers, keeping the overall 
distribution of income after taxes and transfers stable for a while. 
The consequent accumulation of fiscal deficits become politically 
unpalatable, though, and the government's ensuing ``war on the 
deficit'' provided the rationale for the social cuts that resulted in a 
widening of overall income inequality in the latter half of the 
decade--the first such widening in the postwar era. (Inequality in 
Canada still remains much lower in the United States.)
    The top 20% of families increased their share of market income from 
41.9% to 45.2% during 1989-98, while the bottom 20% saw their share 
drop from 3.8% to 3.1% (Robinson 2001). Even after taxes and transfers, 
the bottom 40% of families saw their inflation-adjusted income fall by 
close to 5% during 1989-98. The next 40% saw almost no change in their 
incomes. Only the top 20% saw a significant gain in per capita 
disposable income, an increase of 6.6%.
    These have been difficult times for Canadian unions as well. The 
waves of layoffs and plant closures and the threat of closures in 
heavily unionized manufacturing sectors cut into their numbers: 
unionization rates in manufacturing fell from 35.0% to 33.4% during 
1988-92. Years of defensive bargaining have resulted in unions' 
inability to appropriate a share of productivity increases for their 
members. This, too, signals an erosion of labor's bargaining power. And 
yet, despite the disastrous labor market conditions in manufacturing 
and throughout the economy, despite negative changes in labor laws and 
employment standards in some provinces, total union membership (not 
just in manufacturing) has remained remarkably stable: the overall 
unionization rate slipped only slightly from 32.0% of the paid 
workforce in 1987 to 30.7% in 1998 (Jackson and Robinson 2000).

                              NAFTA'S ROLE

    To what extent should NAFTA take credit (or blame) for these 
changes? It is impossible to examine NAFTA in isolation from the broad 
anti-government and pro-deregulation policy agenda that has for the 
last two decades been transforming national economies and restructuring 
the roles and relationships among governments, markets, and citizens in 
the push to create an integrated global market economy. As a 
cornerstone of this well-known neoliberal family of policies--
privatization, deregulation, investment and trade liberalization, 
public sector cutbacks, tax cuts, and monetary austerity--NAFTA has 
made it easier for Canadian policymakers to bring about a ``structural 
adjustment'' of the economy in line with the dominant U.S. model. 
Advancing and entrenching these policies in a treaty has secured 
investor rights, reined in interventionist government impulses and 
bargaining table demands of labor, and provided insurance against 
future governments' backsliding.
    These policies have had, with some exceptions, an adverse impact on 
the employment and income conditions of working people in Canada. This 
is not an unintended consequence since, in essence, these policies 
transfer power from workers to management and investors, from wages to 
profits, from the public sector to the market.
    But assessing causality is a complex task. Outcomes are the result 
of policies interacting with each other in mutually reinforcing ways. 
They are shaped by technological forces, corporate strategies, and a 
varied landscape of social and labor market institutions. NAFTA and its 
siblings have put downward pressure on employment and income 
conditions, but their impact varies from country to country, from 
sector to sector, from province to province depending on the strength 
of social and labor market institutions and the commitment of 
governments to either counter or reinforce these pressures. To be sure, 
policy choices do exist, but their range is more constrained, and with 
each turn of the ``free market'' screw the NAFTA legal framework makes 
it more difficult and often impossible to go in the other direction. 
For all these reasons isolating NAFTA impacts is exceedingly difficult.
    The key provisions of the agreement itself that directly or 
indirectly affect product or labor markets are a good place to start. 
NAFTA removes tariffs and other non-tariff barriers on all goods and 
services, thus impeding governments' ability to protect strategic or 
vulnerable sectors from import competition. These tariff restrictions 
also prevent governments from granting tariff or duty waivers to 
foreign multinationals in exchange for commitments to strengthen 
domestic capacity and employment.
    NAFTA's most important provisions apply to investment. The treaty 
entrenches a set of rules protecting private property rights of 
investors, and virtually all types of ownership interests, financial or 
non-financial, direct or indirect, actual or potential, are covered. 
NAFTA liberalizes investment, enhancing its ability to operate less 
hampered by non-commercial considerations and reducing the risk of 
future governments unilaterally imposing new conditions on investment.
    The very broad national treatment provisions of NAFTA oblige each 
member country to treat foreign investors exactly the same as it treats 
its own national investors, regardless of their contribution to the 
national economy. These provisions create an impetus for powerful 
alliances between foreign and domestically owned businesses to promote 
further deregulation and resist new regulation, since any policy to 
regulate foreign capital has to be applied equally to national capital. 
They remove important industrial policy tools, from local sourcing to 
technology transfer--tools that seek to channel foreign investment to 
strengthen domestic industrial capacity, create jobs, etc.
    NAFTA prevents governments from regulating the outflow as well as 
the inflow of capital. It prevents governments from placing 
restrictions on any kind of cross-border financial transfer, including 
profits, dividends, royalties, fees, proceeds of sale of an investment, 
and payments on loans to subsidiaries. It also prevents governments 
from restricting the transfer of physical assets and technologies. 
While NAFTA claims to break down international protections and 
barriers, it provides strong intellectual property protection (patent, 
copyright, trademark, etc.) for corporations' technology. This is 
another instance of taking power out of the public realm and empowering 
corporations.
    NAFTA limits the ability of state-owned enterprises to operate in 
ways that are inconsistent with commercial practice and in ways that 
impair benefits expected by private investors of the other NAFTA 
countries. This clearly affects the ability of public enterprises to 
pursue public policy goals that may override commercial goals. It also 
limits the ability of future governments to re-regulate or re-
nationalize industries once they have been deregulated or privatized. 
It provides the legal framework for greater private penetration into 
traditionally public areas, notably health care and education.
    Finally, NAFTA guarantees investors the right to prompt 
compensation at ``fair market value'' for measures that are deemed to 
be ``tantamount to expropriation''--a vague term for measures that are 
seen in some way to impair commercial benefits, including any future 
benefits that might be expected. Claims under these and other 
provisions may be adjudicated through various dispute panels, including 
an investor-state disputes tribunal, where in recent years a flurry of 
corporate challenges have forced governments to reverse policy 
decisions. The likelihood of these kinds of challenges is putting a 
chill on any policy or regulation that might be perceived as an 
infringement of investor rights.
    Under these rules of continental integration, considerations of 
competitiveness tend to trump all other policy considerations. In 
Canada this dynamic has had three major impacts:
     Corporations cut costs, restructure. On the corporate 
level, Canadian companies rationalize their cost cutting and 
restructuring through takeovers, downsizing, closure, and relocations 
as the only means to stay competitive against their NAFTA partners. 
Increased competition also intensifies the pressure on employers to 
demand worker concessions. Workers (except certain elite categories) 
are legally confined by national borders. Capital has the upper hand, 
since it can move more easily under the new regime or threaten to move 
if labor does not make wage and other concessions. It also increases 
the pressure to lower costs through production and work reorganization, 
leading to the increased use of part-time, temporary, and contract 
workers and outsourcing to non-union firms in low-wage jurisdictions.
     The government adds corporate breaks, drops worker and 
environmental protections. The Canadian government is shifting its 
fiscal and regulatory policies in order to be more competitive under 
NAFTA. This translates to raising subsidies while lowering taxes, 
regulations, and standards to maintain and attract investment. There 
are no common rules governing acceptable and unacceptable subsidies or 
limiting subsidy wars among governments. And labor and environmental 
side agreements, which purport to limit the competitive bidding-down of 
labor and environmental regulations, are ineffectual. Policy levers 
such as performance requirements and (conditional) tariffs, which aim 
to nudge investors in accordance with public policy priorities, have 
been largely removed. Thus, the need to provide incentives to attract 
investment has created dual stresses--downward pressure on regulations 
and upward pressure on government spending.
     Macro policy tilts to capital, away from labor. The 
macroeconomic policy priorities and choices, especially on the issue of 
wage control, changed under NAFTA. They have included disciplining 
labor through monetary policy austerity, reducing government income 
supports--notably unemployment insurance and other social program 
spending--and lowering corporate and personal taxes. As a result the 
wages and well-being of Canadian workers are declining.
    The last point requires further explanation, since the connection 
between macroeconomic policy and NAFTA is not usually made (Jackson 
1999).\3\ Most economists agree that the great Canadian slump of the 
1990's was caused mainly by bad macroeconomic policy choices--first by 
severe monetary tightening, which coincided with the implementation of 
the bilateral FTA, and later in the decade by fiscal retrenchment, 
which, according to the OECD, was the harshest of any industrial 
country in the postwar era. At its peak in 1990, short-term interest 
rates were five points above U.S. rates. The massive Federal spending 
cuts began in 1995 and over 4 years cut spending from 16% to 11% of 
GDP, the lowest level since the late 1930's. Program spending at all 
levels of government fell from 45% to less than 35% of GDP during 1992-
99, an unprecedented structural shift in the public-private sector 
balance (Stanford and Brown 2000).
---------------------------------------------------------------------------
    \3\ Andrew Jackson (1999) was the first to make the connection 
between macroeconomic policy and NAFTA.
---------------------------------------------------------------------------
    Many economists look at this disastrous economic record as the 
consequence of macro-policy error. The NAFTA-induced structural changes 
have been largely ignored. Were policymakers--in both the Mulroney and 
Chretien regimes--simply incompetent, or were they acting out of 
conviction that the top priority was to administer a structural jolt to 
the economy in order to enhance the conditions for Canadian business 
competitiveness?
    Monetary policy in the late 1980's and early 1990's was driven by 
the determination of monetary authorities to virtually eliminate 
inflation from the Canadian economy (which at the time was roughly the 
same as U.S. inflation and thus was not a problem). Canadian 
authorities were also concerned about falling labor cost 
competitiveness with U.S. manufacturing as Canada entered free trade. 
Productivity was growing more slowly, and real wages were growing 
faster, than in the U.S. These wage increases were certainly justified 
by productivity increases, but in the de-unionized United States, wages 
were rising more slowly than productivity.
    Policymakers also believed that a major fiscal adjustment was 
required to bring Canadian social programs and policies into line as 
integration with the U.S. proceeded. A 1996 report from the 
government's Privy Council Office noted: ``the basic affordability of 
the [social safety net] system and the benefits payment regime has a 
direct consequence on competitiveness. . . . By raising the cost of 
labour as a productive input, such programs can either drive jobs south 
or encourage further substitution of capital for labour'' (Privy 
Council Office 1997).
    Thus, the Bank of Canada deliberately raised unemployment to 
discipline labor. The Federal Government later massively cut 
unemployment insurance programs and welfare transfers to (in its view) 
strengthen the incentive to work and enhance labor market flexibility. 
(The deep recession-induced deficits were the main justification to the 
general public for the social cuts that followed). As the unemployment 
insurance changes kicked in, the proportion of the unemployed 
collecting benefits dropped dramatically, from 75% in 1990 to 36% in 
2000 (Canadian Labor Congress 1999), essentially the same as the U.S. 
level (37% in 2000; Mishel et al. 2001). Though monetary tightening 
(punishing interest rates and an overvalued Canadian dollar) would have 
short-term negative consequences for the economy, including a 
deterioration in competitiveness, policymakers believed it would, along 
with the fiscal adjustments, accelerate the necessary restructuring and 
strengthen the long-term competitiveness of Canadian business in the 
new North America.
    The bulk of the social program destruction was implemented by 1997, 
and with the budget balanced, the government began the second phase of 
the fiscal adjustment--corporate and upper-end income tax cuts. In 
2000, the finance minister announced tax cuts totaling more than $100 
billion over 5 years.\4\ Canadians are far enough along now in this 
adventure to answer the question: ``Have the FTA and NAFTA delivered 
the goods that were promised?'' The answer depends on who you ask. For 
those who wanted to diminish the role of government as an active player 
in the economy and provider of collective social protections, and for 
those whose wanted to improve the environment for business 
competitiveness by disciplining wages, NAFTA and its predecessor have 
been a success.
---------------------------------------------------------------------------
    \4\ Whether the Canadian government made a specific commitment to 
the Americans in response to congressional pressure to raise the value 
of the Canadian dollar relative to the U.S. dollar is not known. 
However, the Bank of Canada's raising of short-term interest rates had 
the effect of pushing the Canadian dollar to a peak of 89 cents in 
1990.
---------------------------------------------------------------------------
    But in the public debate that preceded implementation of the free 
trade deal, delivering the goods, according to proponents, meant rising 
productivity levels and rising incomes. It meant ushering in a golden 
age of prosperity for all Canadians. That was the promise to the 
Canadian public. The answer here is clearly no.
    The Canadian employment situation has unquestionably improved in 
the last 2 years, though workers have yet to reap any benefits in terms 
of improved earnings. However, with the erosion of their social 
protections Canadians have become more dependent on the private labor 
market than at any time in the last 40 years. As one observer put it, 
workers are now flying without a net (Stanford and Brown 2000). As the 
economy slows in 2001, this employment resurgence may prove to be 
short-lived, and the future for Canadian workers is once again clouded.

                               References

    Canadian Labour Congress. 1999. Left Out in the Cold: The End of UI 
for Canadian Workers. Ottawa, Ontario, Canada.: Canadian Labour 
Congress. (Author Kevin Hayes also provided useful information).
    Crane, David. 1997a. Toronto Star, May 3.
    Crane, David. 1997b. Toronto Star, May 4.
    Dungan, P. and S. Murphy. 1999. ``The Changing Industry and Skill 
Mix of Canada's International Trade.'' Perspectives on North American 
Free Trade. Paper No. 4. Industry Canada.
    Jackson, Andrew. 1999. ``Impact of the FTA and NAFTA on Canadian 
Labour Markets.'' In B. Campbell et. al., Pulling Apart:: The 
Deterioration of Employment and Income in North America Under Free 
Trade. Ottawa, Ontario, Canada.: Canadian Centre for Policy 
Alternatives.
    Jackson, A., and D. Robinson. 2000. Falling Behind: The State of 
Working Canada. Ottawa, Ontario, Canada.: Canadian Centre for Policy 
Alternatives.
    Mishel, Lawrence, Jared Bernstein, and John Schmidt. 2001. The 
State of Working America 2000-2001. An Economic Policy Institute book. 
Ithaca, N.Y.: ILR Press.
    Privy Council Office. 1997. Canada 2005: Global Challenges and 
Opportunities. Cited in Crane 1997b.
    Robinson, D. 2001. State of the Economy. Ottawa, Ontario, Canada.: 
Canadian Centre for Policy Alternatives.
    Sharpe, Andrew. 2000. A Comparison of Canadian and U.S. Labour 
Market Performance in the 1990's. Ottawa, Ontario, Canada.: Centre for 
the Study of Living Standards.
    Stanford, J., and A. Brown. 2000. Flying Without A Net: The 
Economic Freedom of Working Canadians in 2000. Ottawa, Ontario, 
Canada.: Canadian Centre for Policy Alternatives.
    Yalnizyan, A. 1998. The Growing Gap. Centre for Social Justice.
  

                                  
